XNAS:ANDE Andersons Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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



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


2



Part I. Financial Information


Item 1. Financial Statements


The Andersons, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)(In thousands)
 
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
23,930

 
$
20,390

 
$
18,616

Restricted cash
5,644

 
18,651

 
12,572

Accounts receivable, net
205,046

 
167,640

 
240,254

Inventories (Note 2)
597,091

 
760,459

 
469,551

Commodity derivative assets – current
122,010

 
83,950

 
187,438

Deferred income taxes
18,784

 
21,483

 
17,710

Other current assets
38,535

 
34,649

 
30,867

Total current assets
1,011,040

 
1,107,222

 
977,008

Other assets:
 
 
 
 
 
Commodity derivative assets – noncurrent
4,844

 
2,289

 
8,560

Other assets, net
70,040

 
53,327

 
46,610

Equity method investments
189,610

 
199,061

 
179,888

 
264,494

 
254,677

 
235,058

Railcar assets leased to others, net (Note 3)
252,965

 
197,137

 
178,141

Property, plant and equipment, net (Note 3)
266,275

 
175,087

 
153,642

Total assets
$
1,794,774

 
$
1,734,123

 
$
1,543,849

Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Borrowings under short-term line of credit
$
309,608

 
$
71,500

 
$
194,200

Accounts payable for grain
129,979

 
391,905

 
80,374

Other accounts payable
148,497

 
142,762

 
164,325

Customer prepayments and deferred revenue
55,912

 
79,557

 
64,231

Commodity derivative liabilities – current
29,764

 
15,874

 
24,289

Accrued expenses and other current liabilities
51,283

 
60,445

 
51,410

Current maturities of long-term debt (Note 10)
29,647

 
32,208

 
45,432

Total current liabilities
754,690

 
794,251

 
624,261

Other long-term liabilities
11,546

 
43,014

 
33,757

Commodity derivative liabilities – noncurrent
454

 
1,519

 
1,850

Employee benefit plan obligations
50,437

 
52,972

 
30,835

Long-term debt, less current maturities (Note 10)
317,648

 
238,885

 
260,645

Deferred income taxes
70,806

 
64,640

 
68,038

Total liabilities
1,205,581

 
1,195,281

 
1,019,386

Commitments and contingencies (Note 11)

 

 

Shareholders’ equity:
 
 
 
 
 
Common shares, without par value (42,000 shares authorized at 6/30/12, 12/31/11 and 6/30/11; 19,198 shares issued)
96

 
96

 
96

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

 

 

Additional paid-in-capital
180,535

 
179,463

 
177,266

Treasury shares (557, 697 and 629 shares at 6/30/12, 12/31/11 and 6/30/11, respectively; at cost)
(12,519
)
 
(14,997
)
 
(12,214
)
Accumulated other comprehensive loss
(42,998
)
 
(43,090
)
 
(29,467
)
Retained earnings
444,539

 
402,523

 
374,715

Total shareholders’ equity of The Andersons, Inc.
569,653

 
523,995

 
510,396

Noncontrolling interests
19,540

 
14,847

 
14,067

Total equity
589,193

 
538,842

 
524,463

Total liabilities and equity
$
1,794,774

 
$
1,734,123

 
$
1,543,849

See Notes to Condensed Consolidated Financial Statements


3


The Andersons, Inc.
Condensed Consolidated Statements of Income
(Unaudited)(In thousands, except per share data)
 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2012
 
2011
2012
 
2011
Sales and merchandising revenues
$
1,315,834

 
$
1,338,167

$
2,452,967

 
$
2,339,841

Cost of sales and merchandising revenues
1,213,184

 
1,215,395

2,264,447

 
2,138,384

Gross profit
102,650

 
122,772

188,520

 
201,457

Operating, administrative and general expenses
59,210

 
57,730

119,310

 
111,437

Interest expense
5,380

 
7,562

10,710

 
14,898

Other income:
 
 
 
 
 
 
Equity in earnings of affiliates
5,096

 
12,512

9,379

 
19,758

Other income, net
2,671

 
2,018

5,917

 
4,324

Income before income taxes
45,827

 
72,010

73,796

 
99,204

Income tax provision
17,356

 
25,975

27,597

 
35,781

Net income
28,471

 
46,035

46,199

 
63,423

Net income (loss) attributable to the noncontrolling interests
(728
)
 
817

(1,407
)
 
939

Net income attributable to The Andersons, Inc.
$
29,199

 
$
45,218

$
47,606

 
$
62,484

Per common share:
 
 
 
 
 
 
Basic earnings attributable to The Andersons, Inc. common shareholders
$
1.57

 
$
2.44

$
2.56

 
$
3.37

Diluted earnings attributable to The Andersons, Inc. common shareholders
$
1.56

 
$
2.42

$
2.54

 
$
3.34

Dividends paid
$
0.1500

 
$
0.1100

$
0.3000

 
$
0.2200

See Notes to Condensed Consolidated Financial Statements

The Andersons, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)(In thousands)
 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2012
 
2011
2012
 
2011
Net income
$
28,471

 
$
46,035

$
46,199

 
$
63,423

Other comprehensive income, net of tax:
 
 
 
 
 
 
Decrease in estimated fair value of investment in debt securities (net of income tax of 1,126)
(1,884
)
 

(1,884
)
 

Change in unrecognized actuarial loss and prior service cost (net of income tax of $895, ($521), $1,135 and ($411))
1,497

 
(875
)
1,898

 
(689
)
Cash flow hedge activity (net of income tax of $8, ($44), $47 and $13)
14

 
(74
)
78

 
21

Other comprehensive income
(373
)
 
(949
)
92

 
(668
)
Comprehensive income
28,098

 
45,086

46,291

 
62,755

Comprehensive income attributable to the noncontrolling interests
(728
)
 
817

(1,407
)
 
939

Comprehensive income attributable to The Andersons, Inc.
$
28,826

 
$
44,269

$
47,698

 
$
61,816

See Notes to Condensed Consolidated Financial Statements


4


The Andersons, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)(In thousands)
 
Six Months Ended
June 30,
 
2012
 
2011
Operating Activities
 
 
 
Net income
$
46,199

 
$
63,423

Adjustments to reconcile net income to cash used in operating activities:
 
 
 
Depreciation and amortization
22,500

 
19,951

Bad debt expense
493

 
2,702

Cash distributions in excess of income of unconsolidated affiliates
9,451

 
(4,439
)
Gains on sales of railcars and related leases
(8,674
)
 
(7,033
)
Excess tax benefit from share-based payment arrangement
(35
)
 
(21
)
Deferred income taxes
4,399

 
4,443

Stock based compensation expense
2,875

 
1,863

Other
62

 
14

Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(36,277
)
 
(90,627
)
Inventories
176,766

 
177,357

Commodity derivatives
(27,790
)
 
33,294

Other assets
1,624

 
8,790

Accounts payable for grain
(261,925
)
 
(194,222
)
Other accounts payable and accrued expenses
(63,758
)
 
47,744

Net cash (used in) provided by operating activities
(134,090
)
 
63,239

Investing Activities
 
 
 
Purchase of investments
(19,996
)
 
(100
)
Proceeds from redemption of investment
19,998

 

Acquisition of businesses
(93,112
)
 

Purchases of railcars
(77,028
)
 
(32,155
)
Proceeds from sale of railcars
16,057

 
17,774

Purchases of property, plant and equipment
(38,171
)
 
(12,572
)
Proceeds from sale of property, plant and equipment
725

 
120

Proceeds from minority investor
6,100

 

Change in restricted cash
13,007

 
(438
)
Net cash used in investing activities
(172,420
)
 
(27,371
)
Financing Activities
 
 
 
Net change in short-term borrowings
238,108

 
(46,900
)
Proceeds from issuance of long-term debt
106,878

 
44,391

Payments of long-term debt
(30,675
)
 
(39,663
)
Proceeds from sale of treasury shares to employees and directors
1,350

 
710

Payments of debt issuance costs
(72
)
 
(815
)
Purchase of treasury stock

 
(140
)
Dividends paid
(5,574
)
 
(4,075
)
Excess tax benefit from share-based payment arrangement
35

 
21

Net cash provided by (used in) financing activities
310,050

 
(46,471
)
Increase (decrease) in cash and cash equivalents
3,540

 
(10,603
)
Cash and cash equivalents at beginning of period
20,390

 
29,219

Cash and cash equivalents at end of period
$
23,930

 
$
18,616

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

 
$
177,875

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

 
$
13,128

 
$
464,559

Net income
 
 
 
 
 
 
 
 
62,484

 
939

 
63,423

Other comprehensive income
 
 
 
 
 
 
(668
)
 
 
 
 
 
(668
)
Purchase of treasury shares (4 shares)
 
 
 
 
(140
)
 
 
 
 
 
 
 
(140
)
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $1,199 (133 shares)
 
 
(609
)
 
1,984

 
 
 
 
 
 
 
1,375

Dividends declared ($0.22 per common share)
 
 
 
 
 
 
 
 
(4,086
)
 
 
 
(4,086
)
Balance at June 30, 2011
$
96

 
$
177,266

 
$
(12,214
)
 
$
(29,467
)
 
$
374,715

 
$
14,067

 
$
524,463

Balance at December 31, 2011
$
96

 
$
179,463

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

 
$
14,847

 
$
538,842

Net income
 
 
 
 
 
 
 
 
47,606

 
(1,407
)
 
46,199

Other comprehensive income
 
 
 
 
 
 
92

 
 
 
 
 
92

Proceeds received from minority investor
 
 
 
 
 
 
 
 
 
 
6,100

 
6,100

Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $675 (140 shares)
 
 
1,072

 
2,478

 
 
 
 
 
 
 
3,550

Dividends declared ($0.30 per common share)
 
 
 
 
 
 
 
 
(5,590
)
 
 
 
(5,590
)
Balance at June 30, 2012
$
96

 
$
180,535

 
$
(12,519
)
 
$
(42,998
)
 
$
444,539

 
$
19,540

 
$
589,193

See Notes to Condensed Consolidated Financial Statements


5


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

1. Basis of Presentation and Consolidation
These Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”). All significant intercompany accounts and transactions are eliminated in consolidation.
Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of the results of operations for the periods indicated, have been made. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.
The year-end Condensed Consolidated Balance Sheet data at December 31, 2011 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. A Condensed Consolidated Balance Sheet as of June 30, 2011 has been included as the Company operates in several seasonal industries.
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in The Andersons, Inc. Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).
New Accounting Standard
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. Moreover, an entity can bypass the qualitative assessment and perform the quantitative impairment test for any indefinite-lived intangible in any period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of this guidance will not impact the Company's Consolidated Financial Statements or disclosures.

2. Inventories
Major classes of inventories are as follows:
 
(in thousands)
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Grain
$
465,453

 
$
570,337

 
$
298,580

Ethanol and by-products
18,516

 
5,461

 
5,381

Agricultural fertilizer and supplies
57,637

 
118,716

 
112,892

Lawn and garden fertilizer and corncob products
21,714

 
37,001

 
22,585

Retail merchandise
30,685

 
25,612

 
27,492

Railcar repair parts
2,777

 
3,063

 
2,252

Other
309

 
269

 
369

 
$
597,091

 
$
760,459

 
$
469,551








6


3. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
 
(in thousands)
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Land
$
19,505

 
$
17,655

 
$
15,424

Land improvements and leasehold improvements
52,536

 
47,958

 
45,634

Buildings and storage facilities
172,354

 
150,461

 
142,864

Machinery and equipment
243,216

 
191,833

 
186,245

Software
11,204

 
10,861

 
10,603

Construction in progress
33,613

 
13,006

 
6,696

 
532,428

 
431,774

 
407,466

Less accumulated depreciation and amortization
266,153

 
256,687

 
253,824

 
$
266,275

 
$
175,087

 
$
153,642

There have been significant additions to property, plant and equipment in the first half of 2012 primarily related to business acquisitions, construction of a grain load-out facility and the phased implementation of an enterprise resource planning system.
Depreciation expense on property, plant and equipment amounted to $12.0 million, $20.4 million and $9.9 million for the periods ended June 30, 2012, December 31, 2011, and June 30, 2011, respectively.
Railcars
The components of Railcar assets leased to others are as follows:
 
(in thousands)
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Railcar assets leased to others
$
332,997

 
$
272,883

 
$
248,030

Less accumulated depreciation
80,032

 
75,746

 
69,889

 
$
252,965

 
$
197,137

 
$
178,141

Railcar assets leased to others has increased significantly during the six months ended June 30, 2012 due to an increase in railcar purchases. The rail fleet has increased to approximately 23,100 cars from 22,400 last year.
Depreciation expense on railcar assets leased to others amounted to $7.8 million, $13.8 million and $6.7 million for the periods ended June 30, 2012, December 31, 2011 and June 30, 2011, respectively.

4. 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. The exchange traded contracts are primarily via the regulated Chicago Mercantile Exchange. The Company’s forward purchase and sales contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.

All of these contracts are considered derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company accounts for its commodity derivatives at estimated fair value, the same method it uses to value its grain inventory. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.
Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in sales and merchandising revenues.
Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a futures, options or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The Company nets, by counterparty, its futures and over-the-counter positions against the cash collateral provided or received. The margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Consolidated Balance Sheets.
The following table presents at June 30, 2012, December 31, 2011 and June 30, 2011, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash posted/received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within short-term commodity derivative assets (or liabilities) on the Consolidated Balance Sheets:
 
 
June 30, 2012
 
December 31, 2011
 
June 30, 2011
(in thousands)
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
Collateral paid
$
151,939

 
$

 
$
66,870

 
$

 
$
43,191

 
$

Fair value of derivatives
(106,629
)
 

 
(20,480
)
 

 
40,476

 

Balance at end of period
$
45,310

 
$

 
$
46,390

 
$

 
$
83,667

 
$

Certain of our contracts allow the Company to post items other than cash as collateral. Grain inventory posted as collateral on our derivative contracts are recorded in Inventories on the Condensed Consolidated Balance Sheets and the fair value of such inventory was $6.1 million, $1.0 million, and $78.2 million as of June 30, 2012, December 31, 2011, and June 30, 2011, respectively.

The gains included in the Company’s Condensed Consolidated Statements of Income and the line items in which they are located for the three and six months ended June 30, 2012 and 2011 are as follows:
 
 
Three months ended
June 30,
Six months ended
June 30,
(in thousands)
2012
 
2011
2012
 
2011
Gains (losses) on commodity derivatives included in sales and merchandising revenues
$
(12,900
)
 
$
102,585

$
(16,557
)
 
$
103,863

At June 30, 2012, the Company had the following volume of commodity derivative contracts outstanding (on a gross basis):
 
Commodity
Number of bushels
(in thousands)
 
Number of gallons
(in thousands)
 
Number of pounds
(in thousands)
 
Number of tons
(in thousands)
Non-exchange traded:
 
 
 
 
 
 
 
Corn
209,347

 

 

 

Soybeans
32,936

 

 

 

Wheat
10,847

 

 

 

Oats
14,217

 

 

 

Ethanol

 
98,858

 

 

Corn oil

 

 
54,319

 

Other

 

 

 
75

Subtotal
267,347

 
98,858

 
54,319

 
75

Exchange traded:
 
 
 
 
 
 
 
Corn
110,965

 

 

 

Soybeans
27,030

 

 

 

Wheat
38,835

 

 

 

Oats
4,230

 

 

 

Bean oil

 

 
15,480

 

Ethanol

 
1,176

 

 

Other

 
10

 

 

Subtotal
181,060

 
1,186

 
15,480

 

Total
448,407

 
100,044

 
69,799

 
75


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

(in thousands except per common share data)
Three months ended
June 30,
 
Six months ended
June 30,
2012
 
2011
 
2012
 
2011
Net income attributable to The Andersons, Inc.
$
29,199

 
$
45,218

 
$
47,606

 
$
62,484

Less: Distributed and undistributed earnings allocated to nonvested restricted stock
146

 
205

 
179

 
235

Earnings available to common shareholders
$
29,053

 
$
45,013

 
$
47,427

 
$
62,249

Earnings per share – basic:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
18,541

 
18,485

 
18,522

 
18,469

Earnings per common share – basic
$
1.57

 
$
2.44

 
$
2.56

 
$
3.37

Earnings per share – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
18,541

 
18,485

 
18,522

 
18,469

Effect of dilutive awards
132

 
134

 
166

 
168

Weighted average shares outstanding – diluted
18,673

 
18,619

 
18,688

 
18,637

Earnings per common share – diluted
$
1.56

 
$
2.42

 
$
2.54

 
$
3.34

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




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

 
$

$

 
$

Interest cost
1,105

 
1,163

2,248

 
2,289

Expected return on plan assets
(1,534
)
 
(1,558
)
(3,073
)
 
(3,118
)
Recognized net actuarial loss
299

 
247

749

 
470

Benefit cost (income)
$
(130
)
 
$
(148
)
$
(76
)
 
$
(359
)
 
 
Postretirement Benefits
Postretirement Benefits
(in thousands)
Three months ended
June 30,
Six months ended
June 30,
2012
 
2011
2012
 
2011
Service cost
$
184

 
$
136

$
376

 
$
277

Interest cost
327

 
325

660

 
643

Amortization of prior service cost
(136
)
 
(136
)
(272
)
 
(272
)
Recognized net actuarial loss
313

 
242

640

 
451

Benefit cost
$
688

 
$
567

$
1,404

 
$
1,099


7. Segment Information
The Company’s operations include six reportable business segments that are distinguished primarily on the basis of products and services offered. The Grain business includes grain merchandising, the operation of terminal grain elevator facilities and the investment in Lansing Trade Group, LLC (“LTG”). The Ethanol business purchases and sells ethanol and also manages the ethanol production facilities organized as limited liability companies that are investments accounted for under the equity method (“ethanol LLCs”) and various service contracts for these investments. The Ethanol Group also performs the same functions for The Andersons Denison Ethanol LLC, a consolidated subsidiary. Rail operations include the leasing, marketing and fleet management of railcars and locomotives, railcar repair and metal fabrication. The Plant Nutrient business manufactures and distributes agricultural inputs, primarily fertilizer, to dealers and farmers. Turf & Specialty operations include the production and distribution of turf care and corncob-based products. The Retail business operates large retail stores, a specialty food market, a distribution center and a lawn and garden equipment sales and service shop. Included in “Other” are the corporate level amounts not attributable to an operating segment.
 
 
Three months ended
June 30,
Six months ended
June 30,
 
2012
 
2011
2012
 
2011
(in thousands)
 
 
 
 
 
 
Revenues from external customers
 
 
 
 
 
 
Grain
$
718,911

 
$
797,130

$
1,418,772

 
$
1,435,097

Ethanol
167,758

 
164,704

318,428

 
297,452

Plant Nutrient
308,797

 
259,823

484,157

 
383,472

Rail
32,046

 
29,501

67,905

 
58,411

Turf & Specialty
43,845

 
41,551

88,972

 
88,821

Retail
44,477

 
45,458

74,733

 
76,588

Other

 


 

Total
$
1,315,834

 
$
1,338,167

$
2,452,967

 
$
2,339,841

 
 
Three months ended
June 30,
Six months ended
June 30,
(in thousands)
2012
 
2011
2012
 
2011
Inter-segment sales
 
 
 
 
 
 
Grain
$

 
$
1

$
1

 
$
2

Ethanol

 


 

Plant Nutrient
5,334

 
3,221

8,417

 
8,606

Rail
208

 

411

 
189

Turf & Specialty
497

 
627

1,473

 
1,332

Retail

 


 

Other

 


 

Total
$
6,039

 
$
3,849

$
10,302

 
$
10,129

 
 
Three months ended
June 30,
Six months ended
June 30,
(in thousands)
2012
 
2011
2012
 
2011
Interest expense (income)
 
 
 
 
 
 
Grain
$
2,687

 
$
3,859

$
5,939

 
$
8,699

Ethanol
185

 
274

209

 
686

Plant Nutrient
632

 
973

1,342

 
1,816

Rail
1,156

 
1,511

2,334

 
2,958

Turf & Specialty
312

 
372

668

 
821

Retail
157

 
207

353

 
467

Other
251

 
366

(135
)
 
(549
)
Total
$
5,380

 
$
7,562

$
10,710

 
$
14,898


 
Three months ended
June 30,
Six months ended
June 30,
(in thousands)
2012
 
2011
2012
 
2011
Equity in earnings (loss) of affiliates
 
 
 
 
 
 
Grain
$
7,505

 
$
5,428

$
13,457

 
$
11,658

Ethanol
(2,410
)
 
7,082

(4,081
)
 
8,096

Plant Nutrient
1

 
2

3

 
4

Rail

 


 

Turf & Specialty

 


 

Retail

 


 

Other

 


 

Total
$
5,096

 
$
12,512

$
9,379

 
$
19,758

 
 
Three months ended
June 30,
Six months ended
June 30,
(in thousands)
2012
 
2011
2012
 
2011
Other income, net
 
 
 
 
 
 
Grain
$
489

 
$
522

$
1,316

 
$
1,102

Ethanol
20

 
37

36

 
95

Plant Nutrient
1,010

 
134

1,128

 
259

Rail
824

 
841

1,600

 
1,594

Turf & Specialty
289

 
259

490

 
549

Retail
155

 
144

279

 
300

Other
(116
)
 
81

1,068

 
425

Total
$
2,671

 
$
2,018

$
5,917

 
$
4,324

 
 
Three months ended
June 30,
Six months ended
June 30,
(in thousands)
2012
 
2011
2012
 
2011
Income (loss) before income taxes
 
 
 
 
 
 
Grain
$
15,277

 
$
36,541

$
34,712

 
$
51,642

Ethanol
(2,105
)
 
8,830

(1,984
)
 
12,401

Plant Nutrient
27,953

 
24,077

33,781

 
29,191

Rail
7,199

 
2,763

15,217

 
6,309

Turf & Specialty
2,753

 
1,778

4,955

 
5,056

Retail
1,428

 
1,877

(1,321
)
 
(787
)
Other
(5,950
)
 
(4,673
)
(10,157
)
 
(5,547
)
Noncontrolling interests
(728
)
 
817

(1,407
)
 
939

Total
$
45,827

 
$
72,010

$
73,796

 
$
99,204


(in thousands)
June 30, 2012
 
December 31, 2011
 
June 30, 2011
Identifiable assets
 
 
 
 
 
Grain
$
844,526

 
$
883,395

 
$
772,995

Ethanol
212,094

 
148,975

 
93,059

Plant Nutrient
214,617

 
240,543

 
281,691

Rail
310,651

 
246,188

 
214,971

Turf & Specialty
66,580

 
69,487

 
61,141

Retail
56,986

 
52,018

 
54,243

Other
89,320

 
93,517

 
65,749

Total
$
1,794,774

 
$
1,734,123

 
$
1,543,849














8. Related Party Transactions
Equity Method Investments
The Company, directly or indirectly, holds investments in companies that are accounted for under the equity method ("the ethanol LLCs). The Company’s equity in these entities is presented at cost plus its accumulated proportional share of income or loss, less any distributions it has received.
The following table presents the Company’s investment balance in each of its equity method investees by entity:
 
(in thousands)
June 30, 2012
 
December 31, 2011
 
June 30, 2011
The Andersons Albion Ethanol LLC
$
31,248

 
$
32,829

 
$
31,075

The Andersons Clymers Ethanol LLC
38,225

 
40,001

 
40,106

The Andersons Marathon Ethanol LLC
37,782

 
43,019

 
37,577

Lansing Trade Group, LLC
80,052

 
81,209

 
69,175

Other
2,303

 
2,003

 
1,955

Total
$
189,610

 
$
199,061

 
$
179,888

The Company holds a majority interest (66%) in The Andersons Ethanol Investment LLC (“TAEI”). This consolidated entity holds a 50% interest in The Andersons Marathon Ethanol LLC (“TAME”). The noncontrolling interest in TAEI is attributed 34% of the gains and losses of TAME recorded by the Company.
The Company holds a majority interest (85%) in The Andersons Denison Ethanol LLC ("TADE") which is a consolidated entity. The noncontrolling interest in TADE is attributed 15% of the gains and losses of TADE recorded by the Company.
The following table summarizes income (losses) earned from the Company’s equity method investments by entity:
 
(in thousands)
% ownership at
June 30, 2012
(direct and indirect)
 
Three months ended
June 30,
Six months ended
June 30,
 
 
 
2012
 
2011
 
2012
 
2011
The Andersons Albion Ethanol LLC
50%
 
$
(215
)
 
$
2,146

 
$
418

 
$
2,530

The Andersons Clymers Ethanol LLC
38%
 
(655
)
 
2,783

 
(1,012
)
 
2,919

The Andersons Marathon Ethanol LLC
50%
 
(1,540
)
 
2,153

 
(3,487
)
 
2,648

Lansing Trade Group, LLC
51% *
 
7,244

 
5,346

 
13,160

 
11,512

Other
7%-33%
 
262

 
84

 
300

 
149

Total
 
 
$
5,096

 
$
12,512

 
$
9,379

 
$
19,758


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

Total distributions received from unconsolidated affiliates were $18.8 million for the first half of 2012.
While the Company holds a majority of the outstanding shares of LTG, all major operating decisions of LTG are made by LTG’s Board of Directors and the Company does not have a majority of the board seats. In addition, based on the terms of the LTG operating agreement, the minority shareholders have substantive participating rights that allow them to effectively participate in the decisions made in the ordinary course of business that are significant to LTG. Due to these factors, the Company does not have control over LTG and therefore accounts for this investment under the equity method.

Investment in Debt Securities
The Company owns 100% of the cumulative convertible preferred shares of Iowa Northern Railway Corporation (“IANR”), which operates a short-line railroad in Iowa. As a result of this investment, the Company has a 49.9% voting interest in IANR, with the remaining 50.1% voting interest held by the common shareholders. The preferred shares have certain rights associated with them, including voting, dividends, liquidation, redemption and conversion. Dividends accrue to the Company at a rate of 14% annually whether or not declared by IANR and are cumulative in nature. The Company can convert its preferred shares into common shares of IANR at any time, but the shares cannot be redeemed until May 2015. This investment is accounted for as “available-for-sale” debt securities in accordance with ASC 320 and is carried at estimated fair value in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheet. The estimated fair value of the Company’s investment in IANR as of June 30, 2012 was $17.4 million.
Based on the Company’s assessment, IANR is considered a variable interest entity (“VIE”). Since the Company does not possess the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, it is not considered to be the primary beneficiary of IANR and therefore does not consolidate IANR. The decisions that most significantly impact the economic performance of IANR are made by IANR’s Board of Directors. The Board of Directors has five directors; two directors from the Company, two directors from the common shareholders and one independent director who is elected by unanimous decision of the other four directors. The vote of four of the five directors is required for all key decisions.
The Company’s current maximum exposure to loss related to IANR is $20.2 million, which represents the Company’s investment at fair value plus unpaid accrued dividends to date of $2.8 million. The Company does not have any obligation or commitments to provide additional financial support to IANR.
Related Party Transactions
In the ordinary course of business, the Company will enter into related party transactions with each of the investments described above, along with other related parties. The following table sets forth the related party transactions entered into for the time periods presented:
 
(in thousands)
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
Sales revenues
$
226,989

 
$
233,966

 
$
420,050

 
$
416,836

Service fee revenues (a)
5,393

 
5,852

 
10,872

 
11,019

Purchases of product
145,513

 
159,781

 
294,322

 
288,779

Lease income (b)
1,855

 
1,415

 
3,733

 
2,667

Labor and benefits reimbursement (c)
3,010

 
2,611

 
5,751

 
5,384

Other expenses (d)
197

 
45

 
336

 
45

Accounts receivable at June 30 (e)
16,575

 
23,558

 


 


Accounts payable at June 30 (f)
20,478

 
21,409

 


 


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

For the quarters ended June 30, 2012 and 2011, revenues recognized for the sale of ethanol that the Company purchased from the ethanol LLCs were $151.9 million and $168.7 million, respectively. For the six months ended June 30, 2012 and 2011, revenues recognized for the sale of ethanol that the Company purchased from the ethanol LLCs were $294.9 million and $326.7 million, respectively. For the quarters ended June 30, 2012 and 2011, revenues recognized for the sale of corn to the ethanol LLCs under these agreements were $165.3 million and $194.4 million, respectively. For the six months ended June 30, 2012 and 2011, revenues recognized for the sale of corn to the ethanol LLCs were $344.4 million and $341.1 million, respectively.
From time to time, the Company enters into derivative contracts with certain of its related parties, including the ethanol LLCs and LTG, for the purchase and sale of corn and ethanol, for similar price risk mitigation purposes and on similar terms as the purchase and sale derivative contracts it enters into with unrelated parties. The fair value of derivative contracts with related parties was a gross asset for the periods ended June 30, 2012, December 31, 2011 and June 30, 2011 of $1.1 million, $0.6 million, and $4.1 million, respectively. The fair value of derivative contracts with related parties was a gross liability for the periods ended June 30, 2012, December 31, 2011 and June 30, 2011 of $1.8 million, $1.9 million, and $2.3 million, respectively.

9. Fair Value Measurements
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2012, December 31, 2011 and June 30, 2011:
 
(in thousands)
June 30, 2012
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
104

 
$

 
$

 
$
104

Restricted cash
5,644

 

 

 
5,644

Commodity derivatives, net
48,558

 
48,078

 

 
96,636

Convertible preferred securities (b)

 

 
17,350

 
17,350

Other assets and liabilities (a)
7,182

 
(2,022
)
 

 
5,160

Total
$
61,488

 
$
46,056

 
$
17,350

 
$
124,894

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

 
$

 
$

 
$
183

Restricted cash
18,651

 

 

 
18,651

Commodity derivatives, net
43,503

 
22,876

 
2,467

 
68,846

Convertible preferred securities (b)

 

 
20,360

 
20,360

Other assets and liabilities (a)
6,224

 

 
(2,178
)
 
4,046

Total
$
68,561

 
$
22,876

 
$
20,649

 
$
112,086

 
(in thousands)
June 30, 2011
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
182

 
$

 
$

 
$
182

Restricted cash
12,572

 

 

 
12,572

Commodity derivatives, net
89,769

 
71,296

 
8,794

 
169,859

Convertible preferred securities (b)

 

 
15,790

 
15,790

Other assets and liabilities (a)
6,345

 

 
(1,883
)
 
4,462

Total
$
108,868

 
$
71,296

 
$
22,701

 
$
202,865

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

The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because “basis” for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the Agribusiness industry, we have concluded that “basis” is a “Level 2” fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a significant input to fair value for the majority of these commodity contracts.
The Company’s convertible preferred securities are measured at fair value using a combination of the income approach on a quarterly basis and the market approach on an annual basis. Specifically, the income approach incorporates the use of the Discounted Cash Flow method, whereas the Market Approach incorporates the use of the Guideline Public Company method. Application of the Discounted Cash Flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future. The assumptions input into this method are estimated annual cash flows for a specified estimation period, the discount rate, and the terminal value at the end of the estimation period. In the Guideline Public Company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. On an annual basis, a comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.
A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:
 
 
2012

2011
(in thousands)
Interest
rate
derivatives
and
swaptions

Convertible
preferred
securities

Commodity
derivatives,
net

Interest
rate
derivatives
and
swaptions

Convertible
preferred
securities

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

 
$
2,467

 
$
(2,156
)
 
$
15,790

 
$
12,406

Gains (losses) included in earnings:

 

 

 

 

 

New contracts

 

 

 

 

 
442

Change in market prices

 

 

 
(2
)
 

 
1,877

Settled contracts

 

 

 

 

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

 

 

 
149

 

 

New contracts entered into

 

 

 
507

 

 

Transfers to level 2
2,178

 

 
(2,467
)
 

 

 

Transfers from level 2

 

 

 

 

 
2,500

Asset (liability) at March 31,
$

 
$
20,360

 
$

 
$
(1,502
)
 
$
15,790

 
$
14,983

Gains (losses) included in earnings:


 


 


 


 


 


       New contracts

 

 

 


 

 
(290
)
       Change in market prices

 

 

 
(310
)
 

 
(5,179
)
       Settled contracts

 

 

 


 

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

 
(3,010
)
 

 
(120
)
 

 

New contracts entered into

 

 

 
49

 

 

Transfers to level 2

 

 

 

 

 

Transfers from level 2

 

 

 

 

 
209

Asset (liability) at June 30,
$

 
$
17,350

 
$

 
$
(1,883
)
 
$
15,790

 
$
8,794


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)
June 30,
2012

December 31,
2011
Fair value of long-term debt
$
360,911

 
$
279,001

Fair value in excess of carrying value
13,615

 
7,908

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

10. Debt
The Company is party to borrowing arrangements with a syndicate of banks. See Note 10 in the Company’s 2011 Form 10-K for a complete description of these arrangements. Total borrowing capacity for the Company under all lines of credit is currently at $878.1 million, including $28.1 million non-recourse debt of The Andersons Denison Ethanol LLC ("TADE") discussed below. At June 30, 2012, the Company had a total of $463.4 million available for borrowing under its lines of credit.

Borrowings on the short-term line of credit increased to $309.6 million at June 30, 2012 due to margin calls on commodity contracts as a result of rising commodity prices. The Company drew $55 million on the long-term syndicate line in the second quarter. The long-term portion of the syndicate line can be drawn on and the resulting debt considered long-term when used for long-term purposes such as replacing long-term debt that is maturing, funding the purchase of long-term assets, or increasing permanent working capital when needed. The expectation at the time of drawing is that it will be kept open until more permanent replacement debt is secured, until other long-term assets are sold, or earnings are generated to pay it down.

TADE, a consolidated subsidiary of the Company, entered into borrowing arrangements with a syndicate of financial institutions which provide a $13 million short-term line of credit, a $15.1 million long-term line of credit, and a $12.4 million term loan. TADE had standby letters of credit outstanding of $822 thousand at June 30, 2012, which reduces the amount available on the lines of credit. As of June 30, 2012, $1.6 million in borrowings were outstanding on the short-term line of credit, $15.0 million in borrowings were outstanding on the long-term line of credit and $12.4 million in borrowings were outstanding on the term loan. Borrowings under the lines of credit and the term loan bear interest at variable interest rates, which are based off LIBOR plus an applicable spread. The maturity date for the short-term line of credit is June 1, 2013, January 20, 2022 for the long-term line of credit and January 1, 2017 for the term loan. TADE was in compliance with all financial and non-financial covenants as of June 30, 2012, including but not limited to minimum working capital and net worth. TADE debt is collateralized by the mortage on the ethanol facility and related equipment or other assets and is not guaranteed by the Company.
The Company’s short-term and long-term debt at June 30, 2012December 31, 2011 and June 30, 2011 consisted of the following:
 
(in thousands)
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Borrowings under short-term line of credit - nonrecourse
$
1,608

 
$

 
$

Borrowings under short-term line of credit - recourse
308,000

 
71,500

 
194,200

Total borrowings under short-term line of credit
$
309,608

 
$
71,500

 
$
194,200

Current maturities of long -term debt – nonrecourse
$
1,385

 
$
157

 
$
2,827

Current mat