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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, 2018
¨
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.)
1947 Briarfield Boulevard, 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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
Accelerated Filer
¨
Non-accelerated filer
¨

Smaller reporting company
¨
Emerging growth company
¨

 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
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 28.3 million common shares outstanding, no par value, at October 26, 2018.


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,
2018
 
December 31,
2017
 
September 30,
2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
16,820

 
$
34,919

 
$
24,478

Accounts receivable, net
206,380

 
183,238

 
196,192

Inventories (Note 2)
490,331

 
648,703

 
475,602

Commodity derivative assets – current (Note 5)
76,861

 
30,702

 
45,202

Other current assets
58,374

 
63,790

 
53,958

Assets held for sale
29,527

 
37,859

 
8,383

Total current assets
878,293

 
999,211

 
803,815

Other assets:
 
 
 
 
 
Commodity derivative assets – noncurrent (Note 5)
766

 
310

 
245

Goodwill
6,024

 
6,024

 
23,105

Other intangible assets, net
100,730

 
112,893

 
113,371

Other assets, net
26,174

 
12,557

 
11,852

Equity method investments
240,350

 
223,239

 
215,031

 
374,044

 
355,023

 
363,604

Rail Group assets leased to others, net (Note 3)
464,776

 
423,443

 
377,393

Property, plant and equipment, net (Note 3)
434,505

 
384,677

 
419,348

Total assets
$
2,151,618

 
$
2,162,354

 
$
1,964,160


3

Table of Contents

The Andersons, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)(In thousands)
 
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt (Note 4)
$
132,000

 
$
22,000

 
$
19,000

Trade and other payables
344,406

 
503,571

 
381,359

Customer prepayments and deferred revenue
38,242

 
59,710

 
29,520

Commodity derivative liabilities – current (Note 5)
91,403

 
29,651

 
38,578

Accrued expenses and other current liabilities
68,925

 
69,579

 
67,064

Current maturities of long-term debt (Note 4)
15,677

 
54,205

 
53,972

Total current liabilities
690,653

 
738,716

 
589,493

Other long-term liabilities
30,615

 
33,129

 
34,407

Commodity derivative liabilities – noncurrent (Note 5)
2,548

 
825

 
902

Employee benefit plan obligations
25,356

 
26,716

 
36,356

Long-term debt, less current maturities (Note 4)
437,280

 
418,339

 
371,315

Deferred income taxes
122,523

 
121,730

 
181,876

Total liabilities
1,308,975

 
1,339,455

 
1,214,349

Commitments and contingencies (Note 14)

 

 

Shareholders’ equity:
 
 
 
 
 
Common shares, without par value (63,000 shares authorized; 29,430 shares issued at 9/30/2018, 12/31/17 and 9/30/2017)
96

 
96

 
96

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

 

 

Additional paid-in-capital
222,368

 
224,622

 
223,814

Treasury shares, at cost (929, 1,063 and 1,079 shares at 9/30/2018, 12/31/17 and 9/30/2017, respectively)
(35,039
)
 
(40,312
)
 
(40,905
)
Accumulated other comprehensive loss
(4,364
)
 
(2,700
)
 
(9,682
)
Retained earnings
628,676

 
633,496

 
568,438

Total shareholders’ equity of The Andersons, Inc.
811,737

 
815,202

 
741,761

Noncontrolling interests
30,906

 
7,697

 
8,050

Total equity
842,643

 
822,899

 
749,811

Total liabilities and equity
$
2,151,618

 
$
2,162,354

 
$
1,964,160

See Notes to Condensed Consolidated Financial Statements


4

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)(In thousands, except per share data)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Sales and merchandising revenues
$
685,579

 
$
836,595

 
$
2,232,720

 
$
2,682,273

Cost of sales and merchandising revenues
631,715

 
766,924

 
2,024,677

 
2,448,310

Gross profit
53,864

 
69,671

 
208,043

 
233,963

Operating, administrative and general expenses
65,986

 
68,153

 
190,096

 
219,242

Asset impairment

 

 
6,272

 

Goodwill impairment

 

 

 
42,000

Interest expense
5,176

 
5,384

 
20,000

 
17,472

Other income:
 
 
 
 
 
 
 
Equity in earnings (loss) of affiliates, net
7,225

 
3,586

 
20,601

 
8,093

Other income, net
6,434

 
5,285

 
10,949

 
17,028

Income (loss) before income taxes
(3,639
)
 
5,005

 
23,225

 
(19,630
)
Income tax provision (benefit)
(1,764
)
 
2,389

 
5,668

 
7,505

Net income (loss)
(1,875
)
 
2,616

 
17,557

 
(27,135
)
Net income (loss) attributable to the noncontrolling interests
223

 
83

 
(175
)
 
73

Net income (loss) attributable to The Andersons, Inc.
$
(2,098
)
 
$
2,533

 
$
17,732

 
$
(27,208
)
Per common share:
 
 
 
 
 
 
 
Basic earnings (loss) attributable to The Andersons, Inc. common shareholders
$
(0.07
)
 
$
0.09

 
$
0.63

 
$
(0.96
)
Diluted earnings (loss) attributable to The Andersons, Inc. common shareholders
$
(0.07
)
 
$
0.09

 
$
0.62

 
$
(0.96
)
Dividends declared
$
0.165

 
$
0.160

 
$
0.495

 
$
0.480

See Notes to Condensed Consolidated Financial Statements


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The Andersons, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)(In thousands)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(1,875
)
 
$
2,616

 
$
17,557

 
$
(27,135
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in fair value of convertible preferred securities (net of income tax of $0, $134, $0 and $134)

 
211

 
(87
)
 
211

Change in unrecognized actuarial loss and prior service cost (net of income tax of $(38), $(64), $(139) and $(699))
(129
)
 
(101
)
 
(467
)
 
(1,099
)
Cash flow hedge activity (net of income tax of $40, $0, $56 and $0)
119

 

 
170

 

Foreign currency translation adjustments (net of income tax of $0, $0, $0 and $0)
993

 
2,201

 
(1,280
)
 
3,674

Other comprehensive income (loss)
983

 
2,311

 
(1,664
)
 
2,786

Comprehensive income (loss)
(892
)
 
4,927

 
15,893

 
(24,349
)
Comprehensive income (loss) attributable to the noncontrolling interests
223

 
83

 
(175
)
 
73

Comprehensive income (loss) attributable to The Andersons, Inc.
$
(1,115
)
 
$
4,844

 
$
16,068

 
$
(24,422
)
See Notes to Condensed Consolidated Financial Statements


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The Andersons, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)(In thousands)
 
Nine months ended September 30,
 
2018
 
2017
Operating Activities
 
 
 
Net income (loss)
$
17,557

 
$
(27,135
)
Adjustments to reconcile net income (loss) to cash used in operating activities:
 
 
 
Depreciation and amortization
67,960

 
64,546

Bad debt expense (recovery)
(436
)
 
1,076

Equity in (earnings) losses of affiliates, net of dividends
(18,390
)
 
(2,168
)
Gains on sale of Rail Group assets and related leases
(5,911
)
 
(7,642
)
Gain on sale of assets
(4,181
)
 
(11,443
)
Stock-based compensation expense
4,898

 
4,550

Goodwill impairment

 
42,000

 Asset impairment
6,272

 

Other
(2,626
)
 
(610
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(20,853
)
 
(334
)
Inventories
156,375

 
200,667

Commodity derivatives
18,080

 
16,073

Other assets
127

 
10,422

Payables and other accrued expenses
(190,042
)
 
(229,268
)
Net cash provided by (used in) operating activities
28,830

 
60,734

Investing Activities
 
 
 
Acquisition of business, net of cash acquired

 
(3,507
)
Purchases of Rail Group assets
(108,054
)
 
(77,513
)
Proceeds from sale of Rail Group assets
47,644

 
18,368

Purchases of property, plant and equipment and capitalized software
(86,694
)
 
(26,705
)
Proceeds from sale of assets
42,307

 
26,601

Proceeds from returns of investments in affiliates

 
1,339

Purchase of investments
(11,086
)
 
(4,929
)
Other

 
1,470

Net cash provided by (used in) investing activities
(115,883
)
 
(64,876
)
Financing Activities
 
 
 
Net change in short-term borrowings
110,000

 
(11,059
)
Proceeds from issuance of long-term debt
57,000

 
35,175

Proceeds from long-term financing arrangement

 
12,195

Payments of long-term debt
(112,995
)
 
(54,326
)
Proceeds from noncontrolling interest owner
31,115

 

Proceeds from sale of treasury shares to employees and directors

 
450

Payments of debt issuance costs
(1,446
)
 
(2,024
)
Dividends paid
(13,976
)
 
(13,485
)
Other
(744
)
 
(936
)
Net cash provided by (used in) financing activities
68,954

 
(34,010
)
Decrease in cash and cash equivalents
(18,099
)
 
(38,152
)
Cash and cash equivalents at beginning of period
34,919

 
62,630

Cash and cash equivalents at end of period
$
16,820

 
$
24,478

See Notes to Condensed Consolidated Financial Statements

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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 Income
(Loss)
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2016
$
96

 
$
222,910

 
$
(45,383
)
 
$
(12,468
)
 
$
609,206

 
$
16,336

 
$
790,697

Net income (loss)
 
 
 
 
 
 
 
 
(27,208
)
 
73

 
(27,135
)
Other comprehensive income (loss)
 
 
 
 
 
 
2,786

 
 
 
 
 
2,786

Other change in noncontrolling interest
 
 
 
 
 
 
 
 
 
 
(8,359
)
 
(8,359
)
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $(323) (122 shares)
 
 
899

 
4,426

 
 
 
 
 
 
 
5,325

Dividends declared ($0.48 per common share)
 
 
 
 
 
 
 
 
(13,503
)
 
 
 
(13,503
)
Restricted share award dividend equivalents
 
 
5

 
52

 
 
 
(57
)
 
 
 

Balance at September 30, 2017
$
96

 
$
223,814

 
$
(40,905
)
 
$
(9,682
)
 
$
568,438

 
$
8,050

 
$
749,811

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
96

 
$
224,622

 
$
(40,312
)
 
$
(2,700
)
 
$
633,496

 
$
7,697

 
$
822,899

Net income (loss)
 
 
 
 
 
 
 
 
17,732

 
(175
)
 
17,557

Other comprehensive income (loss)
 
 
 
 
 
 
(1,664
)
 
 
 
 
 
(1,664
)
Cash received from (paid to) noncontrolling interest
 
 
(2,268
)
 
 
 
 
 
 
 
23,384

 
21,116

Adoption of accounting standard, net of income tax of $2,869
 
 
 
 
 
 
 
 
(8,441
)
 
 
 
(8,441
)
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $(0) (134 shares)
 
 
14

 
5,153

 
 
 
 
 
 
 
5,167

Dividends declared ($0.495 per common share)
 
 
 
 
 
 
 
 
(13,991
)
 
 
 
(13,991
)
Restricted share award dividend equivalents
 
 


 
120

 
 
 
(120
)
 
 
 

Balance at September 30, 2018
$
96

 
$
222,368

 
$
(35,039
)
 
$
(4,364
)
 
$
628,676

 
$
30,906

 
$
842,643

See Notes to Condensed Consolidated Financial Statements


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


1. Basis of Presentation and Consolidation
These Condensed Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”). All 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 and recurring items considered necessary for the fair presentation of the results of operations, financial position, and cash flows for the periods indicated have been made. The results in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. An unaudited Condensed Consolidated Balance Sheet as of September 30, 2017 has been included as the Company operates in several seasonal industries.
The Condensed Consolidated Balance Sheet data at December 31, 2017 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2017 (the “2017 Form 10-K”).
New Accounting Standards
Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12 Targeted Improvements to Accounting for Hedging Activities. This standard simplifies the recognition and presentation of changes in the fair value of hedging instruments and, among other things, eliminates the requirement to separately measure and record hedge ineffectiveness. The Company early adopted ASU 2017-12 during the current year noting the effects of this standard on our condensed consolidated financial statements were not material. There was no transition impact.
Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (ASC 606). The FASB issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10 ASU 2016-12 and ASU 2016-20, respectively.  The core principle of the new revenue standard is that an entity recognizes revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the standard in the current year using the modified retrospective method. As a result of the adoption we recognized a cumulative catch-up transition adjustment in beginning retained earnings at January 1, 2018 for non-recourse financing transactions that were open as of December 31, 2017. This resulted in a $25.6 million increase in Rail Group net assets, $34.0 million increase in financing liabilities and deferred tax liabilities and $8.4 million decrease to retained earnings. See Note 7 for further detail.

Leasing

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). The FASB issued subsequent amendments to the initial guidance in July 2018 with ASU 2018-10 and in August 2018 with ASU 2018-11. ASC 842 supersedes the current accounting for leases. The new standard, while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (ii) eliminates current real estate specific lease provisions, (iii) modifies the lease classification criteria and (iv) aligns many of the underlying lessor model principles with those in the new revenue standard. ASC 842 is effective for fiscal years beginning after December 15, 2018, and interim periods within. Early adoption is permitted, however the Company does not plan to early adopt. The new standard is effective for the Company beginning January 1, 2019 and must be adopted using either the modified retrospective approach, which requires application of the new guidance at the beginning of the earliest comparative period presented or the optional alternative approach, which requires application of the new guidance at the beginning of the standard’s effective date.

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The Company expects this standard to have the effect of bringing certain off balance-sheet rail assets onto the balance sheet along with a corresponding liability for the associated obligations. Additionally, we have other arrangements currently classified as operating leases which will be recorded as a right of use asset and corresponding liability on the balance sheet. We are currently evaluating the impact these changes will have on the Consolidated Financial Statements.

Other applicable standards

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU reduces the complexity of accounting for costs of implementing a cloud computing service arrangement. This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software. The guidance is effective for fiscal years beginning after December 15, 2020. The Company does not expect this standard to have a material impact on its Consolidated Financial Statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This standard modified the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The standard is effective for fiscal years ending after December 15, 2020. and early adoption is permitted. The Company is currently evaluating when to adopt this standard but has not done so in the current period.

In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement which removes and modifies some existing disclosure requirements and adds others. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. is currently evaluating when to adopt this standard but has not done so in the current period.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings in their consolidated financial statements. This guidance is effective for fiscal years beginning after December 15, 2018. We have evaluated the impact of this new standard on our consolidated financial statements noting it is not material. Early adoption is permitted, but the Company has not chosen to do so at this time.

In May 2017, the FASB issued ASU 2017-09 Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. Under this standard, if the vesting conditions, fair value, and classification of the awards are the same immediately before and after the modification an entity would not apply modification accounting. The FASB then issued ASU 2018-07 which expands the scope to include share-based payment transactions for acquiring goods and services from nonemployees. The Company has adopted these standards during the year, noting no impact as the Company has not made any modifications to our stock compensation awards.

In March 2017, the FASB issued ASU 2017-07 Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires that the service cost component be reported in the same line item as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit costs should be presented in the income statement separately from the service cost component and outside of income from operations if that subtotal is presented. The Company has adopted this standard in the current year using the retrospective approach and prior periods have been recast to reflect this change, noting the amounts are immaterial.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This standard clarifies how companies present and classify certain cash receipts and payments in the statement of cash flows. The Company has adopted this standard in the current year noting the impact is immaterial.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. This includes allowances for trade receivables. The Company has not historically incurred significant credit losses and does not currently anticipate circumstances that would lead to a CECL approach differing from the Company's existing allowance estimates in a material way. The guidance is effective for fiscal years beginning after December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted, but the Company does not plan to do so.

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In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The FASB issued subsequent amendments to the initial guidance in February 2018 and March 2018 within ASU 2018-03 and ASU 2018-04, respectively. This standard provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The Company has adopted this standard in the current year noting the impact is immaterial.


2. Inventories
Major classes of inventories are as follows:
(in thousands)
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Grain
$
324,232

 
$
505,217

 
$
342,837

Ethanol and co-products
15,419

 
11,003

 
12,502

Plant nutrients and cob products
145,363

 
126,962

 
114,131

Retail merchandise

 

 
718

Railcar repair parts
5,317

 
5,521

 
5,414

 
$
490,331

 
$
648,703

 
$
475,602



Inventories on the Condensed Consolidated Balance Sheets at December 31, 2017 and September 30, 2017 do not include 1.0 million and 1.0 million bushels of grain, respectively, held in storage for others. Inventories held in storage for others was di minims as of September 30, 2018. The Company does not have title to the grain and is only liable for any deficiencies in grade or shortage of quantity that may arise during the storage period. Management has not experienced historical losses on any deficiencies and does not anticipate material losses in the future.

3. Property, Plant and Equipment
The components of Property, plant and equipment, net are as follows:
(in thousands)
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Land
$
29,545

 
$
22,388

 
$
23,342

Land improvements and leasehold improvements
68,859

 
69,127

 
71,559

Buildings and storage facilities
282,826

 
284,820

 
298,951

Machinery and equipment
380,109

 
373,127

 
384,422

Construction in progress
65,539

 
7,502

 
7,703

 
826,878

 
756,964

 
785,977

Less: accumulated depreciation
392,373

 
372,287

 
366,629

 
$
434,505

 
$
384,677

 
$
419,348



Capitalized interest totaled $0.9 million for the nine months ended September 30, 2018.
Depreciation expense on property, plant and equipment was $34.7 million and $36.0 million for the nine months ended September 30, 2018 and 2017, respectively. Additionally, depreciation expense on property, plant and equipment was $11.5 million and $11.9 million for the three months ended September 30, 2018 and 2017, respectively.
In June 2018, the Company recorded charges totaling $1.6 million for impairment of property, plant and equipment in the Grain segment related to assets that were reclassified as assets held for sale at June 30, 2018 and were sold in the third quarter. In December 2017, the Company recorded charges totaling $10.9 million for impairment of property, plant and equipment in the Grain segment, of which $5.6 million relates to assets that are deemed held and used and $5.3 million related to assets that have been reclassified as assets held for sale at December 31, 2017. The Company wrote down the value of these assets to the extent their carrying amounts exceeded fair value. The Company classified the significant assumptions used to determine the fair value of the impaired assets as Level 3 inputs in the fair value hierarchy.


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Table of Contents

Rail Group Assets
The components of Rail Group assets leased to others are as follows:
(in thousands)
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Rail Group assets leased to others
$
576,622

 
$
531,391

 
$
484,214

Less: accumulated depreciation
111,846

 
107,948

 
106,821

 
$
464,776

 
$
423,443

 
$
377,393


Depreciation expense on Rail Group assets leased to others amounted to $18.4 million and $14.9 million for the nine months ended September 30, 2018 and 2017, respectively. Additionally, depreciation expense on Rail Group assets leased to others amounted to $6.1 million and $5.2 million for the three months ended September 30, 2018 and 2017, respectively.
In June 2018, the Company recorded charges totaling $4.7 million related to Rail Group assets leased to others that have been reclassified as assets held for sale at June 30, 2018. The Company classified the significant assumptions used to determine the fair value of the impaired assets as Level 3 inputs in the fair value hierarchy.

4. Debt

The Company has a line of credit agreement with a syndicate of banks. The agreement provides for a credit facility of $800 million. During the third quarter, the Andersons Railcar Leasing Company LLC amended and restated their revolving asset based loan agreement, increasing the credit facility to $200.0 million. Total borrowing capacity for the Company under all lines of credit is currently at $1,085.0 million, including subsidiary debt that is non-recourse to the Company of $15.0 million for The Andersons Denison Ethanol LLC ("TADE"), $70.0 million for ELEMENT LLC and $200.0 million for The Andersons Railcar Leasing Company LLC. At September 30, 2018, the Company had a total of $823.1 million available for borrowing under its lines of credit. The Company's borrowing capacity is reduced by a combination of outstanding borrowings and letters of credit. The Company was in compliance with all financial covenants as of September 30, 2018.

The Company’s short-term and long-term debt at September 30, 2018December 31, 2017 and September 30, 2017 consisted of the following:
(in thousands)
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Short-term Debt – Non-Recourse
$

 
$

 
$

Short-term Debt – Recourse
132,000

 
22,000

 
19,000

Total Short-term Debt
$
132,000

 
$
22,000

 
$
19,000

 
 
 
 
 
 
Current Maturities of Long-term Debt – Non-Recourse
$
3,772

 
$

 
$

Current Maturities of Long-term Debt – Recourse
11,905

 
54,205

 
53,972

Total Current Maturities of Long-term Debt
$
15,677

 
$
54,205

 
$
53,972

 
 
 
 
 
 
Long-term Debt, Less: Current Maturities – Non-Recourse
$
77,114

 
$

 
$

Long-term Debt, Less: Current Maturities – Recourse
360,166

 
418,339

 
371,315

Total Long-term Debt, Less: Current Maturities
$
437,280

 
$
418,339

 
$
371,315



5. Derivatives
The Company’s operating results are affected by changes to commodity prices. The Grain and Ethanol businesses have established “unhedged” 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. These contracts are primarily traded via the regulated CME. 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.


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Table of Contents

All these contracts meet the definition of 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 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 cost of 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 future, option 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 margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Condensed Consolidated Balance Sheets.
The following table presents at September 30, 2018December 31, 2017 and September 30, 2017, 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 current or noncurrent commodity derivative assets (or liabilities) on the Condensed Consolidated Balance Sheets:
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
(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)
$
14,942

 
$

 
$
1,351

 
$

 
$
27,737

 
$

Fair value of derivatives
36,653

 

 
17,252

 

 
(999
)
 

Balance at end of period
$
51,595

 
$

 
$
18,603

 
$

 
$
26,738

 
$



The following table presents, on a gross basis, current and noncurrent commodity derivative assets and liabilities:
 
September 30, 2018
(in thousands)
Commodity Derivative Assets - Current
 
Commodity Derivative Assets - Noncurrent
 
Commodity Derivative Liabilities - Current
 
Commodity Derivative Liabilities - Noncurrent
 
Total
Commodity derivative assets
$
69,957

 
$
767

 
$
731

 
$
38

 
$
71,493

Commodity derivative liabilities
(8,038
)
 
(1
)
 
(92,134
)
 
(2,586
)
 
(102,759
)
Cash collateral
14,942

 

 

 

 
14,942

Balance sheet line item totals
$
76,861

 
$
766

 
$
(91,403
)
 
$
(2,548
)
 
$
(16,324
)

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Table of Contents

 
December 31, 2017
(in thousands)
Commodity Derivative Assets - Current
 
Commodity Derivative Assets - Noncurrent
 
Commodity Derivative Liabilities - Current
 
Commodity Derivative Liabilities - Noncurrent
 
Total
Commodity derivative assets
$
36,929

 
$
311

 
$
489

 
$
1

 
$
37,730

Commodity derivative liabilities
(7,578
)
 
(1
)
 
(30,140
)
 
(826
)
 
(38,545
)
Cash collateral
1,351

 

 

 

 
1,351

Balance sheet line item totals
$
30,702

 
$
310

 
$
(29,651
)
 
$
(825
)
 
$
536

 
September 30, 2017
(in thousands)
Commodity Derivative Assets - Current
 
Commodity Derivative Assets - Noncurrent
 
Commodity Derivative Liabilities - Current
 
Commodity Derivative Liabilities - Noncurrent
 
Total
Commodity derivative assets
$
33,804

 
$
288

 
$
676

 
$
74

 
$
34,842

Commodity derivative liabilities
(16,339
)
 
(43
)
 
(39,254
)
 
(976
)
 
(56,612
)
Cash collateral
27,737

 

 

 

 
27,737

Balance sheet line item totals
$
45,202

 
$
245

 
$
(38,578
)
 
$
(902
)
 
$
5,967



The net pre-tax gains and losses on commodity derivatives not designated as hedging instruments included in the Company’s Condensed Consolidated Statements of Operations and the line items in which they are located for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Gains (losses) on commodity derivatives included in cost of sales and merchandising revenues
$
(51,059
)
 
$
(690
)
 
$
(30,451
)
 
$
(15,538
)

The Company had the following volume of commodity derivative contracts outstanding (on a gross basis) at September 30, 2018, December 31, 2017 and September 30, 2017:
 
September 30, 2018
Commodity (in thousands)
Number of Bushels
 
Number of Gallons
 
Number of Pounds
 
Number of Tons
Non-exchange traded:
 
 
 
 
 
 
 
Corn
277,774

 

 

 

Soybeans
45,755

 

 

 

Wheat
7,948

 

 

 

Oats
31,155

 

 

 

Ethanol

 
230,813

 


 

Corn oil

 

 
2,560

 

Other

 
1,000

 

 
115

Subtotal
362,632

 
231,813

 
2,560

 
115

Exchange traded:
 
 
 
 
 
 
 
Corn
123,250

 

 

 

Soybeans
31,855

 

 

 

Wheat
44,130

 

 

 

Oats
1,005

 

 

 

Ethanol

 
92,274

 

 

Subtotal
200,240

 
92,274

 

 

Total
562,872

 
324,087

 
2,560

 
115



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December 31, 2017
Commodity (in thousands)
Number of Bushels
 
Number of Gallons
 
Number of Pounds
 
Number of Tons
Non-exchange traded:
 
 
 
 
 
 
 
Corn
218,391

 


 


 

Soybeans
18,127

 

 

 

Wheat
14,577

 

 

 

Oats
25,953

 

 

 

Ethanol

 
197,607

 

 

Corn oil

 

 
6,074

 

Other
47

 

 

 
97

Subtotal
277,095

 
197,607

 
6,074

 
97

Exchange traded:
 
 
 
 
 
 
 
Corn
82,835

 

 

 

Soybeans
37,170

 

 

 

Wheat
65,640

 

 

 

Oats
1,345

 

 

 

Ethanol

 
39,438

 

 

Other

 
840

 

 

Subtotal
186,990

 
40,278

 

 

Total
464,085

 
237,885

 
6,074

 
97

 
September 30, 2017
Commodity (in thousands)
Number of Bushels
 
Number of Gallons
 
Number of Pounds
 
Number of Tons
Non-exchange traded:
 
 
 
 
 
 
 
Corn
222,287

 

 

 

Soybeans
44,463

 

 

 

Wheat
8,598

 

 

 

Oats
36,451

 

 

 

Ethanol

 
201,521

 


 

Corn oil

 

 
5,782

 

Other
51

 

 


 
110

Subtotal
311,850

 
201,521

 
5,782

 
110

Exchange traded:
 
 
 
 
 
 
 
Corn
113,990

 

 

 

Soybeans
45,220

 

 

 

Wheat
61,795

 

 

 

Oats
895

 

 

 

Ethanol

 
22,890

 

 

Other

 
840

 

 

Subtotal
221,900

 
23,730

 

 

Total
533,750

 
225,251

 
5,782

 
110



Interest Rate and Other Derivatives

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a

15

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counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
At September 30, 2018, December 31, 2017 and September 30, 2017, the Company had recorded the following amounts for the fair value of the Company's other derivatives:
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
(in thousands)
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
Interest rate contracts included in Other long-term assets (Other long-term liabilities)
$
193


$
(1,244
)

$
(1,929
)
Foreign currency contracts included in Other current assets (Accrued expenses and other current liabilities)
(737
)

426


1,605

Derivatives designated as hedging instruments
 
 
 
 
 
Interest rate contract included in Other assets
227






The recording of derivatives gains and losses and the financial statement line in which they are located are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Interest rate derivative gains (losses) included in Interest income (expense)
$
521


$
229


$
1,662


$
601

Foreign currency derivative gains (losses) included in Other income, net
372


950


(1,163
)

1,717

Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Interest rate derivative gains (losses) included in OCI
159




226



Interest rate derivatives gains (losses) included in Interest income (expense)
54




126





As of September 30, 2018, the Company had one outstanding interest rate derivative, with a notional amount of $40 million and a maturity date of March 2021, that was designated as a cash flow hedge of interest rate risk. The gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

6. Employee Benefit Plans

The following are components of the net periodic benefit cost for the pension and postretirement benefit plans maintained by the Company for the three and nine months ended September 30, 2018 and 2017:
 
Pension Benefits
(in thousands)
Three months ended September 30,
 
Nine months ended September 30,
2018
 
2017
 
2018
 
2017
Interest cost
$
33

 
$
38

 
$
98

 
$
116

Recognized net actuarial loss
61

 
63

 
183

 
189

Benefit cost
$
94

 
$
101

 
$
281

 
$
305



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Postretirement Benefits
(in thousands)
Three months ended September 30,
 
Nine months ended September 30,
2018
 
2017
 
2018
 
2017
Service cost
$
81

 
$
81

 
$
243

 
$
310

Interest cost
188

 
202

 
565

 
784

Amortization of prior service cost
(227
)
 
(228
)
 
(683
)
 
(228
)
Benefit cost
$
42

 
$
55

 
$
125

 
$
866



7. Revenue

Many of the Company’s revenues are generated from contracts that are outside the scope of ASC 606 and thus are accounted for under other accounting standards. Specifically, many of the Company's Grain and Ethanol sales contracts are derivatives under ASC 815, Derivatives and Hedging and the Rail Group's leasing revenue is accounted for under ASC 840, Leases. The breakdown of revenues between ASC 606 and other standards is as follows:
(in thousands)
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Revenues under ASC 606
$
156,394

 
$
706,927

Revenues under ASC 840
25,853

 
78,110

Revenues under ASC 815
503,332

 
1,447,683

Total Revenues
$
685,579

 
$
2,232,720



The remainder of this note applies only to those revenues that are accounted for under ASC 606.
Disaggregation of revenue
The following tables disaggregate revenues under ASC 606 by major product/service line:
 
Three months ended September 30, 2018
(in thousands)
Grain
 
Ethanol
 
Plant Nutrient
 
Rail
 
Total
Specialty nutrients
$

 
$

 
$
36,856

 
$

 
$
36,856

Primary nutrients

 

 
60,460

 

 
60,460

Services
3,052

 
2,713

 
877

 
8,925

 
15,567

Co-products

 
29,282

 

 

 
29,282

Other
245

 

 
5,996

 
7,988

 
14,229

Total
$
3,297

 
$
31,995

 
$
104,189

 
$
16,913

 
$
156,394

For the three months ended September 30, 2018, approximately 10% of revenues accounted for under ASC 606 are recorded over time which primarily relates to service revenues noted above.
 
Nine months ended September 30, 2018
(in thousands)
Grain
 
Ethanol
 
Plant Nutrient
 
Rail
 
Total
Specialty nutrients
$

 
$

 
$
206,215

 
$

 
$
206,215

Primary nutrients

 

 
313,967

 

 
313,967

Service
10,851

 
8,018

 
3,498

 
26,350

 
48,717

Co-products

 
88,390

 

 

 
88,390

Other
747

 

 
19,231

 
29,660

 
49,638

Total
$
11,598

 
$
96,408

 
$
542,911

 
$
56,010

 
$
706,927


For the nine months ended September 30, 2018, approximately 7% of revenues accounted for under ASC 606 are recorded over time which primarily relates to service revenues noted above.

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Specialty and primary nutrients
The Company sells several different types of specialty nutrient products, including: low-salt liquid starter fertilizers, micro-nutrients and other specialty lawn products. These products can be sold through the wholesale distribution channels as well as directly to end users at the farm center locations. Similarly, the Company sells several different types of primary nutrient products, including nitrogen, phosphorus and potassium. These products may be purchased and re-sold as is or sold as finished goods resulting from a blending and manufacturing process. The contracts associated with specialty and primary nutrients generally have just a single performance obligation, as the Company has elected the accounting policy to consider shipping and handling costs as fulfillment costs. Revenue is recognized when control of the product has passed to the customer. Payment terms generally range from 0 - 30 days.
Service
Service revenues primarily relate to the railcar repair business. The Company owns several railcar repair shops which repair railcars through specific contracts with customers or by operating as an agent for a particular railroad to repair cars that are on its rail line per Association of American Railroads (“AAR”) standards. These contracts contain a single performance obligation which is to complete the requested and/or required repairs on the railcars. As the customer simultaneously receives and consumes the benefit of the repair work we perform, revenue for these contracts is recognized over time. The Company uses an input-based measure of progress using costs incurred to total expected costs as that is the measure that most faithfully depicts our progress towards satisfying our performance obligation. Upon completion of the work, the invoice is sent to the customer, with payment terms that generally range from 0 - 30 days.
Co-products
In addition to the ethanol sales contracts that are considered derivative instruments, the Ethanol Group sells several other co-products that remain subject to ASC 606, including E-85, DDGs, syrups and renewable identification numbers (“RINs”). RINs are credits for compliance with the Environmental Protection Agency's Renewable Fuel Standard program and are created by renewable fuel producers. Contracts for these co-products generally have a single performance obligation, as the Company has elected the accounting policy to consider shipping and handling costs as fulfillment costs. Revenue is recognized when control of the product has passed to the customer which follows shipping terms on the contract. Payment terms generally range from 5 - 15 days.
Contract balances
The opening and closing balances of the Company’s contract liabilities are as follows:
(in thousands)
Contract liabilities
Balance at January 1, 2018
$
25,520

Balance at March 31, 2018
67,715

Balance at June 30, 2018
10,047

Balance at September 30, 2018
29,836



The difference between the opening and closing balances of the Company’s contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. Contract liabilities relate to the Plant Nutrient business for payments received in advance of fulfilling our performance obligations under our customer contracts. Due to seasonality of this business, contract liabilities were built up in the first quarter. In the second quarter, the change in liabilities is due to revenue recognized in the current period relating to the liability. This liability then increased in the third quarter primarily as a result of payments received in advance of fulfilling our performance obligations under our customer contracts in preparation for early spring.

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Impact of New Revenue Guidance on Financial Statement Line Items
The following table compares the reported condensed consolidated balance sheet, as of September 30, 2018, to the pro forma amounts had the previous guidance been in effect:
 
Balance Sheet
 
September 30, 2018
(in thousands)
As Reported
 
ASC 606 Impact
 
Pro forma as if the previous accounting guidance was in effect
Cash and cash equivalents and restricted cash
$
16,820

 
$

 
$
16,820

Accounts receivable, net
206,380

 

 
206,380

Inventories
490,331

 
178

 
490,509

Commodity derivative assets - current
76,861

 

 
76,861

Other current assets
87,901

 
(268
)
 
87,633

Other noncurrent assets
374,044

 

 
374,044

Rail Group assets leased to others, net
464,776

 
(23,337
)
 
441,439

Property, plant and equipment, net
434,505

 

 
434,505

     Total assets
2,151,618


(23,427
)
 
2,128,191

Short-term debt and current maturities of long-term debt
147,677

 
(3,772
)
 
143,905

Trade and other payables and accrued expenses and other current liabilities
413,331

 

 
413,331

Commodity derivative liabilities - current
91,403

 

 
91,403

Customer prepayments and deferred revenue
38,242

 

 
38,242

Commodity derivative liabilities - noncurrent and Other long-term liabilities
33,163

 

 
33,163

Employee benefit plan obligations
25,356

 

 
25,356

Long-term debt, less current maturities
437,280

 
(31,018
)
 
406,262

Deferred income taxes
122,523

 
2,869

 
125,392

     Total liabilities
1,308,975

 
(31,921
)
 
1,277,054

Retained earnings
628,676

 
8,494

 
637,170

Common shares, additional paid-in-capital, treasury shares, accumulated other comprehensive loss and noncontrolling interests
213,967

 

 
213,967

     Total equity
842,643

 
8,494

 
851,137

     Total liabilities and equity
$
2,151,618

 
$
(23,427
)
 
$
2,128,191



Total reported assets were $23.4 million greater than on the pro forma balance sheet, which assumes the previous guidance remained in effect as of September 30, 2018. This was largely due to the Rail Group assets that were recorded on the balance sheet on January 1, 2018 as part of the cumulative catch-up adjustment upon the adoption of ASC 606.
Total reported liabilities were $31.9 million greater than on the pro forma balance sheet, which assumes the previous guidance remained in effect as of September 30, 2018. This was largely due to the financing obligation and deferred taxes related to the Rail Group assets that were recorded on the balance sheet on January 1, 2018 as part of the cumulative catch-up adjustment upon the adoption of ASC 606.

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The following table compares the reported condensed statement of operations for the three and nine months ended September 30, 2018, to the pro forma amounts had the previous guidance been in effect:
 
Statement of Operations
 
Three months ended September 30, 2018
(in thousands)
As Reported
 
ASC 606 Impact
 
Pro forma as if the previous accounting guidance was in effect
Sales and merchandising revenues
$
685,579

 
$
173,183

 
$
858,762

Cost of sales and merchandising revenues
631,715

 
173,706

 
805,421

Gross profit
53,864

 
(523
)
 
53,341

Operating, administrative and general expenses
65,986

 

 
65,986

Asset impairment

 

 

Interest expense
5,176

 
(387
)
 
4,789

Other income:
 
 
 
 
 
Equity in earnings of affiliates, net
7,225

 

 
7,225

Other income, net
6,434

 

 
6,434

Income (loss) before income taxes
(3,639
)
 
(136
)
 
(3,775
)
Income tax provision
(1,764
)
 
(34
)
 
(1,798
)
Net income (loss)
(1,875
)
 
(102
)
 
(1,977
)
Net income attributable to the noncontrolling interests
223

 

 
223

Net income (loss) attributable to The Andersons, Inc.
$
(2,098
)
 
$
(102
)
 
$
(2,200
)
 
Statement of Operations
 
Nine months ended September 30, 2018
(in thousands)
As Reported
 
ASC 606 Impact
 
Pro forma as if the previous accounting guidance was in effect
Sales and merchandising revenues
$
2,232,720

 
$
522,648

 
$
2,755,368

Cost of sales and merchandising revenues
2,024,677

 
524,121

 
2,548,798

Gross profit
208,043

 
(1,473
)
 
206,570

Operating, administrative and general expenses
190,096

 

 
190,096

Asset impairment
6,272

 

 
6,272

Interest expense
20,000

 
(1,185
)
 
18,815

Other income:
 
 
 
 
 
Equity in earnings of affiliates, net
20,601

 

 
20,601

Other income, net
10,949

 

 
10,949

Income (loss) before income taxes
23,225

 
(288
)
 
22,937

Income tax provision
5,668

 
(72
)
 
5,596

Net income (loss)
17,557

 
(216
)
 
17,341

Net income attributable to the noncontrolling interests
(175
)
 

 
(175
)
Net income (loss) attributable to The Andersons, Inc.
$
17,732

 
$
(216
)
 
$
17,516


The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2018 due to the adoption of ASC 606 on January 1, 2018 compared to the results that would have been reported if the Company had continued to recognize revenues under ASC 605:
While grain origination agreements, and their related sales contracts, will be accounted for under ASC 815, we are still required to evaluate the principal versus agent guidance in ASC 606 to determine whether realized gains or losses should be presented on a gross or net basis in the consolidated statements of operations upon physical settlement. The

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Company has determined that it is the agent in certain origination arrangements within our Grain Group and therefore realized gains or losses will be presented under ASC 606. Since these transactions are now being recorded on a net basis, revenues and related cost of sales would have been $170.4 million and $515.4 million higher under the previous guidance for the three and nine months ended September 30, 2018, respectively.

ASC 606 requires certain Rail Group assets and related financing obligations to be recorded on the balance sheet as these transactions no longer qualify as sales as a result of the existence of repurchase options within the sales contracts. The result of this change primarily impacts geography within the income statement, as lease expense to the financial institution is replaced with a combination of depreciation and interest expense.

The net impact of accounting for revenue under the new guidance had an immaterial impact on net income (loss) and no impact on the Company's earnings per common share for the three and nine months ended September 30, 2018.
The adoption of ASC 606 had an immaterial on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at period end. The guidance provides certain practical expedients that limit this requirement. The Company has various contracts that meet the following practical expedients provided by ASC 606:
The performance obligation is part of a contract that has an original expected duration of one year or less.
The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met.

Contract costs
The company has elected to apply the practical expedient and accordingly recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in Operating, administrative and general expenses.
Significant judgments
In making its determination of standalone selling price, the Company maximizes its use of observable inputs.  Standalone selling price, once established, is then used to allocate total consideration proportionally to the various performance obligations, if applicable, within a contract.
To estimate variable consideration, the Company applies both the “expected value” method and “most likely amount” method based on the form of variable consideration, according to which method would provide the best prediction.  The expected value method involves a probability-weighted determination of the expected amount, whereas the most likely amount method identifies the single most likely outcome in a range of possible amounts.  However, once a method has been applied to one form of variable consideration, it is applied consistently throughout the contract term.
The primary types of variable consideration present in the Company’s contracts are product returns, volume rebates and the CPI index.  The overall impact of this variable consideration is not material.
Practical expedients
The Company has elected to apply the following practical expedients provided by ASC 606:
Future performance obligations - see discussion above.
Contract costs - see discussion above.
Shipping and handling activities - see discussion above.
Sales tax presentation - the Company has elected to exclude from the transaction price all sales taxes that are assessed by a governmental authority that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.
Modified retrospective approach - see discussion in Note 1 regarding adoption elections.



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8. Income Taxes

On a quarterly basis, the Company estimates the effective tax rate expected to be applicable for the full year and makes changes if necessary based on new information or events. The estimated annual effective tax rate is forecast based on actual historical information and forward-looking estimates and is used to provide for income taxes in interim reporting periods. The Company also recognizes the tax impact of certain unusual or infrequently occurring items, such as the effects of changes in tax laws or rates and impacts from settlements with tax authorities, discretely in the quarter in which they occur.

The Company recorded income tax benefit of $1.8 million for the three months ended September 30, 2018, an effective income tax rate of 48.5%, as compared to income tax expense of $2.4 million for the three months ended September 30, 2017, an effective income tax rate of 47.7%. Income tax expense was $5.7 million for the nine months ended September 30, 2018, an effective income tax rate of 24.4%, as compared to $7.5 million for the nine months ended September 30, 2017, an effective income tax rate of (38.2)%. The current year income tax expense for both the three and nine-month periods ended September 30, 2018 reflect the reduction in the U.S. statutory tax rate and other U.S. tax law changes as a result of the 2017 Tax Cuts and Jobs Act.

Our effective income tax rate for the three months ended September 30, 2018, is higher than our effective income tax rate for the three months ended September 30, 2017, due to the current period loss before income taxes and additional tax benefits from tax credits and permanent provision to return items, including reversal of the provisional estimate for transition tax. These items resulted in a net increase of 14.8%, offset by the decrease in the U.S. federal statutory rate of 14%.

Our effective income tax rate for the nine months ended September 30, 2018, is higher than our effective income tax rate for the nine months ended September 30, 2017, as attributed to the Company’s loss before income taxes in the period ended September 31, 2017, after a goodwill write-off which did not provide a corresponding tax benefit. This was partially offset in the current period by the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the 2017 Tax Cuts and Jobs Act.

The company’s accounting for certain elements of the Tax Act was incomplete as of the period ended December 31, 2017, and remains incomplete as of September 30, 2018. However, the company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax
Act, the Company recorded a provisional discrete net tax benefit of $73.5 million in the period ended December 31, 2017. This provisional estimate consists of a net expense of $1.4 million for the one-time transition tax and a net benefit of $74.9 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the
transition tax provisional estimate, the Company determined the estimate of the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the Company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, its rate may be affected by other analysis related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. Due to the complexity of the new global intangible low-taxed income ("GILTI") tax rules, the company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice to either (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method"); or (ii) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis and potential future modifications to existing structures, which are not currently known. The Company has not made a policy decision regarding whether to record deferred taxes on GILTI. The Company will continue to analyze the full effects of the Tax Act on its Consolidated Financial Statements. During the third quarter of 2018, a portion of initial estimate was refined as a result of the US federal tax return filing and regulations issued by the Internal Revenue Service. As a result, the Company recorded a provisional benefit of $1.4 million in the third quarter of 2018 to reverse the one-time transition tax expense provisional estimate, as well as a $1.3 million expense related to the remeasurement of certain deferred tax assets and liabilities. The measurement period under SAB 118 remains open as there is still anticipated guidance clarifying certain aspects of the Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the fourth quarter of 2018 when the full analysis is complete.




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9. Accumulated Other Comprehensive Loss

The following tables summarize the after-tax components of accumulated other comprehensive income (loss) attributable to the Company for the three and nine months ended September 30, 2018 and 2017:
 
 
 
 
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)

 
 
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
(in thousands)
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Investment in Convertible Preferred Securities
 
Defined Benefit Plan Items
 
Total
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Investment in Convertible Preferred Securities
 
Defined Benefit Plan Items
 
Total
Beginning Balance
 
$
51

 
$
(9,989
)
 
$
257

 
$
4,334

 
$
(5,347
)
 
$

 
$
(7,716
)
 
$
344

 
$
4,672

 
$
(2,700
)
 
Other comprehensive income (loss) before reclassifications
 
65

 
993

 

 
39

 
$
1,097

 
44

 
(1,280
)
 
(87
)
 
37

 
(1,286
)
 
Amounts reclassified from accumulated other comprehensive loss
 
54

 

 

 
(168
)
 
$
(114
)
 
126

 

 

 
(504
)
 
(378
)
Net current-period other comprehensive income (loss)
 
119

 
993

 

 
(129
)
 
983

 
170

 
(1,280
)
 
(87
)
 
(467
)
 
(1,664
)
Ending balance
 
$
170

 
$
(8,996
)
 
$
257

 
$
4,205

 
$
(4,364
)
 
$
170

 
$
(8,996
)
 
$
257

 
$
4,205

 
$
(4,364
)
 
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)
 
 
Three months ended September 30, 2017
 
Nine months ended September 30, 2017
(in thousands)
 
Foreign Currency Translation Adjustment
 
Investment in Convertible Preferred Securities
 
Defined Benefit Plan Items
 
Total
 
Foreign Currency Translation Adjustment
 
Investment in Convertible Preferred Securities

 
Defined Benefit Plan Items
 
Total
Beginning Balance
 
$
(9,529
)
 
$

 
$
(2,464
)
 
$
(11,993
)
 
$
(11,002
)
 
$

 
$
(1,466
)
 
$
(12,468
)
 
Other comprehensive income (loss) before reclassifications
 
2,201

 
211

 
41

 
2,453

 
3,674

 
211

 
(957
)
 
2,928

 
Amounts reclassified from accumulated other comprehensive loss
 

 

 
(142
)
 
(142
)
 

 

 
(142
)
 
(142
)
Net current-period other comprehensive income (loss)
 
2,201

 
211

 
(101
)
 
2,311

 
3,674

 
211

 
(1,099
)
 
2,786

Ending balance
 
$
(7,328
)
 
$
211

 
$
(2,565
)
 
$
(9,682
)
 
$
(7,328
)
 
$
211

 
$
(2,565
)
 
$
(9,682
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits


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Table of Contents

The following table shows the reclassification adjustments from accumulated other comprehensive loss to net income for the three and nine months ended September 30, 2018:
 
 
Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (a)
(in thousands)
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income Is Presented
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income Is Presented
Defined Benefit Plan Items
 
 
 
 
 
 
 
 
     Amortization of prior-service cost
 
(228
)
 
(b)
 
(684
)
 
(b)
 
 
(228
)
 
Total before tax
 
(684
)
 
Total before tax
 
 
60

 
Income tax provision
 
180

 
Income tax provision
 
 
$
(168
)
 
Net of tax
 
$
(504
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
     Interest payments
 
73

 
Interest expense
 
171

 
Interest expense
 
 
73

 
Total before tax
 
171

 
Total before tax
 
 
(19
)
 
Income tax provision
 
(45
)
 
Income tax provision
 
 
$
54

 
Net of tax
 
$
126

 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(114
)
 
Net of tax
 
$
(378
)
 
Net of tax
 
 
Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (a)
(in thousands)
Three months ended September 30, 2017
 
Nine months ended September 30, 2017
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income Is Presented
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income Is Presented
Defined Benefit Plan Items
 
 
 
 
 
 
 
 
     Amortization of prior-service cost
 
(227
)
 
(b)
 
(227
)
 
(b)
 
 
(227
)
 
Total before tax
 
(227
)
 
Total before tax
 
 
85

 
Income tax provision
 
85

 
Income tax provision
 
 
$
(142
)
 
Net of tax
 
$
(142
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(142
)
 
Net of tax
 
$
(142
)
 
Net of tax
(a) Amounts in parentheses indicate credits to profit/loss
(b) This accumulated other comprehensive loss component is included in the computation of net periodic benefit cost (see Note 6).




24

Table of Contents

10. Earnings Per Share
The Company’s non-vested restricted stock that was granted prior to March 2015 is considered a participating security since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest. 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.
(in thousands, except per common share data)
Three months ended September 30,
 
Nine months ended September 30,
2018
 
2017
 
2018
 
2017
Net income (loss) attributable to The Andersons, Inc.
$
(2,098
)
 
$
2,533

 
$
17,732

 
$
(27,208
)
Less: Distributed and undistributed earnings allocated to nonvested restricted stock

 

 

 

Earnings (losses) available to common shareholders
$
(2,098
)
 
$
2,533

 
$
17,732

 
$
(27,208
)
Earnings per share – basic:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
28,263

 
28,350

 
28,254

 
28,327

Earnings (losses) per common share – basic
$
(0.07
)
 
$
0.09

 
$
0.63

 
$
(0.96
)
Earnings per share – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
28,263

 
28,350

 
28,254

 
28,327

Effect of dilutive awards

 
134

 
233

 

Weighted average shares outstanding – diluted
28,263

 
28,484

 
28,487

 
28,327

Earnings (losses) per common share – diluted
$
(0.07
)
 
$
0.09

 
$
0.62

 
$
(0.96
)

All outstanding share awards were antidilutive for the three months ended September 30, 2018 as the Company incurred a net loss for the period. There were no antidilutive stock-based awards outstanding for the nine months ended September 30, 2018. There were 43 thousand antidilutive stock-based awards outstanding for the three months ended September 30, 2017, and all outstanding share awards were antidilutive for the nine months ended September 30, 2017.

11. Fair Value Measurements

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2018, December 31, 2017 and September 30, 2017:
(in thousands)
September 30, 2018
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Commodity derivatives, net (a)
$
51,595


$
(67,919
)

$

 
$
(16,324
)
Provisionally priced contracts (b)
(55,697
)

(23,136
)


 
$
(78,833
)
Convertible preferred securities (c)




7,154

 
$
7,154

Other assets and liabilities (d)
5,988


193



 
$
6,181

Total
$
1,886

 
$
(90,862
)
 
$
7,154

 
$
(81,822
)
(in thousands)
December 31, 2017
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Commodity derivatives, net (a)
18,603

 
(18,067
)
 

 
536

Provisionally priced contracts (b)
(98,190
)
 
(67,094
)
 

 
(165,284
)
Convertible preferred securities (c)

 

 
7,388

 
7,388

Other assets and liabilities (d)
9,705

 
(1,244
)
 

 
8,461

Total
$
(69,882
)
 
$
(86,405
)
 
$
7,388

 
$
(148,899
)

25

Table of Contents

(in thousands)
September 30, 2017
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Commodity derivatives, net (a)
26,738

 
(20,771
)
 

 
5,967

Provisionally priced contracts (b)
(85,546
)
 
(33,944
)
 

 
(119,490
)
Convertible preferred securities (c)

 

 
6,638

 
6,638

Other assets and liabilities (d)
10,996

 
(1,929
)
 

 
9,067

Total
$
(47,812
)
 
$
(56,644
)
 
$
6,638

 
$
(97,818
)
 
(a)
Includes associated cash posted/received as collateral
(b)
Included in "Provisionally priced contracts" are those instruments based only on underlying futures values (Level 1) and delayed price contracts (Level 2)
(c)
Recorded in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheets.
(d)
Included in other assets and liabilities are assets held in rabbi trusts to fund deferred compensation plans, ethanol risk management contracts, and foreign exchange derivative contracts (Level 1), and interest rate derivatives (Level 2).

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.

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

The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because basis for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the Agribusiness industry, we have concluded that basis is a Level 2 fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a material input to fair value for these commodity contracts.

These fair value disclosures exclude physical grain inventories measured at net realizable value. The net realizable value used to measure the Company’s agricultural commodity inventories is the fair value (spot price of the commodity in an exchange), less cost of disposal and transportation based on the local market. This valuation would generally be considered Level 2. The amount is disclosed in Note 2. Changes in the net realizable value of commodity inventories are recognized as a component of cost of sales and merchandising revenues.

Provisionally priced contract liabilities are those for which the Company has taken ownership and possession of grain but the final purchase price has not been established. In the case of payables where the unpriced portion of the contract is limited to the futures price of the underlying commodity or the Company has delivered provisionally priced grain and a subsequent payable or receivable is set up for any future changes in the grain price, quoted CBOT prices are used and the liability is deemed to be Level 1 in the fair value hierarchy. All other unpriced contracts, primarily delayed price contracts, are determined on the basis of local grain market prices at the balance sheet date and, as such, are deemed to be Level 2 in the fair value hierarchy as they include variable future and basis components.

The risk management contract liability allows related ethanol customers to effectively unprice the futures component of their inventory for a period of time, subjecting the bushels to market fluctuations. The Company records an asset or liability for the market value changes of the commodities over the life of the contracts based on quoted CBOT prices and as such, the balance is deemed to be Level 1 in the fair value hierarchy.


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Table of Contents

A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:
 
 
Convertible Preferred Securities
(in thousands)
 
2018
 
2017
Assets (liabilities) at January 1,
 
$
7,388

 
$
3,294

Gains (losses) included in earnings
 

 

Assets (liabilities) at March 31,
 
$
7,388

 
$
3,294

Gains (losses) included in earnings
 

 

New investments
 
100

 

Asset (liabilities) at June 30,

$
7,488


$
3,294

Gains (losses) included in earnings
 
5,080

 

Unrealized gains (losses) included in other comprehensive income
 

 
344

New investments
 
986

 
3,000

Sale proceeds
 
(6,400
)
 

Asset (liability) at September 30,
 
$
7,154

 
$
6,638



The following tables summarize quantitative information about the Company's Level 3 fair value measurements as of September 30, 2018, December 31, 2017 and September 30, 2017:
Quantitative Information about Level 3 Fair Value Measurements
(in thousands)
Fair Value as of September 30, 2018
 
Valuation Method
 
Unobservable Input
 
Weighted Average
Convertible preferred securities (a)
$
7,154

 
Implied based on market prices
 
N/A
 
N/A
(in thousands)
Fair Value as of December 31, 2017
 
Valuation Method
 
Unobservable Input
 
Weighted Average
Convertible preferred securities (a)
$
7,388

 
Implied based on market prices
 
N/A
 
N/A
Real Property (b)
29,347

 
Third-Party Appraisal
 
N/A
 
N/A
(in thousands)
Fair Value as of September 30, 2017
 
Valuation Method
 
Unobservable Input
 
Weighted Average
Convertible preferred securities (a)
$
6,638

 
Implied based on market prices
 
N/A
 
N/A

(a) Due to early stages of business and timing of investments, implied value based on market price was deemed to approximate fair value. As the underlying enterprises have matured, observable price changes and other additional market data is available to consider in order to estimate fair value, including additional capital raising, internal valuation models, progress towards key business milestones, and other relevant market data points.
(b) The Company recognized impairment charges on certain assets and measured the fair value using Level 3 inputs on a nonrecurring basis. The fair value of the assets was determined using prior transactions, third-party appraisals and a pending sale of grain assets held by the Company.

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,
2018

December 31,
2017
 
September 30,
2017
Fair value of long-term debt, including current maturities
$
445,342

 
$
474,769

 
$
431,542

Fair value in excess of carrying value (a)
11,629

 
1,451

 
2,389


(a) Carrying value used for this purpose excludes unamortized debt issuance costs
The fair value of the Company’s cash equivalents, accounts receivable and accounts payable approximate their carrying value as they are close to maturity.


27

Table of Contents

12. 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.
The following table presents the Company’s investment balance in each of its equity method investees by entity:
(in thousands)
September 30, 2018
 
December 31, 2017
 
September 30, 2017
The Andersons Albion Ethanol LLC
$
49,882

 
$
45,024

 
$
42,302

The Andersons Clymers Ethanol LLC
22,589

 
19,830

 
17,837

The Andersons Marathon Ethanol LLC
15,373

 
12,660

 
12,390

Lansing Trade Group, LLC
99,904

 
93,088

 
89,541

Thompsons Limited (a)
50,280

 
50,198

 
50,399

Other
2,322

 
2,439

 
2,562

Total
$
240,350

 
$
223,239

 
$
215,031


 (a) Thompsons Limited and related U.S. operating company held by joint ventures
The following table summarizes income (loss) earned from the Company’s equity method investments by entity:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
% Ownership at September 30, 2018
 
2018
 
2017
 
2018
 
2017
The Andersons Albion Ethanol LLC
55%
 
$
2,408

 
$
1,473

 
$
4,858

 
$
3,331

The Andersons Clymers Ethanol LLC
39%
 
1,376

 
1,822

 
3,121

 
2,597

The Andersons Marathon Ethanol LLC
33%
 
1,029

 
985

 
2,713

 
1,301

Lansing Trade Group, LLC
33% (a)
 
2,428

 
305

 
8,603

 
491

Thompsons Limited (b)
50%
 
35

 
(940
)
 
1,345

 
546

Other
5% - 50%
 
(51
)
 
(59
)
 
(39
)
 
(173
)
Total
 
 
$
7,225

 
$
3,586

 
$
20,601

 
$
8,093


 (a) This does not consider restricted management units which once vested will reduce the ownership percentage by approximately 1%
 (b) Thompsons Limited and related U.S. operating company held by joint ventures

Total distributions received from unconsolidated affiliates were $2.2 million and $7.1 million for the nine months ended September 30, 2018 and 2017, respectively.
In the third quarter of 2018, The Andersons Albion Ethanol LLC and Lansing Trade Group ("LTG") qualified as significant equity investees of the Company under the income test. The following table presents unaudited summarized financial information for the investees:
(in thousands)
Three months ended September 30,
 
Nine months ended September 30,
2018
 
2017
 
2018
 
2017
Revenues
$
1,504,141

 
$
1,341,123

 
$
4,244,385

 
$
3,797,546

Gross profit
49,497

 
42,973

 
147,013

 
111,468

Income (loss) from continuing operations
12,126

 
3,265

 
36,955

 
7,950

Net income (loss)
11,678

 
3,121

 
35,240

 
6,583

Net income (loss) attributable to Companies
11,678

 
3,300

 
35,240

 
7,486




28

Table of Contents

Related Party Transactions

In the ordinary course of business and on an arms-length basis, the Company will enter into related party transactions with each of the investments described above, along with other related parties.

On March 2, 2018, the Company invested in ELEMENT, LLC.  The Company owns 51% of ELEMENT, LLC and ICM, Inc. owns the remaining 49% interest.  ELEMENT, LLC is constructing a 70 million-gallon-per-year bio-refinery.  As part of the Company’s investment into ELEMENT, LLC, the Company and ICM, Inc. entered into a number of agreements with the entity.  Most notably, ICM, Inc. will operate the facility under a management contract and manage the initial construction of the facility, while the Company will provide corn origination, ethanol marketing, and risk management services.  The results of operations for ELEMENT, LLC have been included in our consolidated results of operations beginning on March 2, 2018 and are a component of our Ethanol segment. The plant is expected to be operational in 2019.

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)
2018
 
2017
 
2018
 
2017
Sales revenues
$
82,394

 
$
225,367

 
$
278,974

 
$
665,331

Service fee revenues (a)
5,231

 
14,397

 
15,539

 
28,433

Purchases of product and capital assets
177,583

 
165,084

 
556,551

 
467,495

Lease income (b)
1,623

 
1,850

 
4,829

 
4,559

Labor and benefits reimbursement (c)
3,436

 
3,208

 
10,603

 
10,071

 
(a)
Service fee revenues include management fees, corn origination fees, ethanol and distillers dried grains (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.
(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.
(in thousands)
September 30, 2018
 
December 31, 2017
 
September 30, 2017
Accounts receivable (d)
$
32,584

 
$
30,252

 
$
18,694

Accounts payable (e)
32,347

 
27,866

 
27,413


(d)
Accounts receivable represents amounts due from related parties for sales of corn, leasing revenue and service fees.
(e)
Accounts payable represents amounts due to related parties for purchases of ethanol and other various items.

For the three months ended September 30, 2018 and 2017, revenues recognized for the sale of ethanol and other co-products that the Company purchased from the unconsolidated ethanol LLCs were $161.9 million and $160.8 million, respectively. For the nine months ended September 30, 2018 and 2017, revenues recognized for the sale of ethanol and other co-products that the Company purchased from the unconsolidated ethanol LLCs were $480.4 million and $445.4 million, respectively.

For the three and nine months ended September 30, 2017 revenues recognized for the sale of corn to the unconsolidated ethanol LLCs were $119.1 million and $362.2 million. As a result of the new revenue recognition guidance, these transactions are now being recorded on a net basis instead of a gross basis, which is included in service fee revenues above. See Note 7 for further discussion.

From time to time, the Company enters into derivative contracts with certain of its related parties, including the unconsolidated ethanol LLCs, LTG, and the Thompsons Limited joint ventures, for the purchase and sale of grain and ethanol, for price risk mitigation purposes and on similar terms as the purchase and sale of derivative contracts it enters into with unrelated parties. The fair value of derivative contract assets with related parties as of September 30, 2018December 31, 2017 and September 30, 2017 was $6.8 million, $0.2 million and $1.9 million, respectively. The fair value of derivative contract liabilities with related parties as of September 30, 2018, December 31, 2017 and September 30, 2017 was $7.2 million, $2.5 million and $0.1 million, respectively.




29

Table of Contents

13. Segment Information
The Company’s operations include four 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 LTG and Thompsons Limited. The Ethanol business purchases and sells ethanol, and provides risk management, origination and management services to ethanol production facilities. These facilities are organized as limited liability companies, two are consolidated and three are investments accounted for under the equity method. The Company performs a combination of these services under various contracts for these investments. The Plant Nutrient business manufactures and distributes agricultural inputs, primarily fertilizer, to dealers and farmers, along with turf care and corncob-based products. Rail operations include the leasing, marketing and fleet management of railcars and other assets, railcar repair and metal fabrication. Prior to 2018, the Company reported the Retail operations as a fifth reportable business segment even though it did not meet the quantitative thresholds for segment disclosures. As previously disclosed, the Company closed the Retail business during 2017, and accordingly has recast the prior results for this segment within the Other category, which also includes other corporate level costs 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. The Company does not have any customers who represent 10 percent or more of total revenues.
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Revenues from external customers
 
 
 
 
 
 
 
Grain
$
343,430

 
$
497,613

 
$
986,202

 
$
1,464,588

Ethanol
194,849

 
191,531

 
568,625

 
533,515

Plant Nutrient
104,188

 
103,620

 
542,911

 
514,943

Rail
43,112

 
43,093

 
134,982

 
121,632

Other

 
738

 

 
47,595

Total
$
685,579

 
$
836,595

 
$
2,232,720

 
$
2,682,273

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Inter-segment sales
 
 
 
 
 
 
 
Grain
$
442

 
$
72

 
$
1,435

 
$
279

Plant Nutrient

 

 

 
241

Rail
288

 
327

 
959

 
893

Total
$
730

 
$
399

 
$
2,394

 
$
1,413

 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Income (loss) before income taxes
 
 
 
 
 
 
 
Grain
$
(8,619
)
 
$
2,641

 
$
1,228

 
$
4,497

Ethanol
9,058

 
6,098

 
17,022

 
12,474

Plant Nutrient
(7,976
)
 
(7,920
)
 
8,239

 
(27,074
)
Rail
5,732

 
6,127

 
10,645

 
18,065

Other
(2,057
)
 
(2,024
)
 
(13,734
)
 
(27,665
)
Noncontrolling interests
223

 
83

 
(175
)
 
73

Total
$
(3,639
)
 
$
5,005

 
$
23,225

 
$
(19,630
)


30

Table of Contents

(in thousands)
September 30, 2018
 
December 31, 2017
 
September 30, 2017
Identifiable assets
 
 
 
 
 
Grain
$
788,770

 
$
948,871

 
$
799,655

Ethanol
263,949

 
180,173

 
173,545

Plant Nutrient
415,314

 
379,309

 
389,396

Rail
564,227

 
490,448

 
446,884

Other
119,358

 
163,553

 
154,680

Total
$
2,151,618

 
$
2,162,354

 
$
1,964,160



14. 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 of 2017, the Company’s Plant Nutrient business recorded a $2.2 million reserve for settlement of a 2015 legal claim.
The estimated losses for all other outstanding claims that are considered reasonably possible is not material.
Commitments
In the first quarter of 2018, the Company began construction of a new ethanol facility, which is expected to be completed in 2019. Portions of the project are covered by design and build contracts, with approximately $105.9 million of remaining obligation, of which $10.5 million has been prepaid, as of September 30, 2018.
Build-to-Suit Lease
In August 2015, the Company entered into a lease agreement with an initial term of 15 years for a build-to-suit facility to be used as the new corporate headquarters which was completed in the third quarter of 2016. Since the Company is deemed to be the owner of this facility for accounting purposes during the construction period, it has recognized an asset and a corresponding financing obligation.
The Company has recorded a build-to-suit financing obligation in other long-term liabilities of $23.1 million, $24.3 million, and $24.7 million at September 30, 2018, December 31, 2017, and September 30, 2017, respectively. The Company has recorded a build-to-suit financing obligation in other current liabilities of $1.5 million, $1.4 million, and $1.4 million at September 30, 2018, December 31, 2017, and September 30, 2017, respectively.



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15. Supplemental Cash Flow Information

Certain supplemental cash flow information, including noncash investing and financing activities for the nine months ended September 30, 2018 and 2017 are as follows:
 
Nine months ended September 30,
(in thousands)
2018
 
2017
Supplemental disclosure of cash flow information
 
 
 
Interest paid
$
23,327

 
$
20,356

Noncash investing and financing activity
 
 
 
Capital projects incurred but not yet paid
13,941

 
6,319

Investment merger (decreasing equity method investments and non-controlling interest)

 
8,360

Dividends declared not yet paid
4,663

 
4,501

Debt resulting from accounting standard adoption
36,953

 

Railcar assets resulting from accounting standard adoption
25,643

 



16. Sale of Assets
The Company closed on an agreement to sell its grain elevators in Humboldt, Kenton and Dyer, Tennessee for $19.5 million plus working capital during the second quarter of 2018 and its Como location for $1.3 million plus working capital during the third quarter of 2018.
During the third quarter of 2018, the Company also closed on an agreement to sell one of its convertible preferred security investments for $6.4 million and recorded a pre-tax gain of $3.9 million in Other income, net.

The Company sold two of its retail properties during the third quarter of 2017 for $7.6 million and recorded a $5.7 million gain in Other income, net.

On March 31, 2017 the Company sold four farm center locations in Florida for $17.4 million and recorded a $4.7 million gain, net of transaction costs in Other income, net. The sale price included a working capital adjustment of $3.6 million.

17. Exit Costs and Assets Held for Sale

The Company classified $29.5 million of assets as held for sale on the Condensed Consolidated Balance Sheet at September 30, 2018. This includes $25.1 million of Rail Group assets, which is primarily comprised of barges. Additionally, property plant and equipment of $4.4 million was classified as held for sale including $4.2 million of Retail store assets and $0.2 million relating to administrative offices at an outlying location in the Plant Nutrient Group

The Company classified $37.9 million of assets as Assets held for sale on the Condensed Consolidated Balance Sheet at December 31, 2017. This includes $19.5 million of Property, plant and equipment, net, $11.4 million of Inventories, and $1.2 million of Commodity derivative assets related to certain western Tennessee locations of the Grain Group. The Company classified $4.2 million and $1.6 million of additional Property, plant and equipment, net as Assets held for sale related to the remaining Retail store assets and administrative offices at an outlying location in the Plant Nutrient Group, respectively.

The Company classified $8.4 million of Property, plant and equipment, net as Assets held for sale on the Condensed Consolidated Balance Sheet at September 30, 2017, all of which related to Retail store assets.

The Retail business closed during the second quarter of 2017. Inventory and fixtures liquidation efforts were completed throughout the year. The Company recorded minimal additional exit charges during the third quarter of 2017 and a total of $11.5 million during the first nine months of 2017.



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18. Subsequent Events

On October 15, 2018, the Company entered into an agreement to purchase the remaining equity (not currently owned by the Company) of LTG. The transaction will also result in the consolidation of Thompsons and related entities as they are currently jointly owned by the Company and LTG.  The Company currently owns approximately 32.5% of LTG equity and will acquire the remaining approximately 67.5% interest for approximately $305 million, which includes the Company’s share of estimated working capital of the acquired entities and other closing adjustments. The Company will assume approximately $166 million of long-term debt, consisting of up to $130 million from LTG and about $36 million from Thompsons. The Company will pay the purchase price with cash and unregistered common shares of the Company. The Company intends to fund the cash portion utilizing the Company's existing line of credit. The final purchase price will be dependent on the number of shares issued, share price on date of closing, and actual working capital, among other items. The transaction is expected to close in the January 2019.


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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. The reader is 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, 2017 (“2017 Form 10-K”). In some cases, the reader 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 2017 Form 10-K, have not materially changed through the third quarter of 2018, other than as a result of adopting the new revenue recognition accounting standard. See additional information regarding these policies in the Notes to the Condensed Consolidated Financial statements herein in Notes 1 and 7.

Executive Overview

Our operations are organized, managed and classified into four reportable business segments: Grain, Ethanol, Plant Nutrient, and Rail. Each of these segments is based on the nature of products and services offered. Prior to 2018, we reported the Retail operations as a fifth reportable business segment even though it did not meet the quantitative thresholds for segment disclosures. As previously disclosed, we closed the Retail business during 2017, and accordingly have recast the prior results for this segment within the Other category, which also includes other corporate level costs not attributable to an operating segment.

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 between periods may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes in gross profit.

Grain Group

The Grain Group’s results in the third quarter were down due to significantly lower basis levels, due primarily to high new crop yields and exports tariffs. While the drop in basis levels led to third quarter losses, the Group should now have the ability to fill the remainder of our storage capacity at attractive prices which provides strong basis appreciation opportunity going into the fourth quarter.

Grain inventories on hand at September 30, 2018 were 72.0 million bushels. These amounts compare to 75.1 million bushels on hand at September 30, 2017, of which 1.0 million bushels were stored for others. Total grain storage capacity, including temporary pile storage, was approximately 140 million bushels at September 30, 2018 compared to 153 million bushels at September 30, 2017. This decrease in capacity is a result of the sale of four Tennessee locations in 2018.

In October, the Company announced that it had entered into a merger agreement with Lansing Trade Group, LLC, its long-time affiliate, to acquire the 67.5% of Lansing equity that it does not already own. We believe the acquisition will create a grain and trading business of highly complementary assets with greater scale that will significantly expand our reach in the agricultural marketplace.

Ethanol Group

The Ethanol Group's third quarter results reflect increased ethanol volumes from improved yields at the plant locations as well as an increase in coproduct sales. Improved DDG values helped drive improved results at the Group's unconsolidated LLC's.

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The construction of the Group's new bio-refinery facility is well underway and the project is expected to be operational by mid- 2019.

Ethanol and related coproducts volumes for the three and nine months ended September 30, 2018 and 2017 were as follows:
(in thousands)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Ethanol (gallons shipped)
117,848

 
108,452

 
337,984

 
307,379

E-85 (gallons shipped)
16,022

 
12,482

 
47,501

 
32,385

Corn Oil (pounds shipped)
5,200

 
4,504

 
15,574

 
12,842

DDG (tons shipped) *
40

 
42

 
120

 
121

* DDG tons shipped converts wet tons to a dry ton equivalent amount

The above table shows only shipped volumes that flow through the Company's sales revenues. Total ethanol, corn oil and DDG production by the unconsolidated LLCs is higher. However, the portion of that volume that is sold directly to its customers is excluded here.

Plant Nutrient Group

The Plant Nutrient Group's third quarter results reflect a decrease in sales volume in our primary nutrients and lower margins in our specialty nutrient products. While primary product margins have improved, the outlook for the Group remains challenged.

Storage capacity at our wholesale nutrient and farm center facilities, including leased storage, was approximately 476 thousand tons for dry nutrients and approximately 515 thousand tons for liquid nutrients at September 30, 2018, compared to approximately 478 thousand tons for dry nutrients and approximately 525 thousand tons for liquid nutrients at September 30, 2017.

Tons of product sold for the three and nine months ended September 30, 2018 and 2017 were as follows:
(in thousands)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Primary nutrients
214

 
254

 
1,072

 
1,099

Specialty nutrients
108

 
109

 
541

 
540

Other
13

 
15

 
42

 
53

Total tons
335

 
378

 
1,655

 
1,692


In the table above, primary nutrients is comprised of nitrogen, phosphorus, and potassium from our wholesale and farm center businesses. Specialty nutrients encompasses low-salt liquid starter fertilizers, micro-nutrients for wholesale and farm center businesses, as well as the lawn business. Other tons includes those from the cob business.

Rail Group

The Rail Group results reflect a decrease in the leasing business due to lower leasing rates. Renewal lease rates are lower than the expiring rates, even though market rates have seen gradual improvement. Despite lower lease rates, the base leasing business remains healthy as it saw an increase in average utilization rates from 85.8 percent in the third quarter of 2017 to 92.0 percent in the third quarter of 2018. A portion of this increase is attributable to the railcar scrap program from the second quarter. However, most of the increase is from higher industry carload traffic. Rail Group assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) at September 30, 2018 were 22,509 compared to 22,986 at September 30, 2017, due to the scrapped cars and excluding the remaining cars held for sale.

The Group expects continued steady growth in cars on lease, with an abundant railcar supply putting pressure on renewing lease rates. We also expect the repair business to continue to grow profitably.


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Other
Our “Other” activities include corporate income and expense and cost for functions that provide support and services to the operating segments. The results include expenses and benefits not allocated to the operating segments, including a portion of our ERP project. The results of our former retail business, which was closed in 2017, are also included in "Other" activities.

Operating Results
The following discussion focuses on the operating results as shown in the Condensed Consolidated Statements of Operations and includes a separate discussion by segment. Additional segment information is included in the Notes to the Condensed Consolidated Financial Statements herein in Note 13 Segment Information.
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Sales and merchandising revenues
$
685,579

 
$
836,595

 
$
2,232,720

 
$
2,682,273

Cost of sales and merchandising revenues
631,715

 
766,924

 
2,024,677

 
2,448,310

Gross profit
53,864

 
69,671

 
208,043

 
233,963

Operating, administrative and general expenses
65,986

 
68,153

 
190,096

 
219,242

Asset impairment

 

 
6,272

 

Goodwill impairment

 

 

 
42,000

Interest expense (income)
5,176

 
5,384

 
20,000

 
17,472

Equity in earnings (losses) of affiliates, net
7,225

 
3,586

 
20,601

 
8,093

Other income (expense), net
6,434

 
5,285

 
10,949

 
17,028

Income (loss) before income taxes
(3,639
)
 
5,005

 
23,225

 
(19,630
)
Income (loss) attributable to noncontrolling interests
223

 
83

 
(175
)
 
73

Income (loss) before income taxes attributable to The Andersons, Inc.
$
(3,862
)
 
$
4,922

 
$
23,400

 
$
(19,703
)
Comparison of the three months ended September 30, 2018 with the three months ended September 30, 2017:
Grain Group
 
Three months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
343,430

 
$
497,613

Cost of sales and merchandising revenues
326,818

 
465,297

Gross profit
16,612

 
32,316

Operating, administrative and general expenses
26,142

 
27,622

Interest expense (income)
2,126

 
1,898

Equity in earnings (losses) of affiliates, net
2,412

 
(694
)
Other income (expense), net
625

 
539

Income (loss) before income taxes
$
(8,619
)
 
$
2,641


Operating results for the Grain Group declined by $11.3 million compared to the results of the same period last year. Sales and merchandising revenues decreased $154.2 million and cost of sales and merchandising revenues decrease $138.5 million for an unfavorable net gross profit impact of $15.7 million. The adoption of ASC 606 led to a decrease in revenue of $170.4 million related primarily to grain origination revenues. The gross profit decrease was primarily driven by mark-to-market changes on our grain inventory that we believe will substantially rebound before year-end.

Equity in earnings of affiliates improved by $3.1 million due to better operating results from Lansing Trade Group during the quarter.


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Ethanol Group
 
Three months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
194,849

 
$
191,531

Cost of sales and merchandising revenues
187,889

 
185,143

Gross profit
6,960

 
6,388

Operating, administrative and general expenses
3,296

 
4,526

Interest expense (income)
(784
)
 
(27
)
Equity in earnings (losses) of affiliates, net
4,813

 
4,280

Other income (expense), net
20

 
12

Income (loss) before income taxes
9,281

 
6,181

Income (loss) attributable to noncontrolling interests
223

 
83

Income (loss) before income taxes attributable to The Andersons, Inc.
$
9,058

 
$
6,098


Operating results for the Ethanol Group improved $3.0 million from the same period last year. Sales and merchandising revenues increased $3.3 million compared to the results of the same period last year. This was driven by strong yields which led to a 9% increase in ethanol gallons sold. Cost of sales and merchandising revenues increased as a result of the increase in sales volume.

Operating, administrative and general expenses decreased $1.2 million primarily due to a $1.5 million write-off of a potential capital project that occurred in 2017.

Equity in earnings of affiliates increased $0.5 million due to improved results from the unconsolidated ethanol LLCs. The improved results were driven by an improvement in DDG values and productivity savings in the current quarter.
Plant Nutrient Group
 
Three months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
104,188

 
$
103,620

Cost of sales and merchandising revenues
88,646

 
86,271

Gross profit
15,542

 
17,349

Operating, administrative and general expenses
22,829

 
22,086

Interest expense (income)
1,315

 
1,561

Other income (expense), net
626

 
(1,622
)
Income (loss) before income taxes
$
(7,976
)
 
$
(7,920
)

Operating results for the Plant Nutrient Group were flat compared to the same period in the prior year. Sales and merchandising revenues increased $0.6 million which was more than offset by an increase in cost of sales and merchandising revenues of $2.4 million. This led to a decrease in gross profit of $1.8 million. While there was an 10% reduction in volume year over year, much of the shortfall in gross profit is the result of continued margin compression for specialty nutrients.

Operating, administrative and general expenses increased $0.7 million due an increase in amortization from capitalized software.

Other income is $2.2 million higher due to a legal settlement of $2.1 million paid in the prior year.

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Rail Group
 
Three months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
43,112

 
$
43,093

Cost of sales and merchandising revenues
28,362

 
29,671

Gross profit
14,750

 
13,422

Operating, administrative and general expenses
6,636

 
6,246

Interest expense (income)
2,602

 
1,742

Other income (expense), net
220

 
693

Income (loss) before income taxes
$
5,732

 
$
6,127


Operating results declined $0.4 million from the same period last year while Sales and merchandising revenues remained flat. Leasing revenues increased by approximately $1.4 million due to higher utilization and repair and other revenues increased $0.3 million. This was offset by a decrease in car sales revenue of $2.1 million as we sold fewer cars than prior year. Cost of sales and merchandising revenues decreased $1.3 million compared to the prior year due to lower car sales, in addition to lower freight and storage costs, as we had on average fewer idle cars than the prior year quarter. As a result, gross profit increased $1.3 million compared to last year.

Interest expense increased $0.9 million as a result of the revolving asset-based loan and impact of adopting the new revenue recognition standard.
Other
 
Three months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$

 
$
738

Cost of sales and merchandising revenues

 
542

Gross profit

 
196

Operating, administrative and general expenses
7,083

 
7,673

Interest expense (income)
(83
)
 
210

Other income (expense), net
4,943

 
5,663

Income (loss) before income taxes
$
(2,057
)
 
$
(2,024
)

Sales and merchandising revenues decreased $0.7 million, cost of sales and merchandising revenues decreased $0.5 million and gross profit decreased $0.2 million. These decreases are a result of the retail business winding down operations in the prior year.

Operating, administrative and general expenses decreased $0.6 million. We incurred $3.5 million of transaction costs related to the merger with LTG which was partially offset by reduction in health care claim costs. Additionally, labor, severance, benefits and other operating expenses decreased $1.5 million due to the shutdown of the retail business as these costs were incurred in the third quarter of 2017 but not incurred in the second quarter of 2018.

Other income, net decreased by $0.7 million. Income for 2018 includes $3.9 million of gains related to the sale of an investment and an increase in value of $1.2 million related to another investment, while 2017 includes $5.7 million of gains related to the sale of retail stores.

Income Taxes

For the three months ended September 30, 2018, the Company recorded income tax benefit of $1.8 million at an effective rate of 48.5%. In 2017, the Company recorded an income tax expense of $2.4 million at an effective tax rate of 47.4%. The net increase in effective tax rate resulted from the current period loss before income taxes, discrete net tax benefits from provision to return items including transition tax, and additional tax benefits for prior year amendments for federal tax credits. This was offset by the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the U.S. tax reform.

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Comparison of the Nine months ended September 30, 2018 with the Nine months ended September 30, 2017:
Grain Group
 
Nine months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
986,202

 
$
1,464,588

Cost of sales and merchandising revenues
908,833

 
1,378,176

Gross profit
77,369

 
86,412

Operating, administrative and general expenses
77,669

 
78,904

Asset impairment
1,564

 

Interest expense (income)
9,015

 
6,921

Equity in earnings (losses) of affiliates, net
9,909

 
864

Other income (expense), net
2,198

 
3,046

Income (loss) before income taxes
$
1,228

 
$
4,497


Operating results for the Grain Group declined by $3.3 million compared to the results of the same period last year. Sales and merchandising revenues decreased $478.4 million which was largely offset by a decrease in cost of sales and merchandising revenues of $469.3 million for a decrease in gross profit of $9.0 million. The adoption of ASC 606 led to a decrease in revenue of $515.4 million and an equal offsetting decrease to cost of sales related primarily to grain origination revenues. The gross profit decrease was driven by mark-to-market changes on our grain inventory in the third quarter.

In the second quarter of 2018, asset impairment charges were recorded for $1.6 million related to Grain operations in Tennessee. These assets were sold during the third quarter.

Interest expense increased $2.1 million due to rising interest rates and higher average working capital usage.

Equity in earnings of affiliates improved by $9.0 million due to better operating results from Lansing Trade Group.

Ethanol Group
 
Nine months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
568,625

 
$
533,515

Cost of sales and merchandising revenues
553,757

 
518,267

Gross profit
14,868

 
15,248

Operating, administrative and general expenses
9,966

 
10,016

Interest expense (income)
(1,095
)
 
(52
)
Equity in earnings (losses) of affiliates, net
10,692

 
7,229

Other income (expense), net
158

 
34

Income (loss) before income taxes
16,847

 
12,547

Income (loss) attributable to noncontrolling interests
(175
)
 
73

Income (loss) before income taxes attributable to The Andersons, Inc.
$
17,022

 
$
12,474


Operating results for the Ethanol Group improved $4.5 million from the same period last year. Sales and merchandising revenues increased $35.1 million compared to the results of the same period last year. This was driven by an 11% increase in ethanol volumes largely attributable to the Albion expansion. Cost of sales and merchandising revenues increased as a result of the increase in sales volume.

Interest expense is $1.0 million less than the same period last year as a result of capitalizing interest related to the construction of the bio-refinery facility.

Equity in earnings of affiliates increased $3.5 million due to improved results from the unconsolidated ethanol LLCs. Improved earnings are driven by improved DDG values, lower expense and lower productivity savings in the current quarter.

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Plant Nutrient Group
 
Nine months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
542,911

 
$
514,943

Cost of sales and merchandising revenues
467,965

 
431,852

Gross profit
74,946

 
83,091

Operating, administrative and general expenses
64,210

 
67,727

Goodwill impairment

 
42,000

Interest expense (income)
4,397

 
5,016

Other income (expense), net
1,900

 
4,578

Income (loss) before income taxes
$
8,239

 
$
(27,074
)

Operating results for the Plant Nutrient Group improved $35.3 million over the same period in the prior year, driven mostly from the nonrecurring goodwill impairment charge of $42.0 recorded in the prior year. Sales and merchandising revenues increased $28.0 million which was more than offset by an increase in cost of sales and merchandising revenues of $36.1 million. This led to an $8.1 million decrease in gross profit as the result of margin compression, mainly for specialty products and the sale of the Florida Farm Center after the first quarter of 2017.

Operating, administrative and general expenses decreased $3.5 million, largely due to the sale of the Florida farm center locations in 2017.

Other income, net decreased $2.7 million which is a result of a $4.7 million gain on the sale of farm center locations in Florida and a legal settlement of $2.1 million that were recorded in 2017.
Rail Group
 
Nine months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
134,982

 
$
121,632

Cost of sales and merchandising revenues
94,122

 
83,203

Gross profit
40,860

 
38,429

Operating, administrative and general expenses
18,730

 
17,141

Asset impairment
4,708

 

Interest expense (income)
7,688

 
5,487

Other income (expense), net
911

 
2,264

Income (loss) before income taxes
$
10,645

 
$
18,065


Operating results declined $7.4 million from the same period last year. Sales and merchandising revenues increased $13.4 million. Revenue from car sales increased by $9.5 million, including cars scrapped, and leasing revenues increased by $6.0 million due to higher utilization. These were offset by a $2.1 million decrease in repair and other revenues. Cost of sales and merchandising revenues increased $10.9 million compared to the prior year primarily due to an increase in car sales. As a result, gross profit increased $2.4 million compared to last year.

Operating, administrative and general expenses increased primarily due to an increase in depreciation from cars added to the balance sheet as a result of adopting the new revenue accounting standard.

Asset impairment charges were recorded for $4.7 million from a decision to scrap idle, out-of-favor cars during the second quarter of 2018.

Other income decreased $1.4 million, as end of lease settlements that occurred in the first quarter of 2017 did not recur.

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Other
 
Nine months ended September 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$

 
$
47,595

Cost of sales and merchandising revenues

 
36,812

Gross profit

 
10,783

Operating, administrative and general expenses
19,521

 
45,454

Interest expense (income)
(5
)
 
100

Other income (expense), net
5,782

 
7,106

Income (loss) before income taxes
$
(13,734
)
 
$
(27,665
)

Sales and merchandising revenues decreased $47.6 million, cost of sales and merchandising revenues decreased $36.8 million and gross profit decreased $10.8 million. These decreases are a result of the retail business partially operating in the first six months of 2017 but no longer operational in 2018.

Operating, administrative and general expenses decreased $25.9 million primarily due to a decrease in labor, severance, benefits and other operating expenses that were incurred in the first nine months of 2017 as a result of the shutdown of the retail business, but not incurred in 2018.

Other income, net decreased by $1.4 million. Income for 2018 includes $3.9 million of gains related to the sale of an investment and an increase in value of $1.2 million related to another investment, while 2017 includes $5.7 million in gains related to the sale of retail stores and $1.2 million for the sale of fixtures.

Income Taxes

For the nine months ended September 30, 2018, an income tax expense of $5.7 million was recorded at an effective rate of 24.4%. In 2017, income tax expense of $7.5 million was recorded at an effective rate of (38.2)%. The change in 2018 effective tax rate is primarily due to the benefits of tax reform as well as a nondeductible goodwill impairment charge that was recorded in the prior year.


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Liquidity and Capital Resources
Working Capital
At September 30, 2018, the Company had working capital of $187.6 million. The following table presents changes in the components of current assets and current liabilities:
(in thousands)
September 30, 2018
 
September 30, 2017
 
Variance
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
16,820

 
$
24,478

 
$
(7,658
)
Accounts receivable, net
206,380

 
196,192

 
10,188

Inventories
490,331

 
475,602

 
14,729

Commodity derivative assets – current
76,861

 
45,202

 
31,659

Other current assets
58,374

 
53,958

 
4,416

Assets held for sale
29,527

 
8,383

 
21,144

Total current assets
878,293

 
803,815

 
74,478

Current Liabilities:
 
 
 
 
 
Short-term debt
132,000

 
19,000

 
113,000

Trade and other payables
344,406

 
381,359

 
(36,953
)
Customer prepayments and deferred revenue
38,242

 
29,520

 
8,722

Commodity derivative liabilities – current
91,403

 
38,578

 
52,825

Accrued expenses and other current liabilities
68,925

 
67,064

 
1,861

Current maturities of long-term debt
15,677

 
53,972

 
(38,295
)
Total current liabilities
690,653

 
589,493

 
101,160

Working Capital
$
187,640

 
$
214,322

 
$
(26,682
)
September 30, 2018 current assets increased $74.5 million in comparison to those of September 30, 2017. This increase was primarily due to increases in accounts receivable, inventories, assets held for sale and commodity derivative assets. Accounts receivable increased due to the amount and timing of sales in the Grain Group. The increase in inventory relates to an increase in Plant Nutrients inventory as a result of holding inventory for appreciation, which was partially offset by a decrease in Grain inventory due to the sale of Tennessee locations. Assets held for sale increased primarily as a result of the decision to sell barges in the Rail Group. Current commodity derivative assets and liabilities, which reflects the customer net asset or liability based on the value of forward contracts as compared to market prices at the end of the period, show a net decrease. See also the discussion below on additional sources and uses of cash for an understanding of the decrease in cash from prior year.
Current liabilities increased $101.2 million compared to the prior year primarily due to increases in short-term debt and commodity derivative liabilities. Current maturities of long-term debt decreased as debt was paid down using short-term debt. Overall, debt increased due of timing of payables and purchases of fixed assets in the rail group. Additionally, trade and other payables decreased due to higher hold pay requests from vendors and a decrease in payables related to Tennessee due to the sale of these locations.
Sources and Uses of Cash
Operating Activities
Our operating activities provided cash of $28.8 million and $60.7 million in the first nine months of 2018 and 2017, respectively. The decrease in cash provided was due to changes in working capital, as discussed above. This was partially offset by a $16.2 million decrease due to lower dividends from equity affiliates.
Investing Activities
Investing activities used cash of $115.9 million through the first nine months of 2018 compared to cash used of $64.8 million in the prior year. Cash used for the purchases of property, plant, equipment, and software increased due to costs associated with the construction of the bio-refinery in the first nine months of 2018. This was partially offset by $15.7 million proceeds from the sale of assets from the sale of three Tennessee grain locations, corporate investments and proceeds from scrapping project in the Rail Group.

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In 2018, we expect to spend a total of $120 million for the purchase of railcars and related leases and capitalized modifications of railcars. We also expect these purchases to be funded from sales and dispositions or non-recourse debt of approximately $100 million during the year.
In addition to the construction of the bio-refinery, total capital spending for 2018 on property, plant and equipment in our base business excluding rail leasing activity, but inclusive of information technology spending is expected to be approximately $60 million.
Financing Activities
Financing activities provided cash of $69.0 million and used $34.0 million for the nine months ended September 30, 2018 and 2017, respectively. This was largely due to an increase in proceeds from debt and an increase in proceeds from noncontrolling interest owner related to our investment in the bio-refinery.
We are party to borrowing arrangements with a syndicate of banks that provide a total of $1,085.0 million in borrowings. This amount includes $15.0 million of debt of The Andersons Denison Ethanol LLC, $70 million of debt of ELEMENT LLC and $200.0 million of debt of The Andersons Railcar Leasing Company LLC, that is non-recourse to the Company. Of that total, we had $823.1 million available for borrowing at September 30, 2018. Peak short-term borrowings to date were $555 million on April 12, 2018. Typically, our highest borrowing occurs in the late winter and early spring due to seasonal inventory requirements in our fertilizer and grain businesses.

We paid $14.0 million in dividends in the nine months of 2018 compared to $13.5 million in the prior year. We paid $0.165 per common share for the dividends paid in January, April and July 2018 and $0.16 per common share for the dividends paid in January, April and July 2017. On August 24, 2018 we declared a cash dividend of $0.165 per common share payable on October 22, 2018 to shareholders of record on October 1, 2018.
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, 2018. 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 ethanol plant assets and railcar assets.
Because we are a significant borrower of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices and/or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, we receive a return of cash.
We believe our sources of liquidity will be adequate to fund our operations, capital expenditures and payments of dividends in the foreseeable future.

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Off-Balance Sheet Transactions

Our Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. We lease assets from financial intermediaries through sale-leaseback transactions, the majority of which involve operating leasebacks. Rail Group assets we own or lease from a financial intermediary are generally leased to a customer under an operating lease. We also arrange non-recourse lease transactions under which we sell assets to a financial intermediary, and assign the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, we generally provide ongoing maintenance and management services for the financial intermediary, and receive a fee for such services.

The following table describes our Rail Group asset positions at September 30, 2018: 
Method of Control
Financial Statement
 
Units
Owned - railcars available for sale
On balance sheet – current
 
665

Owned - railcar assets leased to others
On balance sheet – non-current
 
18,853

Railcars leased from financial intermediaries
Off balance sheet
 
2,502

Railcars in non-recourse arrangements
Off balance sheet
 
326

Total Railcars
 
 
22,346

Locomotive assets leased to others
On balance sheet – non-current
 
24

Locomotives leased from financial intermediaries
Off balance sheet
 
4

Total Locomotives
 
 
28

Barge assets leased from financial intermediaries
Off balance sheet
 
15

Total Barges
 
 
15

In addition, we manage 750 railcars for third party customers or owners for which we receive a fee and we classified 69 railcars and 50 barges as held for sale as of September 30, 2018, all of which are excluded from the table above.

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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, 2017. There were no material changes in market risk, specifically commodity and interest rate risk during the quarter ended September 30, 2018.

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. Based on the results of this evaluation, management concluded that, as of September 30, 2018, the Company's disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2017.  As required by Rule 13a-15(d) 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 any change in the Company’s internal controls over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting. The Company is undertaking the phased implementation of an ERP software system. The Company believes it is maintaining and monitoring appropriate internal controls during the implementation period and further believes that its internal control environment will be enhanced as a result of this implementation.  There have been no other 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 are 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 most significant factors known to us that could materially adversely affect our business, financial condition or operating results are described in our 2017 Form 10-K (Item 1A).

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

No sales or repurchases of shares have occurred in 2018.

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Item 6. Exhibits
(a) Exhibits
 
 
 
 
No.
  
Description
 
 
 
2.1
 
 
 
 
12
  
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
101
 
Financial Statements from the interim report on Form 10-Q of The Andersons, Inc. for the period ended September 30, 2018, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations, (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 6, 2018
 
By /s/ Patrick E. Bowe
 
 
Patrick E. Bowe
 
 
Chief Executive Officer (Principal Executive Officer)
 
 
Date: November 6, 2018
 
By /s/ Brian A. Valentine
 
 
Brian A. Valentine
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 


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Exhibit Index
The Andersons, Inc.
 
 
 
 
No.
  
Description
 
 
 
2.1
 
 
 
 
12
  
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
101
 
Financial Statements from the interim report on Form 10-Q of The Andersons, Inc. for the period ended September 30, 2018, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations, (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.


49