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ANDE > SEC Filings for ANDE > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for ANDERSONS INC

Form 10-Q for ANDERSONS INC


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. You are urged to carefully consider these risks and others, including those risk factors listed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Form 10-K"). In some cases, you can identify forward-looking statements by terminology such as "may," "anticipates," "believes," "estimates," "predicts," or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. These forward-looking statements relate only to events as of the date on which the statements are made and the Company undertakes no obligation, other than any imposed by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Critical Accounting Policies and Estimates Our critical accounting policies and critical accounting estimates, as described in our 2013 Form 10-K, have not materially changed during the first quarter of 2014.
Executive Overview
The agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the agricultural commodities that the business deals in will have a relatively equal impact on sales and cost of sales and a much less significant impact on gross profit. As a result, changes in sales for the period may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes to merchandising revenues and service income. Grain Business
Our Grain business operates grain elevators in various states in the U.S. Corn Belt. In addition to storage, merchandising and grain trading, Grain performs marketing, risk management, and corn origination services to its customers and affiliated ethanol production facilities. Grain is a significant investor in Lansing Trade Group, LLC ("LTG"), an established commodity trading, grain handling and merchandising business with operations throughout the country and with global trading/merchandising offices. On January 22, 2014, we entered into an agreement with LTG for a partial share redemption of our investment in LTG, reducing our interest from approximately 47.5 percent to approximately 39.2 percent on a fully diluted basis.
Grain inventories on hand at March 31, 2014 were 89.4 million bushels, of which 5.6 million bushels were stored for others. This compares to 86.4 million bushels on hand at March 31, 2013, of which 17.7 million bushels were stored for others.
First quarter 2014 results reflect the refilling of the pipeline at both the farm level and commercial level, along with strong exports and difficult weather conditions that provided limited opportunity for space income across the U.S. grain industry. Opportunity for space income has improved slightly in the second quarter and we expect this to continue for the balance of the year. However, it is dependent on the progress of the new crop, which at this time is slightly delayed. Overall, the United States Department of Agriculture estimates corn acreage to be around 92 million acres, down four percent from last year. Ethanol Business
Our Ethanol business holds investments in four ethanol production facilities organized as separate limited liability companies, three of which are accounted for under the equity method (the "unconsolidated ethanol LLCs") and one that is consolidated, The Andersons Denison Ethanol LLC ("TADE"). The Ethanol business purchases and sells ethanol, offers facility operations, risk management, and ethanol, corn oil and distillers dried grains ("DDG") marketing to the ethanol plants in which it invests in and operates.
This first quarter reflects strong margins due to several key factors, including reduced industry-wide ethanol production due to natural gas supply, weather and rail logistics. We also saw low levels of U.S. ethanol stocks, a steady increase in US gasoline demand, strong ethanol exports, limited imports, and high DDG prices relative to corn value. At this time, we have locked in positive margins for a majority of planned production in the second and third quarters.


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Ethanol volumes shipped for the three months ended March 31, 2014 and 2013 were as follows:

                                 Three months ended
(in thousands)                        March 31,
                                   2014          2013
Ethanol (gallons shipped) (a)    72,315         69,834
E-85 (gallons shipped)            5,568          3,721
Corn Oil (pounds shipped)        20,363         17,247
DDG (tons shipped) (b)               51             60

(a) The sales volumes are less than the total produced by the LLCs, as a portion of the volume is sold directly to one of its other investors
(b) The sales volumes are less than the total produced by the LLCs, as the unconsolidated LLCs ship directly to its customers Plant Nutrient Business Our Plant Nutrient business is a leading manufacturer, distributor and retailer of agricultural and related plant nutrients and pelleted lime and gypsum products in the U.S. Corn Belt, Florida and Puerto Rico. The Plant Nutrient Group provides warehousing, packaging and manufacturing services to basic manufacturers and other distributors. The business also manufactures and distributes a variety of industrial products throughout the U.S. and Puerto Rico including nitrogen reagents for air pollution control systems used in coal-fired power plants and water treatment products. The major nutrient products sold by the business principally contain nitrogen, phosphate, potassium and sulfur.

Storage capacity at our wholesale nutrient and farm center facilities was approximately 485,000 tons for dry nutrients and approximately 414,000 tons for liquid nutrients at March 31, 2014.
Fertilizer tons sold (including sales and service tons) for the three months ended March 31, 2014 was approximately 0.3 million tons, consistent with those seen in the three months ended March 31, 2013. Volume for the period was lower than anticipated due to the harsh weather experienced during the first quarter 2014, but we expect most of the tonnage will shift into the second quarter. Despite the inclement weather so far in 2014, we do not anticipate a significant decline in planted corn acreage at this time. Rail Business
Our Rail business buys, sells, leases, rebuilds and repairs various types of used railcars and rail equipment. The business also provides fleet management services to fleet owners. Rail has a diversified fleet of car types (boxcars, gondolas, covered and open top hoppers, tank cars and pressure differential cars) and locomotives.
In the first quarter, Rail had gains on sales of railcars and related leases in the amount of $10.8 million compared to $9.7 million in the prior year. Railcars and locomotives under management (owned, leased or managed for financial institutions in non-recourse arrangements) at March 31, 2014 were 22,192 compared to 23,508 at March 31, 2013. The average utilization rate (railcars and locomotives under management that are in lease services, exclusive of railcars managed for third party investors) has increased from 84.6% to 88.4% for the quarters ended March 31, 2013 and 2014, respectively.
The Rail Group is focused on strategically growing the rail fleet and continues to look for opportunities to open new repair facilities. We also anticipate future business related to mandated modification in the tank car industry. Turf & Specialty Business
Turf & Specialty produces granular fertilizer products for the professional lawn care and golf course markets. It also sells consumer fertilizer and weed and turf pest control products for "do-it-yourself" application to mass merchandisers, small independent retailers and other lawn fertilizer manufacturers and performs contract manufacturing of fertilizer and weed and turf pest control products. These products are distributed throughout the United States and Canada and into Europe and Asia. The turf products industry is highly seasonal, with the majority of sales occurring from early spring to early summer. Turf & Specialty is also one of a very limited number of processors of corncob-based products in the United States. Corncob-based products are manufactured for a variety of uses including laboratory animal bedding, private-label cat litter, as well as absorbents, blast cleaners, carriers and polishers. Corncob-based products are sold throughout the year. Retail Business
Our Retail business includes large retail stores operated as "The Andersons" and a specialty food market operated as "The Andersons Market". It also operates a sales and service facility for outdoor power equipment. The retail concept is More for Your Home and the conventional retail stores focus on providing significant product breadth with offerings in home improvement and other mass merchandise categories, as well as specialty foods, wine and indoor and outdoor garden centers.


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The retail business is highly competitive. Our stores compete with a variety of retail merchandisers, including home centers, department and hardware stores, as well as local and national grocers. The Retail Group continues to work on new departments and products to maximize the profitability. Other
Our "Other" business segment represents corporate functions that provide support and services to the operating segments. The results contained within this segment include expenses and benefits not allocated back to the operating segments, including implementation expenses for our ERP project. We anticipate an increase in expenses throughout the remainder of the year as the first stage of the project implementation commences.

Operating Results
The following discussion focuses on the operating results as shown in the
Condensed Consolidated Statements of Income with a separate discussion by
segment. Additional segment information is included in the Notes to the
Condensed Consolidated Financial Statements herein in Note 7. Segment
Information.

                                                                    Three months ended
                                                                         March 31,
(in thousands)                                                     2014            2013
Sales and merchandising revenues                               $ 1,003,294     $ 1,271,970
Cost of sales and merchandising revenues                           926,519       1,192,697
Gross profit                                                        76,775          79,273
Operating, administrative and general expenses                      70,985          62,008
Interest expense                                                     6,002           6,404
Equity in earnings of affiliates, net                               20,501           7,804
Other income, net                                                   19,612           2,726
Income before income taxes                                          39,901          21,391
Income (loss) attributable to noncontrolling interests               3,321            (266 )
Income before income taxes attributable to The Andersons, Inc. $    36,580     $    21,657

Comparison of the three months ended March 31, 2014 with the three months ended March 31, 2013:

Grain Group
                                                                   Three months ended
                                                                        March 31,
(in thousands)                                                     2014           2013
Sales and merchandising revenues                               $  583,159     $  836,495
Cost of sales and merchandising revenues                          566,151        811,645
Gross profit                                                       17,008         24,850
Operating, administrative and general expenses                     23,160         21,183
Interest expense                                                    2,775          3,849
Equity in earnings of affiliates, net                               1,884          7,910
Other income, net                                                  18,346            571
Income before income taxes                                         11,303          8,299
Loss attributable to noncontrolling interest                           (3 )            -
Income before income taxes attributable to The Andersons, Inc. $   11,306     $    8,299

Operating results for the Grain Group have improved $3.0 million compared to the results of the same period last year. Sales and merchandising revenues decreased $253.3 million and is primarily the result of lower grain prices, which decreased almost 30 percent. Cost of sales and merchandising revenues decreased $245.5 million compared to the first quarter of 2013 and was also driven by lower prices. Gross profit is down $7.8 million over the first quarter of 2013 with over half of the decrease a result of lower basis appreciation in corn and wheat, as well as lower wheat inventory. Basis is defined as the difference between cash price of a commodity in one of the Company's facilities and the nearest exchange traded futures price.


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Operating expenses increased $2.0 million compared to the same period in 2013, driven primarily by higher labor and benefit costs and utility costs. Interest expense is lower compared to the same period in 2013 due to lower commodity prices resulting in lower inventory values. Equity in earnings of affiliates decreased $6.0 million over the same period in 2013, primarily driven by a decreased ownership percentage of the investment in LTG and lower operating results of LTG in the first quarter of 2014. Other income is higher in the current year due to a gain, net of deal costs, recognized from the partial share redemption in our investment in LTG of $17.1 million.

Ethanol Group
                                                                   Three months ended
                                                                        March 31,
(in thousands)                                                     2014           2013
Sales and merchandising and service fee revenues               $  188,820     $  199,309
Cost of sales and merchandising revenues                          181,455        194,504
Gross profit                                                        7,365          4,805
Operating, administrative and general expenses                      2,508          2,391
Interest expense                                                      100            326
Equity in earnings (loss) of affiliates, net                       18,617           (106 )
Other income (expense), net                                          (226 )          231
Income before income taxes                                         23,148          2,213
Income (loss) attributable to noncontrolling interests              3,324           (266 )
Income before income taxes attributable to The Andersons, Inc. $   19,824     $    2,479

Operating results for the Ethanol Group increased $17.3 million over the results of the same period last year. Sales and merchandising and service fee revenues decreased $10.5 million and is primarily due to a decrease in the average price per gallon of ethanol sold and price per tons of DDG sold, partially offset by an increase in volume for both. The decrease in cost of sales is due to lower corn prices. The increase in gross profit quarter over quarter is attributed to the increase in ethanol demand and the price of ethanol and DDG relative to corn value which contributed to more favorable margins.

Operating expenses and interest expense were comparable to the same period last year. Equity in earnings of affiliates improved $18.7 million and relates to improved earnings from our unconsolidated ethanol LLC investments. The ethanol plants' performance was favorably impacted by higher ethanol margins resulting from declining corn costs and higher demand for ethanol.

Plant Nutrient Group
                                                  Three months ended
                                                       March 31,
(in thousands)                                    2014          2013
Sales and merchandising revenues               $ 107,630     $ 111,902
Cost of sales and merchandising revenues          93,555        97,953
Gross profit                                      14,075        13,949
Operating, administrative and general expenses    14,900        13,568
Interest expense                                     771           918
Other income (expense), net                          185           (25 )
Loss before income taxes                       $  (1,411 )   $    (562 )

Operating results for the Plant Nutrient Group decreased $0.8 million from the same period last year. Sales and merchandising revenues decreased $4.3 million due to a decrease in average price per ton sold, which followed the price of nutrients. This decrease was partially offset by an increase in volume. The decreases in cost of sales and merchandising revenues and gross profit were also driven by lower costs per ton sold.

Operating expenses were up slightly from the same period in 2013, due to increased labor and benefit costs. There were no significant changes in interest expense or other income.


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Rail Group
                                                  Three months ended
                                                      March 31,
(in thousands)                                     2014         2013
Sales and merchandising revenues               $    52,302    $ 46,364
Cost of sales and merchandising revenues            30,437      27,385
Gross profit                                        21,865      18,979
Operating, administrative and general expenses       5,874       3,838
Interest expense                                     1,656       1,513
Other income, net                                      710         946
Income before income taxes                     $    15,045    $ 14,574

Operating results for the Rail Group increased by $0.5 million compared to the results from the same period last year. The increase in revenues was driven by a $5.8 million increase in car sales and $0.7 million in leasing revenues, partially offset by a decrease in revenues at the repair facilities of $0.6 million. The increase in car sales was due to strong demand for all car types. Cost of sales and merchandising revenues increased $3.1 million compared to the same period last year primarily as a result of higher volume of car sales.

Rail gross profit increased by $2.9 million compared to the first quarter of 2013. While gross profit on car sales increased $1.1 million, gross margin percent decreased as a result of the sales mix. Gross profit in the leasing business increased $2.0 million and is attributed to improved margins through lower expenses in 2014.

Operating expenses increased $2.0 million quarter over quarter primarily due to increased costs of labor and benefits due to recent repair expansion and additional depreciation expense. There were no significant changes in interest expense and other income compared to the same period last year.

Turf & Specialty Group
                                                  Three months ended
                                                      March 31,
(in thousands)                                     2014         2013
Sales and merchandising revenues               $    43,725    $ 47,187
Cost of sales and merchandising revenues            35,250      38,169
Gross profit                                         8,475       9,018
Operating, administrative and general expenses       6,989       4,890
Interest expense                                       418         402
Other income, net                                      307         275
Income before income taxes                     $     1,375    $  4,001

Operating results for the Turf & Specialty Group decreased $2.6 million for the first quarter of 2014 compared to results from the same period last year. Sales and merchandising revenues decreased $3.5 million primarily due to a lower margin sales mix that saw a decrease in the average price per ton sold. Consistent with the decrease in revenues, cost of sales and merchandising revenues decreased $2.9 million compared to the same period last year and was driven by a lower average cost per ton. Gross profit decreased $0.5 million primarily due to a lower margin mix.

Operating expenses increased $2.1 million. The largest driver of this increase was labor and benefit costs due to recent acquisitions and additional depreciation expense. The inclement weather caused additional overtime costs to make up a backlog of orders to service our customers. There were no significant fluctuations in interest expense and other income quarter over quarter.


Table of Contents

Retail Group
                                                  Three months ended
                                                      March 31,
(in thousands)                                    2014          2013
Sales and merchandising revenues               $  27,658     $ 30,713
Cost of sales and merchandising revenues          19,671       23,041
Gross profit                                       7,987        7,672
Operating, administrative and general expenses    10,264       10,740
Interest expense                                     170          215
Other income, net                                    112          114
Loss before income taxes                       $  (2,335 )   $ (3,169 )

Operating results for the Retail Group improved $0.8 million from the same period last year. Sales and merchandising revenues decreased $3.1 million. The average sale per customer remained consistent but we saw a decrease in customer count quarter over quarter, caused, in part, by the weather conditions and the closing of the Woodville store in the first quarter of 2013. Cost of sales and merchandising revenues decreased $3.4 million and was also driven by lower customer counts. Despite lower volumes, gross profit increased due to the strong margins realized on work wear and winter goods.

Operating expenses were $0.5 million lower than the comparable period last year primarily due to lower labor and benefits and lower depreciation expense related to the Woodville store closing and the impairment charge taken in 2013. There were no significant changes in interest expense and other income quarter over quarter.

Other
                                                  Three months ended
                                                      March 31,
(in thousands)                                    2014          2013
Sales and merchandising revenues               $       -     $      -
Cost of sales and merchandising revenues               -            -
Gross profit                                           -            -
Operating, administrative and general expenses     7,290        5,398
Interest (income) expense                            112         (819 )
Other income, net                                    178          614
Loss before income taxes                       $  (7,224 )   $ (3,965 )

Net corporate operating loss not allocated to business segments produced a loss of $7.2 million for the quarter ended March 31, 2014. Operating expenses were higher in the first quarter of 2014 due to higher incentive and benefit costs. Interest (income) expense increased due to mark-to-market adjustments on interest rate derivative contracts.

Income tax expense of $13.9 million was provided at 34.8%. In the first quarter of 2013, income tax expense of $9.1 million was provided at a rate of 42.4%. The higher 2013 effective tax rate was due primarily to a correction made with respect to the accounting for the other comprehensive income ("OCI") portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. The 2014 effective tax rate also reflects a benefit associated with income attributable to noncontrolling interests that does not increase tax expense.

The Company anticipates that its 2014 effective annual rate will be 34.4%. The Company's actual 2013 effective tax rate was 36.0%. The lower effective rate for 2014 is due to increased benefits related to domestic production activities and the 2013 correction made with respect to the accounting for the OCI portion of the Company's retiree health care plan liability and the Medicare Part D subsidy.


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Liquidity and Capital Resources
Working Capital
At March 31, 2014, we had working capital of $246.6 million. The following table
presents changes in the components of current assets and current liabilities:
(in thousands)                                    March 31, 2014       March 31, 2013       Variance
Current Assets:
Cash and cash equivalents                       $         43,693     $         58,284     $  (14,591 )
Restricted cash                                              652                  635             17
Accounts receivable, net                                 191,972              197,842         (5,870 )
Inventories                                              725,584              753,378        (27,794 )
Commodity derivative assets - current                    119,330              158,079        (38,749 )
Deferred income taxes                                      9,104               15,482         (6,378 )
Other current assets                                      48,214               63,350        (15,136 )
Total current assets                                   1,138,549            1,247,050       (108,501 )
Current Liabilities:
Borrowing under short-term line of credit                226,100              292,100        (66,000 )
Accounts payable for grain                               183,998              183,997              1
Other accounts payable                                   177,623              182,013         (4,390 )
Customer prepayments and deferred revenue                124,981              160,191        (35,210 )
. . .
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