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ANDERSONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. You are urged to carefully consider these risks and others, including those risk factors listed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Form 10-K"). In some cases, you can identify forward-looking statements by terminology such as "may," "anticipates," "believes," "estimates," "predicts," or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. These forward-looking statements relate only to events as of the date on which the statements are made and the Company undertakes no obligation, other than any imposed by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Critical Accounting Policies and Estimates Our critical accounting policies and critical accounting estimates, as described in our 2013 Form 10-K, have not materially changed through the first three quarters of 2014. Executive Overview Our agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the agricultural commodities that the business deals in will have a relatively equal impact on sales and cost of sales and a much less significant impact on gross profit. As a result, changes in sales for the period may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes to merchandising revenues and service income. Grain Group Our Grain Group primarily operates grain elevators in various states in the U.S. Corn Belt. In addition to storage, merchandising and grain trading, Grain performs marketing, risk management, and corn origination services for its customers and affiliated ethanol production facilities. Grain is a significant investor in Lansing Trade Group, LLC ("LTG"), an established commodity trading, grain handling and merchandising business with operations throughout the country and with global trading/merchandising offices. On January 22, 2014, we entered into an agreement with LTG for a partial share redemption of our investment in LTG, reducing our interest at the time from approximately 47.5 percent to approximately 39.2 percent on a fully diluted basis. Grain inventories on hand at September 30, 2014 were 53.8 million bushels, of which 2.0 million bushels were stored for others. This compares to 46.8 million bushels on hand at September 30, 2013, of which 4.7 million bushels were stored for others. The third quarter results show improved space income, attributable to wheat basis appreciation. We were also able to capitalize on a short window of unprecedented bean basis premiums on the old crop prior to current year bean harvest. Crop conditions were good in the majority of our areas, leading to record yields. The harvest, however, has had a slow start due to unfavorable weather conditions. High yield expectations in conjunction with a late harvest, however, are likely to make harvest logistics a challenge and could delay shipments out of our facilities. We have also completed several acquisitions during October 2014, the most significant was Auburn Bean and Grain, which includes six grain and four agronomy assets. The six grain locations will provide additional storage capacity of approximately 18.1 million bushels, enhancing our presence in Michigan, which is one of our core states. The agronomy assets will provide additional storage capacity of 16.0 thousand tons of dry and 3.7 million gallons of liquid nutrient and will be part of our Plant Nutrient Group. We also acquired a majority of the assets of two San Antonio, Texas-based, food grade grain companies, United Grain LLC and Keller Grain, Inc., as we continue to expand our food grade corn business. Ethanol Group Our Ethanol Group holds investments in four ethanol production facilities organized as separate limited liability companies, three are accounted for under the equity method (the "unconsolidated ethanol LLCs") and one is consolidated, The Andersons Denison Ethanol LLC. The Ethanol Group purchases and sells ethanol, offers facility operations, risk management, and ethanol and corn oil marketing to the ethanol plants it invests in and operates. 28-------------------------------------------------------------------------------- Table of Contents The third quarter reflects continued strong margins due to several key factors, including a drop in corn prices due to optimal growing conditions. While ethanol prices also fell during the quarter, the spread between corn and ethanol prices remained in strong positive alignment as ethanol export demand remained high. Much of the third quarter sales were hedged prior to the quarter and at higher margins than currently available in the spot market. Further, all four ethanol plants had scheduled maintenance shut-downs during the third quarter and have experienced increased production since the maintenance was performed. At this time, we have approximately 85 percent of the fourth quarter futures risk hedged. The majority of those hedges were placed in the second and third quarters, consistent with our strategy to lock-in reasonable forward returns when available in the market. Other hedges were added in the third quarter, consistent with our risk management strategy. Ethanol volumes shipped for the three and nine months ended September 30, 2014 and 2013 were as follows: Three months ended Nine months ended (in thousands) September 30, September 30, 2014 2013 2014 2013 Ethanol (gallons shipped) 69,202 70,271 216,968 209,986 E-85 (gallons shipped) 8,113 7,875 20,913 18,223 Corn Oil (pounds shipped) 20,686 22,736 64,034 61,592 DDG (tons shipped) 41 42 123 132 The above table shows only shipped volumes that flow through the Company's sales revenues. Total ethanol and DDG production by the unconsolidated LLCs are higher, however, the portion of this volume that is sold directly to their customers is excluded here. Plant Nutrient Group Our Plant Nutrient Group is a leading manufacturer, distributor and retailer of agricultural and related plant nutrients, pelleted lime and gypsum products in the U.S. Corn Belt, Florida and Puerto Rico. The Plant Nutrient Group provides warehousing, packaging and manufacturing services to basic producers and other distributors. The Group also manufactures and distributes a variety of industrial products throughout the U.S. and Puerto Rico including nitrogen reagents for air pollution control systems used in coal-fired power plants and water treatment products. The major nutrient products sold by the business principally contain nitrogen, phosphate, potassium and sulfur. Storage capacity at our wholesale nutrient and farm center facilities, including leased storage, was approximately 495,000 tons for dry nutrients and approximately 440,000 tons for liquid nutrients at September 30, 2014. Fertilizer tons sold for the three and nine months ended September 30, 2014 and 2013 were as follows: Three months ended Nine months ended (in thousands) September 30, September 30, 2014 2013 2014 2013 Sales tons 285 229 1,335 1,221 Service tons 45 46 199 197 Total tons 330 275 1,534 1,418 Volume for the quarter was less than anticipated due to an overall weakening in the nutrient markets and uncertainty of corn acres in 2015. Rail performance was also problematic causing delays of certain products. We expect part of this volume shortage to shift to the fourth quarter as summer and early fall orders are still waiting to be filled. With a late harvest and the nutrient depletion caused by high yields, we expect good demand for the remainder of the year, barring additional transportation interruptions. As noted previously, the purchase of Auburn Bean and Grain will provide four additional agronomy locations, with increased dry and liquid nutrient capacity. Rail Group Our Rail Group buys, sells, leases, rebuilds and repairs various types of used railcars and rail equipment. The Group also provides fleet management services to fleet owners. Rail has a diversified fleet of car types (boxcars, gondolas, covered and open top hoppers, tank cars and pressure differential cars), locomotives and barges. 29-------------------------------------------------------------------------------- Table of Contents In the third quarter, Rail had gains on sales of railcars and related leases in the amount of $1.4 million compared to $2.8 million in the prior year. Railcars and locomotives under management (owned, leased or managed for financial institutions in non-recourse arrangements) at September 30, 2014 were 22,139 compared to 22,651 at September 30, 2013. The average utilization rate (railcars and locomotives under management that are in lease services, exclusive of railcars managed for third party investors) has increased to 89.9% from 86.2% for the quarters ended September 30, 2014 and 2013. The Rail Group is focused on strategically growing the rail fleet and continues to look for opportunities to open new repair facilities and other adjacent business. We also anticipate future repair business related to mandated modification in the tank car industry. Turf & Specialty Group Turf & Specialty produces granular fertilizer products for the professional lawn care and golf course markets. It also sells consumer fertilizer and weed and turf pest control products for "do-it-yourself" application to mass merchandisers, small independent retailers and other lawn fertilizer manufacturers, and performs contract manufacturing of fertilizer and weed and turf pest control products. These products are distributed throughout the United States and Canada and into Europe and Asia. The turf products industry is highly seasonal, with the majority of sales occurring from early spring to early summer. Turf & Specialty is also one of a very limited number of processors of corncob-based products in the United States. Corncob-based products are manufactured for a variety of uses including laboratory animal bedding, cat litter, as well as absorbents, blast cleaners, carriers and polishers. Corncob-based products are sold throughout the year. Retail Group Our Retail Group includes large retail stores operated as "The Andersons" and a specialty food market operated as "The Andersons Market". It also operates a sales and service facility for outdoor power equipment. The retail concept is A Store Like no Other and the conventional retail stores focus on providing significant product breadth with offerings in home improvement and other mass merchandise categories, as well as specialty foods, wine and indoor and outdoor garden centers. The retail business is highly competitive. Our stores compete with a variety of retail merchandisers, including home centers, department and hardware stores, as well as local and national grocers. The Retail Group continues to optimize departments and products to maximize the profitability. Other Our "Other" represents corporate functions that provide support and services to the operating segments. The results contained within this segment include expenses and benefits not allocated back to the operating segments, including implementation expenses for our Enterprise Resource Planning ("ERP") project. We anticipate an increase in our ERP project expenses throughout the remainder of the year as the first stage of the project implementation commenced during the second quarter. Operating Results The following discussion focuses on the operating results as shown in the Condensed Consolidated Statements of Income with a separate discussion by segment. Additional segment information is included in the Notes to the Condensed Consolidated Financial Statements herein in Note 7. Segment Information. Three months ended Nine months ended September 30, September 30, (in thousands) 2014 2013 2014 2013 Sales and merchandising revenues $ 952,927 $ 1,181,374 $ 3,268,303 $ 4,020,308 Cost of sales and merchandising revenues 868,009 1,108,228 2,985,115 3,764,660 Gross profit 84,918 73,146 283,188 255,648 Operating, administrative and general expenses 76,737 69,193 223,997 192,665 Interest expense 4,253 5,348 16,401 16,607 Equity in earnings of affiliates, net 23,917 22,177 76,631 39,991 Other income, net 1,685 7,605 25,094 11,623 Income before income taxes 29,530 28,387 144,515 97,990 Income attributable to noncontrolling interests 2,454 878 10,844 1,805 Income before income taxes attributable to The Andersons, Inc. $ 27,076 $ 27,509 $ 133,671 $ 96,185 30 -------------------------------------------------------------------------------- Table of Contents Comparison of the three months ended September 30, 2014 with the three months ended September 30, 2013: Grain Group Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 575,354 $ 765,833 Cost of sales and merchandising revenues 542,606 738,828 Gross profit 32,748 27,005 Operating, administrative and general expenses 26,414 24,518 Interest expense 1,723 1,391 Equity in earnings of affiliates, net 10,190 12,003 Other income (expense), net (2,354 ) 1,216 Income before income taxes 12,447 14,315 Loss attributable to noncontrolling interest (2 ) (8 ) Income before income taxes attributable to The Andersons, Inc. $ 12,449 $ 14,323 Operating results for the Grain Group have decreased $1.9 million compared to the results of the same period last year. Sales and merchandising revenues decreased $190.5 million and primarily is the result of lower grain prices, with corn down almost 40 percent. Wheat and soybean revenues were also lower due to decreases in both price and volume. Cost of sales and merchandising revenues decreased $196.2 million compared to the third quarter of 2013 also driven by lower prices in corn and volume in wheat and soybeans. Gross profit is up $5.7 million over the third quarter of 2013 with most of the increase a result of higher space income, including basis appreciation in wheat. Basis is defined as the difference between cash price of a commodity in one of the Company's facilities and an exchange traded futures price. Operating expenses increased $1.9 million compared to the same period in 2013, as a result of higher labor and benefit costs, including additional headcount and merit increases. Equity in earnings of affiliates decreased $1.8 million over the same period in 2013, due to lower operating results of LTG in the third quarter of 2014. Other income (expense) decreased $3.6 million of which, $3.3 million relates to a guarantee expense due to one customer's contracts in default. Ethanol Group Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising and service fee revenues $ 179,405 $ 213,384 Cost of sales and merchandising revenues 166,635 208,649 Gross profit 12,770 4,735 Operating, administrative and general expenses 2,782 2,865 Interest expense 77 289 Equity in earnings of affiliates, net 13,727 10,174 Other income, net 71 35 Income before income taxes 23,709 11,790 Income attributable to noncontrolling interests 2,456 886 Income before income taxes attributable to The Andersons, Inc. $ 21,253 $ 10,904 Operating results for the Ethanol Group increased $10.3 million over the results of the same period last year. Sales and merchandising and service fee revenues decreased $34.0 million, as the average prices of ethanol and DDG decreased 11 percent and 25 percent, respectively. The $42.0 million decrease in cost of sales is due primarily to lower corn and ethanol prices. The increase in gross profit quarter over quarter is attributed to the increase in ethanol demand and the price of ethanol relative to corn value. 31-------------------------------------------------------------------------------- Table of Contents Equity in earnings of affiliates improved $3.6 million and relates to improved earnings from the unconsolidated ethanol LLCs. The ethanol plants' performance was favorably impacted by higher ethanol margins resulting from declining corn costs and higher demand for ethanol. Plant Nutrient Group Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 110,809 $ 95,681 Cost of sales and merchandising revenues 96,875 82,128 Gross profit 13,934 13,553 Operating, administrative and general expenses 15,663 14,770 Interest expense 1,017 746 Other income, net 2,617 320 Loss before income taxes $ (129 ) $ (1,643 ) Operating results for the Plant Nutrient Group improved $1.5 million from the same period last year. Sales and merchandising revenues increased $15.1 million due to an increase in sales volumes of almost 25 percent. The increase is partially offset by a six percent decrease in average price per ton sold, which followed the price of nutrients in the market. The increase in cost of sales and merchandising revenues follows that of revenues, which is a result of higher volumes and lower costs per ton sold. The lower cost per ton sold is comparable with the selling price decrease and reflective of the market. Gross margin increased slightly, reflecting the impact of the higher volumes and lower margins. Operating expenses were up slightly from the same period in 2013, due to additional depreciation from recent capital projects. Other income increased $2.3 million due to the settlement of a legal claim during the quarter. Rail Group Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 32,022 $ 47,523 Cost of sales and merchandising revenues 21,181 34,523 Gross profit 10,841 13,000 Operating, administrative and general expenses 5,652 4,451 Interest expense 1,821 1,220 Other income, net 792 5,031 Income before income taxes $ 4,160 $ 12,360 Operating results for the Rail Group decreased by $8.2 million compared to the results from the same period last year. The $15.5 million decrease in revenues is due to an $18.1 million decrease in car sales, partially offset by an increase in revenues at the repair facilities of $2.3 million and a minor increase in lease revenues. Cost of sales and merchandising revenues decreased $13.3 million compared to the same period last year primarily as a result of a lower volume of car sales. Rail gross profit decreased by $2.2 million compared to the third quarter of 2014, as increased depreciation and freight expenses impacted margins on the leasing business. Operating expenses increased $1.2 million quarter over quarter due to increased labor, benefits, and depreciation expenses from recent expansion in the repair business. Other income in the prior year includes a $3.5 million gain from the settlement of an early rail lease termination. 32-------------------------------------------------------------------------------- Table of Contents Turf & Specialty Group Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 22,631 $ 27,624 Cost of sales and merchandising revenues 17,325 21,216 Gross profit 5,306 6,408 Operating, administrative and general expenses 8,097 6,423 Interest expense 338 203 Other income, net 244 135 Loss before income taxes $ (2,885 ) $ (83 ) Operating results for the Turf & Specialty Group decreased $2.8 million compared to results from the same period last year. Despite a 16 percent increase in average price per ton, sales and merchandising revenues decreased $5.0 million as volumes decreased almost 30 percent. Cost of sales and merchandising revenues decreased by $3.9 million. Both decreases are attributable to lost contract manufacturing sales, which typically realize higher selling prices and lower margins. Operating expenses increased $1.7 million, most of which relates to labor and benefit costs and depreciation expense from recent acquisitions. There were no significant fluctuations in interest expense and other income quarter over quarter. Retail Group Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 32,706 $ 31,329 Cost of sales and merchandising revenues 23,387 22,884 Gross profit 9,319 8,445 Operating, administrative and general expenses 10,523 10,438 Interest expense 182 152 Other income, net 418 102 Loss before income taxes $ (968 ) $ (2,043 ) Operating results for the Retail Group improved $1.1 million over the third quarter 2013. The prior year results reflect additional costs of several store resets, which the Group was able to realize a benefit from in the current year. Other Three months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ - $ - Cost of sales and merchandising revenues - - Gross profit - - Operating, administrative and general expenses 7,606 5,728 Interest expense (income) (905 ) 1,347 Other income (expense), net (103 ) 766 Loss before income taxes $ (6,804 ) $ (6,309 ) The other operating loss not allocated to business segments increased slightly compared to the third quarter 2013. Operating expenses were higher in the third quarter of 2014 due to higher labor and benefit costs and additional ERP project expenses. Interest expense (income) improved $2.3 million over prior year primarily due to mark-to-market adjustments on interest rate 33-------------------------------------------------------------------------------- Table of Contents derivative contracts and lower levels of borrowing in the current year. Other income (expense) decreased due to lower earnings on the deferred compensation plan. Income Taxes Income tax expense of $10.3 million was provided at 34.7%. In the third quarter of 2013, income tax expense of $10.3 million was provided at a rate of 36.5%. The lower 2014 effective tax rate is due primarily to the benefit associated with income attributable to noncontrolling interests that does not increase tax expense. The Company anticipates that its 2014 effective annual rate will be 34.2%. The Company's actual 2013 effective tax rate was 36.0%. The lower effective rate for 2014 is due to increased benefits related to domestic production activities and the 2013 correction made with respect to the accounting for the OCI portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. Comparison of the nine months ended September 30, 2014 with the nine months ended September 30, 2013: Grain Group Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 1,814,517 $ 2,493,678 Cost of sales and merchandising revenues 1,736,852 2,419,731 Gross profit 77,665 73,947 Operating, administrative and general expenses 73,868 67,944 Interest expense 7,203 7,714 Equity in earnings of affiliates, net 20,541 24,940 Other income, net 16,967 1,438 Income before income taxes 34,102 24,667 Loss attributable to noncontrolling interest (8 ) (8 ) Income before income taxes attributable to The Andersons, Inc. $ 34,110 $ 24,675 Operating results for the Grain Group have improved $9.4 million compared to the results of the same period last year. Sales and merchandising revenues decreased $679.2 million and primarily is the result of lower grain prices, with corn down almost 40 percent. Wheat and soybean revenues were also lower due primarily to decreases in volume. These decreases were partially offset by higher oats volumes and prices. Cost of sales and merchandising revenues decreased $682.9 million, driven by lower prices in corn and volume in wheat and soybeans. Gross profit is up $3.7 million over the third quarter of 2013 with most of the increase a result of higher basis appreciation in wheat. Operating expenses increased $5.9 million compared to prior year. The increase is a result of higher labor and benefit costs, including additional headcount, merit increases, and incentive compensation expense. Equity in earnings of affiliates decreased $4.4 million over prior year, primarily driven by a decreased ownership percentage of the investment in LTG and lower 2014 year-to-date operating results of LTG. This decrease was partially offset by earnings from our Thompsons Limited investment. Other income is higher in the current year due to a gain, net of deal costs, recognized from the partial share redemption in our investment in LTG of $17.1 million, partially offset by the $3.3 million charge from a guarantee expense on one customer's contracts in default. 34-------------------------------------------------------------------------------- Table of Contents Ethanol Group Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising and service fee revenues $ 594,613 $ 634,933 Cost of sales and merchandising revenues 555,840 615,744 Gross profit 38,773 19,189 Operating, administrative and general expenses 8,978 8,013 Interest expense 253 895 Equity in earnings of affiliates, net 56,090 15,051 Other income, net 201 465 Income before income taxes 85,833 25,797 Income attributable to noncontrolling interests 10,852 1,813 Income before income taxes attributable to The Andersons, Inc. $ 74,981 $ 23,984 Operating results for the Ethanol Group increased $51.0 million over the prior year. Sales and merchandising and service fee revenues decreased $40.3 million primarily due to a decrease in the average price per gallon of ethanol sold and price per ton of DDG sold, partially offset by an increase in volume for both. The decrease in cost of sales primarily is due to lower corn and ethanol prices. The increase in gross profit quarter over quarter is attributed to the increase in ethanol demand and the price of ethanol and DDG relative to corn value which contributed to more favorable margins. Operating expenses increased slightly due to higher labor and incentive compensation expense in 2014. Equity in earnings of affiliates improved $41.0 million and relates to improved earnings from the unconsolidated ethanol LLCs. The ethanol plants' performance was impacted favorably by higher ethanol margins resulting from declining corn costs and strong demand for ethanol. Plant Nutrient Group Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 530,334 $ 537,922 Cost of sales and merchandising revenues 461,592 473,219 Gross profit 68,742 64,703 Operating, administrative and general expenses 45,723 41,666 Interest expense 2,748 2,461 Other income, net 3,193 459 Loss before income taxes $ 23,464 $ 21,035 Operating results for the Plant Nutrient Group increased $2.4 million from the same period last year. Sales and merchandising revenues decreased $7.6 million due to a 10 percent decrease in average price per ton sold, which followed the price of nutrients in the market. This decrease was partially offset by a nine percent increase in volume of sales tons. The decreases in cost of sales and merchandising revenues were driven by lower costs per ton sold, comparable with the selling price decrease and reflective of the market. The majority of the $4.0 million increase in gross profit relates to the increase in volume. Operating expenses increased $4.1 million from the same period in 2013, due to increases in incentive compensation expense and additional depreciation from recent capital projects. The increase in other income is due to a $2.3 million settlement of a legal claim during the third quarter of 2014. 35-------------------------------------------------------------------------------- Table of Contents Rail Group Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 117,733 $ 132,488 Cost of sales and merchandising revenues 71,164 85,952 Gross profit 46,569 46,536 Operating, administrative and general expenses 17,588 12,439 Interest expense 5,381 4,162 Other income, net 2,289 6,679 Income before income taxes $ 25,889 $ 36,614 Operating results for the Rail Group decreased by $10.7 million compared to the results from the same period last year. The $14.8 million decrease in revenues was driven by a $20.2 million decrease in car sales, offset by an increase in leasing revenues of $1.7 million and an increase in revenues at the repair facilities of $3.6 million. Cost of sales and merchandising revenues also decreased $14.8 million compared to the same period last year primarily as a result of a lower volume of car sales. Rail gross profit remained flat compared to prior year. Operating expenses increased $5.1 million from the same period in 2013 primarily due to increased labor and benefits costs, and maintenance expense from recent expansion in the repair business. Interest expense increased $1.2 million due to higher fixed asset costs for leasing. Other income in the prior year, includes a $3.5 million gain from the settlement of an early rail lease termination. Turf & Specialty Group Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 109,269 $ 117,955 Cost of sales and merchandising revenues 87,683 95,208 Gross profit 21,586 22,747 Operating, administrative and general expenses 20,938 16,268 Interest expense 1,178 951 Other income, net 1,018 585 Income before income taxes $ 488 $ 6,113 Operating results for the Turf & Specialty Group decreased $5.6 million compared to results from the prior year. Sales and merchandising revenues decreased $8.7 million as volumes were down approximately 10 percent. Cost of sales and merchandising revenues decreased $7.5 million compared to the prior year, also due to lower volumes. As such, gross profit decreased $1.2 million. These decreases are attributable to lost contract manufacturing sales, which typically realize higher selling prices and lower margins. Operating expenses increased $4.7 million. The largest drivers of this increase were labor and benefit costs, and depreciation expense due to recent acquisitions. 36-------------------------------------------------------------------------------- Table of Contents Retail Group Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ 101,837 $ 103,332 Cost of sales and merchandising revenues 71,984 74,806 Gross profit 29,853 28,526 Operating, administrative and general expenses 31,723 31,996 Interest expense 516 519 Other income, net 720 316 Loss before income taxes $ (1,666 ) $ (3,673 ) Operating results for the Retail Group improved $2.0 million from the same period last year. Sales and merchandising revenues decreased $1.5 million. The prior year sales and merchandising revenues includes $2.3 million from the Woodville store, which was closed in the first quarter of 2013. The average sale per customer remained consistent but we saw a decrease in customer count from prior year, caused, in part, by the weather conditions in the first quarter of 2014 and the closing of the Woodville store in the prior year. Cost of sales and merchandising revenues decreased $2.8 million also driven by lower customer counts. Despite lower volumes, gross profit increased due to the strong margins realized on work wear and in the deli. The prior year results also reflect additional costs of several store resets, which the Group was able to realize a benefit from in the current year. Other Nine months ended September 30, (in thousands) 2014 2013 Sales and merchandising revenues $ - $ - Cost of sales and merchandising revenues - - Gross profit - - Operating, administrative and general expenses 25,179 14,339 Interest (income) expense (878 ) (95 ) Other income, net 706 1,681 Loss before income taxes $ (23,595 ) $ (12,563 ) The other operating loss not allocated to business segments increased $11.0 million compared to the prior year. Operating expenses were higher in 2014 due to higher labor and benefit costs, including performance based compensation accruals, and additional ERP project expenses. Income Taxes Income tax expense of $49.8 million was provided at 34.5%. In 2013, income tax expense of $36.9 million was provided at a rate of 37.7%. The higher 2013 effective tax rate was due primarily to a correction made with respect to the accounting for the other comprehensive income ("OCI") portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. The 2014 effective tax rate also reflects a benefit associated with income attributable to noncontrolling interests that does not increase tax expense. The Company anticipates that its 2014 effective annual rate will be 34.2%. The Company's actual 2013 effective tax rate was 36.0%. The lower effective rate for 2014 is due to increased benefits related to domestic production activities and the 2013 correction made with respect to the accounting for the OCI portion of the Company's retiree health care plan liability and the Medicare Part D subsidy. 37-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Working Capital At September 30, 2014, we had working capital of $257.3 million. The following table presents changes in the components of current assets and current liabilities: (in thousands) September 30, 2014 September 30, 2013 Variance Current Assets: Cash and cash equivalents $ 326,946 $ 134,441 $ 192,505 Restricted cash 173 164 9 Accounts receivable, net 162,270 178,970 (16,700 ) Inventories 396,464 429,017 (32,553 ) Commodity derivative assets - current 126,396 105,390 21,006 Deferred income taxes 148 5,254 (5,106 ) Other current assets 36,518 42,278 (5,760 ) Total current assets 1,048,915 895,514 153,401 Current Liabilities: Short-term debt 451 - 451 Accounts payable for grain 222,178 241,575 (19,397 ) Other accounts payable 165,133 200,664 (35,531 ) Customer prepayments and deferred revenue 27,246 23,974 3,272 Commodity derivative liabilities - current 229,265 88,234 141,031 Accrued expenses and other current liabilities 70,598 63,900 6,698 Current maturities of long-term debt 76,757 44,232 32,525 Total current liabilities 791,628 662,579 129,049 Working Capital $ 257,287 $ 232,935 $ 24,352 In comparison to September 30, 2013, current assets increased primarily related to cash. See the discussion below on sources and uses of cash for an understanding of the change in cash from prior year. Accounts receivable are lower in the current year due to lower grain prices and decreased revenues in several of our business units. The decrease in inventory is also due to lower grain prices. Other current assets decreased in 2014 as we continue to use up the prepaid federal income tax balance that resulted from significant overpayments in 2013, and timing of amortization and payments on prepaid assets. Commodity derivative assets and liabilities have increased and reflect the customer net asset or liability based on the value of forward contracts as compared to market prices at the end of the period. Current liabilities increased primarily due to increases in commodity derivative liabilities and current maturities of long-term debt. Current maturities of long-term debt increased due to the scheduled timing of payments of certain notes that are due within the next year. Offsetting this increase, are decreases in accounts payable for grain and other accounts payable. The decrease in accounts payable for grain is attributable to lower grain prices. The decrease in other accounts payable is the result of decreased nutrient purchases in Plant Nutrient, as the nutrient supply is tight, along with timing of payments. Sources and Uses of Cash Operating Activities Our operating activities provided cash of $102.3 million and $129.0 million in the first nine months of 2014 and 2013, respectively. Increased net income and certain working capital changes, including decreases in inventory and commodity derivatives, and distributions from investments in affiliates provided significant cash. The ethanol LLCs made distributions throughout the year to us as a result of strong financial performance, and a portion of the proceeds received from LTG as part of the partial share redemption agreement was a distribution of earnings. The most significant uses of cash in both periods relate to the significant payout to farmers in January of each year and other accounts payable and accrued expenses. We have made income tax payments, net of refunds, of $33.2 million through the third quarter of 2014. We expect to make payments totaling approximately $11.7 million for the remainder of 2014. 38-------------------------------------------------------------------------------- Table of Contents Investing Activities Total capital spending for 2014 on property, plant and equipment in our base business, inclusive of information technology spending is expected to be approximately $80 million. In addition to spending on conventional property, plant and equipment, we expect to spend $72 million for the purchase of railcars, nonrailcar assets and related leases and capitalized modifications of railcars. We also expect to offset this amount by proceeds from the sales and dispositions of $45 million. Through September 30, 2014, we invested $39.3 million in the purchase of additional railcars, which is partially offset by proceeds from sales of railcars of $30.9 million. Through September 30, 2013, we invested $71.6 million in the purchase of additional railcars, which was more than offset by proceeds from sales of $87.6 million. In the first quarter of 2014, we recognized a portion of the proceeds received from LTG as part of the partial share redemption as proceeds from sale of investments. The prior year reflects our $49.2 million purchase of the Thompons Limited investment. Financing Activities Due to strong cash positions, our short-term borrowing in 2014 is significantly lower than the prior year. In 2013, we had a significant amount of committed short-term lines of credit available to finance working capital, primarily inventories, margin calls on commodity contracts and accounts receivable. We are party to borrowing arrangements with a syndicate of banks that provides a total of $878.1 million in borrowings, which includes $28.1 million non-recourse debt of The Andersons Denison Ethanol LLC. Of that total, we had $847.1 million remaining available for borrowing at September 30, 2014. Peak short-term borrowings to date were $270.6 million on April 2, 2014. Typically, our highest borrowing occurs in the Spring due to seasonal inventory requirements in our fertilizer and grain businesses. We paid $0.1100 per common share for the dividends paid in January, April and July 2014, and $0.1067 per common share for the dividends paid in January, April, July and October 2013. On August 28, 2014, we declared a cash dividend of $0.11 per common share payable on October 22, 2014 to shareholders of record on October 1, 2014. During the first nine months, we granted approximately 156 thousand shares and share units to employees and directors under our equity-based compensation plans. During the first nine months of 2013, approximately 500 shares were issued under our equity-based compensation plans. Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of equity and limitations on additional debt. We are in compliance with all such covenants as of September 30, 2014. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. Our non-recourse long-term debt is collateralized by railcar and ethanol plant assets. Because we are a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices and/or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, we receive a return of cash. We believe our sources of liquidity will be adequate to fund our operations, capital expenditures and payments of dividends through the next twelve months. Off-Balance Sheet Transactions Our Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. We lease railcars from financial intermediaries through sale-leaseback transactions, the majority of which involve operating sale leasebacks. Railcars we own or lease from a financial intermediary are generally leased to a customer under an operating lease. We also arrange non-recourse lease transactions under which we sell railcars or other long-term 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. On most of the railcar and non-railcar assets, we hold an option to purchase these assets at the end of the lease. 39-------------------------------------------------------------------------------- Table of Contents The following table describes our railcar and non-railcar asset positions at September 30, 2014: |