Document
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 June 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 July 27, 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)
 
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
58,611

 
$
34,919

 
$
18,934

Restricted cash

 

 
1,033

Accounts receivable, net
218,476

 
183,238

 
186,331

Inventories (Note 2)
495,611

 
648,703

 
463,205

Commodity derivative assets – current (Note 5)
54,259

 
30,702

 
11,619

Other current assets
42,648

 
63,790

 
59,873

Assets held for sale
9,816

 
37,859

 
10,028

Total current assets
879,421

 
999,211

 
751,023

Other assets:
 
 
 
 
 
Commodity derivative assets – noncurrent (Note 5)
1,008

 
310

 
1,191

Goodwill
6,024

 
6,024

 
23,105

Other intangible assets, net
105,289

 
112,893

 
113,492

Other assets, net
26,888

 
12,557

 
8,686

Equity method investments
232,159

 
223,239

 
215,794

 
371,368

 
355,023

 
362,268

Rail Group assets leased to others, net (Note 3)
458,424

 
423,443

 
375,092

Property, plant and equipment, net (Note 3)
408,575

 
384,677

 
423,042

Total assets
$
2,117,788

 
$
2,162,354

 
$
1,911,425


3

Table of Contents

The Andersons, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)(In thousands)
 
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term debt (Note 4)
$
185,000

 
$
22,000

 
$
124,000

Trade and other payables
282,221

 
503,571

 
267,194

Customer prepayments and deferred revenue
16,103

 
59,710

 
15,113

Commodity derivative liabilities – current (Note 5)
85,160

 
29,651

 
18,104

Accrued expenses and other current liabilities
74,512

 
69,579

 
69,256

Current maturities of long-term debt (Note 4)
13,700

 
54,205

 
62,482

Total current liabilities
656,696

 
738,716

 
556,149

Other long-term liabilities
30,325

 
33,129

 
34,441

Commodity derivative liabilities – noncurrent (Note 5)
3,202

 
825

 
334

Employee benefit plan obligations
26,131

 
26,716

 
36,837

Long-term debt, less current maturities (Note 4)
435,580

 
418,339

 
354,066

Deferred income taxes
118,864

 
121,730

 
181,806

Total liabilities
1,270,798

 
1,339,455

 
1,163,633

Commitments and contingencies (Note 14)

 

 

Shareholders’ equity:
 
 
 
 
 
Common shares, without par value (63,000 shares authorized; 29,430 shares issued at 6/30/2018, 12/31/17 and 6/30/2017)
96

 
96

 
96

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

 

 

Additional paid-in-capital
223,259

 
224,622

 
222,261

Treasury shares, at cost (943, 1,063 and 1,080 shares at 6/30/2018, 12/31/17 and 6/30/2017, respectively)
(35,561
)
 
(40,312
)
 
(40,945
)
Accumulated other comprehensive loss
(5,347
)
 
(2,700
)
 
(11,993
)
Retained earnings
635,438

 
633,496

 
570,406

Total shareholders’ equity of The Andersons, Inc.
817,885

 
815,202

 
739,825

Noncontrolling interests
29,105

 
7,697

 
7,967

Total equity
846,990

 
822,899

 
747,792

Total liabilities and equity
$
2,117,788

 
$
2,162,354

 
$
1,911,425

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 June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Sales and merchandising revenues
$
911,402

 
$
993,662

 
$
1,547,141

 
$
1,845,678

Cost of sales and merchandising revenues
820,928

 
905,828

 
1,392,962

 
1,681,386

Gross profit
90,474

 
87,834

 
154,179

 
164,292

Operating, administrative and general expenses
59,853

 
69,544

 
124,110

 
151,089

Asset impairment
6,272

 

 
6,272

 

Goodwill impairment

 
42,000

 

 
42,000

Interest expense
7,825

 
5,988

 
14,824

 
12,088

Other income:
 
 
 
 
 
 
 
Equity in earnings (loss) of affiliates, net
9,803

 
6,385

 
13,376

 
4,507

Other income, net
2,828

 
4,248

 
4,514

 
11,743

Income (loss) before income taxes
29,155

 
(19,065
)
 
26,863

 
(24,635
)
Income tax provision (benefit)
7,742

 
7,652

 
7,432

 
5,117

Net income (loss)
21,413

 
(26,717
)
 
19,431

 
(29,752
)
Net income (loss) attributable to the noncontrolling interests
(116
)
 
(64
)
 
(398
)
 
(10
)
Net income (loss) attributable to The Andersons, Inc.
$
21,529

 
$
(26,653
)
 
$
19,829

 
$
(29,742
)
Per common share:
 
 
 
 
 
 
 
Basic earnings (loss) attributable to The Andersons, Inc. common shareholders
$
0.76

 
$
(0.94
)
 
$
0.70

 
$
(1.05
)
Diluted earnings (loss) attributable to The Andersons, Inc. common shareholders
$
0.76

 
$
(0.94
)
 
$
0.70

 
$
(1.05
)
Dividends declared
$
0.165

 
$
0.160

 
$
0.330

 
$
0.320

See Notes to Condensed Consolidated Financial Statements


5

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)(In thousands)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
21,413

 
$
(26,717
)
 
$
19,431

 
$
(29,752
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in fair value of convertible preferred securities (net of income tax of $0, $0, $(87) and $0)
 

 

 
(87
)
 

Change in unrecognized actuarial loss and prior service cost (net of income tax of $(86), $(628), $(101) and $(635))
 
(287
)
 
(988
)
 
(338
)
 
(998
)
Cash flow hedge activity (net of income tax of $17, $0, $17 and $0)
 
51

 

 
51

 

Foreign currency translation adjustments (net of income tax of $0, $0, $0 and $0)
 
(1,123
)
 
959

 
(2,273
)
 
1,473

Other comprehensive income (loss)
 
(1,359
)
 
(29
)
 
(2,647
)
 
475

Comprehensive income (loss)
 
20,054

 
(26,746
)
 
16,784

 
(29,277
)
Comprehensive income (loss) attributable to the noncontrolling interests
 
(116
)
 
(64
)
 
(398
)
 
(10
)
Comprehensive income (loss) attributable to The Andersons, Inc.
 
$
20,170

 
$
(26,682
)
 
$
17,182

 
$
(29,267
)
See Notes to Condensed Consolidated Financial Statements


6

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)(In thousands)
 
Six months ended June 30,
 
2018
 
2017
Operating Activities
 
 
 
Net income (loss)
$
19,431

 
$
(29,752
)
Adjustments to reconcile net income (loss) to cash used in operating activities:
 
 
 
Depreciation and amortization
45,232

 
42,878

Bad debt expense (recovery)
(837
)
 
839

Equity in (earnings) losses of affiliates, net of dividends
(11,192
)
 
(3,793
)
Gains on sale of Rail Group assets and related leases
(3,989
)
 
(4,984
)
(Gain) loss on sale of assets
(342
)
 
(5,888
)
Stock-based compensation expense
3,006

 
2,935

Goodwill impairment

 
42,000

 Asset impairment
6,272

 

Other
(138
)
 
(1,780
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(33,859
)
 
13,086

Inventories
151,095

 
213,064

Commodity derivatives
34,850

 
27,670

Other assets
17,552

 
10,629

Payables and other accrued expenses
(271,010
)
 
(352,133
)
Net cash provided by (used in) operating activities
(43,929
)
 
(45,229
)
Investing Activities
 
 
 
Acquisition of business, net of cash acquired

 
(3,507
)
Purchases of Rail Group assets
(68,087
)
 
(66,506
)
Proceeds from sale of Rail Group assets
40,967

 
9,390

Purchases of property, plant and equipment and capitalized software
(54,300
)
 
(15,976
)
Proceeds from sale of assets
34,981

 
14,434

Purchase of investments

 
(2,429
)
Other

 
437

Net cash provided by (used in) investing activities
(46,439
)
 
(64,157
)
Financing Activities
 
 
 
Net change in short-term borrowings
163,000

 
93,941

Proceeds from issuance of long-term debt
50,000

 
15,175

Proceeds from long-term financing arrangement

 
10,396

Payments of long-term debt
(110,150
)
 
(42,849
)
Proceeds from noncontrolling interest owner
21,806

 

Payments of debt issuance costs
(787
)
 
(2,024
)
Dividends paid
(9,312
)
 
(8,984
)
Other
(497
)
 
35

Net cash provided by (used in) financing activities
114,060

 
65,690

Decrease in cash and cash equivalents
23,692

 
(43,696
)
Cash and cash equivalents at beginning of period
34,919

 
62,630

Cash and cash equivalents at end of period
$
58,611

 
$
18,934

See Notes to Condensed Consolidated Financial Statements

7

Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Equity
(Unaudited)(In thousands, except per share data)
 
Common
Shares
 
Additional
Paid-in
Capital
 
Treasury
Shares
 
Accumulated
Other
Comprehensive 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)
 
 
 
 
 
 
 
 
(29,742
)
 
(10
)
 
(29,752
)
Other comprehensive income (loss)
 
 
 
 
 
 
475

 
 
 
 
 
475

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)
 
 
(654
)
 
4,386

 
 
 
 
 
 
 
3,732

Dividends declared ($0.32 per common share)
 
 
 
 
 
 
 
 
(9,001
)
 
 
 
(9,001
)
Restricted share award dividend equivalents
 
 
5

 
52

 
 
 
(57
)
 
 
 

Balance at June 30, 2017
$
96

 
$
222,261

 
$
(40,945
)
 
$
(11,993
)
 
$
570,406

 
$
7,967

 
$
747,792

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
96

 
$
224,622

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

 
$
7,697

 
$
822,899

Net income (loss)
 
 
 
 
 
 
 
 
19,829

 
(398
)
 
19,431

Other comprehensive income (loss)
 
 
 
 
 
 
(2,647
)
 
 
 
 
 
(2,647
)
Cash received from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
21,806

 
21,806

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) (120 shares)
 
 
(1,363
)
 
4,631

 
 
 
 
 
 
 
3,268

Dividends declared ($0.33 per common share)
 
 
 
 
 
 
 
 
(9,326
)
 
 
 
(9,326
)
Restricted share award dividend equivalents
 
 


 
120

 
 
 
(120
)
 
 
 

Balance at June 30, 2018
$
96

 
$
223,259

 
$
(35,561
)
 
$
(5,347
)
 
$
635,438

 
$
29,105

 
$
846,990

See Notes to Condensed Consolidated Financial Statements


8

Table of Contents

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 June 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 ASU is effective for annual periods beginning December 15, 2018, with early adoption permitted. The Company adopted ASU 2017-12 during the second quarter of 2018 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 period 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). 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.

9

Table of Contents


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 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 and do not expect the impact to be 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 of Topic 718 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 first quarter 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 first quarter 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.

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 first quarter noting the impact is immaterial.



10

Table of Contents


2. Inventories
Major classes of inventories are as follows:
(in thousands)
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Grain
$
385,118

 
$
505,217

 
$
373,863

Ethanol and co-products
22,828

 
11,003

 
14,041

Plant nutrients and cob products
82,230

 
126,962

 
69,365

Retail merchandise

 

 
906

Railcar repair parts
5,435

 
5,521

 
5,030

 
$
495,611

 
$
648,703

 
$
463,205


Inventories on the Condensed Consolidated Balance Sheets at June 30, 2018, December 31, 2017 and June 30, 2017 do not include 0.1 million, 1.0 million and 0.8 million bushels of grain, respectively, held in storage for others. 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)
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Land
$
29,579

 
$
22,388

 
$
23,566

Land improvements and leasehold improvements
68,384

 
69,127

 
71,236

Buildings and storage facilities
280,226

 
284,820

 
298,077

Machinery and equipment
377,202

 
373,127

 
382,321

Construction in progress
37,456

 
7,502

 
7,372

 
792,847

 
756,964

 
782,572

Less: accumulated depreciation
384,272

 
372,287

 
359,530

 
$
408,575

 
$
384,677

 
$
423,042

Depreciation expense on property, plant and equipment was $23.2 million and $24.1 million for the six months ended June 30, 2018 and 2017, respectively. Additionally, depreciation expense on property, plant and equipment was $11.5 million and $12.0 million for the three months ended June 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 have been reclassified as assets held for sale at June 30, 2018. 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.
Rail Group Assets
The components of Rail Group assets leased to others are as follows:
(in thousands)
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Rail Group assets leased to others
$
564,555

 
$
531,391

 
$
482,524

Less: accumulated depreciation
106,131

 
107,948

 
107,432

 
$
458,424

 
$
423,443

 
$
375,092


11

Table of Contents

Depreciation expense on Rail Group assets leased to others amounted to $12.2 million and $9.7 million for the six months ended June 30, 2018 and 2017, respectively. Additionally, depreciation expense on Rail Group assets leased to others amounted to $6.0 million and $5.0 million for the three months ended June 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. Total borrowing capacity for the Company under all lines of credit is currently at $950.0 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 $65.0 million for The Andersons Railcar Leasing Company LLC. At June 30, 2018, the Company had a total of $642.1 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 June 30, 2018.

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

 
$

 
$

Short-term Debt – Recourse
185,000

 
22,000

 
124,000

Total Short-term Debt
$
185,000

 
$
22,000

 
$
124,000

 
 
 
 
 
 
Current Maturities of Long-term Debt – Non-Recourse
$
2,922

 
$

 
$

Current Maturities of Long-term Debt – Recourse
10,778

 
54,205

 
62,482

Total Current Maturities of Long-term Debt
$
13,700

 
$
54,205

 
$
62,482

 
 
 
 
 
 
Long-term Debt, Less: Current Maturities – Non-Recourse
$
72,290

 
$

 
$

Long-term Debt, Less: Current Maturities – Recourse
363,290

 
418,339

 
354,066

Total Long-term Debt, Less: Current Maturities
$
435,580

 
$
418,339

 
$
354,066


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.

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

12

Table of Contents

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 June 30, 2018December 31, 2017 and June 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:
 
June 30, 2018
 
December 31, 2017
 
June 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)
$
(52,888
)
 
$

 
$
1,351

 
$

 
$
15,452

 
$

Fair value of derivatives
68,244

 

 
17,252

 

 
(12,835
)
 

Balance at end of period
$
15,356

 
$

 
$
18,603

 
$

 
$
2,617

 
$


The following table presents, on a gross basis, current and noncurrent commodity derivative assets and liabilities:
 
June 30, 2018
(in thousands)
Commodity Derivative Assets - Current
 
Commodity Derivative Assets - Noncurrent
 
Commodity Derivative Liabilities - Current
 
Commodity Derivative Liabilities - Noncurrent
 
Total
Commodity derivative assets
$
123,917

 
$
1,022

 
$
626

 
$
36

 
$
125,601

Commodity derivative liabilities
(16,770
)
 
(14
)
 
(85,786
)
 
(3,238
)
 
(105,808
)
Cash collateral
(52,888
)
 

 

 

 
(52,888
)
Balance sheet line item totals
$
54,259

 
$
1,008

 
$
(85,160
)
 
$
(3,202
)
 
$
(33,095
)
 
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


13

Table of Contents

 
June 30, 2017
(in thousands)
Commodity Derivative Assets - Current
 
Commodity Derivative Assets - Noncurrent
 
Commodity Derivative Liabilities - Current
 
Commodity Derivative Liabilities - Noncurrent
 
Total
Commodity derivative assets
$
26,101

 
$
1,201

 
$
4,404

 
$
2

 
$
31,708

Commodity derivative liabilities
(29,934
)
 
(10
)
 
(22,508
)
 
(336
)
 
(52,788
)
Cash collateral
15,452

 

 

 

 
15,452

Balance sheet line item totals
$
11,619

 
$
1,191

 
$
(18,104
)
 
$
(334
)
 
$
(5,628
)

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 six months ended June 30, 2018 and 2017 are as follows:
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Gains (losses) on commodity derivatives included in cost of sales and merchandising revenues
$
45,844

 
$
(41,873
)
 
$
20,608

 
$
(14,848
)
The Company had the following volume of commodity derivative contracts outstanding (on a gross basis) at June 30, 2018, December 31, 2017 and June 30, 2017:
 
June 30, 2018
Commodity (in thousands)
Number of Bushels
 
Number of Gallons
 
Number of Pounds
 
Number of Tons
Non-exchange traded:
 
 
 
 
 
 
 
Corn
272,979

 

 

 

Soybeans
49,208

 

 

 

Wheat
11,163

 

 

 

Oats
36,612

 

 

 

Ethanol

 
332,761

 


 

Corn oil

 

 
6,158

 

Other
82

 
1,500

 

 
77

Subtotal
370,044

 
334,261

 
6,158

 
77

Exchange traded:
 
 
 
 
 
 
 
Corn
133,730

 

 

 

Soybeans
45,775

 

 

 

Wheat
48,105

 

 

 

Oats
1,190

 

 

 

Ethanol

 
140,364

 

 

Subtotal
228,800

 
140,364

 

 

Total
598,844

 
474,625

 
6,158

 
77


14

Table of Contents

 
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

 
June 30, 2017
Commodity (in thousands)
Number of Bushels
 
Number of Gallons
 
Number of Pounds
 
Number of Tons
Non-exchange traded:
 
 
 
 
 
 
 
Corn
184,197

 

 

 

Soybeans
31,532

 

 

 

Wheat
7,340

 

 

 

Oats
41,526

 

 

 

Ethanol

 
256,518

 

 

Corn oil

 

 
4,658

 

Other
90

 
500

 

 
100

Subtotal
264,685

 
257,018

 
4,658

 
100

Exchange traded:
 
 
 
 
 
 
 
Corn
94,895

 

 

 

Soybeans
27,470

 

 

 

Wheat
43,925

 

 

 

Oats
2,290

 

 

 

Ethanol

 
3,990

 

 

Other

 
840

 

 
60

Subtotal
168,580

 
4,830

 

 
60

Total
433,265

 
261,848

 
4,658

 
160


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

Table of Contents

counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
At June 30, 2018, December 31, 2017 and June 30, 2017, the Company had recorded the following amounts for the fair value of the Company's other derivatives:
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
(in thousands)
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
Interest rate contracts included in Other long-term liabilities
$
(37
)
 
$
(1,244
)
 
$
(2,158
)
Foreign currency contracts included in Other current assets (Accrued expenses and other current liabilities)
(1,109
)
 
426

 
654

Derivatives designated as hedging instruments
 
 
 
 
 
Interest rate contract included in Accrued expenses and other current liabilities
(88
)
 

 

Interest rate contract included in Other assets
155

 

 

The recording of derivatives gains and losses and the financial statement line in which they are located are as follows:
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Interest rate derivative gains (losses) included in Interest income (expense)
$
351

 
$
(17
)
 
$
1,141

 
$
372

Foreign currency derivative gains (losses) included in Other income, net
(413
)
 
669

 
(1,535
)
 
767

Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Interest rate derivative gains (losses) included in OCI
67

 

 
67

 


As of June 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 six months ended June 30, 2018 and 2017:
 
Pension Benefits
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Interest cost
$
32

 
$
39

 
$
65

 
$
78

Recognized net actuarial loss
61

 
63

 
122

 
126

Benefit cost
$
93

 
$
102

 
$
187

 
$
204


16

Table of Contents

 
Postretirement Benefits
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Service cost
$
75

 
$
106

 
$
162

 
$
229

Interest cost
190

 
282

 
377

 
582

Amortization of prior service cost
(228
)
 

 
(456
)
 

Benefit cost
$
37

 
$
388

 
$
83

 
$
811


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 June 30, 2018
 
Six months ended June 30, 2018
Revenues under ASC 606
$
356,883

 
$
550,533

Revenues under ASC 840
26,228

 
52,257

Revenues under ASC 815
528,291

 
944,351

Total Revenues
$
911,402

 
$
1,547,141


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 June 30, 2018
(in thousands)
Grain
 
Ethanol
 
Plant Nutrient
 
Rail
 
Total
Specialty nutrients
$

 
$

 
$
94,281

 
$

 
$
94,281

Primary nutrients

 

 
200,288

 

 
200,288

Service
3,381

 
2,760

 
2,412

 
9,308

 
17,861

Co-products

 
32,462

 

 

 
32,462

Other
292

 

 
6,124

 
5,575

 
11,991

Total
$
3,673

 
$
35,222

 
$
303,105

 
$
14,883

 
$
356,883

Approximately 5% of revenues accounted for under ASC 606 are recorded over time which primarily relates to service revenues noted above.

 
Six months ended June 30, 2018
(in thousands)
Grain
 
Ethanol
 
Plant Nutrient
 
Rail
 
Total
Specialty nutrients
$

 
$

 
$
169,359

 
$

 
$
169,359

Primary nutrients

 

 
253,507

 

 
253,507

Service
7,799

 
5,305

 
2,621

 
17,425

 
33,150

Co-products

 
59,108

 

 

 
59,108

Other
502

 

 
13,235

 
21,672

 
35,409

Total
$
8,301

 
$
64,413

 
$
438,722

 
$
39,097

 
$
550,533



17

Table of Contents

Approximately 6% of revenues accounted for under ASC 606 are recorded over time which primarily relates to service revenues noted above.
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


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.

18

Table of Contents

Impact of New Revenue Guidance on Financial Statement Line Items
The following table compares the reported condensed consolidated balance sheet, as of June 30, 2018, to the pro forma amounts had the previous guidance been in effect:
 
Balance Sheet
 
June 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
$
58,611

 
$

 
$
58,611

Accounts receivable, net
218,476

 

 
218,476

Inventories
495,611

 
158

 
495,769

Commodity derivative assets - current
54,259

 

 
54,259

Other current assets
52,464

 
(202
)
 
52,262

Other noncurrent assets
371,368

 

 
371,368

Rail Group assets leased to others, net
458,424

 
(24,131
)
 
434,293

Property, plant and equipment, net
408,575

 

 
408,575

     Total assets
2,117,788


(24,175
)
 
2,093,613

Short-term debt and current maturities of long-term debt
198,700

 
(2,922
)
 
195,778

Trade and other payables and accrued expenses and other current liabilities
356,733

 

 
356,733

Commodity derivative liabilities - current
85,160

 

 
85,160

Customer prepayments and deferred revenue
16,103

 

 
16,103

Commodity derivative liabilities - noncurrent and Other long-term liabilities
33,527

 

 
33,527

Employee benefit plan obligations
26,131

 

 
26,131

Long-term debt, less current maturities
435,580

 
(32,597
)
 
402,983

Deferred income taxes
118,864

 
2,869

 
121,733

     Total liabilities
1,270,798

 
(32,650
)
 
1,238,148

Retained earnings
635,438

 
8,475

 
643,913

Common shares, additional paid-in-capital, treasury shares, accumulated other comprehensive loss and noncontrolling interests
211,552

 

 
211,552

     Total equity
846,990

 
8,475

 
855,465

     Total liabilities and equity
2,117,788

 
(24,175
)
 
2,093,613


Total reported assets were $24.2 million greater than on the pro forma balance sheet, which assumes the previous guidance remained in effect as of June 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 $32.7 million greater than on the pro forma balance sheet, which assumes the previous guidance remained in effect as of June 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.

19

Table of Contents

The following table compares the reported condensed statement of operations for the three and six months ended June 30, 2018, to the pro forma amounts had the previous guidance been in effect:

 
Statement of Operations
 
Three months ended June 30, 2018
(in thousands)
As Reported
 
ASC 606 Impact
 
Pro forma as if the previous accounting guidance was in effect
Sales and merchandising revenues
$
911,402

 
$
185,276

 
$
1,096,678

Cost of sales and merchandising revenues
820,928

 
185,765

 
1,006,693

Gross profit
90,474

 
(489
)
 
89,985

Operating, administrative and general expenses
59,853

 

 
59,853

Asset impairment
6,272

 

 
6,272

Interest expense
7,825

 
(395
)
 
7,430

Other income:
 
 
 
 
 
Equity in earnings of affiliates, net
9,803

 

 
9,803

Other income, net
2,828

 

 
2,828

Income (loss) before income taxes
29,155

 
(94
)
 
29,061

Income tax provision
7,742

 
(16
)
 
7,726

Net income (loss)
21,413

 
(78
)
 
21,335

Net income attributable to the noncontrolling interests
(116
)
 

 
(116
)
Net income (loss) attributable to The Andersons, Inc.
$
21,529

 
$
(78
)
 
$
21,451

 
Statement of Operations
 
Six months ended June 30, 2018
(in thousands)
As Reported
 
ASC 606 Impact
 
Pro forma as if the previous accounting guidance was in effect
Sales and merchandising revenues
$
1,547,141

 
$
349,465

 
$
1,896,606

Cost of sales and merchandising revenues
1,392,962

 
350,415

 
1,743,377

Gross profit
154,179

 
(950
)
 
153,229

Operating, administrative and general expenses
124,110

 

 
124,110

Asset impairment
6,272

 

 
6,272

Interest expense
14,824

 
(798
)
 
14,026

Other income:
 
 
 
 
 
Equity in earnings of affiliates, net
13,376

 

 
13,376

Other income, net
4,514

 

 
4,514

Income (loss) before income taxes
26,863

 
(152
)
 
26,711

Income tax provision
7,432

 
(38
)
 
7,394

Net income (loss)
19,431

 
(114
)
 
19,317

Net income attributable to the noncontrolling interests
(398
)
 

 
(398
)
Net income (loss) attributable to The Andersons, Inc.
$
19,829

 
$
(114
)
 
$
19,715


20

Table of Contents

The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three and six months ended June 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 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 now being recorded on a net basis, revenues and related cost of sales would have been $183.1 million and $345.0 million higher under the previous guidance for the three and six months ended June 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 six months ended June 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.

21

Table of Contents

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.

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.

For the three months ended June 30, 2018, the Company recorded income tax expense of $7.7 million at an effective tax rate of 26.6%. The annual effective tax rate differs from the statutory U.S. Federal tax rate due to the impact of state income taxes, nondeductible compensation, and permanent tax differences from equity method investments. The net increase in effective tax rate for the three months ended June 30, 2018 resulted from in the period ended June 30, 2017 the Company had a loss before income taxes after a goodwill write-off which did not provide a corresponding tax benefit. 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. For the three months ended June 30, 2017, the Company recorded an income tax expense of $7.7 million at an effective tax rate of (40.1)%.

For the six months ended June 30, 2018, the Company recorded income tax expense of $7.4 million at an effective tax rate of 27.7%. The annual effective tax rate differs from the statutory U.S. Federal tax rate due to the impact of state income taxes, nondeductible compensation, and permanent tax differences from equity method investments. The effective tax rate for the six-month period ended June 30, 2018 also includes tax expense due to changes in the state allocation/apportionment as a result of a statutory merger. The increase in effective tax rate for the six months ended June 30, 2018 as compared to the same period last year was attributed to the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the U.S. tax reform. Additionally, in the period ended June 30, 2017 the Company had a loss before income taxes after a goodwill write-off which did not provide a corresponding tax benefit. For the six months ended June 30, 2017, the Company recorded an income tax expense of $5.1 million at an effective tax rate of (20.8)%.

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 June 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, the Company must determine 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 transition tax, the Company continues to gather additional information to more precisely compute the final amount. Likewise, 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.



22

Table of Contents

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 six months ended June 30, 2018 and 2017:
 
 
 
 
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)

 
 
 
Three months ended June 30, 2018
 
Six months ended June 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
 
$

 
$
(8,866
)
 
$
257

 
$
4,621

 
$
(3,988
)
 
$

 
$
(7,716
)
 
$
344

 
$
4,672

 
$
(2,700
)
 
Other comprehensive income (loss) before reclassifications
 
51

 
(1,123
)
 

 
(119
)
 
$
(1,191
)
 
51

 
(2,273
)
 
(87
)
 
(2
)
 
(2,311
)
 
Amounts reclassified from accumulated other comprehensive loss
 

 

 

 
(168
)
 
$
(168
)
 

 

 

 
(336
)
 
(336
)
Net current-period other comprehensive income (loss)
 
51

 
(1,123
)
 

 
(287
)
 
(1,359
)
 
51

 
(2,273
)
 
(87
)
 
(338
)
 
(2,647
)
Ending balance
 
$
51

 
$
(9,989
)
 
$
257

 
$
4,334

 
$
(5,347
)
 
$
51

 
$
(9,989
)
 
$
257

 
$
4,334

 
$
(5,347
)
 
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)
 
 
Three months ended June 30, 2017
 
Six months ended June 30, 2017
(in thousands)
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plan Items
 
Total
 
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plan Items
 
Total
Beginning Balance
 
$
(10,488
)
 
$
(1,476
)
 
$
(11,964
)
 
 
$
(11,002
)
 
$
(1,466
)
 
$
(12,468
)
 
Other comprehensive income (loss) before reclassifications

 
959

 
(988
)
 
(29
)
 
 
1,473

 
(998
)
 
475

Net current-period other comprehensive income (loss)
 
959

 
(988
)
 
(29
)
 
 
1,473

 
(998
)
 
475

Ending balance
 
$
(9,529
)
 
$
(2,464
)
 
$
(11,993
)
 
 
$
(9,529
)
 
$
(2,464
)
 
$
(11,993
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits

The following table shows the reclassification adjustments from accumulated other comprehensive loss to net income for the three and six months ended June 30, 2018:
 
 
Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (a)
(in thousands)
Three months ended June 30, 2018
 
Six months ended June 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)
 
(456
)
 
(b)
 
 
(228
)
 
Total before tax
 
(456
)
 
Total before tax
 
 
60

 
Income tax provision
 
120

 
Income tax provision
 
 
$
(168
)
 
Net of tax
 
$
(336
)
 
Net of tax
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(168
)
 
Net of tax
 
$
(336
)
 
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).

23

Table of Contents

There were no reclassification adjustments from accumulated other comprehensive loss to net income for the three and six months ended June 30, 2017.

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 June 30,
 
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Net income (loss) attributable to The Andersons, Inc.
$
21,529

 
$
(26,653
)
 
$
19,829

 
$
(29,742
)
Less: Distributed and undistributed earnings allocated to nonvested restricted stock

 

 

 

Earnings (losses) available to common shareholders
$
21,529

 
$
(26,653
)
 
$
19,829

 
$
(29,742
)
Earnings per share – basic:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
28,261

 
28,350

 
28,249

 
28,316

Earnings (losses) per common share – basic
$
0.76

 
$
(0.94
)
 
$
0.70

 
$
(1.05
)
Earnings per share – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
28,261

 
28,350

 
28,249

 
28,316

Effect of dilutive awards
128

 

 
187

 

Weighted average shares outstanding – diluted
28,389

 
28,350

 
28,436

 
28,316

Earnings (losses) per common share – diluted
$
0.76

 
$
(0.94
)
 
$
0.70

 
$
(1.05
)
There were 28 thousand and 25 thousand antidilutive stock-based awards outstanding for the three and six months ended June 30, 2018, respectively. All outstanding share awards were antidilutive for the three and six months ended June 30, 2017 as the Company incurred a net loss in these periods.

11. Fair Value Measurements

The following tables present the Company's assets and liabilities that are measured at fair value on a nonrecurring basis at June 30, 2018:
(in thousands)
June 30, 2018
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Property, plant and equipment (a)
$

 
$

 
$
1,300

 
$
1,300

Rail car assets (b)
$

 
$

 
$
4,063

 
$
4,063

Total
$

 
$

 
$
5,363

 
$
5,363

(a)
The Company recognized impairment charges on certain grain assets during 2018 and measured the fair value using Level 3 inputs on a nonrecurring basis. The fair value of the grain assets was determined using a pending sale of these grain assets held by the Company.
(b)
The Company recognized impairment charges on certain rail assets during 2018 and measured fair value using Level 3 inputs on a nonrecurring basis. The fair value of the rail assets was determined based on a national scrap index less cost to sell.

24

Table of Contents

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2018, December 31, 2017 and June 30, 2017:
(in thousands)
June 30, 2018
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Commodity derivatives, net (a)
$
15,356

 
$
(48,451
)
 
$

 
$
(33,095
)
Provisionally priced contracts (b)
(37,787
)
 
(24,511
)
 

 
(62,298
)
Convertible preferred securities (c)

 

 
7,488

 
7,488

Other assets and liabilities (d)
4,136

 
(37
)
 

 
4,099

Total
$
(18,295
)
 
$
(72,999
)
 
$
7,488

 
$
(83,806
)
(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
)
(in thousands)
June 30, 2017
Assets (liabilities)
Level 1
 
Level 2
 
Level 3
 
Total
Restricted cash
$
1,033

 
$

 
$

 
$
1,033

Commodity derivatives, net (a)
2,817

 
(8,445
)
 

 
(5,628
)
Provisionally priced contracts (b)
(87,958
)
 
(30,779
)
 

 
(118,737
)
Convertible preferred securities (c)

 

 
3,294

 
3,294

Other assets and liabilities (d)
10,155

 
(2,158
)
 

 
7,997

Total
$
(73,953
)
 
$
(41,382
)
 
$
3,294

 
$
(112,041
)
 
(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),

25

Table of Contents

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.

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


The following tables summarize quantitative information about the Company's Level 3 fair value measurements as of June 30, 2018, December 31, 2017 and June 30, 2017:
Quantitative Information about Level 3 Fair Value Measurements
(in thousands)
Fair Value as of June 30, 2018
 
Valuation Method
 
Unobservable Input
 
Weighted Average
Convertible preferred securities (a)
$
7,488

 
Implied based on market prices
 
N/A
 
N/A
Real Property (b)
1,300

 
Sale agreement
 
N/A
 
N/A
Rail car assets (c)
4,063

 
National scrap index less cost to sell
 
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 June 30, 2017
 
Valuation Method
 
Unobservable Input
 
Weighted Average
Convertible preferred securities (a)
$
3,294

 
Cost Basis, Plus Interest
 
N/A
 
N/A
(a) Due to early stages of business and timing of investments, cost basis, plus interest was deemed to approximate fair value in prior periods. 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.
(c)The Company recognized impairment charges on rail assets during 2018 and measured fair value using Level 3 inputs on a nonrecurring basis. The fair value of the assets was determined based on a national scrap index less cost to sell.


26

Table of Contents

Fair Value of Financial Instruments
The fair value of the Company’s long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. As such, the Company has concluded that the fair value of long-term debt is considered Level 2 in the fair value hierarchy.
(in thousands)
June 30,
2018

December 31,
2017
 
June 30,
2017
Fair value of long-term debt, including current maturities
$
444,821

 
$
474,769

 
$
423,316

Fair value in excess of carrying value (a)
(8,063
)
 
1,451

 
2,612

(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.

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)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
The Andersons Albion Ethanol LLC
$
47,474

 
$
45,024

 
$
40,829

The Andersons Clymers Ethanol LLC
21,214

 
19,830

 
19,903

The Andersons Marathon Ethanol LLC
14,344

 
12,660

 
14,045

Lansing Trade Group, LLC
97,476

 
93,088

 
89,235

Thompsons Limited (a)
49,251

 
50,198

 
49,252

Other
2,400

 
2,439

 
2,530

Total
$
232,159

 
$
223,239

 
$
215,794

 (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 June 30,
 
Six months ended June 30,
(in thousands)
% Ownership at June 30, 2018
 
2018
 
2017
 
2018
 
2017
The Andersons Albion Ethanol LLC
55%
 
$
1,329

 
$
2,135

 
$
2,450

 
$
1,858

The Andersons Clymers Ethanol LLC
39%
 
1,236

 
569

 
1,745

 
776

The Andersons Marathon Ethanol LLC
33%
 
1,728

 
779

 
1,684

 
316

Lansing Trade Group, LLC
33% (a)
 
3,591

 
896

 
6,175

 
185

Thompsons Limited (b)
50%
 
1,980

 
2,081

 
1,311

 
1,486

Other
5% - 50%
 
(61
)
 
(75
)
 
11

 
(114
)
Total
 
 
$
9,803

 
$
6,385

 
$
13,376

 
$
4,507

 (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 $2.1 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively.
 

27

Table of Contents

In the second quarter of 2018, Lansing Trade Group qualified as a significant equity investee of the Company under the income test. The following table presents unaudited financial information for the three and six months ended June 30, 2018 and 2017:
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Revenues
$
1,372,059

 
$
1,010,639

 
$
2,604,118

 
$
2,357,338

Gross profit
45,915

 
33,054

 
90,336

 
62,810

Income (loss) from continuing operations
11,569

 
3,030

 
20,397

 
1,325

Net income (loss)
10,785

 
2,606

 
19,130

 
102

Net income (loss) attributable to Lansing Trade Group
10,785

 
2,899

 
19,130

 
826


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 will construct 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. Construction is underway and 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 June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Sales revenues
$
107,686

 
$
241,896

 
$
196,580

 
$
439,964

Service fee revenues (a)
5,191

 
9,410

 
10,308

 
14,036

Purchases of product and capital assets
197,444

 
167,904

 
378,968

 
302,411

Lease income (b)
1,624

 
1,422

 
3,206

 
2,709

Labor and benefits reimbursement (c)
3,601

 
6,863

 
7,168

 
10,553

 
(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)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Accounts receivable (d)
$
27,030

 
$
30,252

 
$
25,673

Accounts payable (e)
39,620

 
27,866

 
25,590

(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 June 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 $172.3 million and $161.3 million, respectively. For the six months ended June 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 $318.5 million and $284.5 million, respectively.

For the three and six months ended June 30, 2017 revenues recognized for the sale of corn to the unconsolidated ethanol LLCs were $125.5 million and $243.0 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.

28

Table of Contents


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 June 30, 2018December 31, 2017 and June 30, 2017 was $8.1 million, $0.2 million and $0.6 million, respectively. The fair value of derivative contract liabilities with related parties as of June 30, 2018, December 31, 2017 and June 30, 2017 was $3.9 million, $2.5 million and $0.7 million, respectively.


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 June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Revenues from external customers
 
 
 
 
 
 
 
Grain
$
365,920

 
$
488,447

 
$
642,772

 
$
966,975

Ethanol
200,938

 
187,831

 
373,776

 
341,984

Plant Nutrient
303,106

 
264,736

 
438,723

 
411,323

Rail
41,438

 
38,149

 
91,870

 
78,539

Other

 
14,499

 

 
46,857

Total
$
911,402

 
$
993,662

 
$
1,547,141

 
$
1,845,678

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Inter-segment sales
 
 
 
 
 
 
 
Grain
$
462

 
$
141

 
$
993

 
$
207

Plant Nutrient

 
70

 

 
241

Rail
338

 
275

 
671

 
566

Total
$
800

 
$
486

 
$
1,664

 
$
1,014


29

Table of Contents

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Income (loss) before income taxes
 
 
 
 
 
 
 
Grain
$
9,877

 
$
6,929

 
$
9,847

 
$
1,856

Ethanol
6,125

 
4,660

 
7,964

 
6,376

Plant Nutrient
15,124

 
(25,825
)
 
16,215

 
(19,154
)
Rail
944

 
5,860

 
4,913

 
11,938

Other
(2,799
)
 
(10,625
)
 
(11,678
)
 
(25,641
)
Noncontrolling interests
(116
)
 
(64
)
 
(398
)
 
(10
)
Total
$
29,155

 
$
(19,065
)
 
$
26,863

 
$
(24,635
)
(in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Identifiable assets
 
 
 
 
 
Grain
$
820,016

 
$
948,871

 
$
783,316

Ethanol
248,560

 
180,173

 
170,730

Plant Nutrient
356,166

 
379,309

 
351,871

Rail
535,087

 
490,448

 
448,417

Other
157,959

 
163,553

 
157,091

Total
$
2,117,788

 
$
2,162,354

 
$
1,911,425


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.
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 $129.2 million of remaining obligation, of which $12.9 million has been prepaid, as of June 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 $23.5 million, $24.3 million, and $23.9 million at June 30, 2018, December 31, 2017, and June 30, 2017, respectively. The Company has recorded a build-to-suit financing obligation in other current liabilities of $1.4 million, $1.4 million, and $0.8 million at June 30, 2018, December 31, 2017, and June 30, 2017, respectively.


30

Table of Contents

15. Supplemental Cash Flow Information

Certain supplemental cash flow information, including noncash investing and financing activities for the six months ended June 30, 2018 and 2017 are as follows:
 
Six months ended June 30,
(in thousands)
2018
 
2017
Supplemental disclosure of cash flow information
 
 
 
Interest paid
$
16,982

 
$
12,430

Noncash investing and financing activity
 
 
 
Capital projects incurred but not yet paid
10,744

 
3,695

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

 
8,360

Outstanding receivable for sale of assets

 
4,356

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

On April 2, 2018, the Company closed on an agreement to sell its grain elevators in Humboldt, Kenton and Dyer, Tennessee for $19.5 million, plus working capital, recording a nominal gain.

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 $9.8 million of Property, plant and equipment, net as Assets held for sale on the Condensed Consolidated Balance Sheet at June 30, 2018. This includes $4.2 million of Retail store assets, $4.1 million of Rail Group assets, $1.3 million of Grain assets relating to its Como, Tennessee operations, and $0.2 million relating to administrative offices at an outlying location in the Plant Nutrient Group

The Company classified $37.9 million of Property, plant and equipment, net 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 $10.0 million of Property, plant and equipment, net as Assets held for sale on the Condensed Consolidated Balance Sheet at June 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, and no additional charges were incurred during the first six months of 2018. The Company recorded
$3.5 million of exit charges during the second quarter of 2017 for a total of $11.3 million of exit charges recorded during the first six months of 2017.

18. Subsequent Events

On July 16, 2018, the Company signed an agreement to sell one of its convertible preferred security investments for a pre-tax gain of approximately $3.9 million, expected to close in the third quarter.

On August 2, 2018, The Andersons Railcar Leasing Company LLC amended its line of credit agreement with a syndicate of banks. The amended agreement provides for an increased credit facility in the amount of $200 million.


31

Table of Contents

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 second 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 second quarter performance reflects a strong performance resulted in improved earnings compared to the second quarter of 2017. Market volatility led to better merchandising opportunities, as well as significant improvement in our earnings in equity affiliates.

Grain inventories on hand at June 30, 2018 were 80.9 million bushels, of which 0.1 million bushels were stored for others. These amounts compare to 78.0 million bushels on hand at June 30, 2017, of which 0.8 million bushels were stored for others. Total grain storage capacity, including temporary pile storage, was approximately 145 million bushels at June 30, 2018 compared to 153 million bushels at June 30, 2017. This decrease in capacity is a result of the sale of three Tennessee locations in the second quarter of 2018.

The Grain Group will continue to capitalize on market volatility while growing originations, risk management services, and its food ingredients business.

Ethanol Group

The Ethanol Group's second quarter results reflect increased volumes from more efficient production as well as improvement in our earnings in equity affiliates. The group is also seeing higher DDG values due to the lack of vomitoxin issues in the current year. The Company began construction of its new bio-refinery facility in the first quarter and the project remains on target, expected to be completed in 2019.

32

Table of Contents



Ethanol and related coproducts volumes for the three and six months ended June 30, 2018 and 2017 were as follows:
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Ethanol (gallons shipped)
117,061

 
109,504

 
220,136

 
198,927

E-85 (gallons shipped)
16,577

 
10,646

 
31,479

 
19,903

Corn Oil (pounds shipped)
5,567

 
4,078

 
10,374

 
8,338

DDG (tons shipped) *
42

 
37

 
81

 
79

* 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 second quarter results reflect considerably lower margins in our primary and specialty nutrient products despite an increase in volumes. Strong results in the lawn business partially offset the wholesale business margin challenges. We expect volume and margin pressures in the wholesale business to continue to be a challenge for the remainder of 2018.

Storage capacity at our wholesale nutrient and farm center facilities, including leased storage, was approximately 484 thousand tons for dry nutrients and approximately 515 thousand tons for liquid nutrients at June 30, 2018, compared to approximately 486 thousand tons for dry nutrients and approximately 527 thousand tons for liquid nutrients at June 30, 2017.

Tons of product sold for the three and six months ended June 30, 2018 and 2017 were as follows:
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Primary nutrients
657

 
628

 
859

 
845

Specialty nutrients
247

 
221

 
433

 
430

Other
13

 
16

 
29

 
39

Total tons
917

 
865

 
1,321

 
1,314


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 reported income from steady improvement despite a $4.7 million impairment charge from a decision to scrap about 550 idle, out-of-favor cars during the second quarter of 2018. The group saw an increase in average utilization rates from 84.4 percent in the second quarter of 2017 to 89.5 percent in the second quarter of 2018. When the scrapping project is complete, the utilization rate should rise by approximately 2 percent excluding other factors. Rail Group assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) at June 30, 2018 were 23,059 compared to 23,649 at June 30, 2017, due to the scrapped cars and excluding the remaining cars held for sale.

The Group will look to take advantage of stronger GDP growth in our leasing business despite the headwinds from increased tank car certification expenses and lack of certain car sale gains from the impact of new accounting standards. The Group also expects continued rebound of the railcar repair business.


33

Table of Contents

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 June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Sales and merchandising revenues
$
911,402

 
$
993,662

 
$
1,547,141

 
$
1,845,678

Cost of sales and merchandising revenues
820,928

 
905,828

 
1,392,962

 
1,681,386

Gross profit
90,474

 
87,834

 
154,179

 
164,292

Operating, administrative and general expenses
59,853

 
69,544

 
124,110

 
151,089

Asset impairment
6,272

 

 
6,272

 

Goodwill impairment

 
42,000

 

 
42,000

Interest expense (income)
7,825

 
5,988

 
14,824

 
12,088

Equity in earnings (losses) of affiliates, net
9,803

 
6,385

 
13,376

 
4,507

Other income (expense), net
2,828

 
4,248

 
4,514

 
11,743

Income (loss) before income taxes
29,155

 
(19,065
)
 
26,863

 
(24,635
)
Income (loss) attributable to noncontrolling interests
(116
)
 
(64
)
 
(398
)
 
(10
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
29,271

 
$
(19,001
)
 
$
27,261

 
$
(24,625
)
Comparison of the three months ended June 30, 2018 with the three months ended June 30, 2017:
Grain Group
 
Three months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
365,920

 
$
488,447

Cost of sales and merchandising revenues
331,213

 
458,000

Gross profit
34,707

 
30,447

Operating, administrative and general expenses
25,573

 
25,955

Asset impairment
1,564

 

Interest expense (income)
3,930

 
2,327

Equity in earnings (losses) of affiliates, net
5,510

 
2,903

Other income (expense), net
727

 
1,861

Income (loss) before income taxes
$
9,877

 
$
6,929


Operating results for the Grain Group improved by $2.9 million compared to the results of the same period last year. Sales and merchandising revenues decreased $122.5 million which was more than offset by a decrease in cost of sales and merchandising revenues of $126.8 million for a net favorable gross profit impact of $4.3 million. The adoption of ASC 606 led to a decrease in revenue of $183.1 million and an equal offsetting decrease to cost of sales. The gross profit increase was primarily driven by stronger sales volumes and merchandising margins in the second quarter of 2018.

Asset impairment charges of $1.6 million related to one additional grain elevator in Tennessee. These assets are classified as held for sale as of June 30, 2018.


34

Table of Contents

Equity in earnings of affiliates improved by $2.6 million due to better operating results from Lansing Trade Group during the quarter.

Ethanol Group
 
Three months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
200,938

 
$
187,831

Cost of sales and merchandising revenues
195,896

 
184,511

Gross profit
5,042

 
3,320

Operating, administrative and general expenses
3,641

 
2,243

Interest expense (income)
(270
)
 
(22
)
Equity in earnings (losses) of affiliates, net
4,293

 
3,482

Other income (expense), net
45

 
15

Income (loss) before income taxes
6,009

 
4,596

Income (loss) attributable to noncontrolling interests
(116
)
 
(64
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
6,125

 
$
4,660


Operating results for the Ethanol Group improved $1.5 million from the same period last year. Sales and merchandising revenues increased $13.1 million compared to the results of the same period last year. This was driven by a 10% increase in ethanol gallons sold and a 57% increase in E-85 sales. Cost of sales and merchandising revenues increased as a result of the increase in sales volume and a decrease in overall margins.

Operating, administrative and general expenses increased $1.4 million primarily due to a project that allowed certain costs to be capitalized in the prior year.

Equity in earnings of affiliates increased $0.8 million due to improved results from the unconsolidated ethanol LLCs. The improved results were driven by an increase in ethanol sales volumes and higher DDG values.
Plant Nutrient Group
 
Three months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
303,106

 
$
264,736

Cost of sales and merchandising revenues
265,939

 
224,802

Gross profit
37,167

 
39,934

Operating, administrative and general expenses
21,024

 
22,580

Goodwill impairment

 
42,000

Interest expense (income)
1,641

 
1,815

Other income (expense), net
622

 
636

Income (loss) before income taxes
$
15,124

 
$
(25,825
)

Operating results for the Plant Nutrient Group improved $40.9 million over the same period in the prior year, driven mostly from the nonrecurring goodwill impairment charge recorded in the prior year. Sales and merchandising revenues increased $38.4 million. Wholesale revenue increased $29.0 million due to a 9.5% increase in primary tons and an increase of 7.4% specialty tons. Lawn tons increased 29.9% resulting in an increase of revenue by $7.7 million. Cost of sales and merchandising revenues increased $41.1 million, primarily due to the increase in volumes previously noted. Gross profit decreased $2.8 million. Specialty and Primary sales were the primary driver of this decrease due to compressed margins.

Operating, administrative and general expenses decreased $1.6 million, largely due to our overall cost control efforts.
Rail Group
 
Three months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
41,438

 
$
38,149

Cost of sales and merchandising revenues
27,880

 
25,450

Gross profit
13,558

 
12,699

Operating, administrative and general expenses
5,863

 
5,395

Asset impairment
4,708

 

Interest expense (income)
2,718

 
1,936

Other income (expense), net
675

 
492

Income (loss) before income taxes
$
944

 
$
5,860


Operating results declined $4.9 million from the same period last year. Sales and merchandising revenues increased $3.3 million. Leasing revenues increased by $2.0 million due to higher utilization, while revenues from car sales increased $1.5 million due to higher car sales, including scrapping activity. Repair and other revenues decreased $0.2 million. Cost of sales and merchandising revenues increased $2.4 million compared to the prior year due to an increase in car sales. As a result, gross profit increased $0.9 million compared to last year.

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, taking advantage of high scrap prices.

Interest expense increased $0.9 million as a result of the revolving asset based loan agreement entered in to during the first quarter of 2018.
Other
 
Three months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$

 
$
14,499

Cost of sales and merchandising revenues

 
13,065

Gross profit

 
1,434

Operating, administrative and general expenses
3,752

 
13,371

Interest expense (income)
(194
)
 
(68
)
Other income (expense), net
759

 
1,244

Income (loss) before income taxes
$
(2,799
)
 
$
(10,625
)

Sales and merchandising revenues decreased $14.5 million, cost of sales and merchandising revenues decreased $13.1 million and gross profit decreased $1.4 million. These decreases are a result of the retail business partially operating in the second quarter of 2017 but no longer operational in 2018.

Operating, administrative and general expenses decreased $9.6 million primarily due to a decrease in labor, severance, benefits and other operating expenses that were incurred in the second quarter of 2017 as a result of the shutdown of the retail business but not incurred in the second quarter of 2018.

Income Taxes

For the three months ended June 30, 2018, the Company recorded income tax expense of $7.7 million at an effective rate of 23.6%. In 2017, the company recorded an income tax expense of $7.7 million at an effective tax rate of (40.1)%. The change in 2018 effective tax rate is primarily due to the benefits of tax reform.


35

Table of Contents

Comparison of the six months ended June 30, 2018 with the six months ended June 30, 2017:
Grain Group
 
Six months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
642,772

 
$
966,975

Cost of sales and merchandising revenues
582,015

 
912,879

Gross profit
60,757

 
54,096

Operating, administrative and general expenses
51,527

 
51,282

Asset impairment
1,564

 

Interest expense (income)
6,889

 
5,023

Equity in earnings (losses) of affiliates, net
7,497

 
1,558

Other income (expense), net
1,573

 
2,507

Income (loss) before income taxes
$
9,847

 
$
1,856


Operating results for the Grain Group improved by $8.0 million compared to the results of the same period last year. Sales and merchandising revenues decreased $324.2 million which was more than offset by a decreased in cost of sales and merchandising revenues of $330.9 million for a net favorable gross profit impact of $6.7 million. The adoption of ASC 606 led to a decrease in revenue of $345.0 million and an equal offsetting decrease to cost of sales. The gross profit increase was driven by increased sales volumes on similar margins.

Asset impairment charges were recorded for $1.6 million related to Grain operations in Tennessee. These assets are classified as held for sale as of June 30, 2018.

Equity in earnings of affiliates improved by $5.9 million due to better operating results from Lansing Trade Group.

Ethanol Group
 
Six months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
373,776

 
$
341,984

Cost of sales and merchandising revenues
365,868

 
333,124

Gross profit
7,908

 
8,860

Operating, administrative and general expenses
6,670

 
5,490

Interest expense (income)
(311
)
 
(25
)
Equity in earnings (losses) of affiliates, net
5,879

 
2,949

Other income (expense), net
138

 
22

Income (loss) before income taxes
7,566

 
6,366

Income (loss) attributable to noncontrolling interests
(398
)
 
(10
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
7,964

 
$
6,376


Operating results for the Ethanol Group improved $1.6 million from the same period last year. Sales and merchandising revenues increased $31.8 million compared to the results of the same period last year. This was driven by a 13% increase in ethanol gallons sold, a portion of which is attributable to the Albion plant expansion that was not operating at its current capacity until the second quarter of 2017, and a 58% increase in E-85 sales. Cost of sales and merchandising revenues increased as a result of the increase in sales volume. Gross profit declined due to a decrease of 8% in the average selling price of ethanol.

Operating, administrative and general expenses increased $1.2 million primarily due to a project that allowed certain costs to be capitalized in the prior year.



36

Table of Contents

Equity in earnings of affiliates increased $2.9 million due to improved results from the unconsolidated ethanol LLCs. These results are partially attributable to higher DDG and the fact that we have not experienced the vomitoxin issues that were prevalent in 2017, as well as higher ethanol sales volumes.

Plant Nutrient Group
 
Six months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
438,723

 
$
411,323

Cost of sales and merchandising revenues
379,319

 
345,581

Gross profit
59,404

 
65,742

Operating, administrative and general expenses
41,381

 
45,641

Goodwill impairment

 
42,000

Interest expense (income)
3,082

 
3,455

Other income (expense), net
1,274

 
6,200

Income (loss) before income taxes
$
16,215

 
$
(12,244
)

Operating results for the Plant Nutrient Group improved $35.4 million over the same period in the prior year, driven mostly from the nonrecurring goodwill impairment charge recorded in the prior year. Sales and merchandising revenues increased $27.4 million. Revenues increased $40.2 million due to a 5% increase in specialty and primary tons within the wholesale business, which was partially offset by a 24% decrease in farm center tons, most of which is a result of selling the Florida farm center locations in the prior year. Cost of sales and merchandising revenues increased $33.7 million, primarily due to the volume changes noted above. While revenues increased due to an increase in volumes, margins were compressed leading to a $6.3 million decrease in gross profit.

Operating, administrative and general expenses decreased $4.3 million, largely due to our overall cost control efforts and as a result of Florida farm center locations being sold in 2017.

Other income (expense), net decreased $4.9 million as 2017 includes a $4.7 million gain on the sale of farm center locations in Florida.
Rail Group
 
Six months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$
91,870

 
$
78,539

Cost of sales and merchandising revenues
65,760

 
53,532

Gross profit
26,110

 
25,007

Operating, administrative and general expenses
12,094

 
10,895

Asset impairment
4,708

 

Interest expense (income)
5,086

 
3,745

Other income (expense), net
691

 
1,571

Income (loss) before income taxes
$
4,913

 
$
11,938


Operating results declined $7.0 million from the same period last year. Sales and merchandising revenues increased $13.3 million. Revenue from car sales increased by $11.5 million, including cars scrapped, and leasing revenues increased by $3.7 million due to higher utilization. These were offset by a $1.9 million decrease in repair and other revenues. Cost of sales and merchandising revenues increased $12.2 million compared to the prior year primarily due to an increase in car sales. As a result, gross profit increased $1.1 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 the new revenue accounting standard.


37

Table of Contents

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 $0.9 million, as end of lease settlements that occurred in the first quarter of 2017 did not recur.
Other
 
Six months ended June 30,
(in thousands)
2018
 
2017
Sales and merchandising revenues
$

 
$
46,857

Cost of sales and merchandising revenues

 
36,270

Gross profit

 
10,587

Operating, administrative and general expenses
12,438

 
37,781

Interest expense (income)
78

 
(110
)
Other income (expense), net
838

 
1,443

Income (loss) before income taxes
$
(11,678
)
 
$
(25,641
)

Sales and merchandising revenues decreased $46.9 million, cost of sales and merchandising revenues decreased $36.3 million and gross profit decreased $10.6 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 $25.3 million primarily due to a decrease in labor, severance, benefits and other operating expenses that were incurred in the first half of 2017 as a result of the shutdown of the retail business, but not incurred in the first half of 2018.

Income Taxes

For the six months ended June 30, 2018, an income tax expense of $7.4 million at an effective rate of 27.7%. In 2017, an income tax expense of $5.1 million was recorded at (20.8)%. 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.


38

Table of Contents

Liquidity and Capital Resources
Working Capital
At June 30, 2018, the Company had working capital of $222.7 million. The following table presents changes in the components of current assets and current liabilities:
(in thousands)
June 30, 2018
 
June 30, 2017
 
Variance
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
58,611

 
$
18,934

 
$
39,677

Restricted cash

 
1,033

 
(1,033
)
Accounts receivable, net
218,476

 
186,331

 
32,145

Inventories
495,611

 
463,205

 
32,406

Commodity derivative assets – current
54,259

 
11,619

 
42,640

Other current assets
42,648

 
59,873

 
(17,225
)
Assets held for sale
9,816

 
10,028

 
(212
)
Total current assets
879,421

 
751,023

 
128,398

Current Liabilities:
 
 
 
 
 
Short-term debt
185,000

 
124,000

 
61,000

Trade and other payables
282,221

 
267,194

 
15,027

Customer prepayments and deferred revenue
16,103

 
15,113

 
990

Commodity derivative liabilities – current
85,160

 
18,104

 
67,056

Accrued expenses and other current liabilities
74,512

 
69,256

 
5,256

Current maturities of long-term debt
13,700

 
62,482

 
(48,782
)
Total current liabilities
656,696

 
556,149

 
100,547

Working Capital
$
222,725

 
$
194,874

 
$
27,851

June 30, 2018 current assets increased $128.4 million in comparison to those of June 30, 2017. This increase was primarily due to increases in cash, accounts receivable, inventories 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 the timing of shipments in Grain, an increase in wholesale inventory as purchases were made earlier in the year due to rising commodity prices and the timing of summer fill programs, and an increase in Ethanol inventory due to increased inventory in-transit as a result of shipping more product FOB destination. 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 $100.5 million compared to the prior year primarily due to increases in short-term debt and commodity derivative liabilities. This increase was partially offset by a decrease in current maturities of long-term debt due to the timing of payments for certain debt instruments
Sources and Uses of Cash
Operating Activities
Our operating activities used cash of $43.9 million and $45.2 million in the first six months of 2018 and 2017, respectively. The decrease in cash used was due to changes in working capital, as discussed above.
Investing Activities
Investing activities used cash of $46.4 million through the first six months of 2018 compared to cash used of $64.2 million in the prior year. Proceeds from sale of Rail Group assets increased as a result of an increase in revenue from car sales. Additionally, cash used for the purchases of property, plant, equipment, and software increased due to costs associated with the beginning stages of the construction of the bio-refinery that began in the first six months of 2018. Finally, there was an increase of $20.5 million proceeds from the sale of assets from the sale of three Tennessee grain locations.
In 2018, we expect to spend a total of $145 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 $125 million during the year.

39

Table of Contents

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 $114.1 million and $65.7 million for the six months ended June 30, 2018 and 2017, respectively. This was largely due to an increase in short-term borrowings and a decrease of long-term debt as discussed above.
We are party to borrowing arrangements with a syndicate of banks that provide a total of $950.0 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 $65.0 million of debt of The Andersons Railcar Leasing Company LLC, that is non-recourse to the Company. Of that total, we had $642.1 million available for borrowing at June 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.

The company also received cash of $21.8 million for a noncontrolling interest in ELEMENT LLC.

We paid $9.3 million in dividends in the six months of 2018 compared to $9.0 million in the prior year. We paid $0.165 per common share for the dividends paid in January and April 2018 and $0.16 per common share for the dividends paid in January and April 2017. On May 11, 2018 we declared a cash dividend of $0.165 per common share payable on July 23, 2018 to shareholders of record on July 2, 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 June 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.
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.

40

Table of Contents

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 June 30, 2018: 
Method of Control
Financial Statement
 
Units
Owned - railcars available for sale
On balance sheet – current
 
1,104

Owned - railcar assets leased to others
On balance sheet – non-current
 
18,241

Railcars leased from financial intermediaries

Off balance sheet
 
2,543

Railcars in non-recourse arrangements
Off balance sheet
 
516

Total Railcars
 
 
22,404

Locomotive assets leased to others
On balance sheet – non-current
 
32

Locomotives leased from financial intermediaries
Off balance sheet
 
4

Total Locomotives
 
 
36

Barge assets leased from financial intermediaries
Off balance sheet
 
65

Total Barges
 
 
65

In addition, we manage 776 railcars for third party customers or owners for which we receive a fee and we classified 554 railcars as held for sale as of June 30, 2018, both of which are excluded from the table above.

41

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk
For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2017. There were no material changes in market risk, specifically commodity and interest rate risk during the quarter ended June 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 June 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.




42

Table of Contents


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.

43

Table of Contents

Item 6. Exhibits
(a) Exhibits
 
 
 
 
No.
  
Description
 
 
 
10.1
 
Marketing Agreement between The Andersons, Inc. and Cargill, Incorporated. (Incorporated by reference to Form 8-K filed June 28, 2018)
 
 
 
10.2
 
 
 
 
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 June 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.


44

Table of Contents

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: August 8, 2018
 
By /s/ Patrick E. Bowe
 
 
Patrick E. Bowe
 
 
Chief Executive Officer (Principal Executive Officer)
 
 
Date: August 8, 2018
 
By /s/ Brian A. Valentine
 
 
Brian A. Valentine
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 


45

Table of Contents

Exhibit Index
The Andersons, Inc.
 
 
 
 
No.
  
Description
 
 
 
10.1
 
Marketing Agreement between The Andersons, Inc. and Cargill, Incorporated. (Incorporated by reference to Form 8-K filed June 28, 2018)
 
 
 
10.2
 
 
 
 
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 June 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.


46