SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
| x | ||
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
Commission file number 000-20557
THE ANDERSONS, INC.
(Exact name of registrant as specified in its charter)
| OHIO | 34-1562374 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 480 W. Dussel Drive, Maumee, Ohio | 43537 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (419) 893-5050
Securities registered pursuant to Section 12(b) of the Act: Common Shares
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso¨ Noþx
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yeso¨ Noþx
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. Yesþx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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. Yesþx Noo¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | x | Accelerated filer | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yeso¨ Noþx
The aggregate market value of the registrant’s voting stock which may be voted by persons other than affiliates of the registrant was $554.1$780.6 million on June 30, 2010,2011, computed by reference to the last sales price for such stock on that date as reported on the Nasdaq Global Select Market.
The registrant had 18.5 million common shares outstanding, no par value, at February 9, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 2011,11, 2012, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Commission on or about March 13, 2011.
Table of Contents
Company Overview
The Andersons, Inc. (the “Company”) is a diversified company with interests in the grain, ethanol and plant nutrient sectors of U.S. agriculture, as well as in railcar leasing and repair, turf products production and general merchandise retailing. Founded in Maumee, Ohio in 1947, the Company now has operations in 16 U.S.across the United States and in Puerto Rico, plusand has railcar leasing interests in Canada and Mexico.
Segment Descriptions
The Company’s operations are classified into fivesix reportable business segments: Grain, & Ethanol, Rail, Plant Nutrient, Turf & Specialty, and Retail. Each of these segments is organized based upon the nature of products and services offered. See Note 167 to the consolidated financial statementsConsolidated Financial Statements in Item 8 for information regarding business segments.
Grain & Ethanol Group
The Grain & Ethanol Group provides merchandising and services to the grain industry primarily in the U.S. Corn Belt. It also is an investor in and operator of three ethanol facilities.
In 2008, the Company renewed the five-year lease agreement and the five-year marketing agreement (“the Agreement”) with Cargill, Incorporated (“Cargill”) for Cargill’s Maumee and Toledo, Ohio grain handling and storage facilities. As part of the agreement, Cargill is given the marketing rights to grain in the Cargill-
2
Grain prices are not predetermined, so sales are negotiated by the Company’s merchandising staff. The principal grains sold by the Company are yellow corn, yellow soybeans and soft red and white wheat. Approximately 85%94% of the grain bushels sold by the Company in 20102011 were purchased by U.S. grain processors and feeders, and approximately 15%6% were exported. Most of the Company’s exported grain sales are done through intermediaries while some grain is shipped directly to foreign countries, mainly Canada. Almost allMost grain shipments from our facilities are by rail or boat. Rail shipments are made primarily to grain processors and feeders with some rail shipments made to exporters on the Gulf of Mexico or east coast. Boat shipments are from the Port of Toledo. Grain sales are made on a negotiated basis by the Company’s merchandising staff, exceptIn addition, grain is transported via truck for direct ship transactions where customers sell grain sales subject to the Agreement with Cargill which are made on a negotiated basis with Cargill’s merchandising staff.
The Company’s grain operations rely principally on forward purchase contracts with producers, dealers and countrycommercial elevators to ensure an adequate supply of grain to the Company’s facilities throughout the year. The Company makes grain purchases at prices referenced to the CME.Chicago Mercantile Exchange (“the CME”). Bushels contracted for future delivery at January 31, 20112012 approximated 248.1178.5 million.
The Company competes in the sale of grain with other public and private grain merchants, otherbrokers, elevator operators and farmer cooperatives that operate elevator facilities.owned cooperative elevators. Some of the Company’s competitors are also its customers. Competition is based primarily on price, service and reliability. Because the Company generally buys in smaller lots, its competition is generally local or regional in scope, although there are some large national and international companies that maintain regional grain purchase and storage facilities. A significant portionSignificant portions of grain bushels purchased and sold are done so using forward contracts.
The grain handling business has ais seasonal componentin nature in that a large portion of the principal grains are harvested and delivered from the farm and commercial elevators in July, October and November although the balancea significant portion of the principal grains continue to be delivered to The Andersons all year long.
Fixed price purchase and sale commitments for grain and grain held in inventory expose the Company to risks related to adverse changes in market prices. The Company attempts to manage these risks by entering into exchange-traded futures and option contracts with the CME. The contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments. The CME is a regulated commodity futures exchange that maintains futures markets for the grains merchandised by the Company. Futures prices are determined by worldwide supply and demand.
The Company’s grain risk management practices are designed to reduce the risk of changing commodity prices. In that regard, such practices also limit potential gains from further changes in market prices. Profitability is primarily derived from margins on grain sold, and revenues generated from other merchandising activities with its customers (including storage and service income), not from futures and options transactions. The Company has policies that specify the key controls over its risk management practices. These policies include a description of the objectives of the programs mandatoryand review of positionsposition limits by key management outside of the trading function on a biweeklydaily basis daily position limits, daily review and reconciliation andalong with other internal controls. The Company monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, the Company monitors the parties to its purchase contracts on a regular basis for credit worthiness, defaults and non-delivery.
Purchases of grain can be made the day the grain is delivered to a terminal or via a forward contract made prior to actual delivery. Sales of grain generally are made by contract for delivery in a future period. When the Company purchases grain at a fixed price or at a price where a component of the purchase price is fixed via reference to a futures price on the CME, it also enters into an offsetting sale of a futures contract on the CME. Similarly, when the Company sells grain at a fixed price, the sale is offset with the purchase of a futures contract on the CME. At the close of business each day, inventory and open purchase and sale contracts as well as open futures and option positions are marked-to-market. Gains and losses in the value of the Company’s ownership positions due to changing market prices are netted with and
3
When a futures contract is entered into, an initial margin deposit must be sent to the CME. The amount of the margin deposit is set by the CME and varies by commodity. If the market price of a futures contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required by the CME. Subsequent price changes could require additional maintenance margin deposits or result in the return of maintenance margin deposits by the CME. Significant increases in market prices, such as those that occur when grain supplies are affected by unfavorable weather conditions and/or when increases in demand occur, can have an effect on the Company’s liquidity and, as a result, require it to maintain appropriate short-term lines of credit. The Company may utilize CME option contracts to limit its exposure to potential required margin deposits in the event of a rapidly rising market.
The Company owns 52% of the diluted equity in Lansing Trade Group LLC (“LTG”). LTG is largely focused on the movement of physical commodities, including grain and ethanol and is exposed to the some of the same risks as the Company’s grain and ethanol businesses. LTG trades in other commodities that the Company’s grain and ethanol businesses do not trade in, some of which are not exchange traded. This investment provides the Company with further opportunity to diversify and complement its income through activity outside of its traditional product and geographic regions. This investment is accounted for under the equity method. The Company periodically enters into transactions with LTG as disclosed in Note 8 of Item 8.
Sales of grain and related service and merchandising revenues totaled $2,849.4 million, $1,936.8 million and $1,734.6 million for the years ended December 31, 2011, 2010 and 2009.
The Company intends to continue to grow its traditional grain business through geographic expansion of its physical operations, pursuit of grain handling agreements, food supply chain risk management relationships, expansion at existing facilities and acquisitions.
Ethanol Group—
The Ethanol Division operatesGroup has ownership interests in three ethanol plants for Limited Liability Companies (“the ethanol LLCs” or “LLCs”). Each of the LLCs owns an ethanol plant that is operated by the Company’s Ethanol Group. The plants are located in Indiana, Michigan, and Ohio that are collectively capableand have combined capacity of producing 275 million gallons of ethanol. The divisionGroup offers facility operations, risk management corn origination, ethanol and distiller dried grains marketing services to the LLCs it operates as well as third parties.
The ethanol LLC investments are accounted for using the equity method of accounting. The Company holds a 50.01%50% interest in The Andersons Albion Ethanol LLC (“TAAE”) and a 38% interest in The Andersons Clymers Ethanol LLC (“TACE”). The Company holds a 50% interest in The Andersons Marathon Ethanol LLC (“TAME”) through its majority owned subsidiary The Andersons Ethanol Investment LLC (“TAEI”). A third party owns 34% of TAEI.
The Company has a management agreement with each of the LLCs. As part of these agreements, the CompanyEthanol Group runs the day-to-day operations of the plants and provides all administrative functions. The Company is separately compensated for these services. In addition to the management agreements, the Company also has entered into ethanol and distillers dried grains (“DDG”) marketing agreements in which the Company markets the ethanol and DDG produced to external customers. As compensation for these services the Company receives a fee based on each gallon of ethanola fixed cost plus an indexed annual increase determined by a consumer price index and each ton of DDG sold. Finally,is accounted for on a gross basis. Additionally, the Company has entered into corn origination agreements with each of the LLCs under which the Company originatesGrain Group has the exclusive right to act as supplier for 100% of the corn used by the LLCs in the production of ethanol. For this service, the Company alsoGrain Group receives a unit based fee.
Sales of ethanol and related merchandising and service revenuefee revenues totaled $467.8$641.5 million, $468.6 million and $419.4 million in 2011, 2010 and $466.3 million in 2010, 2009 and 2008.
It is reasonably possible that within the ethanol industry and grow its traditional grain business through business acquisitions. Thenext 12 months, the Company may make additional investments in the ethanol and other grain processing industriesindustry singly or through joint venture agreements and by providing origination, management, logistics, merchandising and other services.
4
The Company’s Plant Nutrient Group is a leading manufacturer and distributor of agricultural plant nutrients in the U.S. Corn Belt and Florida. It operates 30 facilities in19 wholesale distribution and manufacturing locations as well as 8 leased locations throughout Ohio, Michigan, Indiana, Illinois, Florida, Wisconsin, Minnesota and Puerto Rico.
Wholesale Nutrients —– The Wholesale Nutrients business manufactures, stores, and distributes about 2nearly 2.0 million tons of dry and liquid agricultural nutrients, and pelleted lime and gypsum products primarily to agricultural farm supply dealers.annually. The Group purchases basic nitrogen, phosphate, potassium and sulfur materials for resale and uses some of these same materials in its manufactured nutrient products.
The Plant Nutrient business also manufactures and distributes a variety of industrial products throughout the U.S. and Puerto Rico including nitrogen reagents for air pollution control systems used in coal-fired power plants, water treatment and dust abatement products, and de-icers and anti-icers for airport runways, roadways, and other commercial applications.
Farm Centers —– The Farm Centers offer a variety of essential crop nutrients, crop protection chemicals and seed products in addition to application and agronomic services to commercial and family farmers. Soil and tissue sampling along with global satellite assisted services provide for pinpointing crop or soil deficiencies and prescriptive agronomic advice is provided to farmer customers.
5
In its plant nutrient businesses, the Company competes with regional and local cooperatives wholesalers and retailers, predominantly publicly owned basic manufacturers and privately owned retailers, wholesalers and importers. Some of these competitors are also suppliers and have considerably larger resources than the Company. Competition in the nutrient business of the Company is based largely on depth of product offering, price, location and service.
For the years ended December 31, 2011, 2010 2009 and 2008,2009, sales and service revenues in the wholesale business totaled $509.8$577.2 million, $381.1$520.5 million and $547.8$390.2 million, respectively. Sales of crop production inputs and service revenues in the farm center business totaled $109.5$113.4 million, 110.2$98.8 million and $104.7$101.1 million in 2011, 2010 and 2009, respectively.
The Company continues to identify opportunities to strategically grow the Plant Nutrient business. On October 31, 2011, the Company completed the purchase of Immokalee Farmers Supply, Inc., which principally supplies crop protection products to the specialty vegetable producers in Southwest Florida. On January 31, 2012, the Company announced the purchase of New Eezy Gro, Inc., which is a manufacturer and 2008,wholesale marketer of specialty agricultural nutrients and industrial products.
Rail Group
The Company’s Rail Group ranks in the top ten in fleet size among privately-owned fleets in the U.S. This group repairs, sells and leases a fleet of almost 23,000 railcars and locomotives of various types, as well as a small number of containers. There are eleven railcar repair facilities across the country. In addition, fleet management services are offered to private railcar owners. The Rail Group is also an investor in the short-line railroad, Iowa Northern Railway Company (“IANR”).
The Company has a diversified fleet of car types (boxcars, gondolas, covered and open top hopper cars, tank cars and pressure differential cars), locomotives, and containers serving a broad customer base. The Company principally operates in the used car market – purchasing used cars and repairing and refurbishing them for specific markets and customers. The Company plans to continue to diversify its fleet both in terms of car types, industries and age of cars. The Rail Group will execute its strategy through expansion of its fleet of railcars and locomotives through targeted portfolio acquisitions and open market purchases as well as strategic selling or scrapping of railcars. The Company also plans to expand its repair and refurbishment operations by adding fixed and mobile facilities.
A significant portion of the railcars and locomotives managed by the Company are included on the balance sheet as long-lived assets. The others are either in off-balance sheet operating leases (with the Company leasing railcars from financial intermediaries and leasing those same railcars to the end-users of the railcars) or non-recourse arrangements (where the Company is not subject to any lease arrangement related to the railcars, but provides management services to the owner of the railcars).
The Company generally holds purchase options on most railcars owned by financial intermediaries. We are under contract to provide maintenance services for many of the railcars that we own or manage. Refer to the Off-Balance Sheet Transactions section of Management’s Discussion and Analysis for a breakdown of our railcar and locomotive positions at December 31, 2011.
In the case of our off-balance sheet railcars and locomotives, the risk management philosophy of the Company is to match-fund the lease commitments where possible. Match-funding (in relation to rail lease transactions) means matching the terms of the financial intermediary funding arrangement with the lease terms of the customer where the Company is both lessee and sublessor. If the Company is unable to match-fund, it will attempt to get an early buyout provision within the funding arrangement to match the underlying customer lease. The Company does not attempt to match-fund lease commitments for railcars that are on our balance sheet.
Competition for railcar marketing and fleet maintenance services is based primarily on price, service ability, and access to both used rail equipment and third party financing. Repair and fabrication shop competition is based primarily on price, quality and location.
For the years ended December 31, 2011, 2010 and 2009, revenues were $107.5 million, $94.8 million and $92.8 million, respectively, which include lease revenues of $70.8 million, $63.1 million and $75.6 million, respectively.
Turf & Specialty Group
The Turf & Specialty Group produces granular fertilizer and control products for the turf and ornamental markets. It also produces private label fertilizer and control products, and corncob-based animal bedding and cat litter for the consumer markets.
Turf Products —– Proprietary professional turf care products are produced for the golf course and professional turf care markets, serving both U.S. and international customers. These products are sold both directly and through distributors to golf courses under The Andersons Golf ProductsTM label and lawn service applicators. The Company also produces and sells fertilizer and 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 control products.
The turf products industry is seasonal with the majority of sales occurring from early spring to early summer. Principal raw materials for the turf care products are nitrogen, phosphate and potash, which are purchased primarily from the Company’s Plant Nutrient Group. Competition is based principally on merchandising ability, logistics, service, quality and technology.
The Company attempts to minimize the amount of finished goods inventory it must maintain for customers, however, because demand is highly seasonal and influenced by local weather conditions, it may be required to carry inventory that it has produced into the next season. Also, because a majority of the consumer and industrial businesses use private label packaging, the Company closely manages production to anticipated orders by product and customer.
For the years ended December 31, 2011, 2010 2009 and 2008,2009, sales of granular plant fertilizer and control products totaled $109.2 million, $104.0 million and $109.5 million, and $103.1 million, respectively.
Cob Products- – The Company is one of a limited number of processors of corncob-based products in the United States. These products serve the chemical and feed ingredient carrier, animal litter and industrial
6
For the years ended December 31, 2011, 2010 2009 and 2008,2009, sales of corncob and related products totaled $19.6$20.5 million, $15.8$19.6 million and $15.8 million, respectively.
Retail Group
The Company’s Retail Group includes large retail stores operated as “The Andersons,” which are located in the Columbus and Toledo, Ohio markets. The retail concept isMore for Your Home® and the 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. Each store carries more than 80,000 different items, has 100,000 square feet or more of in-store display space plus 40,000 or more square feet of outdoor garden center space, and features do-it-yourself clinics, special promotions and varying merchandise displays. The Company also operates a specialty food store operated as “The Andersons Market”™ located in the Toledo, Ohio market area. The specialty food store concept has product offerings with a strong emphasis on “freshness” that features produce, deli and bakery items, fresh meats, specialty and conventional dry goods and wine. The majority of the Company’s non-perishable merchandise is received at a distribution center located in Maumee, Ohio.
The retail merchandising business is highly competitive. The Company competes with a variety of retail merchandisers, including grocery stores, home centers, department and hardware stores. Many of these competitors have substantially greater financial resources and purchasing power than the Company. The principal competitive factors are location, quality of product, price, service, reputation and breadth of selection. The Company’s retail business is affected by seasonal factors with significant sales occurring in the spring and during the Christmasholiday season.
For the years ended December 31, 2011, 2010 2009 and 2008,2009, sales of retail merchandise including commissions on third party sales totaled $157.6 million, $150.6 million and $161.9 million and $173.1 million respectively.
Employees
The Andersons offers a broad range of full-time and part-time career opportunities. Each position in the Company is important to our success, and we recognize the worth and dignity of every individual. We strive to treat each person with respect and utilize his or her unique talents. At December 31, 20102011 the Company had 1,6141,690 full-time and 1,3291,295 part-time or seasonal employees.
Government Regulation
Grain sold by the Company must conform to official grade standards imposed under a federal system of grain grading and inspection administered by the United States Department of Agriculture (“USDA”).
The production levels, markets and prices of the grains that the Company merchandises are materially affected by United States government programs, which include acreage control and price support programs of the USDA. ForIn regards to our investments in ethanol production facilities, the U.S. government has mandated a ten percent blend for motor fuel gasoline sold. In addition, the U.S. Government providesprovided incentives to the ethanol blender through December 2011 but has mandated certain volumes of ethanol be produced and has imposed tariffs on ethanol imported from other countries.discontinued these incentives beginning in 2012. Also, under federal law, the President may prohibit the export of any product, the scarcity of which is deemed detrimental to the domestic economy, or under circumstances relating to national security. Because a portion of the Company’s grain sales is to exporters, the imposition of such restrictions could have an adverse effect upon the Company’s operations.
7
The Company, like other companies engaged in similar businesses, is subject to a multitude of federal, state and local environmental protection laws and regulations including, but not limited to, laws and regulations relating to air quality, water quality, pesticides and hazardous materials.
The provisions of these various regulations could require modifications of certain of the Company’s existing facilities and could restrict the expansion of future facilities or significantly increase the cost of their operations. The Company spent approximately $1.7 million, $1.9 million and $1.8 million and $4.1 million in both capital and expense in order to comply with these regulations in 2011, 2010, and 2009, and 2008, respectively.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our Company website soon after filing with the Securities and Exchange Commission. Our Company website is http://www.andersonsinc.com. The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports are also available at the SEC’s website:http://www.sec.gov.
8
Our operations are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in this Form 10-K 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 following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained elsewhere in this Form 10-K.
Certain of our business segments are affected by the supply and demand of commodities, and are sensitive to factors outside of our control. Adverse price movements could negatively affect our profitability and results of operations.
Our Grain, & Ethanol and Plant Nutrient Groupsbusinesses buy, sell and hold inventories of variousagricultural input and output commodities, some of which are readily traded on commodity futures exchanges. In addition, our Turf & Specialty Groupbusiness uses some of thesethe same fertilizernutrient commodities as the Plant Nutrient business as base raw materials in manufacturing golf course and landscape fertilizer.turf products. Unfavorable weather conditions, both local and worldwide, as well as other factors beyond our control, can affect the supply and demand of these commodities and expose us to liquidity pressures to finance hedges in the Graingrain business in rapidly rising markets. In our Plant Nutrient and Turf & Specialty Groups,businesses, changes in the supply and demand of these commodities can also affect the value of inventories that we hold, as well as the price of raw materials as we are unable to effectively hedge these commodities. Increased costs of inventory and prices of raw material would decrease our profit margins and adversely affect our results of operations.
Corn —– The principal raw material the ethanol LLCs use to produce ethanol and co-products including DDG, is corn. As a result, changes in the price of corn can significantly affect our business. In general, rising cornin the absence of a corresponding increase in petroleum based fuel prices will produce lower profitdecrease ethanol margins for ourthus adversely affecting financial results in the ethanol business. Because ethanol competes with non-corn-based fuels, we generally will be unable to pass along increased corn costs to our customers.LLCs. At certain levels, corn prices may make ethanol uneconomical to use in fuel markets. The price of corn is influenced by weather conditions and other factors affecting crop yields, farmer planting decisionsshift in acreage allocated to corn versus other major crops and general economic market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. The significance and relative effect of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm our share of the ethanol LLCLLCs results. The Company will attempt to lock in ethanol margins as far out as practical in order to secure reasonable returns using whatever risk management tools are available in the marketplace. Inmarketplace.In addition, we may also have difficulty, from time to time, in physically sourcing corn on economical terms due to supply shortages. High costs or shortages could require us to suspend our ethanol operations until corn is available on economical terms, which would have a material adverse effect on our operating results.
Grains —– While we attempt to manage the risk associated with commodity price changes for our grain inventory positions with derivative instruments, including purchase and sale contracts, we are unable to offset 100% of the price risk of each transaction due to timing, availability of futures and options contracts and third party credit risk. Furthermore, there is a risk that the derivatives we employ will not be effective in offsetting the changes associated withall of the risks we are trying to manage. This can happen when the derivative and the underlying value of grain inventories and purchase and sale contracts are not perfectly matched. Our grain derivatives, for example, do not perfectly correlate with the basis pricing component of our grain inventory and contracts. (Basis is defined as the difference between the cash price of a commodity in our facility and the nearestcorresponding exchange-traded futures price.) Differences can reflect time periods, locations or product forms. Although the basis component is smaller and generally less volatile than the futures component of our grain market price, significant unfavorable basis moves on a large grain position as large as ours can significantly impact the profitability of the Grain & Ethanol Group and our business as a whole.
Our futures, options and over-the-counter contracts are subject to margin calls. If there is a significant movement in the commodities market, we could be required to post significant levels of margin, which would impact our liquidity. There is no assurance that the efforts we have taken to mitigate the impact of
9
Natural Gas —– We rely on third parties for our supply of natural gas, which is consumed in the drying of wet grain, manufacturing of certain turf products, pelleted lime and gypsum, and manufacturing of ethanol dry wet grain, and plant nutrients.within the LLCs. The prices for and availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control such as higher prices resulting from colder than average weather conditions and overall economic conditions. Significant disruptions in the supply of natural gas could impair our ability to manufacturethe operations of the ethanol for our customers.facilities. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our future results of operations and financial position.
Gasoline —– In addition, we market ethanol as a fuel additive to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended and as a substitute for oil derivedpetroleum based gasoline. As a result, ethanol prices will be influenced by the supply and demand for gasoline and our future results of operations and financial position may be adversely affected if gasoline demand or price decreases.
Potash, phosphate and nitrogen —– Raw materials used by ourthe Plant Nutrient Groupbusiness include potash, phosphate and nitrogen, for which prices arecan be volatile and driven by global and local supply and demand.demand factors. Significant increases in the price of these commodities may result in lower customer demand and higher than optimal inventory levels. In contrast, reductions in the price of these commodities may create lower-of-cost-or-market inventory adjustments to inventories.
Some of our business segments operate in highly regulated industries. Changes in government regulations or trade association policies could adversely affect our results of operations.
Many of our business segments are subject to government regulation and regulation by certain private sector associations, compliance with which can impose significant costs on our business. Failure to comply with such regulations can result in additional costs, fines or criminal action.
A significant part of our operations is regulated by environmental laws and regulations, including those governing the labeling, use, storage, discharge and disposal of hazardous materials. Because we use and handle hazardous substances in our businesses, changes in environmental requirements or an unanticipated significant adverse environmental event could have a material adverse effect on our business. We cannot assure you that we have been, or will at all times be, in compliance with all environmental requirements, or that we will not incur material costs or liabilities in connection with these requirements. Private parties, including current and former employees, could bring personal injury or other claims against us due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us, or contained in our products. We are also exposed to residual risk because some of the facilities and land which we have acquired may have environmental liabilities arising from their prior use. In addition, changes to environmental regulations may require us to modify our existing plant and processing facilities and could significantly increase the cost of those operations.
Grain &and Ethanol businesses —– In our Grain &and Ethanol Group,businesses, agricultural production and trade flows can be affected by government programs and legislation. Production levels, markets and prices of the grains we merchandise can be affected by U.S. government programs, which include acreage controls and price support programs administered by the USDA. Other examples of government policies that can have an impact on our business include tariffs, duties, subsidies, import and export restrictions and outright embargoes. Because a portion of our grain sales are to exporters, the imposition of export restrictions could limit our sales opportunities. In addition, we have invested in the ethanol industry where development has been stimulated by Federal mandates for refiners to blend ethanol and excise tax credits paid to those blenders to encourage the use of ethanol. Future changes in those mandates and tax credits cancould have an impact on U.S. ethanol processing margins. Furthermore, there is a risk that if the CME repealed the variable storage rates in the wheat futures contracts, there could be a negative impact on liquidity.
10
The Rail Groupbusiness is also subject to risks associated with the demands and restrictions of the Class 1 railroads, a group of rail companies owning a high percentage of the existing rail lines. These companies exercise a high degree of control over whether private railcars can be allowed on their lines and may reject certain railcars or require maintenance or improvements to the railcars. This presents risk and uncertainty for our Rail Groupbusiness and it can increase the Group’s maintenance costs. In addition, a shift in the railroad strategy to investing in new rail cars and improvements to existing railcars, instead of investing in locomotives and infrastructure, could adversely impact our business by causing increased competition and creating ana greater oversupply of railcars. Our rail fleet consists of a range of railcar types (boxcars, gondolas, covered and open top hoppers, tank cars and pressure differential cars), locomotives and locomotives.a small number of containers. However a large concentration of a particular type of railcar could expose us to risk if demand were to decrease for that railcar type. Failure on our part to identify and assess risks and uncertainties such as these could negatively impact our business.
Turf & Specialty —– Our Turf & Specialty Groupbusiness manufactures lawn fertilizers and weed and pest control products and uses potentially hazardous materials. All products containing pesticides, fungicides and herbicides must be registered with the U.S. Environmental Protection Agency (“EPA”) and state regulatory bodies before they can be sold. The inability to obtain or the cancellation of such registrations could have an adverse impact on our business. In the past, regulations governing the use and registration of these materials have required us to adjust the raw material content of our products and make formulation changes. Future regulatory changes may have similar consequences. Regulatory agencies, such as the EPA, may at any time reassess the safety of our products based on new scientific knowledge or other factors. If it were determined that any of our products were no longer considered to be safe, it could result in the amendment or withdrawal of existing approvals, which, in turn, could result in a loss of revenue, cause our inventory to become obsolete or give rise to potential lawsuits against us. Consequently, changes in existing and future government or trade association polices may restrict our ability to do business and cause our financial results to suffer.
We are required to carry significant amounts of inventory across all of our businesses. If a substantial portion of our inventory becomes damaged or obsolete, its value would decrease and our profit margins would suffer.
We are exposed to the risk of a decrease in the value of our inventories due to a variety of circumstances in all of our businesses. For example, within our Grain &and Ethanol Group,businesses, there is the risk that the quality of our grain inventory could deteriorate due to damage, moisture, insects, disease or foreign material. If the quality of our grain were to deteriorate below an acceptable level, the value of our inventory could decrease significantly. In our Plant Nutrient Group,business, planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs and the perception held by the producer of demand for production. Technological advances in agriculture, such as genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could also affect the demand for our crop nutrients and crop protection products. Either of these factors could render some of our inventory obsolete or reduce its value. Within our Rail Group,business, major design improvements to loading, unloading and transporting of certain products can render existing (especially old) equipment obsolete. A significant portion of our rail fleet is composed of older railcars. In addition, in our Turf & Specialty Group,business, we build substantial amounts of inventory in advance of the season to prepare for customer demand. If we were to forecast our customer demand incorrectly, we could build up excess inventory which could cause the value of our inventory to decrease.
Our substantial indebtedness could negatively affect our financial condition, decrease our liquidity and impair our ability to operate the business.
If cash on hand is insufficient to pay our obligations or margin calls as they come due at a time when we are unable to draw on our credit facility, it could have an adverse effect on our ability to conduct our
11
These factors include general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Certain of our long-term borrowings include provisions that require minimum levels of working capital and equity, and impose limitations on additional debt. Our ability to satisfy these provisions can be affected by events beyond our control, such as the demand for and fluctuating price of grain. Although we are and have been in compliance with these provisions, noncompliance could result in default and acceleration of long-term debt payments.
Adoption of new accounting rules can affect our financial position and results of operations.
The Company’s implementation of and compliance with changes in accounting rules and interpretations could adversely affect its operating results or cause unanticipated fluctuations in its results in future periods. The accounting rules and regulations that the Company must comply with are complex and continually changing. The Financial Accounting Standards Board has recently introduced several new or proposed accounting standards, or is developing new proposed standards, such as International Financial Reporting Standards convergence projects, which would represent a significant change from current industry practices. Potential changes in accounting for leases, for example, will eliminate the accounting classificationoff-balance sheet treatment of operating leases, which would not only impact the way we account for these leases, but may also impact our customers lease versus buylease-versus-buy decisions and could have a negative impact on demand for our rail leases.
We face increasing competition and pricing pressure from other companies in our industries. If we are unable to compete effectively with these companies, our sales and profit margins would decrease, and our earnings and cash flows would be adversely affected.
The markets for our products in each of our business segments are highly competitive. While we have substantial operations in our region, some of our competitors are significantly larger, compete in wider markets, have greater purchasing power, and have considerably larger financial resources. We also may enter into new markets where our brand is not recognized and do not have an established customer base. Competitive pressures in all of our businesses could affect the price of, and customer demand for, our products, thereby negatively impacting our profit margins and resulting in a loss of market share.
Our grain and ethanol business usesbusinesses use derivative contracts to reduce volatility in the commodity markets. Non-performance by the counter-parties to those contracts could adversely affect our future results of operations and financial position.
A significant amount of our grain and ethanol purchases and sales are done through forward contracting. In addition, the Company uses exchange traded and to a lesser degree over-the-counter contracts to reduce volatility in changing commodity prices. A significant adverse change in commodity prices could cause a counter-party to one or more of our derivative contracts not to perform on their obligation.
We rely on a limited number of suppliers for certain of our raw materials and other products and the loss of one or several of these suppliers could increase our costs and have a material adverse effect on any one of our business segments.
We rely on a limited number of suppliers for certain of our raw materials and other products. If we were unable to obtain these raw materials and products from our current vendors, or if there were significant increases in our supplier’s prices, it could significantly increase our costs and reduce our profit margins.
Our investments in limited liability companies are subject to risks beyond our control.
We currently have investments in sixnumerous limited liability companies. By operating a business through this arrangement, we do not have lessfull control over operating decisions thanlike we would if we were to ownowned the business outright.
12
The Company may not be able to effectively integrate additional businesses it acquires in the future.
We continuously look for opportunities to enhance our existing businessbusinesses through strategic acquisitions. The process of integrating an acquired business into our existing business and operations may result in unforeseen operating difficulties and expenditures as well as require a significant amount of management resources. There is also the risk that our due diligence efforts may not uncover significant business flaws or hidden liabilities. In addition, we may not realize the anticipated benefits of an acquisition and they may not generate the anticipated financial results. Additional risks may include the inability to effectively integrate the operations, products, technologies and personnel of the acquired companies. The inability to maintain uniform standards, controls, procedures and policies would also negatively impact operations.
Our business involves considerable safety risks. Significant unexpected costs and liabilities would have a material adverse effect on our profitability and overall financial position.
Due to the nature of some of the businesses in which we operate, we are exposed to significant safety risksoperational hazards such as grain dust explosions, fires, malfunction of equipment, abnormal pressures, blowouts, pipeline and tank ruptures, chemical spills or run-off, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. If one of our elevators were to experience a grain dust explosion or if one of our pieces of equipment were to fail or malfunction due to an accident or improper maintenance, it could put our employees and others at serious risk.
The Company’s information technology systems may impose limitations or failures which may affect the Company’s ability to conduct its business.
The Company’s information technology systems, some of which are dependent on services provided by third-parties, provide critical data connectivity, information and services for internal and external users. These interactions include, but are not limited to, ordering and managing materials from suppliers, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, and other processes necessary to manage the business. The Company has put in place business continuity plans for its critical systems. However, if the Company’s information technology systems are damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, and the Company’s business continuity plans do not effectively recover on a timely basis, the Company may suffer interruptions in the ability to manage its operations, which may adversely impact the Company’s revenues and operating results. In addition, although the system has been refreshed periodically, the infrastructure is outdated and may not be adequate to support new business processes, accounting for new transactions, or implementation of new accounting standards if requirements are complex or materially different than what is currently in place. In addition,
The Company may be unable to recover process development and testing costs, which could increase the cost of operating its business.
Early in 2012, the Company began implementing an Enterprise Resource Planning (“ERP”) system that will require significant amounts of capital and human resources to deploy. If for any reason this implementation is exploring new ERP systems, whichnot successful, the Company could posebe required to expense rather than capitalize related amounts. Throughout implementation of the system there are also risks relatingcreated to implementation.
13the Company’s ability to successfully and efficiently operate. These risks include, but are not limited to the inability to resource the appropriate combination of highly skilled employees, distractions to operating the base business due to use of employees time for the project, as well as unforeseen additional costs due to the inability to appropriately integrate within the planned timeframe.
The Company’s principal agriculture, rail, retail and other properties are described below.
Agriculture Facilities
| Agricultural Fertilizer | ||||||||||||
| (in thousands) | Grain Storage | Dry Storage | Liquid Storage | |||||||||
| Location | (bushels) | (cubic feet) | (gallons) | |||||||||
| Florida | — | 134 | 4,021 | |||||||||
| Illinois | 17,497 | 2,233 | — | |||||||||
| Indiana | 24,489 | 4,207 | 22,364 | |||||||||
| Michigan | 15,381 | 1,787 | 5,293 | |||||||||
| Minnesota | — | — | 10,794 | |||||||||
| Nebraska | 3,967 | — | — | |||||||||
| Ohio | 46,023 | 6,759 | 9,204 | |||||||||
| Puerto Rico | — | — | 3,339 | |||||||||
| Wisconsin | — | 57 | 14,932 | |||||||||
| 107,357 | 15,177 | 69,947 | ||||||||||
| Agricultural Fertilizer | ||||||||||||
(in thousands) Location | Grain Storage (bushels) | Dry Storage (cubic feet) | Liquid Storage (gallons) | |||||||||
Florida | — | 137 | 3,965 | |||||||||
Illinois | 13,389 | 2,233 | — | |||||||||
Indiana | 29,189 | 4,323 | 24,253 | |||||||||
Michigan | 17,571 | 1,787 | 5,304 | |||||||||
Minnesota | — | — | 10,419 | |||||||||
Nebraska | 7,267 | — | — | |||||||||
Ohio | 41,623 | 6,759 | 9,041 | |||||||||
Puerto Rico | — | — | 4,472 | |||||||||
Wisconsin | — | 57 | 14,942 | |||||||||
|
|
|
|
|
| |||||||
| 109,039 | 15,296 | 72,396 | ||||||||||
|
|
|
|
|
| |||||||
The grain facilities are mostly concrete and steel tanks, with some flat storage, which is primarily cover-on-first temporary storage. The Company also owns grain inspection buildings and dryers, maintenance buildings and truck scales and dumps. Approximately 92%81% of the total storage capacity is owned, while the remaining 8%19% of the total capacity is leased from third parties.
The Plant Nutrient Group’s wholesale fertilizernutrient and farm center properties consist mainly of fertilizer warehouse and distributionformulation and packaging facilities for dry and liquid fertilizers. The Maumee, Ohio; Champaign, Illinois; Seymour, Indiana; Lordstown, Ohio; and Walton, Indiana locations have fertilizer mixing, bagging and bag storage facilities. The Maumee, Ohio; Webberville, Michigan; Logansport, Walton and Poneto, Indiana; Wisconsin Rapids, Arena and Kaukauna, Wisconsin and all of the Florida locations also include liquid manufacturing facilities. The Company owns all dry storage facilities and owns ninety-five percent94% of the total liquid storage facilities. The tanks located in Puerto Rico are leased.
Retail Store Properties
Name | Location | Square Feet | ||||
Maumee Store | Maumee, OH | 166,000 | ||||
Toledo Store | Toledo, OH | 162,000 | ||||
Woodville Store (1) | Northwood, OH | 120,000 | ||||
Sawmill Store | Columbus, OH | 169,000 | ||||
Brice Store | Columbus, OH | 159,000 | ||||
The Andersons Market (1) | Sylvania, OH | 30,000 | ||||
Distribution Center (1) | Maumee, OH | 245,000 | ||||
| (1) | Facility leased |
The leases for the two stores and the distribution center are operating leases with several renewal options and provide for minimum aggregate annual lease payments approximating $1.4$1.7 million. In addition, the Company owns a service and sales facility for outdoor power equipment adjacent to its Maumee, Ohio retail store.
Other Properties
14
The Company also owns an auto service center that is leased to its former venture partner. The Company’s administrative office building is leased under a net lease expiring in 2015. The Company owns approximately 1,2331,456 acres of land on which the above properties and facilities are located and approximately 327307 acres of farmland and land held for sale or future use.
The Company believes that its properties are adequate for its business, well maintained and utilized, suitable for their intended uses and adequately insured.
The Company has received, and is cooperating fully with, a request for information from the United States Environmental Protection Agency (“U.S. EPA”) regarding the history of its grain and fertilizer facility along the Maumee River in Toledo, Ohio. The U.S. EPA is investigating the possible introduction into the Maumee River of hazardous materials potentially leaching from rouge piles deposited along the riverfront by glass manufacturing operations that existed in the area prior to the Company’s initial acquisition of itsthe land in 1960. The Company has on several prior occasions cooperated with local, state and federal regulators to install or improve drainage systems to contain storm water runoff and sewer discharges along its riverfront property to minimize the potential for such leaching. Other area land owners and the successor to the original glass making operations have also been contacted by the U.S. EPA for information. No claim or finding has been asserted thus far.
The Company is also 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. The Company accrues expensesliabilities where litigation losses are deemed probable and estimable. The Company believes it is unlikely that the results of its current legal proceedings, even if unfavorable, will be materially different from what it currently has 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.
15
The information is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. The executive officers of The Andersons, Inc., their positions and ages (as of March 1, 2011)2012) are presented in the table below.
| Year | ||||||||||
| Name | Position | Age | Assumed | |||||||
| Dennis J. Addis | President, Plant Nutrient Group | 58 | 2000 | |||||||
| Daniel T. Anderson | President, Retail Group and Vice President, Corporate Operations Services President, Retail Group | 55 | 2009 1996 | |||||||
| Michael J. Anderson | President and Chief Executive Officer | 59 | 1999 | |||||||
| Naran U. Burchinow | Vice President, General Counsel and Secretary | 57 | 2005 | |||||||
| Tamara S. Sparks | Vice President, Corporate Business /Financial Analysis Internal Audit Manager | 42 | 2007 1999 | |||||||
| Arthur D. DePompei | Vice President, Human Resources | 57 | 2008 | |||||||
| Richard R. George | Vice President, Controller and CIO | 61 | 2002 | |||||||
| Harold M. Reed | President, Grain & Ethanol Group | 54 | 2000 | |||||||
| Rasesh H. Shah | President, Rail Group | 56 | 1999 | |||||||
| Nicholas C. Conrad | Vice President, Finance and Treasurer Assistant Treasurer | 58 | 2009 1996 | |||||||
| Thomas L. Waggoner | President, Turf & Specialty Group Vice President, Sales & Marketing, Turf & Specialty Group | 56 | 2005 2002 | |||||||
16
Name | Position | Age | Year Assumed | |||
Dennis J. Addis | President, Grain Group President, Plant Nutrient Group | 59 | 2012 2000 | |||
Daniel T. Anderson | President, Retail Group and Vice President, Corporate Operations Services President, Retail Group | 56 | 2009 1996 | |||
Michael J. Anderson | President and Chief Executive Officer | 60 | 1999 | |||
Naran U. Burchinow | Vice President, General Counsel and Secretary | 58 | 2005 | |||
Nicholas C. Conrad | Vice President, Finance and Treasurer Assistant Treasurer | 59 | 2009 1996 | |||
Arthur D. DePompei | Vice President, Human Resources | 58 | 2008 | |||
Neill McKinstray | President, Ethanol Group Vice President & General Manager, Ethanol Division | 59 | 2012 2005 | |||
Harold M. Reed | Chief Operating Officer President, Grain & Ethanol Group | 55 | 2012 2000 | |||
Anne G. Rex | Vice President, Corporate Controller Assistant Controller | 47 | 2012 2002 | |||
Rasesh H. Shah | President, Rail Group | 57 | 1999 | |||
Tamara S. Sparks | Vice President, Corporate Business /Financial Analysis Internal Audit Manager | 43 | 2007 1999 | |||
Thomas L. Waggoner | President, Turf & Specialty Group | 57 | 2005 | |||
William J. Wolf | President, Plant Nutrient Group Vice President of Supply & Merchandising, Plant Nutrient Group | 54 | 2012 2008 | |||
The Common Shares of The Andersons, Inc. trade on the Nasdaq Global Select Market under the symbol “ANDE.” On February 9, 2011,2012, the closing price for the Company’s Common Shares was $44.69$42.84 per share. The following table sets forth the high and low bid prices for the Company’s Common Shares for the four fiscal quarters in each of 20102011 and 2009.
| 2010 | 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
Quarter Ended | ||||||||||||||||
| March 31 | $ | 35.36 | $ | 24.59 | $ | 18.38 | $ | 11.00 | ||||||||
| June 30 | 37.99 | 29.90 | 31.88 | 13.24 | ||||||||||||
| September 30 | 40.16 | 31.28 | 36.82 | 26.48 | ||||||||||||
| December 31 | 42.44 | 32.01 | 37.56 | 24.00 | ||||||||||||
| 2011 | 2010 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Quarter Ended | ||||||||||||||||
March 31 | $ | 51.23 | $ | 36.45 | $ | 35.36 | $ | 24.59 | ||||||||
June 30 | 50.17 | 37.62 | 37.99 | 29.90 | ||||||||||||
September 30 | 43.99 | 33.62 | 40.16 | 31.28 | ||||||||||||
December 31 | 45.75 | 30.04 | 42.44 | 32.01 | ||||||||||||
The Company’s transfer agent and registrar is Computershare Investor Services, LLC, 2 North LaSalle Street, Chicago, IL 60602. Telephone: 312-588-4991.
Shareholders
At February 9, 2011,2012, there were approximately 18.5 million common shares outstanding, 1,3121,343 shareholders of record and approximately 16,00013,276 shareholders for whom security firms acted as nominees.
Dividends
The Company has declared and paid 57 consecutive quarterly dividends since the end of 1996, its first year of trading on the Nasdaq market. Dividends paid from January 20092010 to January 20112012 are as follows:
| Dividend | Amount | |||
| 01/23/09 | $ | 0.0850 | ||
| 04/22/09 | $ | 0.0875 | ||
| 07/22/09 | $ | 0.0875 | ||
| 10/22/09 | $ | 0.0875 | ||
| 01/25/10 | $ | 0.0875 | ||
| 04/22/10 | $ | 0.0900 | ||
| 07/22/10 | $ | 0.0900 | ||
| 10/22/10 | $ | 0.0900 | ||
| 01/24/11 | $ | 0.1100 | ||
Payment Date | Amount | |||
01/25/10 | $ | 0.0875 | ||
04/22/10 | $ | 0.0900 | ||
07/22/10 | $ | 0.0900 | ||
10/22/10 | $ | 0.0900 | ||
01/24/11 | $ | 0.1100 | ||
04/22/11 | $ | 0.1100 | ||
07/22/11 | $ | 0.1100 | ||
09/30/11 | $ | 0.1100 | ||
01/24/12 | $ | 0.1500 | ||
While the Company’s objective is to pay a quarterly cash dividend, dividends are subject to Board of Director approval and loan covenant restrictions.
17approval.
The following table gives information as of December 31, 20102011 about the Company’s Common Shares that may be issued upon the exercise of options under all of its existing equity compensation plans.
| Equity Compensation Plan Information | ||||||||||||
| (a) | Number of securities remaining | |||||||||||
| Number of securities to be | Weighted-average | available for future issuance | ||||||||||
| issued upon exercise of | exercise price of | under equity compensation | ||||||||||
| outstanding options, | outstanding options, | plans (excluding securities | ||||||||||
| Plan category | warrants and rights | warrants and rights | reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | 1,039,552 | (1) | $ | 32.18 | 526,708 | (2) | ||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 1,039,552 | $ | 32.18 | 526,708 | ||||||||
| Equity Compensation Plan Information | ||||||||||||
| Plan category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
Equity compensation plans approved by security holders | 760,767 | (1) | $ | 32.06 | 662,437 | (2) | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | 760,767 | $ | 32.06 | 662,437 | ||||||||
|
|
|
|
|
| |||||||
| (1) | This number includes | |
| (2) | This number includes |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 1996, the Company’s Board of Directors approvedbegan approving the repurchase of 2.8 million shares of common stock for use in employee, officer and director stock purchase and stock compensation plans. Thisplans, which reached 2.8 million authorized shares in 2001. The Company purchased 2.1 million shares under this repurchase program. The original resolution was superseded by the Board in October 2007 to add an additional 0.3with a resolution authorizing the repurchase of 1.0 million shares.shares of common stock. Since the beginning of thisthe current repurchase program, the Company has purchased 2.2repurchased 0.2 million shares in the open market.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
March 31 | — | $ | — | — | — | |||||||||||
June 30 | 3,650 | 38.42 | — | — | ||||||||||||
September 30 | 72,421 | 36.28 | ||||||||||||||
December 31 | 8,887 | 32.73 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
2011 Total | 84,958 | $ | 35.81 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Performance Graph
The graph below compares the total shareholder return on the Corporation’s Common Shares to the cumulative total return for the Nasdaq U.S. Index and a Peer Group Index. The indices reflect the year-end market value of an investment in the stock of each company in the index, including additional shares assumed to have been acquired with cash dividends, if any. The Peer Group Index, weighted for market capitalization, includes the following companies:
• Agrium, Inc. | • Greenbrier Companies, Inc. | |||||
• Archer-Daniels-Midland Co. | ||||||
• | ||||||
| The Scott’s Miracle-Gro Company | ||||||
• Corn Products International, Inc. | • Lowes Companies, Inc. | |||||
• GATX Corp. | ||||||
The graph assumes a $100 investment in The Andersons, Inc. Common Shares on December 31, 20052006 and also assumes investments of $100 in each of the Nasdaq U.S. and Peer Group indices, respectively, on December 31 of the first year of the graph. The value of these investments as of the following calendar year-ends is shown in the table below the graph.
18
| Base Period | Cumulative Returns | |||||||||||||||||||||||
| December 31, 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
| The Andersons, Inc. | $ | 100.00 | $ | 197.68 | $ | 210.09 | $ | 78.16 | $ | 124.29 | $ | 176.88 | ||||||||||||
| NASDAQ U.S. | 100.00 | 110.38 | 122.14 | 73.31 | 106.57 | 125.92 | ||||||||||||||||||
| Peer Group Index | 100.00 | 106.19 | 108.71 | 82.60 | 96.67 | 110.68 | ||||||||||||||||||
| Base Period | Cumulative Returns | |||||||||||||||||||||||
| December 31, 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||
The Andersons, Inc. | $ | 100.00 | $ | 106.28 | $ | 39.54 | $ | 62.88 | $ | 89.48 | $ | 108.72 | ||||||||||||
NASDAQ U.S. | 100.00 | 110.65 | 66.42 | 96.54 | 114.07 | 113.16 | ||||||||||||||||||
Peer Group Index | 100.00 | 102.37 | 77.79 | 91.04 | 104.23 | 101.10 | ||||||||||||||||||
The following table sets forth selected consolidated financial data of the Company. The data for each of the five years in the period ended December 31, 20102011 are derived from the consolidated financial statementsConsolidated Financial Statements of the Company. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Item 7, and the Consolidated Financial Statements and notes thereto included in Item 8.
| For the years ended December 31, | ||||||||||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Operating results | ||||||||||||||||||||
| Grain and ethanol sales and revenues (a) | $ | 2,405,452 | $ | 2,153,978 | $ | 2,411,144 | $ | 1,498,652 | $ | 791,207 | ||||||||||
| Fertilizer, rail, retail and other sales | 988,339 | 871,326 | 1,078,334 | 880,407 | 666,846 | |||||||||||||||
| Total sales and revenues | 3,393,791 | 3,025,304 | 3,489,478 | 2,379,059 | 1,458,053 | |||||||||||||||
| Gross profit — grain & ethanol | 118,490 | 106,804 | 110,954 | 79,367 | 62,809 | |||||||||||||||
| Gross profit — fertilizer, rail, retail and other (b) | 163,189 | 148,702 | 146,875 | 160,345 | 136,431 | |||||||||||||||
| Total gross profit | 281,679 | 255,506 | 257,829 | 239,712 | 199,240 | |||||||||||||||
| Equity in earnings of affiliates | 26,007 | 17,463 | 4,033 | 31,863 | 8,190 | |||||||||||||||
| Other income, net (c) | 11,652 | 8,331 | 6,170 | 21,731 | 13,914 | |||||||||||||||
| Net income | 64,881 | 39,566 | 30,097 | 67,428 | 36,347 | |||||||||||||||
| Net income attributable to The Andersons, Inc. | 64,662 | 38,351 | 32,900 | 68,784 | 36,347 | |||||||||||||||
19
| For the years ended December 31, | ||||||||||||||||||||
| (in thousands, except for per share and ratios and other data) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Operating results | ||||||||||||||||||||
Sales and merchandising revenues (a) | $ | 4,576,331 | $ | 3,393,791 | $ | 3,025,304 | $ | 3,489,478 | $ | 2,379,059 | ||||||||||
Gross profit (b) | 352,852 | 281,679 | 255,506 | 257,829 | 239,712 | |||||||||||||||
Equity in earnings of affiliates | 41,450 | 26,007 | 17,463 | 4,033 | 31,863 | |||||||||||||||
Other income, net (c) | 7,922 | 11,652 | 8,331 | 6,170 | 21,731 | |||||||||||||||
Net income | 96,825 | 64,881 | 39,566 | 30,097 | 67,428 | |||||||||||||||
Net income attributable to The Andersons, Inc. | 95,106 | 64,662 | 38,351 | 32,900 | 68,784 | |||||||||||||||
Financial position | ||||||||||||||||||||
Total assets | 1,734,123 | 1,699,390 | 1,284,391 | 1,308,773 | 1,324,988 | |||||||||||||||
Working capital | 312,971 | 301,815 | 307,702 | 330,699 | 177,679 | |||||||||||||||
Long-term debt (d) | 238,088 | 263,675 | 288,756 | 293,955 | 133,195 | |||||||||||||||
Long-term debt, non-recourse (d) | 797 | 13,150 | 19,270 | 40,055 | 56,277 | |||||||||||||||
Total equity | 538,842 | 464,559 | 406,276 | 365,107 | 356,583 | |||||||||||||||
Cash flows / liquidity | ||||||||||||||||||||
Cash flows from (used in) operations | 290,265 | (239,285 | ) | 180,241 | 278,664 | (158,395 | ) | |||||||||||||
Depreciation and amortization | 40,837 | 38,913 | 36,020 | 29,767 | 26,253 | |||||||||||||||
Cash invested in acquisitions / investments in affiliates | 2,486 | 39,688 | 31,680 | 60,370 | 36,249 | |||||||||||||||
Investments in property, plant and equipment | 44,162 | 30,897 | 16,560 | 20,315 | 20,346 | |||||||||||||||
Net investment in (proceeds from) railcars (e) | 33,763 | (1,748 | ) | 16,512 | 29,533 | 8,751 | ||||||||||||||
EBITDA (f) | 212,252 | 162,702 | 116,989 | 110,372 | 151,162 | |||||||||||||||
Per share data:(g) | ||||||||||||||||||||
Net income – basic | 5.13 | 3.51 | 2.10 | 1.82 | 3.85 | |||||||||||||||
Net income – diluted | 5.09 | 3.48 | 2.08 | 1.79 | 3.75 | |||||||||||||||
Dividends paid | 0.4400 | 0.3575 | 0.3475 | 0.325 | 0.220 | |||||||||||||||
Year-end market value | 43.66 | 36.35 | 25.82 | 16.48 | 44.80 | |||||||||||||||
Ratios and other data | ||||||||||||||||||||
Net income attributable to The Andersons, Inc. return on beginning equity attributable to The Andersons, Inc. | 21.1 | % | 16.4 | % | 10.9 | % | 9.6 | % | 25.4 | % | ||||||||||
Funded long-term debt to equity ratio (h) | 0.4-to-1 | 0.6-to-1 | 0.8-to-1 | 0.9-to-1 | 0.5-to-1 | |||||||||||||||
Weighted average shares outstanding (000’s) | 18,457 | 18,356 | 18,190 | 18,068 | 17,833 | |||||||||||||||
Effective tax rate | 34.5 | % | 37.7 | % | 35.7 | % | 35.4 | % | 35.5 | % | ||||||||||
| (in thousands, except for per share and | For the years ended December 31, | |||||||||||||||||||
| ratios and other data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Financial position | ||||||||||||||||||||
| Total assets | $ | 1,699,390 | $ | 1,284,391 | $ | 1,308,773 | $ | 1,324,988 | $ | 879,048 | ||||||||||
| Working capital | 301,815 | 307,702 | 330,699 | 177,679 | 162,077 | |||||||||||||||
| Long-term debt (d) | 263,675 | 288,756 | 293,955 | 133,195 | 86,238 | |||||||||||||||
| Long-term debt, non-recourse (d) | 13,150 | 19,270 | 40,055 | 56,277 | 71,624 | |||||||||||||||
| Shareholders’ equity | 464,559 | 406,276 | 365,107 | 356,583 | 270,175 | |||||||||||||||
Cash flows / liquidity | ||||||||||||||||||||
| Cash flows from (used in) operations | (239,285 | ) | 180,241 | 278,664 | (158,395 | ) | (54,283 | ) | ||||||||||||
| Depreciation and amortization | 38,913 | 36,020 | 29,767 | 26,253 | 24,737 | |||||||||||||||
| Cash invested in acquisitions / investments in affiliates | 39,688 | 31,680 | 60,370 | 36,249 | 34,255 | |||||||||||||||
| Investments in property, plant and equipment | 30,897 | 16,560 | 20,315 | 20,346 | 16,031 | |||||||||||||||
| Net investment in (proceeds from) railcars (e) | (1,748 | ) | 16,512 | 29,533 | 8,751 | 20,643 | ||||||||||||||
| EBITDA (f) | 162,702 | 116,989 | 110,372 | 151,162 | 95,505 | |||||||||||||||
Per share data:(g) | ||||||||||||||||||||
| Net income — basic | 3.51 | 2.10 | 1.82 | 3.85 | 2.27 | |||||||||||||||
| Net income — diluted | 3.48 | 2.08 | 1.79 | 3.75 | 2.19 | |||||||||||||||
| Dividends paid | 0.3575 | 0.3475 | 0.325 | 0.220 | 0.178 | |||||||||||||||
| Year-end market value | 36.35 | 25.82 | 16.48 | 44.80 | 42.39 | |||||||||||||||
Ratios and other data | ||||||||||||||||||||
| Net income attributable to The Andersons, Inc. return on beginning equity attributable to The Andersons, Inc. | 16.4 | % | 10.9 | % | 9.6 | % | 25.4 | % | 22.9 | % | ||||||||||
| Funded long-term debt to equity ratio (h) | 0.6-to-1 | 0.8-to-1 | 0.9-to-1 | 0.5-to-1 | 0.6-to-1 | |||||||||||||||
| Weighted average shares outstanding (000’s) | 18,356 | 18,190 | 18,068 | 17,833 | 16,007 | |||||||||||||||
| Effective tax rate | 37.7 | % | 35.7 | % | 35.4 | % | 35.5 | % | 33.3 | % | ||||||||||
| (a) | Includes sales of $1,385.4 million in 2011, $928.2 million in 2010, $806.3 million in 2009, $865.8 million in 2008, and $407.4 million in 2007 | |
| (b) | Gross profit in 2011, 2009, and 2008 includes a $3.1 million, $2.9 million, and $97.2 million write down in the Plant Nutrient Group for lower-of-cost-or-market inventory adjustments for inventory on hand and firm purchase commitments that |
| (c) | Includes $1.7 million and $1.1 million of dividend income from IANR in 2011 and 2010, respectively. Includes $2.2 million in Rail end of lease settlements in 2010. |
| (d) | Excludes current portion of long-term debt. |
| (e) | Represents the net of purchases of railcars offset by proceeds on sales of railcars. |
| (f) | Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP measure. |
| should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles, and EBITDA does not necessarily indicate whether cash flow will be sufficient to meet cash requirements, for debt service obligations or otherwise. Because EBITDA, as determined by | |
| (g) | Earnings per share are calculated based on Income attributable to The Andersons, Inc. | |
| (h) | Calculated by dividing long-term debt by total year-end equity as stated under “Financial position.” |
The following table sets forth (1) our calculation of EBITDA and (2) a reconciliation of EBITDA to our net cash flow provided by (used in) operations.
20
| For the years ended December 31, | ||||||||||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Net income attributable to The Andersons, Inc. | $ | 95,106 | $ | 64,662 | $ | 38,351 | $ | 32,900 | $ | 68,784 | ||||||||||
Add: | ||||||||||||||||||||
Provision for income taxes | 51,053 | 39,262 | 21,930 | 16,466 | 37,077 | |||||||||||||||
Interest expense | 25,256 | 19,865 | 20,688 | 31,239 | 19,048 | |||||||||||||||
Depreciation and amortization | 40,837 | 38,913 | 36,020 | 29,767 | 26,253 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
EBITDA | 212,252 | 162,702 | 116,989 | 110,372 | 151,162 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Add/(subtract): | ||||||||||||||||||||
Provision for income taxes | (51,053 | ) | (39,262 | ) | (21,930 | ) | (16,466 | ) | (37,077 | ) | ||||||||||
Interest expense | (25,256 | ) | (19,865 | ) | (20,688 | ) | (31,239 | ) | (19,048 | ) | ||||||||||
Realized gains on railcars and related leases | (8,417 | ) | (7,771 | ) | (1,758 | ) | (4,040 | ) | (8,103 | ) | ||||||||||
Deferred income taxes | 5,473 | 12,205 | 16,430 | 4,124 | 5,274 | |||||||||||||||
Excess tax benefit from share-based payment arrangement | (307 | ) | (876 | ) | (566 | ) | (2,620 | ) | (5,399 | ) | ||||||||||
Equity in earnings of unconsolidated affiliates, net of distributions received | (23,591 | ) | (17,594 | ) | (15,105 | ) | 19,307 | (23,583 | ) | |||||||||||
Noncontrolling interest in income (loss) of affiliates | 1,719 | 219 | 1,215 | (2,803 | ) | (1,356 | ) | |||||||||||||
Changes in working capital and other | 179,445 | (329,043 | ) | 105,654 | 202,029 | (220,265 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) operations | $ | 290,265 | $ | (239,285 | ) | $ | 180,241 | $ | 278,664 | $ | (158,395 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| For the years ended December 31, | ||||||||||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
| Net income attributable to The Andersons, Inc. | $ | 64,662 | $ | 38,351 | $ | 32,900 | $ | 68,784 | $ | 36,347 | ||||||||||
| Add: | ||||||||||||||||||||
| Provision for income taxes | 39,262 | 21,930 | 16,466 | 37,077 | 18,122 | |||||||||||||||
| Interest expense | 19,865 | 20,688 | 31,239 | 19,048 | 16,299 | |||||||||||||||
| Depreciation and amortization | 38,913 | 36,020 | 29,767 | 26,253 | 24,737 | |||||||||||||||
| EBITDA | 162,702 | 116,989 | 110,372 | 151,162 | 95,505 | |||||||||||||||
| Add/(subtract): | ||||||||||||||||||||
| Provision for income taxes | (39,262 | ) | (21,930 | ) | (16,466 | ) | (37,077 | ) | (18,122 | ) | ||||||||||
| Interest expense | (19,865 | ) | (20,688 | ) | (31,239 | ) | (19,048 | ) | (16,299 | ) | ||||||||||
| Realized gains on railcars and related leases | (7,771 | ) | (1,758 | ) | (4,040 | ) | (8,103 | ) | (5,887 | ) | ||||||||||
| Deferred income taxes | 12,205 | 16,430 | 4,124 | 5,274 | 7,371 | |||||||||||||||
| Excess tax benefit from share-based payment arrangement | (876 | ) | (566 | ) | (2,620 | ) | (5,399 | ) | (5,921 | ) | ||||||||||
| Equity in earnings of unconsolidated affiliates, net of distributions received | (17,594 | ) | (15,105 | ) | 19,307 | (23,583 | ) | (4,340 | ) | |||||||||||
| Minority interest in income (loss) of affiliates | 219 | 1,215 | (2,803 | ) | (1,356 | ) | — | |||||||||||||
| Changes in working capital and other | (329,043 | ) | 105,654 | 202,029 | (220,265 | ) | (106,590 | ) | ||||||||||||
| Net cash (used in) provided by operations | $ | (239,285 | ) | $ | 180,241 | $ | 278,664 | $ | (158,395 | ) | $ | (54,283 | ) | |||||||
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 factors, including those listed under Item 1A, “Risk Factors.” 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.
Executive Overview
Grain & Ethanol GroupBusiness
The Grain & Ethanol Groupbusiness operates grain elevators in various states, primarily in the U.S. Corn Belt. In addition to storage, merchandising and grain trading, the GroupGrain performs marketing, risk management, and othercorn origination services for its customers. During 2010, the Group increased its grain storage capacity by approximately 6.4 million bushels through business acquisitions and expansion at existing locations. The Group now has over 107 million bushels of storage capacity. The Group is a significant investor in three ethanol facilities located in Indiana, Michigan and Ohio with a nameplate capacity of 275 million gallons. In addition to its investment in these facilities, the Group operates the facilities under management contractscustomers and provides grain origination,affiliated ethanol and distillers dried grains (“DDG”) marketing and risk management services for which itproduction facilities. Grain is separately compensated. The Group is also a significant investor in Lansing Trade Group, LLC (“LTG”), an established commodity trading, grain handling and merchandising business with operations throughout the country and
21
Grain inventories on hand at December 31, 2011 were 77.5 million bushels, of which 0.4 million bushels were stored for others. This compares to greater ethanol production and use are tax credits for blending corn ethanol into gasoline and tariffs that limit the importation of sugar ethanol. In addition, subsequent to year-end, the EPA approved an increase in the use of ethanol blends from 10% to 15% for light vehicle models 2001 and newer. As the high demand for corn continues into 2011, the Company will continue to monitor the volatility in corn and ethanol prices and its impact68.1 million bushels on the ethanol LLCs closely.
During 2011, Grain increased its storage capacity by approximately 1.7 million bushels through grain merchandising and handling agreements and expansion at existing locations. The Group’s average utilization rate (railcars and locomotives under management that are in lease service, exclusivetotal storage capacity is approximately 109.0 million bushels as of railcars managed for third party investors) has decreased from 78.1% for the year ended December 31, 20092011 compared to 73.6% for the year ended107.3 million bushels at December 31, 2010. However,The Grain Group is currently constructing a grain shuttle loader facility in Anselmo, Nebraska. The 3.8 million bushel capacity grain elevator will primarily handle corn and soybeans and is expected to open in the fall of 2012.
Looking ahead, increased corn acres without a corresponding drop in yields will likely lead to lower corn and grain commodity prices. According to the February 9, 2012 USDA crop report, agricultural commodity prices decreased across the board.
Ethanol Business
The Ethanol business holds investments in the three ethanol production facilities. The business also offers facility operations, risk management, and ethanol and distillers dried grains (“DDG”) marketing to the ethanol plants it operates as well as third parties.
The E-85 blend is now being produced by all three ethanol LLCs. A combined total of 11.9 million gallons were sold by these facilities in 2011. In addition, the Ethanol Group endedhas entered into corn oil marketing agreements with TAME and TACE for which a commission is earned on each pound sold.
As is typical for this time of year, forward margins for ethanol are negative. There is not a significant amount of future production contracted for sale nor are required inputs contracted for. This puts the year with an improved utilization rate of 81.7%. After registering nearly a 20% drop during all of 2009, rail traffic during all of 2010 posted gains of over 7% compared to 2009, but still remains over 12% behind 2008. We expect the upward trend to continue as the U.S. and world economies continue their recovery .
Plant Nutrient GroupBusiness
The Company’s Plant Nutrient Groupbusiness is a leading manufacturer, distributor and retailer principally of agricultural and related plant nutrients and pelleted lime and gypsum products in the U.S. Corn Belt and Florida. It operates 30 facilities in Ohio, Michigan, Indiana, Illinois,the Midwest, Florida Wisconsin, Minnesota and Puerto Rico. The Plant Nutrient Group provides warehousing, packaging and manufacturing services to basic manufacturers and other
22
Margins were strong in 2011 for the continuationPlant Nutrient business as a result of price appreciation resulting from strong world demand creating a tight pipeline for most major ingredients through thesupply situation. Volume was down due to a strong fourth quarter of 2010 due to high demand. Fall application for dry materials along with ammonia was significantly higher due to the early fall harvest, goodand extremely wet weather conditions throughout the spring and high grain prices. It is our belief thatfall of 2011 which reduced the strong fourth quarter volume will have limited downward impact on volumeability to apply nutrients in the first half of 2011.fields. Favorable weather in early 2012 should allow for nutrient application that did not occur in the prior quarter. We expect 20112012 volume to be a good volume yearstrong as the demand for nutrients is high and acres planted are expected to increase. Margins should beincrease and grain prices have been strong as well as a result of tight supplieswell.
On October 31, 2011, the Company completed the purchase of the basicFlorida based Immokalee Farmers Supply, Inc., which serves the specialty vegetable producers in Southwest Florida. Subsequent to year end, the Company announced the purchase of the Ohio based New Eezy Gro, Inc., which is a manufacturer and wholesale marketer of specialty agricultural nutrients and strong price trends.
Rail Business
The Rail business buys, sells, leases, rebuilds and repairs various types of used railcars and rail equipment. The business also provides fleet management services to fleet owners. Rail has a diversified fleet of car types (boxcars, gondolas, covered and open top hoppers, tank cars and pressure differential cars) and locomotives.
Railcars and locomotives under management (owned, leased or managed for financial institutions in non-recourse arrangements) at December 31, 2011 were 22,675 compared to 22,475 at December 31, 2010. The average utilization rate (railcars and locomotives under management that are in lease service, exclusive of railcars managed for third party investors) has increased from 73.6% for the year ended December 31, 2010 to 84.6% for the year ended December 31, 2011. Rail traffic in early 2012 is anticipated to slightly increase over 2011.
During the fourth quarter of 2011, the Rail Group offered a 1,400 car portfolio sale to potential buyers. One or more deals are expected to close on a portion of the cars in the first quarter of 2012 and could result in a gain of up to $9.0 million.
Turf & Specialty GroupBusiness
The Turf & Specialty Groupbusiness 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. The GroupTurf & Specialty is one of a limited number of processors of corncob-based products in the United States. These products primarily serve the chemicalweed and turf pest control and feed ingredient carrier, animal litter and industrial markets, and 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. Corncob-based products are sold throughout the year.
Retail GroupBusiness
The Retail Groupbusiness includes large retail stores operated as “The Andersons” and a specialty food market operated as “The Andersons Market”. The GroupIt also operates a sales and service facility for outdoor power equipment. The retail concept isMore for Your Home® and the conventional retail stores focus on providing significant product breadth with offerings in home improvement and other mass merchandise categories, as well as specialty foods, wine and indoor and outdoor garden centers.
The retail business is highly competitive. The Company competes with a variety of retail merchandisers, including home centers, department and hardware stores, as well as local and national grocers. Food reset projects were completed duringThe Retail Group continues to work on new departments and products to maximize the year in three of the stores, which we expect will increase traffic in the stores and increase sales.
Other
The “Other” business segment of the Company 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.
The Ohio Tax Credit Authority approved job retention tax credits and job creation tax credits for the Company in relation to upcoming capital projects. To earn these credits, the Company has committed to invest a minimum amount in new machinery and equipment and property renovations/improvements in the city of Maumee and surrounding areas. In addition to the capital investment, the Company will retain 636 and create a minimum of 20 full-time equivalent positions.
Operating Results
The following discussion focuses on the operating results as shown in the Consolidated Statements of Income with a separate discussion by segment. Additional segment information is included in Note 167 to the Company’s consolidated financial statementsConsolidated Financial Statements in Item 8.
23
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Sales and merchandising revenues | $ | 4,576,331 | $ | 3,393,791 | $ | 3,025,304 | ||||||
Cost of sales and merchandising revenues | 4,223,479 | 3,112,112 | 2,769,798 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 352,852 | 281,679 | 255,506 | |||||||||
Operating, administrative and general expenses | 229,090 | 195,330 | 199,116 | |||||||||
Interest expense | 25,256 | 19,865 | 20,688 | |||||||||
Equity in earnings of affiliates | 41,450 | 26,007 | 17,463 | |||||||||
Other income, net | 7,922 | 11,652 | 8,331 | |||||||||
|
|
|
|
|
| |||||||
Income before income taxes | 147,878 | 104,143 | 61,496 | |||||||||
Income attributable to noncontrolling interest | 1,719 | 219 | 1,215 | |||||||||
|
|
|
|
|
| |||||||
Operating income | $ | 146,159 | $ | 103,924 | $ | 60,281 | ||||||
|
|
|
|
|
| |||||||
| Year ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Sales and merchandising revenues | $ | 3,393,791 | $ | 3,025,304 | $ | 3,489,478 | ||||||
| Cost of sales | 3,112,112 | 2,769,798 | 3,231,649 | |||||||||
| Gross profit | 281,679 | 255,506 | 257,829 | |||||||||
| Operating, administrative and general | 195,330 | 199,116 | 190,230 | |||||||||
| Interest expense | 19,865 | 20,688 | 31,239 | |||||||||
| Equity in earnings of affiliates | 26,007 | 17,463 | 4,033 | |||||||||
| Other income, net | 11,652 | 8,331 | 6,170 | |||||||||
| Operating income before noncontrolling interest | 104,143 | 61,496 | 46,563 | |||||||||
| (Income) loss attributable to noncontrolling interest | (219 | ) | (1,215 | ) | 2,803 | |||||||
| Operating income | $ | 103,924 | $ | 60,281 | $ | 49,366 | ||||||
Grain & Ethanol Group
| Year ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Sales and merchandising revenues | $ | 2,405,452 | $ | 2,153,978 | ||||
| Cost of sales | 2,286,962 | 2,047,174 | ||||||
| Gross profit | 118,490 | 106,804 | ||||||
| Operating, administrative and general | 57,301 | 64,643 | ||||||
| Interest expense | 8,315 | 9,363 | ||||||
| Equity in earnings of affiliates | 25,999 | 17,452 | ||||||
| Other income, net | 2,733 | 2,319 | ||||||
| Operating income before noncontrolling interest | 81,606 | 52,569 | ||||||
| (Income) loss attributable to noncontrolling interest | (219 | ) | (1,215 | ) | ||||
| Operating income | $ | 81,387 | $ | 51,354 | ||||
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | 2,849,358 | $ | 1,936,813 | ||||
Cost of sales and merchandising revenues | 2,705,745 | 1,833,097 | ||||||
|
|
|
| |||||
Gross profit | 143,613 | 103,716 | ||||||
Operating, administrative and general expenses | 69,258 | 50,861 | ||||||
Interest expense | 13,277 | 6,686 | ||||||
Equity in earnings of affiliates | 23,748 | 15,648 | ||||||
Other income, net | 2,462 | 2,557 | ||||||
|
|
|
| |||||
Operating income | $ | 87,288 | $ | 64,374 | ||||
|
|
|
| |||||
Operating results for the Grain &Group increased $22.9 million over 2010. Sales and merchandising revenues increased $912.5 million over 2010, primarily as a result of higher grain prices and the acquisition of B4 Grain, Inc. in December 2010 which accounts for $220.3 million of the increase.
Gross profit increased $39.9 million primarily as a result of substantial wheat basis appreciation and spread gains. Basis is the difference between the cash price of a commodity in one of the Company’s facilities and the nearest exchange traded futures price. Basis income was higher than 2010 by $43.1 million primarily due to wheat. The increase due to spread gains was $9.3 million higher in the current year. The increase was offset by a $10.4 million decrease in storage income as a result of having fewer bushels of wheat on delivery as compared to 2010.
Operating expenses increased by $18.4 million over 2010. A large portion of the increase is higher labor and benefits expenses due to necessary expansion of human resources as a result of business growth. Specifically, $1.8 million of the labor and benefits increase related to the acquisition noted above. Performance incentives expense was also up year-over-year due to strong financial performance.
Interest expense increased $6.6 million due to a greater need to cover margin deposits which were a result of higher grain prices in the first half of 2011, as well as more wheat bushels on delivery at the end of 2011 versus 2010 upon which short-term interest is calculated.
Equity in earnings of affiliates increased $8.1 million over 2010. Income from the Group’s investment in LTG increased $8.4 million due primarily to strong results in the core grain and point to point merchandising businesses. Other income did not fluctuate significantly from prior year.
Ethanol Group
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | 641,546 | $ | 468,639 | ||||
Cost of sales and merchandising revenues | 626,524 | 453,865 | ||||||
|
|
|
| |||||
Gross profit | 15,022 | 14,774 | ||||||
Operating, administrative and general expenses | 6,785 | 6,440 | ||||||
Interest expense | 1,048 | 1,629 | ||||||
Equity in earnings of affiliates | 17,715 | 10,351 | ||||||
Other income, net | 159 | 176 | ||||||
|
|
|
| |||||
Income before income taxes | 25,063 | 17,232 | ||||||
Income attributable to noncontrolling interest | 1,719 | 219 | ||||||
|
|
|
| |||||
Operating income | $ | 23,344 | $ | 17,013 | ||||
|
|
|
| |||||
Operating results for the Ethanol Group increased $30$6.3 million over 2010. Sales and merchandising revenues increased $172.9 million and is the result of a 41% increase in the average price per gallon of ethanol sold, as volume was relatively unchanged year over year. Gross profit increased $0.2 million due to an increase in services provided to the ethanol industry.
Interest expense decreased $0.6 million from 2010 due to lower borrowings outstanding. Equity in earnings of affiliates increased $7.4 million over 2010 and represents higher earnings from the investment in three ethanol LLCs. There were no significant changes in operating expenses or other income.
Plant Nutrient Group
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | 690,631 | $ | 619,330 | ||||
Cost of sales and merchandising revenues | 593,437 | 539,793 | ||||||
|
|
|
| |||||
Gross profit | 97,194 | 79,537 | ||||||
Operating, administrative and general expenses | 56,101 | 46,880 | ||||||
Interest expense | 3,517 | 3,901 | ||||||
Equity in (loss) earnings of affiliates | (13 | ) | 8 | |||||
Other income, net | 704 | 1,298 | ||||||
|
|
|
| |||||
Operating income | $ | 38,267 | $ | 30,062 | ||||
|
|
|
| |||||
Operating results for the Plant Nutrient Group increased $8.2 million over its 2010 results. Sales were $71.3 million higher due to a 30.8% increase in average price per ton sold for the year offset by a 14.7% decrease in volume. Volume was below last year due to extremely wet weather conditions throughout the spring and fall of 2011 which reduced the ability to apply nutrients during this time and a strong fourth quarter of 2010 where significant tonnage was sold and applied earlier than most years. Gross profit increased $17.7 million over prior year as a result of the impact of price escalation experienced the majority of the year, offset by a $3.1 million lower-of-cost-or-market inventory adjustment taken in the fourth quarter of 2011.
Operating expenses increased $9.2 million and includes asset impairment charges in the amount of $1.7 million. The remaining increase in operating expenses relates to higher labor, benefits and performance incentives. There were no significant changes in interest expense, equity in earnings of affiliates, or other income.
Rail Group
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | 107,459 | $ | 94,816 | ||||
Cost of sales and merchandising revenues | 82,709 | 81,437 | ||||||
|
|
|
| |||||
Gross profit | 24,750 | 13,379 | ||||||
Operating, administrative and general expenses | 12,161 | 12,846 | ||||||
Interest expense | 5,677 | 4,928 | ||||||
Other income, net | 2,866 | 4,502 | ||||||
|
|
|
| |||||
Operating income | $ | 9,778 | $ | 107 | ||||
|
|
|
| |||||
Operating results for the Rail Group increased $9.7 million over 2010. Revenues related to car sales, repairs and fabrication increased $4.9 million and leasing revenues increased $7.7 million for a total increase in sales and merchandising revenues of $12.6 million. Gross profit for Rail increased $11.4 million in total and includes gains on sales of railcars and related leases of $8.4 million. Gross profit from the leasing business was $4.0 higher than the prior year due to higher utilization and average lease rates.
Operating expenses decreased by $0.7 million from prior year due to lower bad debt expense along with a decrease in various other expense categories. Interest expense increased $0.7 million due to increased working capital use for railcar purchases. Other income was higher in 2010 primarily due to settlements received from customers for railcars returned at the end of a lease that were not in the required operating condition, as well as gains from the sale of certain assets.
Turf & Specialty Group
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | 129,716 | $ | 123,549 | ||||
Cost of sales and merchandising revenues | 103,481 | 96,612 | ||||||
|
|
|
| |||||
Gross profit | 26,235 | 26,937 | ||||||
Operating, administrative and general expenses | 23,734 | 23,225 | ||||||
Interest expense | 1,381 | 1,604 | ||||||
Other income, net | 880 | 1,335 | ||||||
|
|
|
| |||||
Operating income | $ | 2,000 | $ | 3,443 | ||||
|
|
|
| |||||
Operating results for the Turf & Specialty Group decreased $1.4 million from its 2010 results. Sales increased $6.2 million. Sales in the lawn fertilizer business increased $5.2 million due to a 5% increase in the average price per ton sold. Sales in the cob business increased $1.0 million as the average price per ton sold was up nearly 7%. Gross profit for Turf & Specialty decreased $0.7 million primarily due to a 7.8% increase in the average cost per ton due to higher raw material costs.
Operating expenses increased $0.5 million over the prior year due to a variety of variable expenses. There were no significant fluctuations in interest expense or other income.
Retail Group
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | 157,621 | $ | 150,644 | ||||
Cost of sales and merchandising revenues | 111,583 | 107,308 | ||||||
|
|
|
| |||||
Gross profit | 46,038 | 43,336 | ||||||
Operating, administrative and general expenses | 47,297 | 45,439 | ||||||
Interest expense | 899 | 1,039 | ||||||
Other income, net | 638 | 608 | ||||||
|
|
|
| |||||
Operating loss | $ | (1,520 | ) | $ | (2,534 | ) | ||
|
|
|
| |||||
Operating results for the Retail Group improved $1.0 million over its 2010 results. Sales increased $7.0 million over 2010. While the average sale per customer increased by 6.5%, customer counts decreased by almost 2%. Gross profit increased $2.7 million due to the increased sales as well as a slight increase in gross margin percentage.
Operating expenses for Retail increased $1.9 million mainly due to higher labor, benefits and performance incentives due to overall company performance. There were no significant changes in interest expense or other income.
Other
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Sales and merchandising revenues | $ | — | $ | — | ||||
Cost of sales and merchandising revenues | — | — | ||||||
|
|
|
| |||||
Gross profit | — | — | ||||||
Operating, administrative and general expenses | 13,754 | 9,639 | ||||||
Interest expense | (543 | ) | 78 | |||||
Equity in earnings of affiliates | — | — | ||||||
Other income, net | 213 | 1,176 | ||||||
|
|
|
| |||||
Operating loss | $ | (12,998 | ) | $ | (8,541 | ) | ||
|
|
|
| |||||
The Corporate operating loss (costs not allocated back to the business units) increased $4.5 million over 2010 and relates primarily to an increase in performance incentives due to favorable operating performance and an increase in charitable contributions.
As a result of the operating performances noted above, income attributable to The Andersons, Inc. of $95.1 million for 2011 was 47% higher than the income attributable to The Andersons, Inc. of $64.7 million in 2010. Income tax expense of $51.1 million was provided at 34.5%. In 2010, income tax expense of $39.3 million was provided at 37.7%. The higher effective tax rate for 2010 was due primarily to the impact of Federal legislation on Medicare Part D. The 2011 effective tax rate also benefited from the permanent tax deduction related to domestic production activities.
Comparison of 2010 with 2009
Grain Group
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | 1,936,813 | $ | 1,734,574 | ||||
Cost of sales and merchandising revenues | 1,833,097 | 1,641,567 | ||||||
|
|
|
| |||||
Gross profit | 103,716 | 93,007 | ||||||
Operating, administrative and general expenses | 50,861 | 58,341 | ||||||
Interest expense | 6,686 | 8,735 | ||||||
Equity in earnings of affiliates | 15,648 | 5,816 | ||||||
Other income, net | 2,557 | 2,030 | ||||||
|
|
|
| |||||
Operating income before noncontrolling interest | $ | 64,374 | $ | 33,777 | ||||
|
|
|
| |||||
Operating results for Grain increased $30.6 million over 2009. Sales of grain increased $174 million, or 10.5%, over 2009 and is the result of an 11% increase in volume. Sales of ethanol increased $80.4 million, or 20%, and is the result of an increase in the overall volume by 7 million gallons and a 16.5% increase in the average price per gallon sold. Fees for services provided to the ethanol industry increased $0.9 million, or 4.2%.
Gross profit increased $11.7$10.7 million, or 11%12%, for the Group.Grain. Basis income was higher than 2009 by $18.6 million due to earlier than normal 2010 harvest causing significant basis appreciation. Position income increased by $7.9 million from 2009 to 2010 primarily as a result of the growth of the ingredient trading area. The harvest occurred earlier in 2010 than 2009 and grain was drier which resulted in $11.5 million less service fees than prior year from drying and mixing services (when wet grain is received into the elevator and dried to an acceptable moisture level). In addition, the market value adjustment for customer credit exposure was $4.6 million higher for 2010 due to higher grain prices.
Operating expenses for the Group decreased $7.3$7.5 million, or 11%13%, from 2009. Bad debt expense decreased approximately $14.6 million due to reductions in amounts reserved for customer receivables and the net reversal of $6.7 million of reserves following the settlement of a long standing collection matter. Approximately $2.7 million of the decrease in operating expenses is the result of a decline in utilities expense due to the early and dry harvest in comparison with 2009. These expense decreases were partially offset by increases in labor, benefits, and depreciation and amortization expenseexpenses due to the acquisition of O’Malley Grain during the second quarter of 2010. Performance incentives expense was also up year-over-year due to higher overall division earnings.
Interest expense for the Group decreased $1.0$2.0 million, or 11%23%, from 2009 due to lower rates on outstanding borrowings.
24
Ethanol Group
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | 468,639 | $ | 419,404 | ||||
Cost of sales and merchandising revenues | 453,865 | 405,607 | ||||||
|
|
|
| |||||
Gross profit | 14,774 | 13,797 | ||||||
Operating, administrative and general expenses | 6,440 | 6,302 | ||||||
Interest expense | 1,629 | 628 | ||||||
Equity in earnings of affiliates | 10,351 | 11,636 | ||||||
Other income, net | 176 | 289 | ||||||
|
|
|
| |||||
Income before income taxes | 17,232 | 18,792 | ||||||
Income attributable to noncontrolling interest | 219 | 1,215 | ||||||
|
|
|
| |||||
Operating income | $ | 17,013 | $ | 17,577 | ||||
|
|
|
| |||||
Operating results for Ethanol decreased $0.6 million from 2009. Total sales and merchandising revenues increased $49.2 million over 2009. IncomeSales of ethanol increased as a result of an increase in the overall volume by 7 million gallons and a 16.5% increase in the average price per gallon sold. Fees for services provided to the ethanol industry increased $0.4 million. Gross profit increased $1.0 million over 2009 and relates to an increase in ethanol service fee income.
There were no significant changes in operating expenses or other income from the Group’s investment2009 to 2010. Interest expense increased $1.0 million over 2009 due to an increase in LTG increased $9.4 million. Income fromshort-term borrowings.
Equity in earnings of affiliates relates to the Group’s investment in the three ethanol LLCsLLCs. Earnings decreased $1.3 million, or 11%, from 2009 primarily as a result of rising corn prices.
Plant Nutrient Group
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | 619,330 | $ | 491,293 | ||||
Cost of sales and merchandising revenues | 539,793 | 431,874 | ||||||
|
|
|
| |||||
Gross profit | 79,537 | 59,419 | ||||||
Operating, administrative and general expenses | 46,880 | 45,955 | ||||||
Interest expense | 3,901 | 3,933 | ||||||
Equity in earnings of affiliates | 8 | 8 | ||||||
Other income, net | 1,298 | 1,755 | ||||||
|
|
|
| |||||
Operating income | $ | 30,062 | $ | 11,294 | ||||
|
|
|
| |||||
Operating results for the Plant Nutrient Group increased $18.8 million over its 2009 results. Sales increased $128 million, or 26%, over 2009 due to an increase in tons sold by 31% offset by a 3% decrease in average price per ton sold for the year.
Volume increased almost twenty percent in the fourth quarter alone due to excellent fall application conditions and the continued restocking of the retail fertilizer pipeline. The overall margin per ton was approximately 6% higher than prior year.
Operating expenses increased $1.0 million over prior year due to incremental expenses relating to an August 2009 acquisition.
Rail Group
| Year ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Sales and merchandising revenues | $ | 94,816 | $ | 92,789 | ||||
| Cost of sales | 81,437 | 75,973 | ||||||
| Gross profit | 13,379 | 16,816 | ||||||
| Operating, administrative and general | 12,846 | 13,867 | ||||||
| Interest expense | 4,928 | 4,468 | ||||||
| Other income, net | 4,502 | 485 | ||||||
| Operating income (loss) | $ | 107 | $ | (1,034 | ) | |||
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | 94,816 | $ | 92,789 | ||||
Cost of sales and merchandising revenues | 81,437 | 75,973 | ||||||
|
|
|
| |||||
Gross profit | 13,379 | 16,816 | ||||||
Operating, administrative and general expenses | 12,846 | 13,867 | ||||||
Interest expense | 4,928 | 4,468 | ||||||
Other income, net | 4,502 | 485 | ||||||
|
|
|
| |||||
Operating income (loss) | $ | 107 | $ | (1,034 | ) | |||
|
|
|
| |||||
Operating results for the Rail Group increased $1.1 million over 2009. Sales of railcars increased $12.6 million, which includes $4.3 million related to intentional scrapping of railcars, nearly offset by leasing revenues which decreased $12.5 million. Sales relating to the repair and fabrication businesses increased $1.9 million. Gross profit for the Group decreased $3.4 million, or 20%, and is the result of more idle cars and increased storage costs during the first half of 2010 coupled with increased freight and maintenance costs, as cars were repaired and moved into service during the second half of 2010. Storage expenses for the Group increased $1.1 million in 2010 compared to 2009.
Other income increased by $4.0 million over 2009 primarily due to $2.2 million in settlements received from customers for railcars returned at the end of a lease that were not in the required operating condition. These settlements may be negotiated in lieu of a customer performing the required repairs. In addition, IANR dividends began accruing in May 2010 and amounted to approximately $1.1 million at year end.
| Year ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Sales and merchandising revenues | $ | 619,330 | $ | 491,293 | ||||
| Cost of sales | 539,793 | 431,874 | ||||||
| Gross profit | 79,537 | 59,419 | ||||||
| Operating, administrative and general | 46,880 | 45,955 | ||||||
| Interest expense | 3,901 | 3,933 | ||||||
| Equity in earnings of affiliates | 8 | 8 | ||||||
| Other income, net | 1,298 | 1,755 | ||||||
| Operating income | $ | 30,062 | $ | 11,294 | ||||
25
| Year ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Sales and merchandising revenues | $ | 123,549 | $ | 125,306 | ||||
| Cost of sales | 96,612 | 99,849 | ||||||
| Gross profit | 26,937 | 25,457 | ||||||
| Operating, administrative and general | 23,225 | 20,424 | ||||||
| Interest expense | 1,604 | 1,429 | ||||||
| Other income, net | 1,335 | 1,131 | ||||||
| Operating income | $ | 3,443 | $ | 4,735 | ||||
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | 123,549 | $ | 125,306 | ||||
Cost of sales and merchandising revenues | 96,612 | 99,849 | ||||||
|
|
|
| |||||
Gross profit | 26,937 | 25,457 | ||||||
Operating, administrative and general expenses | 23,225 | 20,424 | ||||||
Interest expense | 1,604 | 1,429 | ||||||
Other income, net | 1,335 | 1,131 | ||||||
|
|
|
| |||||
Operating income | $ | 3,443 | $ | 4,735 | ||||
|
|
|
| |||||
Operating results for the Turf & Specialty Group decreased $1.3 million from its 2009 results. Sales decreased $1.8 million, or 1%. Sales in the lawn fertilizer business decreased $5.6 million, or 5%, due to a 3% decrease in volume along with a 2% decrease in average price per ton sold. Sales in the cob business increased $3.7 million, or 24% as tonnage sold was up 24% over 2009. Gross profit for the Group increased $1.5 million, or 6% due to an overall increase in volume and margin.
Operating expenses for the Group increased $2.8 million, or 14%, from 2009, and is primarily related to the 2009 recognition of a pension curtailment gain that was not repeated in 2010 and more maintenance projects in 2010.
Retail Group
| Year ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Sales and merchandising revenues | $ | 150,644 | $ | 161,938 | ||||
| Cost of sales | 107,308 | 114,928 | ||||||
| Gross profit | 43,336 | 47,010 | ||||||
| Operating, administrative and general | 45,439 | 49,575 | ||||||
| Interest expense | 1,039 | 961 | ||||||
| Other income, net | 608 | 683 | ||||||
| Operating (loss) | $ | (2,534 | ) | $ | (2,843 | ) | ||
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | 150,644 | $ | 161,938 | ||||
Cost of sales and merchandising revenues | 107,308 | 114,928 | ||||||
|
|
|
| |||||
Gross profit | 43,336 | 47,010 | ||||||
Operating, administrative and general expenses | 45,439 | 49,575 | ||||||
Interest expense | 1,039 | 961 | ||||||
Other income, net | 608 | 683 | ||||||
|
|
|
| |||||
Operating loss | $ | (2,534 | ) | $ | (2,843 | ) | ||
|
|
|
| |||||
Operating results for the Retail Group increased $0.3 million over its 2009 results. Sales decreased $11.4 million, or 7%, from 2009 and were experienced in all of the Group’s market areas, but the majority was due to the Lima store closing in late 2009. Customer counts decreased 3% and the average sale per customer decreased by nearly 5%. Gross profit decreased $3.7 million, or 8%, due to the decreased sales as well as a slight decrease in gross margin percentage.
Operating expenses for the Group decreased $4.1 million, or 8%. As noted above, the Lima, Ohio store was closed in the fourth quarter of 2009 which contributed to the decrease in both sales and expenses year-over-year.
Other
| Year ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Sales and merchandising revenues | $ | — | $ | — | ||||
| Cost of sales | — | — | ||||||
| Gross profit | — | — | ||||||
| Operating, administrative and general | 9,639 | 4,652 | ||||||
| Interest expense | 78 | 534 | ||||||
| Equity in earnings of affiliates | — | 3 | ||||||
| Other income, net | 1,176 | 1,958 | ||||||
| Operating (loss) | $ | (8,541 | ) | $ | (3,225 | ) | ||
26
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Sales and merchandising revenues | $ | — | $ | — | ||||
Cost of sales and merchandising revenues | — | — | ||||||
|
|
|
| |||||
Gross profit | — | — | ||||||
Operating, administrative and general expenses | 9,639 | 4,652 | ||||||
Interest expense | 78 | 534 | ||||||
Equity in earnings of affiliates | — | 3 | ||||||
Other income, net | 1,176 | 1,958 | ||||||
|
|
|
| |||||
Operating loss | $ | (8,541 | ) | $ | (3,225 | ) | ||
|
|
|
| |||||
As a result of the operating performances noted above, income attributable to The Andersons, Inc. of $64.7 million for 2010 was 69% higher than the income attributable to The Andersons, Inc. of $38.4 million in 2009. Income tax expense of $39.3 million was recorded in 2010 at an effective rate of 37.7% which is an increase from the 2009 effective rate of 35.7% due primarily to the impact of Federal legislation on Medicare Part D.
| Year ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sales and merchandising revenues | $ | 2,153,978 | $ | 2,411,144 | ||||
| Cost of sales | 2,047,174 | 2,300,190 | ||||||
| Gross profit | 106,804 | 110,954 | ||||||
| Operating, administrative and general | 64,643 | 60,281 | ||||||
| Interest expense | 9,363 | 18,667 | ||||||
| Equity in earnings of affiliates | 17,452 | 4,027 | ||||||
| Other income, net | 2,319 | 4,751 | ||||||
| Operating income before noncontrolling interest | 52,569 | 40,784 | ||||||
| (Income) loss attributable to noncontrolling interest | (1,215 | ) | 2,803 | |||||
| Operating income | $ | 51,354 | $ | 43,587 | ||||
27
| Year ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sales and merchandising revenues | $ | 92,789 | $ | 133,898 | ||||
| Cost of sales | 75,973 | 96,843 | ||||||
| Gross profit | 16,816 | 37,055 | ||||||
| Operating, administrative and general | 13,867 | 13,645 | ||||||
| Interest expense | 4,468 | 4,154 | ||||||
| Other income, net | 485 | 526 | ||||||
| Operating (loss) income | $ | (1,034 | ) | $ | 19,782 | |||
| Year ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sales and merchandising revenues | $ | 491,293 | $ | 652,509 | ||||
| Cost of sales | 431,874 | 618,519 | ||||||
| Gross profit | 59,419 | 33,990 | ||||||
| Operating, administrative and general | 45,955 | 41,598 | ||||||
| Interest expense | 3,933 | 5,616 | ||||||
| Equity in earnings of affiliates | 8 | 6 | ||||||
| Other income, net | 1,755 | 893 | ||||||
| Operating income (loss) | $ | 11,294 | $ | (12,325 | ) | |||
28
| Year ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sales and merchandising revenues | $ | 125,306 | $ | 118,856 | ||||
| Cost of sales | 99,849 | 94,152 | ||||||
| Gross profit | 25,457 | 24,704 | ||||||
| Operating, administrative and general | 20,424 | 21,307 | ||||||
| Interest expense | 1,429 | 1,522 | ||||||
| Other income, net | 1,131 | 446 | ||||||
| Operating income | $ | 4,735 | $ | 2,321 | ||||
| Year ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sales and merchandising revenues | $ | 161,938 | $ | 173,071 | ||||
| Cost of sales | 114,928 | 121,945 | ||||||
| Gross profit | 47,010 | 51,126 | ||||||
| Operating, administrative and general | 49,575 | 50,089 | ||||||
| Interest expense | 961 | 886 | ||||||
| Other income, net | 683 | 692 | ||||||
| Operating (loss) income | $ | (2,843 | ) | $ | 843 | |||
29
| Year ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Sales and merchandising revenues | $ | — | $ | — | ||||
| Cost of sales | — | — | ||||||
| Gross profit | — | — | ||||||
| Operating, administrative and general | 4,652 | 3,310 | ||||||
| Interest expense | 534 | 394 | ||||||
| Equity in earnings of affiliates | 3 | |||||||
| Other income (loss), net | 1,958 | (1,138 | ) | |||||
| Operating (loss) | $ | (3,225 | ) | $ | (4,842 | ) | ||
30
Working Capital
At December 31, 2010,2011, the Company had working capital of $301.8$313.0 million, a decreasean increase of about $5.9$11.2 million from the prior year. This decreaseincrease was attributable to changes in the following components of current assets and current liabilities (in thousands):
| 2010 | 2009 | Variance | ||||||||||
Current Assets: | ||||||||||||
| Cash and cash equivalents | $ | 29,219 | $ | 145,929 | $ | (116,710 | ) | |||||
| Restricted cash | 12,134 | 3,123 | 9,011 | |||||||||
| Accounts and notes receivables, net | 152,227 | 137,195 | 15,032 | |||||||||
| Margin deposits | 20,259 | 27,012 | (6,753 | ) | ||||||||
| Inventories | 647,189 | 407,845 | 239,344 | |||||||||
| Commodity derivative assets — current | 226,216 | 24,255 | 201,961 | |||||||||
| Deferred income taxes | 16,813 | 13,284 | 3,529 | |||||||||
| Prepaid expenses and other current assets | 34,501 | 28,180 | 6,321 | |||||||||
| 1,138,558 | 786,823 | 351,735 | ||||||||||
Current Liabilities: | ||||||||||||
| Borrowing under short-term line of credit | $ | 241,100 | — | $ | 241,100 | |||||||
| Accounts payable for grain | 274,596 | 234,396 | 40,200 | |||||||||
| Other accounts payable | 111,501 | 110,658 | 843 | |||||||||
| Customer prepayments and deferred revenue | 78,550 | 56,698 | 21,852 | |||||||||
| Commodity derivative liabilities — current | 57,621 | 24,871 | 32,750 | |||||||||
| Accrued expenses | 48,851 | 41,563 | 7,288 | |||||||||
| Current maturities of long-term debt | 24,524 | 10,935 | 13,589 | |||||||||
| 836,743 | 479,121 | 357,622 | ||||||||||
Working capital | $ | 301,815 | $ | 307,702 | $ | (5,887 | ) | |||||
| (in thousands) | 2011 | 2010 | Variance | |||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 20,390 | $ | 29,219 | $ | (8,829 | ) | |||||
Restricted cash | 18,651 | 12,134 | 6,517 | |||||||||
Accounts receivable, net | 167,640 | 152,227 | 15,413 | |||||||||
Inventories | 760,459 | 647,189 | 113,270 | |||||||||
Commodity derivative assets – current | 83,950 | 246,475 | (162,525 | ) | ||||||||
Deferred income taxes | 21,483 | 16,813 | 4,670 | |||||||||
Other current assets | 34,649 | 34,501 | 148 | |||||||||
|
|
|
|
|
| |||||||
Total current assets | 1,107,222 | 1,138,558 | (31,336 | ) | ||||||||
Current liabilities: | ||||||||||||
Borrowing under short-term line of credit | $ | 71,500 | $ | 241,100 | $ | (169,600 | ) | |||||
Accounts payable for grain | 391,905 | 274,596 | 117,309 | |||||||||
Other accounts payable | 142,762 | 111,501 | 31,261 | |||||||||
Customer prepayments and deferred revenue | 79,557 | 78,550 | 1,007 | |||||||||
Commodity derivative liabilities – current | 15,874 | 57,621 | (41,747 | ) | ||||||||
Other current liabilities | 60,445 | 48,851 | 11,594 | |||||||||
Current maturities of long-term debt | 32,208 | 24,524 | 7,684 | |||||||||
|
|
|
|
|
| |||||||
Total current liabilities | 794,251 | 836,743 | (42,492 | ) | ||||||||
|
|
|
|
|
| |||||||
Working capital | $ | 312,971 | $ | 301,815 | $ | 11,156 | ||||||
|
|
|
|
|
| |||||||
In comparison to the prior year-end, current assets increaseddecreased largely as a result higher inventories andof lower commodity derivative assets driven by risingfalling commodity prices in the fourth quarter. Current liabilities increased primarilysecond half of 2011. This decrease was partially offset by higher inventories for the Grain and Plant Nutrient businesses. Grain inventories are up $76.4 million over prior year due to owning the majority of the wheat in our facilities rather than storing it for others as a resultin the prior year along with an increase in ownership bushels in beans. Plant Nutrient inventories are up $28.5 million over prior year due to higher volumes and cost of borrowings on our short-term lineraw materials. Trade receivables fluctuate with timing of credit. We also saw large increasessales along with variations in prices of commodities. The increase in accounts payable for grainreceivable is consistent with the increase in sales and commodity derivative liabilitiesmerchandising revenues. Restricted cash increased due to rising commodity prices.a new industrial development revenue bond. See the discussion below on sources and uses of cash for an understanding of the significant decrease in cash from prior year.
Borrowings and Credit Facilities
On December 17, 2010,5, 2011, the Company entered into a restated loan agreement (“the agreement”) with several financial institutions, including U.S. Bank National Association, acting as agent. The agreement provides the Company with $513$735 million (“Line A) of short-term borrowing capacity and $387$115 million (“Line C”B”) of short-termlong-term borrowing capacity. Due to the fact that we were oversubscribed on the renewal of the syndicate revolvers, the Company entered into an agreement to amend Line A, increasing the total amount of the line by an additional $92 million to $605 million subsequent to year end. The Company plans to use the lines to fund components of working capital and margin call requirements, as necessary, if commodity prices continue to increase into 2011.
31$743.4 million.
Operating Activities and Liquidity
The Company’s operations provided cash of $290.3 million in 2011, an increase of $529.6 million from cash used cashin operations of $239.3 million in 2010, a decrease of $419.5 million from cash provided by operations of $180.2 million in 2009.2010. The significant amount of operating cash flows used in 20102011 relates primarily to an increasethe changes in the commodity prices as noted in the discussionworking capital (before short-term borrowings) discussed above on working capital.
In 2011, the Company paid income taxes of $48.9 million compared to $24.8 million in 2010. Income tax refunds of $24.2 million were received in 2009. The Company makes quarterly estimated tax payments based on full-year estimated income. Through the first nine months of 2008, the Company anticipated significantly higher earnings and was making quarterly income payments accordingly. In the fourth quarter of 2008, the market price of fertilizer decreased dramatically requiring the Company to record lower-of-cost-or market adjustments on its inventory and purchase commitmentsThe significant increase in the amount of $97.2 million. The significantly decreased earnings resulted in lower income taxes paid from 2010 to 2011 is primarily due to the increase in pre-tax book income and asmaking payments of December 31, 2008 the Company had over-paid its income2010 taxes with tax liability for the year. The majority of this over-payment was refundedreturn extension requests filed in the first quarter of 2009.
Investing Activities
Investing activities used $89.0$86.0 million, which is $25.6$3.0 million moreless than wasthe amount used in 2009.2010. The largest portion of the spending relates to business acquisitions in the amount of $39.3 million, capital spending of $30.9 million, and investment in convertible preferred securities of $13.1 million. In addition, purchases of railcars in the amount of $18.4$44.2 million nearlyand $64.2 million, respectively. Purchases of railcars were partially offset by proceeds from the sale of railcars in the amount of $20.1$30.4 million.
The Company spent more on business acquisitions in previous years than in 2011. On October 31, 2011, the Company completed the purchase of Immokalee Farmers Supply, Inc., which serves the specialty vegetable producers in Southwest Florida, for a purchase price of $3.0 million. $2.4 million in cash was paid at closing with the remaining portion of the purchase price accrued as it is contingent upon future performance. On May 1, 2010, the Company acquired two grain cleaning and storage facilities from O’Malley Grain, Inc. for a purchase price of $7.8 million. On December 31, 2010, the Company completed the purchase of grain storage facilities in Nebraska from B4 Grain, Inc. for approximatelywith a cash payment of $31.5 million. These acquisitions were another step westward for the Company and we see it as a great opportunity to be positioned along the high production area of Nebraska.
On May 25, 2010, the Company paid $13.1 million to acquire 100% of newly issued cumulative convertible preferred shares of IANR and Zephyr. As a result of this investment, the Company has a 49.9% voting interest in IANR, with dividends accruing at a rate of 14% annually whether or not declared by IANRannually. The Company recorded dividend income of $1.7 million and are cumulative in nature.
The Company expects to spend approximately $74$123 million in 20112012 on conventional property, plant and equipment, including additions and enhancementswhich includes amounts for an acquisition that occurred subsequent to existing facilities, and anyear end but prior to the filing of this Form 10-K. On January 31, 2012, the Company purchased New Eezy Gro, Inc. for a purchase price of $15.5 million plus working capital in the amount of $1.4 million. An additional $90$90.0 million foris estimated to be spent on the purchase and capitalized modifications of railcars with related sales or financings of $75$96.4 million.
Financing Arrangements
Net cash used in financing activities was $213.1 million in 2011, compared to $211.6 million cash provided by financing activities was $211.6in 2010. A combination of reduced borrowings due to a drop in commodity prices, increasing earnings and working capital, and lower capital spending than originally planned resulted in pay down of a significant amount of long-term debt in the second half of the year. Payments of long-term debt totaled $104.0 million in 2010, compared to $52.6 million cash used by financing activities in 2009.
The Company has significant committed short-term lines of credit available to finance working capital, primarily inventories, margin calls on commodity contracts and accounts receivable. As noted above, the Company is party to a borrowing arrangement with a syndicate of banks, which was amended in December 2010,2011, to provide the Company with $387 million and $513$735 million in short-term lines of credit. The Company had drawn $241.1$71.5 million on its short-term line of credit at December 31, 2011 compared to $241.1 million at December 31, 2010. Peak borrowing on the line of credit during 2011 and 2010 were $601.5 million and 2009 was $305.0 million, and $92.7 million, respectively. Typically,
32
Certain of the Company’s long-term borrowings include covenants that, among other things, impose minimum levels of equity and limitations on additional debt. The Company was in compliance with all such covenants at December 31, 2010.2011. In addition, certain of the Company’s long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. The Company’s non-recourse long-term debt is collateralized by railcar and locomotive assets.
The Company paid $6.6$8.2 million in dividends in 20102011 compared to $6.3$6.6 million in 2009.2010. The Company paid $0.0850$0.0875 per common share for the dividends paid in January 2009, $0.0875 per common share for the dividends paid in April, July and October 2009 and January 2010, $0.090$0.0900 per common share for the dividends paid in April, July and October 2010, and declared a dividend of $0.11$0.1100 per common share for the dividends paid in January, 2011.
Proceeds from the sale of treasury shares to employees and directors were $0.8 million and $1.3 million for 2011 and $0.8 million for 2010, and 2009, respectively. During 2010,2011, the Company issued approximately 157,000137,000 shares to employees and directors under its share compensation plans.
Because the Company is 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 the profitability of the Company. In addition, periods of high grain prices and / or unfavorable market conditions could require the Company to make additional margin deposits on its exchange traded futures contracts. Conversely, in periods of declining prices, the Company receives a return of cash.
The volatility in the capital and credit markets has had a significant impact on the economy in the past few years. Despite the volatile and challenging economic environment, the Company has continued to have good access to the credit markets. In the unlikely event that the Company was faced with a situation where it was not able to access the capital markets (including through the renewal of its line of credit), the Company believes it could successfully implement contingency plans to maintain adequate liquidity such as expanding or contracting the amount of its forward grain contracting, which will reduce the impact of grain price volatility on its daily margin calls. Additionally, the Company could begin to liquidate its stored grain inventory as well as execute sales contracts with its customers that align the timing of the receipt of grain from its producers to the shipment of grain to its customers (thereby freeing up working capital that is typically utilized to store the grain for extended periods of time). WeThe Company could also believe that we could raise equity through other portions of the capital market. The Company believes that its operating cash flow, the marketability of its grain inventories, other liquidity contingency plans and its access to sufficient sources of liquidity, will enable it to meet its ongoing funding requirements. At December 31, 2010,2011, the Company had $760.8$743.4 million available under its lines of credit.
33
Future payments due under contractual obligations at December 31, 20102011 are as follows:
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Less than 1 | After 5 | ||||||||||||||||||
| (in thousands) | year | 1-3 years | 3-5 years | years | Total | |||||||||||||||
| Long-term debt (a) | $ | 21,683 | $ | 76,661 | $ | 108,948 | $ | 78,066 | $ | 285,358 | ||||||||||
| Long-term debt non-recourse (a) | 2,841 | 12,373 | 777 | — | 15,991 | |||||||||||||||
| Interest obligations (b) | 14,993 | 24,632 | 15,659 | 9,651 | 64,935 | |||||||||||||||
| Uncertain tax positions | 311 | 160 | — | — | 471 | |||||||||||||||
| Operating leases (c) | 22,739 | 25,431 | 14,105 | 17,851 | 80,126 | |||||||||||||||
| Purchase commitments (d) | 1,748,062 | 157,450 | 1,311 | — | 1,906,823 | |||||||||||||||
| Other long-term liabilities (e) | 4,196 | 2,559 | 2,787 | 7,567 | 17,109 | |||||||||||||||
| Total contractual cash obligations | $ | 1,814,825 | $ | 299,266 | $ | 143,587 | $ | 113,135 | $ | 2,370,813 | ||||||||||
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations (in thousands) | Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | |||||||||||||||
Long-term debt (a) | $ | 32,051 | $ | 56,799 | $ | 86,450 | $ | 94,839 | $ | 270,139 | ||||||||||
Long-term debt non-recourse (a) | 157 | 797 | — | — | 954 | |||||||||||||||
Interest obligations (b) | 9,961 | 20,755 | 11,326 | 15,675 | 57,717 | |||||||||||||||
Uncertain tax positions | 288 | 11 | — | — | 299 | |||||||||||||||
Operating leases (c) | 17,188 | 21,052 | 14,762 | 12,070 | 65,072 | |||||||||||||||
Purchase commitments (d) | 1,309,610 | 140,221 | 909 | — | 1,450,740 | |||||||||||||||
Other long-term liabilities (e) | 4,211 | 2,606 | 2,859 | 8,137 | 17,813 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total contractual cash obligations | $ | 1,373,466 | $ | 242,241 | $ | 116,306 | $ | 130,721 | $ | 1,862,734 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| (a) | The Company is subject to various loan | |
| (b) | Future interest obligations are calculated based on interest rates in effect as of December 31, | |
| (c) | Approximately | |
| (d) | Includes the amounts related to purchase obligations in the Company’s operating units, including | |
| (e) | Other long-term liabilities include estimated obligations under our retiree healthcare programs and the estimated |
The Company had standby letters of credit outstanding of $14.1$35.1 million at December 31, 2010.
Off-Balance Sheet Transactions
The Company’s Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. The Company leases railcars from financial intermediaries through sale-leaseback transactions, the majority of which involve operating leasebacks. Railcars owned by the Company, or leased by the Company from a financial intermediary, are generally leased to a customer under an operating lease. The Company also arranges non-recourse lease transactions under which it sells railcars or locomotives to a financial intermediary, and assigns the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, the Company generally provides ongoing railcar maintenance and management services for the financial intermediary, and receives a fee for such services. On most of the railcars and locomotives, the Company holds an option to purchase these assets at the end of the lease.
34
Method of Control | Financial Statement | Units | ||||||||
Owned-railcars available for sale | On balance sheet | |||||||||
Owned-railcar assets leased to others | On balance sheet | |||||||||
Railcars leased from financial intermediaries | Off balance sheet | |||||||||
Railcars | Off balance sheet | |||||||||
Total Railcars | 22,551 | |||||||||
Owned-containers leased to others | On balance sheet | |||||||||
Total Containers | 639 | |||||||||
Locomotive assets leased to others | On balance sheet – non-current | 44 | ||||||||
Locomotives leased from financial intermediaries | Off balance sheet | 4 | ||||||||
Locomotives leased from financial intermediaries under limited recourse arrangements | Off balance sheet | — | ||||||||
Locomotives | Off balance sheet | |||||||||
Total Locomotives | 124 | |||||||||
In addition, the Company manages approximately 761342 railcars for third-party customers or owners for which it receives a fee.
The Company has future lease payment commitments aggregating $65.5$51.0 million for the railcars leased by the Company from financial intermediaries under various operating leases. Remaining lease terms vary with none exceeding fifteen years. The Company prefersutilizes non-recourse lease transactions,arrangements whenever possible in order to minimize its credit risk. Refer to Note 1211 to the Company’s consolidated financial statementsConsolidated Financial Statements in Item 8 for more information on the Company’s leasing activities.
Critical Accounting Estimates
The process of preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on the Company’s historical experience and management’s knowledge and understanding of current facts and circumstances. Actual results, under conditions and circumstances different from those assumed, may change from estimates.
Certain of the Company’s accounting estimates are considered critical, as they are important to the depiction of the Company’s financial statements and/and / or require significant or complex judgment by management. There are other items within our financial statements that require estimation, however, they are not deemed critical as defined above. Note 1 to the consolidated financial statementsConsolidated Financial Statements in Item 8 describes our significant accounting policies which should be read in conjunction with our critical accounting estimates.
The Company believes that accounting for allowance for accounts and notes receivable, fair value adjustment for counter-partycounterparty risk, grain inventories and commodity derivative contracts, lower-of-cost-or-market inventory adjustments and impairment of long-lived assets and equity method investments income taxes, and employee benefit plans involve significant estimates and assumptions in the preparation of the consolidated financial statements.
35
The Company records quarterly estimated fair value adjustments to its commodity contracts.contracts on a quarterly basis. These market value adjustments for customer credit exposure are based on internal projections, the Compay’sCompany’s historical experience with its producers and customers and the Company’s knowledge of theirthe counterparties business. In addition, the adjustments to contract fair values tends to fluctuate with the rise and fall of commodity prices.
Grain Inventories and Commodity Derivative Contracts
The Company marks to market all grain inventory, forward purchase and sale contracts for grain and ethanol, over-the-counter grain and ethanol contracts, and exchange-traded futures and options contracts. The overall market for grain inventories is very liquid and active; market value is determined by reference to prices for identical commodities on the CME (adjusted primarily for transportation costs); and the Company’s grain inventories may be sold without significant additional processing. The Company uses forward purchase and sale contracts and both exchange traded and over-the-counter contracts (such as derivatives generally used by the International Swap Dealers Association). Management estimates fair value based on exchange-quoted prices, adjusted for differences in local markets, as well as counter-party non-performance risk in the case of forward and over-the-counter contracts. The amount of risk, and therefore the impact to the fair value of the contracts, varies by type of contract and type of counter-party. With the exception of specific customers thought to be at higher risk, the Company looks at the contracts in total, segregated by contract type, in its assessment of nonperformancenon-performance risk. For those customers that are thought to be at higher risk, the Company makes assumptions as to performance based on past history and facts about the current situation. Changes in fair value are recorded as a component of sales and merchandising revenues in the statement of income.
Lower-of-Cost-or-Market Inventory Adjustments
The Company records its non-grain inventory at the lower of cost or market. Whenever changing conditions warrant, the Company evaluates the carrying value of its inventory compared to the current market. Market price is determined using both external data, such as current selling prices by third parties and quoted trading prices for the same or similar products, and internal data, such as the Company’s current ask price and expectations on normal margins. If the evaluation indicates that the Company’s inventory is being carried at values higher than the current market can support, the Company will write down its inventory to its best estimate of net realizable value.
Impairment of Long-Lived Assets and Equity Method Investments
The Company’s business segments are each highly capital intensive and require significant investment in facilities and / or railcars. Fixed assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. This is done by evaluating the recoverability based on undiscounted projected cash flows, excluding interest and taxes.interest. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair value.
We also annually review the balance of goodwill for impairment in the fourth quarter. TheseHistorically, these reviews for impairment takehave taken into account our quantitative estimates of future undiscounted, and as appropriate discounted, cash flows. Our estimates of future cash flows are based upon a number of assumptions including lease rates, lease terms, operating costs, life of the assets, potential disposition proceeds, budgets and long-range plans. The majority of our goodwill is in the Grain and Ethanol and Plant Nutrient Groups.businesses. Based on the strength of current performance in both of these groups, we do not anticipate anya qualitative goodwill impairment issuesassessment was performed in the near future.
In addition, the Company holds investments in limited liability companies that are accounted for using the equity method of accounting. The Company reviews its investments to determine whether there has been a decline in the estimated fair value of the investment that is below the Company’s carrying value which is other than temporary.
36
The market risk inherent in the Company’s market risk-sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices and interest rates as discussed below.
Commodity Prices
The Company’s daily net commodity position consists of
37
A sensitivity analysis has been prepared to estimate the Company’s exposure to market risk of its commodity position. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in suchquoted market prices. The result of this analysis, which may differ from actual results, is as follows:
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Net (short) long position | $ | (2,105 | ) | $ | 3,848 | |||
| Market risk | (211 | ) | 385 | |||||
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Net position | $ | 5,984 | $ | 2,105 | ||||
Market risk | 598 | 211 | ||||||
Interest Rates
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 and credit ratings for similar types of borrowing arrangements. In addition, the Company has derivative interest rate contracts recorded in its balance sheet at their fair value. The fair value of these contracts is estimated based on quoted market termination values. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates, is summarized below:
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Fair value of long-term debt and interest rate contracts | $ | 307,865 | $ | 327,412 | ||||
| Fair value in excess of carrying value | 4,359 | 6,688 | ||||||
| Market risk | (8,091 | ) | (3,344 | ) | ||||
38
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Fair value of long-term debt | $ | 279,001 | $ | 305,708 | ||||
Fair value in excess of carrying value | 7,908 | 4,359 | ||||||
Market risk | 3,454 | 4,200 | ||||||
Actual results may differ. The estimated fair value and market risk will vary from year to year depending on the total amount of long-term debt and the mix of variable and fixed rate debt.
The Andersons, Inc.
Index to Financial Statements
39
The management of The Andersons, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control —– Integrated Framework. Based on the results of this assessment and on those criteria, management concluded that, as of December 31, 2010,2011, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010,2011, as stated in their report which follows in Item 8 of this Form 10-K.
40
To the Shareholders and Board of Directorsof
Of The Andersons, Inc.:
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Andersons, Inc. and its subsidiaries at December 31, 20102011 and December 31, 2009,2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20102011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2011, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We did not audit the consolidated financial statements of Lansing Trade Group, LLC, an entity in which The Andersons, Inc.inc. has an investment in and accounts for under the equity method of accounting, and for which The Andersons, Inc. recorded $23.6 million, $15.1 million, $5.8 million and $8.8$5.8 million of equity in earnings of affiliates for each of the three years in the period ended December 31, 2010, 2009 and 2008, respectively.2011. The financial statements of Lansing Trade Group, LLC as of December 31, 2010 and December 31, 2009 and for each of the years ended December 31, 2010, December 31, 2009 and December 31, 2008 were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements of The Andersons, Inc. as of December 31, 2010 and December 31, 2009 and for the years ended December 31, 2010, December 31, 2009 and December 31, 2008 expressed herein, insofar as it relates to the amounts included for Lansing Trade Group, LLC, is based solely on the report of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Toledo, OhioMarch 1, 2011
41
Lansing Trade Group, LLC
Overland Park, Kansas
We have audited the consolidated balance sheets of Lansing Trade Group, LLC and Subsidiaries as of December 31, 20102011 and 20092010 and the related consolidated statements of income and comprehensive income, members’ equity and cash flows for each of the three years in the period ended December 31, 20102011 (not included herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20102011 and 2009,2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010,2011, in conformity with U.S. generally accepted accounting principles.
| Crowe Chizek LLP |
Elkhart, Indiana
February 21, 2011
4223, 2012
Consolidated Statements of Income
| Year ended December 31, | ||||||||||||
| (in thousands, except per common share data) | 2010 | 2009 | 2008 | |||||||||
| Sales and merchandising revenues | $ | 3,393,791 | $ | 3,025,304 | $ | 3,489,478 | ||||||
| Cost of sales and merchandising revenues | 3,112,112 | 2,769,798 | 3,231,649 | |||||||||
| Gross profit | 281,679 | 255,506 | 257,829 | |||||||||
| Operating, administrative and general expenses | 195,330 | 199,116 | 190,230 | |||||||||
| Interest expense | 19,865 | 20,688 | 31,239 | |||||||||
| Other income: | ||||||||||||
| Equity in earnings of affiliates | 26,007 | 17,463 | 4,033 | |||||||||
| Other income — net | 11,652 | 8,331 | 6,170 | |||||||||
| Income before income taxes | 104,143 | 61,496 | 46,563 | |||||||||
| Income tax provision | 39,262 | 21,930 | 16,466 | |||||||||
| Net income | 64,881 | 39,566 | 30,097 | |||||||||
| Net (income) loss attributable to the noncontrolling interest | (219 | ) | (1,215 | ) | 2,803 | |||||||
| Net income attributable to The Andersons, Inc. | $ | 64,662 | $ | 38,351 | $ | 32,900 | ||||||
Per common share: | ||||||||||||
| Basic earnings attributable to The Andersons, Inc. common shareholders | $ | 3.51 | $ | 2.10 | $ | 1.82 | ||||||
| Diluted earnings attributable to The Andersons, Inc. common shareholders | $ | 3.48 | $ | 2.08 | $ | 1.79 | ||||||
| Dividends paid | $ | 0.3575 | $ | 0.3475 | $ | 0.325 | ||||||
| Year ended December 31, | ||||||||||||
| (in thousands, except per common share data) | 2011 | 2010 | 2009 | |||||||||
Sales and merchandising revenues | $ | 4,576,331 | $ | 3,393,791 | $ | 3,025,304 | ||||||
Cost of sales and merchandising revenues | 4,223,479 | 3,112,112 | 2,769,798 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 352,852 | 281,679 | 255,506 | |||||||||
Operating, administrative and general expenses | 229,090 | 195,330 | 199,116 | |||||||||
Interest expense | 25,256 | 19,865 | 20,688 | |||||||||
Other income: | ||||||||||||
Equity in earnings of affiliates | 41,450 | 26,007 | 17,463 | |||||||||
Other income - net | 7,922 | 11,652 | 8,331 | |||||||||
|
|
|
|
|
| |||||||
Income before income taxes | 147,878 | 104,143 | 61,496 | |||||||||
Income tax provision | 51,053 | 39,262 | 21,930 | |||||||||
|
|
|
|
|
| |||||||
Net income | 96,825 | 64,881 | 39,566 | |||||||||
Net income attributable to the noncontrolling interest | 1,719 | 219 | 1,215 | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to The Andersons, Inc. | $ | 95,106 | $ | 64,662 | $ | 38,351 | ||||||
|
|
|
|
|
| |||||||
Per common share: | ||||||||||||
Basic earnings attributable to The Andersons, Inc. common shareholders | $ | 5.13 | $ | 3.51 | $ | 2.10 | ||||||
|
|
|
|
|
| |||||||
Diluted earnings attributable to The Andersons, Inc. common shareholders | $ | 5.09 | $ | 3.48 | $ | 2.08 | ||||||
|
|
|
|
|
| |||||||
Dividends paid | $ | 0.4400 | $ | 0.3575 | $ | 0.3475 | ||||||
|
|
|
|
|
| |||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
43
Consolidated Balance Sheets
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 29,219 | $ | 145,929 | ||||
| Restricted cash | 12,134 | 3,123 | ||||||
| Accounts and notes receivable, less allowance for doubtful accounts of $5,684 in 2010; $8,753 in 2009 | 152,227 | 137,195 | ||||||
| Margin deposits, net | 20,259 | 27,012 | ||||||
| Inventories | 647,189 | 407,845 | ||||||
| Commodity derivative assets — current | 226,216 | 24,255 | ||||||
| Deferred income taxes | 16,813 | 13,284 | ||||||
| Other current assets | 34,501 | 28,180 | ||||||
| Total current assets | 1,138,558 | 786,823 | ||||||
| Other assets: | ||||||||
| Commodity derivative assets — noncurrent | 18,113 | 3,137 | ||||||
| Other assets and notes receivable, less allowance for doubtful notes receivable of $254 in 2010; $7,950 in 2009 | 47,855 | 25,629 | ||||||
| Equity method investments | 175,349 | 157,360 | ||||||
| 241,317 | 186,126 | |||||||
| Railcar assets leased to others, net | 168,483 | 179,154 | ||||||
| Property, plant and equipment, net | 151,032 | 132,288 | ||||||
| Total assets | $ | 1,699,390 | $ | 1,284,391 | ||||
Liabilities and Shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Borrowings under short-term line of credit | $ | 241,100 | $ | — | ||||
| Accounts payable for grain | 274,596 | 234,396 | ||||||
| Other accounts payable | 111,501 | 110,658 | ||||||
| Customer prepayments and deferred revenue | 78,550 | 56,698 | ||||||
| Commodity derivative liabilities — current | 57,621 | 24,871 | ||||||
| Accrued expenses and other current liabilities | 48,851 | 41,563 | ||||||
| Current maturities of long-term debt | 24,524 | 10,935 | ||||||
| Total current liabilities | 836,743 | 479,121 | ||||||
| Other long-term liabilities | 25,183 | 16,051 | ||||||
| Commodity derivative liabilities — noncurrent | 3,279 | 830 | ||||||
| Employee benefit plan obligations | 30,152 | 24,949 | ||||||
| Long-term debt, less current maturities | 276,825 | 308,026 | ||||||
| Deferred income taxes | 62,649 | 49,138 | ||||||
| Total liabilities | 1,234,831 | 878,115 | ||||||
| Shareholders’ equity: | ||||||||
| Common shares, without par value, 42,000 shares authorized; 19,198 shares issued | 96 | 96 | ||||||
| Preferred shares, without par value, 1,000 shares authorized; none issued | — | — | ||||||
| Additional paid-in capital | 177,875 | 175,477 | ||||||
| Treasury shares, at cost (762 in 2010; 918 in 2009) | (14,058 | ) | (15,554 | ) | ||||
| Accumulated other comprehensive loss | (28,799 | ) | (25,314 | ) | ||||
| Retained earnings | 316,317 | 258,662 | ||||||
| Total shareholders’ equity of The Andersons, Inc. | 451,431 | 393,367 | ||||||
| Noncontrolling interest | 13,128 | 12,909 | ||||||
| Total shareholders’ equity | 464,559 | 406,276 | ||||||
| Total liabilities and shareholders’ equity | $ | 1,699,390 | $ | 1,284,391 | ||||
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 20,390 | $ | 29,219 | ||||
Restricted cash | 18,651 | 12,134 | ||||||
Accounts receivable, less allowance for doubtful accounts of $4,799 in 2011; $5,684 in 2010 | 167,640 | 152,227 | ||||||
Inventories | 760,459 | 647,189 | ||||||
Commodity derivative assets – current | 83,950 | 246,475 | ||||||
Deferred income taxes | 21,483 | 16,813 | ||||||
Other current assets | 34,649 | 34,501 | ||||||
|
|
|
| |||||
Total current assets | 1,107,222 | 1,138,558 | ||||||
Other assets: | ||||||||
Commodity derivative assets – noncurrent | 2,289 | 18,113 | ||||||
Other assets, net | 53,327 | 47,855 | ||||||
Equity method investments | 199,061 | 175,349 | ||||||
|
|
|
| |||||
| 254,677 | 241,317 | |||||||
Railcar assets leased to others, net | 197,137 | 168,483 | ||||||
Property, plant and equipment, net | 175,087 | 151,032 | ||||||
|
|
|
| |||||
Total assets | $ | 1,734,123 | $ | 1,699,390 | ||||
|
|
|
| |||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Borrowings under short-term line of credit | $ | 71,500 | $ | 241,100 | ||||
Accounts payable for grain | 391,905 | 274,596 | ||||||
Other accounts payable | 142,762 | 111,501 | ||||||
Customer prepayments and deferred revenue | 79,557 | 78,550 | ||||||
Commodity derivative liabilities – current | 15,874 | 57,621 | ||||||
Accrued expenses and other current liabilities | 60,445 | 48,851 | ||||||
Current maturities of long-term debt | 32,208 | 24,524 | ||||||
|
|
|
| |||||
Total current liabilities | 794,251 | 836,743 | ||||||
Other long-term liabilities | 43,014 | 25,183 | ||||||
Commodity derivative liabilities – noncurrent | 1,519 | 3,279 | ||||||
Employee benefit plan obligations | 52,972 | 30,152 | ||||||
Long-term debt, less current maturities | 238,885 | 276,825 | ||||||
Deferred income taxes | 64,640 | 62,649 | ||||||
|
|
|
| |||||
Total liabilities | 1,195,281 | 1,234,831 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Shareholders’ equity: | ||||||||
Common shares, without par value, 42,000 shares authorized; 19,198 shares issued | 96 | 96 | ||||||
Preferred shares, without par value, 1,000 shares authorized; none issued | — | — | ||||||
Additional paid-in capital | 179,463 | 177,875 | ||||||
Treasury shares, at cost (697 in 2011; 762 in 2010) | (14,997 | ) | (14,058 | ) | ||||
Accumulated other comprehensive loss | (43,090 | ) | (28,799 | ) | ||||
Retained earnings | 402,523 | 316,317 | ||||||
|
|
|
| |||||
Total shareholders’ equity of The Andersons, Inc. | 523,995 | 451,431 | ||||||
Noncontrolling interest | 14,847 | 13,128 | ||||||
|
|
|
| |||||
Total equity | 538,842 | 464,559 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 1,734,123 | $ | 1,699,390 | ||||
|
|
|
| |||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
44
Consolidated Statements of Cash Flows
| Year ended December 31 | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
Operating activities | ||||||||||||
| Net income | $ | 64,881 | $ | 39,566 | $ | 30,097 | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||
| Depreciation and amortization | 38,913 | 36,020 | 29,767 | |||||||||
| Bad debt (recovery) expense | (8,716 | ) | 4,973 | 8,710 | ||||||||
| Equity in (earnings) loss of unconsolidated affiliates, net of distributions received | (17,594 | ) | (15,105 | ) | 19,307 | |||||||
| Gains on sales of railcars and related leases | (7,771 | ) | (1,758 | ) | (4,040 | ) | ||||||
| Excess tax benefit from share-based payment arrangement | (876 | ) | (566 | ) | (2,620 | ) | ||||||
| Deferred income taxes | 12,205 | 16,430 | 4,124 | |||||||||
| Gain from pension plan curtailment | — | (4,132 | ) | — | ||||||||
| Stock based compensation expense | 2,589 | 2,747 | 4,050 | |||||||||
| Lower of cost or market inventory and contract adjustment | — | 2,944 | 97,268 | |||||||||
| Impairment of property, plant and equipment | 1,682 | 304 | — | |||||||||
| Other | 215 | 186 | 58 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts and notes receivable | (848 | ) | (15,259 | ) | (23,460 | ) | ||||||
| Inventories | (214,171 | ) | 32,227 | 3,074 | ||||||||
| Commodity derivatives and margin deposits | (158,183 | ) | 2,211 | 102,818 | ||||||||
| Prepaid expenses and other assets | (3,970 | ) | 61,938 | (56,939 | ) | |||||||
| Accounts payable for grain | 20,703 | 18,089 | 72,648 | |||||||||
| Other accounts payable and accrued expenses | 31,656 | (574 | ) | (6,198 | ) | |||||||
| Net cash (used in) provided by operating activities | (239,285 | ) | 180,241 | 278,664 | ||||||||
Investing activities | ||||||||||||
| Acquisition of businesses, net of cash acquired | (39,293 | ) | (30,480 | ) | (18,920 | ) | ||||||
| Purchases of property, plant and equipment | (30,897 | ) | (16,560 | ) | (20,315 | ) | ||||||
| Purchases of railcars | (18,354 | ) | (24,965 | ) | (97,989 | ) | ||||||
| Investment in convertible preferred securities | (13,100 | ) | — | — | ||||||||
| Proceeds from sale of railcars | 20,102 | 8,453 | 68,456 | |||||||||
| Proceeds from sale of property, plant and equipment and other | 1,942 | 540 | 180 | |||||||||
| Proceeds received from minority interest | — | — | 2,278 | |||||||||
| Change in restricted cash | (9,010 | ) | 803 | (201 | ) | |||||||
| Investment in affiliates | (395 | ) | (1,200 | ) | (41,450 | ) | ||||||
| Net cash used in investing activities | (89,005 | ) | (63,409 | ) | (107,961 | ) | ||||||
Financing activities | ||||||||||||
| Net increase (decrease) in short-term borrowings | 241,100 | — | (245,500 | ) | ||||||||
| Proceeds from issuance of long-term debt | 18,986 | 9,523 | 220,827 | |||||||||
| Payments of long-term debt | (36,598 | ) | (52,349 | ) | (82,090 | ) | ||||||
| Payment of debt issuance costs | (7,508 | ) | (4,500 | ) | (2,283 | ) | ||||||
| Purchase of treasury stock | — | (229 | ) | (924 | ) | |||||||
| Proceeds from sale of treasury shares to employees and directors | 1,305 | 750 | 1,914 | |||||||||
| Excess tax benefit from share-based payment arrangement | 876 | 566 | 2,620 | |||||||||
| Dividends paid | (6,581 | ) | (6,346 | ) | (5,885 | ) | ||||||
| Net cash provided by (used in) financing activities | 211,580 | (52,585 | ) | (111,321 | ) | |||||||
| (Decrease) increase in cash and cash equivalents | (116,710 | ) | 64,247 | 59,382 | ||||||||
| Cash and cash equivalents at beginning of year | 145,929 | 81,682 | 22,300 | |||||||||
| Cash and cash equivalents at end of year | $ | 29,219 | $ | 145,929 | $ | 81,682 | ||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Operating activities | ||||||||||||
Net income | $ | 96,825 | $ | 64,881 | $ | 39,566 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 40,837 | 38,913 | 36,020 | |||||||||
Bad debt expense (recovery) | 187 | (8,716 | ) | 4,973 | ||||||||
Equity in earnings of unconsolidated affiliates, net of distributions received | (23,591 | ) | (17,594 | ) | (15,105 | ) | ||||||
Gains on sales of railcars and related leases | (8,417 | ) | (7,771 | ) | (1,758 | ) | ||||||
Excess tax benefit from share-based payment arrangement | (307 | ) | (876 | ) | (566 | ) | ||||||
Deferred income taxes | 5,473 | 12,205 | 16,430 | |||||||||
Gain from pension plan curtailment | — | — | (4,132 | ) | ||||||||
Stock based compensation expense | 4,071 | 2,589 | 2,747 | |||||||||
Lower of cost or market inventory and contract adjustment | 3,142 | — | 2,944 | |||||||||
Impairment of property, plant and equipment | 1,704 | 1,682 | 304 | |||||||||
Other | 254 | 215 | 186 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (15,708 | ) | (848 | ) | (15,259 | ) | ||||||
Inventories | (114,427 | ) | (214,171 | ) | 32,227 | |||||||
Commodity derivatives | 134,309 | (158,183 | ) | 2,211 | ||||||||
Other assets | (1,104 | ) | (3,970 | ) | 61,938 | |||||||
Accounts payable for grain | 117,309 | 20,703 | 18,089 | |||||||||
Other accounts payable and accrued expenses | 49,708 | 31,656 | (574 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) operating activities | 290,265 | (239,285 | ) | 180,241 | ||||||||
Investing activities | ||||||||||||
Acquisition of businesses, net of cash acquired | (2,365 | ) | (39,293 | ) | (30,480 | ) | ||||||
Purchases of property, plant and equipment | (44,162 | ) | (30,897 | ) | (16,560 | ) | ||||||
Purchases of railcars | (64,161 | ) | (18,354 | ) | (24,965 | ) | ||||||
Investment in convertible preferred securities | — | (13,100 | ) | — | ||||||||
Proceeds from sale of railcars | 30,398 | 20,102 | 8,453 | |||||||||
Proceeds from sale of property, plant and equipment and other | 931 | 1,942 | 540 | |||||||||
Change in restricted cash | (6,517 | ) | (9,010 | ) | 803 | |||||||
Investment in affiliates | (121 | ) | (395 | ) | (1,200 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (85,997 | ) | (89,005 | ) | (63,409 | ) | ||||||
Financing activities | ||||||||||||
Net change in short-term borrowings | (169,600 | ) | 241,100 | — | ||||||||
Proceeds from issuance of long-term debt | 73,752 | 18,986 | 9,523 | |||||||||
Payments of long-term debt | (104,008 | ) | (36,598 | ) | (52,349 | ) | ||||||
Payment of debt issuance costs | (3,170 | ) | (7,508 | ) | (4,500 | ) | ||||||
Purchase of treasury stock | (3,040 | ) | — | (229 | ) | |||||||
Proceeds from sale of treasury shares to employees and directors | 815 | 1,305 | 750 | |||||||||
Excess tax benefit from share-based payment arrangement | 307 | 876 | 566 | |||||||||
Dividends paid | (8,153 | ) | (6,581 | ) | (6,346 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by financing activities | (213,097 | ) | 211,580 | (52,585 | ) | |||||||
|
|
|
|
|
| |||||||
(Decrease) increase in cash and cash equivalents | (8,829 | ) | (116,710 | ) | 64,247 | |||||||
Cash and cash equivalents at beginning of year | 29,219 | 145,929 | 81,682 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of year | $ | 20,390 | $ | 29,219 | $ | 145,929 | ||||||
|
|
|
|
|
| |||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
45
Consolidated Statements of Shareholders’ Equity
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common | Paid-in | Treasury | Comprehensive | Retained | Noncontrolling | |||||||||||||||||||||||
| (in thousands, except per share data) | Shares | Capital | Shares | Loss | Earnings | Interest | Total | |||||||||||||||||||||
| Balances at January 1, 2008 | 96 | 168,286 | (16,670 | ) | (7,197 | ) | 199,849 | 12,219 | 356,583 | |||||||||||||||||||
| Net income (loss) | 32,900 | (2,803 | ) | 30,097 | ||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Unrecognized actuarial loss and prior service costs (net of income tax of $12,968) | (22,328 | ) | (22,328 | ) | ||||||||||||||||||||||||
| Cash flow hedge activity (net of income tax of $0.3) | (521 | ) | (521 | ) | ||||||||||||||||||||||||
| Comprehensive income | 7,248 | |||||||||||||||||||||||||||
| Purchase of treasury shares (77 shares) | (924 | ) | (924 | ) | ||||||||||||||||||||||||
| Proceeds received from minority investor | 2,278 | 2,278 | ||||||||||||||||||||||||||
| Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $2,485 (203 shares) | 5,107 | 857 | 5,964 | |||||||||||||||||||||||||
| Dividends declared ($0.3325 per common share) | (6,042 | ) | (6,042 | ) | ||||||||||||||||||||||||
| Balances at December 31, 2008 | 96 | 173,393 | (16,737 | ) | (30,046 | ) | 226,707 | 11,694 | 365,107 | |||||||||||||||||||
| Net income | 38,351 | 1,215 | 39,566 | |||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Unrecognized actuarial gain and prior service costs (net of income tax of $2,431) | 4,491 | 4,491 | ||||||||||||||||||||||||||
| Cash flow hedge activity (net of income tax of $0.1) | 241 | 241 | ||||||||||||||||||||||||||
| Comprehensive income | 44,298 | |||||||||||||||||||||||||||
| Purchase of treasury shares (20 shares) | (229 | ) | (229 | ) | ||||||||||||||||||||||||
| Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $826 (171 shares) | 2,084 | 1,412 | 3,496 | |||||||||||||||||||||||||
| Dividends declared ($0.3475 per common share) | (6,396 | ) | (6,396 | ) | ||||||||||||||||||||||||
| Balances at December 31, 2009 | 96 | 175,477 | (15,554 | ) | (25,314 | ) | 258,662 | 12,909 | 406,276 | |||||||||||||||||||
| Net income | 64,662 | 219 | 64,881 | |||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Unrecognized actuarial loss and prior service costs (net of income tax of $3,116) | (4,992 | ) | (4,992 | ) | ||||||||||||||||||||||||
| Increase in estimated fair value of investment in debt securities (net of income tax of $1,004) | 1,685 | 1,685 | ||||||||||||||||||||||||||
| Cash flow hedge activity (net of income tax of $0.1) | (178 | ) | (178 | ) | ||||||||||||||||||||||||
| Comprehensive income | 61,396 | |||||||||||||||||||||||||||
| Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $1,076 (157 shares) | 2,398 | 1,496 | 3,894 | |||||||||||||||||||||||||
| Dividends declared ($0.3575 per commonshare) | (7,007 | ) | (7,007 | ) | ||||||||||||||||||||||||
| Balances at December 31, 2010 | $ | 96 | $ | 177,875 | $ | (14,058 | ) | $ | (28,799 | ) | $ | 316,317 | $ | 13,128 | $ | 464,559 | ||||||||||||
| (in thousands, except per share data) | Common Shares | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interest | Total | |||||||||||||||||||||
Balances at January 1, 2009 | $ | 96 | $ | 173,393 | $ | (16,737 | ) | $ | (30,046 | ) | $ | 226,707 | $ | 11,694 | $ | 365,107 | ||||||||||||
|
| |||||||||||||||||||||||||||
Net income | 38,351 | 1,215 | 39,566 | |||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Unrecognized actuarial gain and prior service costs (net of income tax of $2,431) | 4,491 | 4,491 | ||||||||||||||||||||||||||
Cash flow hedge activity (net of income tax of $134) | 241 | 241 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Comprehensive income | 44,298 | |||||||||||||||||||||||||||
Purchase of treasury shares (20 shares) | (229 | ) | (229 | ) | ||||||||||||||||||||||||
Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $826 (171 shares) | 2,084 | 1,412 | 3,496 | |||||||||||||||||||||||||
Dividends declared ($0.3475 per common share) | (6,396 | ) | (6,396 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balances at December 31, 2009 | 96 | 175,477 | (15,554 | ) | (25,314 | ) | 258,662 | 12,909 | 406,276 | |||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net income | 64,662 | 219 | 64,881 | |||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Unrecognized actuarial loss and prior service costs (net of income tax of $3,116) | (4,992 | ) | (4,992 | ) | ||||||||||||||||||||||||
Increase in estimated fair value of investment in debt securities (net of income tax of $1,004) | 1,685 | 1,685 | ||||||||||||||||||||||||||
Cash flow hedge activity (net of income tax of $112) | (178 | ) | (178 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Comprehensive income | 61,396 | |||||||||||||||||||||||||||
Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $1,076 (157 shares) | 2,398 | 1,496 | 3,894 | |||||||||||||||||||||||||
Dividends declared ($0.3575 per common share) | (7,007 | ) | (7,007 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balances at December 31, 2010 | 96 | 177,875 | (14,058 | ) | (28,799 | ) | 316,317 | 13,128 | 464,559 | |||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net income | 95,106 | 1,719 | 96,825 | |||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Unrecognized actuarial loss and prior service costs (net of income tax of $10,293) | (17,120 | ) | (17,120 | ) | ||||||||||||||||||||||||
Increase in estimated fair value of investment in debt securities (net of income tax of $1,710) | 2,860 | 2,860 | ||||||||||||||||||||||||||
Cash flow hedge activity (net of income tax of $21) | (31 | ) | (31 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Comprehensive income | 82,534 | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Purchase of treasury shares (85 shares) | (3,039 | ) | (3,039 | ) | ||||||||||||||||||||||||
Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $1,197 (150 shares) | 1,588 | 2,100 | 3,688 | |||||||||||||||||||||||||
Dividends declared ($0.4810 per common share) | (8,900 | ) | (8,900 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balances at December 31, 2011 | $ | 96 | $ | 179,463 | $ | (14,997 | ) | $ | (43,090 | ) | $ | 402,523 | $ | 14,847 | $ | 538,842 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
46
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Consolidation
These consolidated financial statementsConsolidated Financial Statements include the accounts of The Andersons, Inc. and its majoritywholly owned and controlled subsidiaries (the “Company”). All significant intercompany accounts and transactions are eliminated in consolidation.
Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
In the opinion of management, all adjustments consisting of normal recurring items, considered necessary for a fair presentation of the results of operations for the periods indicated, have been made.
Certain balance sheet items have been reclassified from their prior presentation to conform to the first quartercurrent year presentation. These reclassifications are not considered material and had no effect on the statement of 2010, ASU 2009-17 became effective for the Company. ASU 2009-17 provides guidance for identifying entities for which analysisincome, statement of voting interests, and the holding of those voting interests, is not effective in determining whether a controlling financial interest exists. These entities are considered variable interest entities (“VIEs”). The Company holds investments in four equity, method investments that were evaluated under ASU 2009-17 to determine whether they were considered VIEs of the Company and subject to consolidation under this standard. The Company concluded that these entities were not VIEs and therefore not subject to consolidation under this standard. During the second quarter of 2010, the Company made an investment in an entity that is considered a VIE. See Note 3 for further information.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term investments with an initial maturity of three months or less. The carrying values of these assets approximate their fair values.
A significant portion of restricted cash is held in escrow for certain of the Company’s debtindustrial development revenue bonds described in Note 9.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and may bear interest if past due. The allowance for doubtful accounts is ourthe best estimate of the amount of probable credit losses in our existing accounts receivable. We review ourThe allowance for doubtful accounts is reviewed quarterly. Past due balances over 90 days,The allowance is based both on specific identification of potentially uncollectible accounts and greater thanthe application of a specified amount,consistent policy to estimate the allowance necessary for the remaining accounts receivable. For those customers that are reviewed individually for collectability. All other balances are reviewedthought to be at higher risk, the Company makes assumptions as to collectability based on a pooled basis.
47
The Company’s operating results can be 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 mitigate the price risk associated with those contracts and inventory). To reduce the exposure to market price risk on graincommodities owned and forward grain and ethanol purchase and sale contracts, the Company enters into regulatedexchange traded commodity futures and options contracts as well asand over-the-counter forward and option contracts for ethanol, corn, soybeans, wheat and oats. All of thesewith various counterparties.
The exchange traded contracts are considered derivatives. primarily via the regulated Chicago Mercantile Exchange (the “CME”). The forward purchase and sale 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.
The Company records these commodity contracts on the balance sheet as assets or liabilities as appropriate, and accounts for themits commodity derivatives at fair value, using a daily mark-to-market method, the same method it uses to value grain inventory. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and in the case of derivatives, also considers non-performance risk. Company policy limits the Company’s “unhedged” grain position (the amount of grain, either owned or contracted for, that is not offset by a derivative contract for the sale of grain). 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. Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in sales and merchandising revenues in the statementsConsolidated Statements of income. The forward contracts require performance in future periods. Contracts to purchase grain from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of grain to processors or other consumers generally do not extend beyond one year. The terms of contracts for the purchase and sale of grain are consistent with industry standards.Income. Additional information about the fair value of the Company’s commodity derivatives is presented in Note 4 to the consolidated financial statements.
All other inventories are stated at the lower of cost or market. Cost is determined by the average cost method.
Derivatives – Master Netting Arrangements
Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a futures, options or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The Company nets, by counterparty, its futures and over-the-counter positions against the cash collateral provided or received. The net position is recorded within margin deposits or other accounts payable depending on whether the net position is an asset or a liability. At December 31, 2010 and December 31, 2009, the margin deposit assets and margin deposit liabilities consisted ofare included in short-term commodity derivative assets or liabilities, as appropriate, in the following:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Margin | Margin | Margin | Margin | |||||||||||||
| deposit | deposit | deposit | deposit | |||||||||||||
| (in thousands) | assets | liabilities | assets | liabilities | ||||||||||||
| Collateral paid | $ | 166,589 | $ | — | $ | 40,190 | $ | 2,228 | ||||||||
| Fair value of derivatives | (146,330 | ) | — | (13,178 | ) | (4,193 | ) | |||||||||
| Balance at end of period | $ | 20,259 | $ | — | $ | 27,012 | $ | (1,965 | ) | |||||||
48
The Company periodically enters into interest rate contracts to manage interest rate risk on borrowing or financing activities. The Company has a long-term interest rate swap recorded in other long-term liabilities and a foreign currency collar recorded in other assets and has designated them as cash flow hedges; accordingly, changes in the fair value of these instruments are recognized in other comprehensive income. The Company has other interest rate contracts that are not designated as hedges. While the Company considers all of its derivative positions to be effective economic hedges of specified risks, these interest rate contracts for which we dohedge accounting is not apply hedge accountingapplied are recorded on the balance sheetConsolidated Balance Sheets in prepaid expenses andeither other current assets or liabilities (if short-term in nature) or in other assets or current andother long-term liabilities as appropriate,(if non-current in nature), and changes in fair value are recognized currently in income as interest expense. Upon termination of a derivative instrument or a change in the hedged item, any remaining fair value recorded on the balance sheet is recorded as interest expense consistent with the cash flows associated with the underlying hedged item.
Marketing Agreement
The Company has a marketing agreement that covers certain of its grain facilities, some of which are leased from Cargill, Incorporated (“Cargill”). Under the five-year amended and restated agreement (ending in May 2013), the Company sells grain from these facilities to Cargill at market prices. Income earned from operating the facilities (including buying, storing and selling grain and providing grain marketing services to its producer customers) over a specified threshold is shared equally with Cargill. Measurement of this threshold is made on a cumulative basis and cash is paid to Cargill at the end of the contract. The Company recognizes its pro rata share of income every month and accrues for any payment owed to Cargill. The payable balance was $33.2 million and $16.7 million as of December 31, 2011 and 2010, respectively.
Railcars
The Company’s Rail Group purchases, leases, markets and manages railcars for third parties and for internal use. Railcars to which the Company holds title are shown on the balance sheet in one of two categories — prepaid expenses and– other current assets (for railcars that are available for sale) or railcar assets leased to others. Railcars leased to others, both on short-short and long-term leases, are classified as long-term assets and are depreciated over their estimated useful lives.
Railcars have statutory lives of either 40 or 50 years, (measuredmeasured from the date built) depending on type and year built andbuilt. At the time of purchase, the remaining statutory life is used in determining useful lives which are depreciated based on 80% ofa straight-line basis. Additional information regarding railcar assets leased to others is presented in Note 3 to the railcars remaining useful life.
Property, Plant and Equipment
Property, plant and equipment is carriedrecorded at cost. Repairs and maintenance are charged to expense as incurred, while betterments that extend useful lives are capitalized. Depreciation is provided over the estimated useful lives of the individual assets, principally by the straight-line method. Estimated useful lives are generally as follows: land improvements and– 16 years; leasehold improvements —– the shorter of the lease term or the estimated useful life of the improvement;improvement, ranging from 3 to 20 years; buildings and storage facilities —– 20 to 30 years; machinery and equipment —– 3 to 20 years; and software —– 3 to 10 years. The cost of assets retired or otherwise disposed of and the accumulated depreciation thereon are removed from the accounts, with any gain or loss realized upon sale or disposal credited or charged to operations.
Deferred Debt Issue Costs
Costs associated with the issuance of debt are capitalized. These costs are amortized using an interest-method equivalent over the earlier of the stated term of the debt or the period from the issue date through the first early payoff date without penalty, or the expected payoff if the loan does not contain a prepayment penalty. Capitalized costs associated with the short-termborrowing arrangement with a syndication agreementof banks are amortized over the term of the syndication.
Goodwill and Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives (generally 5 to 10 years) on the straight-line method. Goodwill is not amortized but is subject to annual impairment tests or more often when events or circumstances indicate that the carrying amount of goodwill may be impaired. A goodwill impairment loss is recognized to the extent the carrying amount of goodwill exceeds the implied fair value of goodwill.
49 Additional information about the Company’s goodwill and intangible assets is presented in Note 12 to the Consolidated Financial Statements.
Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the assets to the undiscounted future net cash flows the Company expects to generate with the asset. If such assets are considered to be impaired, the Company recognizes impairment expense for the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Accounts Payable for Grain
Accounts payable for grain includes certain amounts related to grain purchases for which, even though we havethe Company has taken ownership and possession of the grain, the final purchase price has not been established (delayed price contracts). Amounts recorded for such delayed price contracts are determined on the basis of grain market prices at the balance sheet date in a similar manner for which we value our inventory. Atgrain inventory is valued and equated to $71.1 million and $37.8 million as of December 31, 2011 and 2010, and 2009, the amount of accounts payable for grain computed on the basis of market prices was $47.0 million and $56.9 million, respectively.
Stock-Based Compensation
Stock-based compensation expense for all stock-based compensation awards areis based on the estimated grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.
Deferred Compensation Liability
Included in accrued expenses are $5.8$6.2 million and $5.3$5.8 million at December 31, 20102011 and 2009,2010, respectively, of deferred compensation for certain employees who, due to Internal Revenue Service guidelines, may not take full advantage of the Company’s qualified defined contribution plan. Assets funding this plan are recorded at fair value and are equal to the value of this liability. This plan has no impact on our results of operations as the changechanges in the fair value of the assets are offset on a one-for-one basis, by the change in the recorded amount of the deferred compensation liability.
Revenue Recognition
Sales of grain and ethanol are primarily recognized at the time of shipment, which is when title and risk of loss transfers to the customer. Direct ship grain sales (where the Company never takes physical possession of the grain) are recognized when the grain arrives at the customer’s facility. Revenues from other grain and ethanol merchandising activities are recognized as services are provided; gains and losses on the market value of grain inventory as well as commodity derivative gains and lossesderivatives are recognized into revenue on a daily basis when these positions are marked-to-market. Sales of other products are recognized at the time title and risk of loss transfers to the customer, which is generally at the time of shipment or, in the case of the retail store sales, when the customer takes possession of the goods. Revenues for all other services are recognized as the service is provided.
Certain of the Company’s operations provide for customer billings, deposits or prepayments for product that is stored at the Company’s facilities. The sales and gross profit related to these transactions are not recognized until the product is shipped in accordance with the previously stated revenue recognition policy and these amounts are classified as a current liability titled “Customer prepayments and deferred revenue.”
Rental revenues on operating leases are recognized on a straight-line basis over the term of the lease. Sales to financial intermediaries of owned railcars which are subject to an operating lease (with the Company being the lessor in such operating leases prior to the sale, referred to as a “non-recourse transaction”) are recognized as revenue on the date of sale if the Company does not maintain substantial risk of ownership in the sold railcars. Revenues recognized related to these non-recourse transactions totaled $2.9 million in 2010, $3.8 million in 2009 and $22.3 million in 2008. Revenue related to railcar servicing and maintenance contracts is recognized over the term of the lease or service contract.
50
Rail Lease Accounting
In addition to the sale of railcars that the Company makes to financial intermediaries on a non-recourse basis and records as revenue as discussed above, the Company also acts as the lessor and/and / or the lessee in various leasing arrangements as described below.
The Company’s Rail Group leases railcars and locomotives to customers, manages railcars for third parties and leases railcars for internal use. The Company acts as the lessor in various operating leases of railcars that are owned by the Company, or leased by the Company from financial intermediaries and, in turn, leased by the Company to end-users of the railcars. The leases from financial intermediaries are generally structured as sale-leaseback transactions, with the leaseback by the Company being treated as an operating lease.
Certain of the Company’s leases include monthly lease fees that are contingent upon some measure of usage (“per diem” leases). This monthly usage is tracked, billed and collected by third party service providers and funds are generally remitted to the Company along with usage data three months after they are earned. Typically, the lease term related to per-diem leases is one year or less. The Company records lease revenue for these per diem arrangements based on recent historical usage patterns and records a true-up adjustment when the actual data is received. Such true-up adjustments were not significant for any period presented.
The Company expenses operating lease payments on a straight-line basis over the lease term.
Income Taxes
Income tax expense for each period includes current tax expense (income taxesplus deferred expense, which is related to current year activity) plus the change in deferred income tax assets and liabilities. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of assets and liabilities and are measured using enacted tax rates and laws governing periods in which the differences are expected to reverse. The Company evaluates the realizability of deferred tax assets and provides a valuation allowance for amounts that management does not believe are more likely than not to be recoverable, as applicable.
The annual effective tax rate is determined by income tax expense from continuing operations, described above, as a percentage of pretax book income. Differences in the effective tax rate and the statutory tax rate may be due to permanent items, tax credits, foreign tax rates and state tax rates in jurisdictions in which the Company operates, or changes in valuation allowances.
The Company records reserves for uncertain tax positions when, despite the belief that tax return positions are fully supportable, it is anticipated that certain tax return positions are likely to be challenged and that the Company may not prevail. These reserves are adjusted in light of changing facts and circumstances, such as the progress of a tax audit or the lapse of statutes of limitations.
Additional information about the Company’s income taxes is presented in Note 13 to the Consolidated Financial Statements.
Employee Benefit Plans
The Company provides all full-time, non-retail employees hired before July 1, 2010 with pension benefits and full-time employees hired before January 1, 2003 with postretirement health care benefits. In order to measure the expense and funded status of these employee benefit plans, management makes several estimates and assumptions, including rates of return on assets set aside to fund these plans, rates of compensation increases, employee turnover rates, anticipated mortality rates and anticipated future healthcare cost trends.
These estimates and assumptions are based on the Company’s historical experience combined with management’s knowledge and understanding of current facts and circumstances. The selection of the discount rate is based on an index given projected plan payouts.
Accumulated Other Comprehensive Loss
The balance in accumulated other comprehensive loss at December 31, 20102011 and 20092010 consists of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Unrecognized actuarial loss and prior service costs | $ | (29,362 | ) | $ | (24,370 | ) | ||
| Cash flow hedges | (1,122 | ) | (944 | ) | ||||
| Increase in estimated fair value of investment in debt securities | 1,685 | — | ||||||
| $ | (28,799 | ) | $ | (25,314 | ) | |||
51
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Unrecognized actuarial loss and prior service costs | $ | (46,482 | ) | $ | (29,362 | ) | ||
Cash flow hedges | (1,154 | ) | (1,122 | ) | ||||
Increase in estimated fair value of investment in debt securities | 4,546 | 1,685 | ||||||
|
|
|
| |||||
| $ | (43,090 | ) | $ | (28,799 | ) | |||
|
|
|
| |||||
Research and development costs are expensed as incurred. The Company’s research and development program is mainly involved with the development of improved products and processes, primarily for the Turf & Specialty Group.operating segment. The Company expended approximately $0.8 million, $1.8 million $1.4 million and $0.5$1.4 million on research and development activities during 2011, 2010 2009 and 2008,2009, respectively. In 2008, the Company, along with several partners, was awarded a $5 million grant from the Ohio Third Frontier Commission. The grant is for the development and commercialization of advanced granules and other emerging technologies to provide solutions for the economic health and environmental concerns of today’s agricultural industry. For the years ended December 31, 2011, 2010 2009 and 2008,2009, the Company received $0.9$0.3 million, $0.9 million and $0.1$0.9 million, respectively, as part of this grant.
Advertising
Advertising costs are expensed as incurred. Advertising expense of $4.0 million, $4.1 million and $4.0 million in 2011, 2010, and $4.2 million in 2010, 2009, and 2008, respectively, is included in operating, administrative and general expenses.
New Accounting Standards
In May 2011, the Financial Accounting Standards Board (“FASB”) updated Accounting Standards Code (“ASC”) Topic 820, to clarify requirements on fair value measurements and related disclosures. This update is effective for interim and annual periods beginning after December 15, 2011. The additional requirements in this update will be included in the note on fair value measurements upon adoption in the first quarter of 2012. The new standard will have no impact on financial condition or results of operations.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). The amendments in ASU 2011-05 eliminate the option to report other comprehensive income in the statement of equity and require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance will change financial statement presentation and require expanded disclosures in the Company’s Consolidated Financial Statements but will not impact financial results.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 is intended to simplify the testing of goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted.
The Company implemented the requirements of ASU 2011-08 for the 2011 annual goodwill impairment analysis that was completed in the fourth quarter. See Note 12 to the Consolidated Financial Statements for more information on the analysis performed.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required by the amendments are required to be applied retrospectively for all comparative periods presented. The adoption of this amended guidance will require expanded disclosure in the notes to the Company’s Consolidated Financial Statements but will not impact financial results.
2. Inventories
Major classes of inventories are as follows:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Grain | $ | 570,337 | $ | 493,911 | ||||
Ethanol | 5,461 | 3,356 | ||||||
Agricultural fertilizer and supplies | 118,716 | 90,182 | ||||||
Lawn and garden fertilizer and corncob products | 37,001 | 32,954 | ||||||
Retail merchandise | 25,612 | 24,416 | ||||||
Railcar repair parts | 3,063 | 2,058 | ||||||
Other | 269 | 312 | ||||||
|
|
|
| |||||
| $ | 760,459 | $ | 647,189 | |||||
|
|
|
| |||||
3. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Land | $ | 17,655 | $ | 15,424 | ||||
Land improvements and leasehold improvements | 47,958 | 45,080 | ||||||
Buildings and storage facilities | 150,461 | 141,349 | ||||||
Machinery and equipment | 191,833 | 181,650 | ||||||
Software | 10,861 | 10,306 | ||||||
Construction in progress | 13,006 | 2,572 | ||||||
|
|
|
| |||||
| 431,774 | 396,381 | |||||||
Less: accumulated depreciation and amortization | 256,687 | 245,349 | ||||||
|
|
|
| |||||
| $ | 175,087 | $ | 151,032 | |||||
|
|
|
| |||||
Depreciation expense on property, plant and equipment amounted to $20.4 million, $18.7 million and $17.4 million in 2011, 2010 and 2009, respectively.
Railcar assets leased to others
The components of railcar assets leased to others are as follows:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Railcar assets leased to others | $ | 272,883 | $ | 234,667 | ||||
Less: accumulated depreciation | 75,746 | 66,184 | ||||||
|
|
|
| |||||
| $ | 197,137 | $ | 168,483 | |||||
|
|
|
| |||||
Depreciation expense on railcar assets leased to others amounted to $13.8 million, $14.0 million and $14.1 million in 2011, 2010 and 2009, respectively.
During the fourth quarter of 2010, a group of railcars were found to have major defects and were written down to scrap value which resulted in a $1.2 million loss. There were no significant impairment charges incurred in 2011.
4. Derivatives
The margin deposit assets and liabilities which were shown net on the face of the balance sheet in previous periods are now included in short-term commodity derivative assets and liabilities, as appropriate. Prior periods have been reclassified to conform to current year presentation. The change in presentation had no effect on current or total assets and liabilities on the Consolidated Balance Sheets.
The Company’s operating results are affected by changes to commodity prices. The Grain and Ethanol businesses have established “unhedged” position limits (the amount of a commodity, either owned or contracted for, that does not have an offsetting derivative contract to lock in the price). To reduce the exposure to market price risk on commodities owned and forward grain and ethanol purchase and sale contracts, the Company enters into exchange traded commodity futures and options contracts and over the counter forward and option contracts with various counterparties. The exchange traded contracts are primarily via the regulated Chicago Mercantile Exchange. The Company’s forward purchase and sales contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.
All of these contracts are considered derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company accounts for its commodity derivatives at estimated fair value, the same method it uses to value its grain inventory. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.
Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in sales and merchandising revenues.
The following table presents at December 31, 2011 and December 31, 2010, 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.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| (in thousands) | Net derivative asset position | Net derivative liability position | Net derivative asset position | Net derivative liability position | ||||||||||||
Collateral paid | $ | 66,870 | $ | — | $ | 166,589 | $ | — | ||||||||
Collateral received | — | — | — | — | ||||||||||||
Fair value of derivatives | (20,480 | ) | — | (146,330 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 46,390 | $ | — | $ | 20,259 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Certain contracts allow the Company to post grain inventory as collateral rather than cash. Grain inventory posted as collateral on derivative contracts are recorded in Inventories on the Condensed Consolidated Balance Sheets and the estimated fair value of such inventory was $1.0 million and $27.3 million as of December 31, 2011 and 2010, respectively.
The following table presents the fair value of the Company’s commodity derivatives as of December 31, 2011 and 2010, and the balance sheet line item in which they are located:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Forward commodity contracts included in Commodity derivative assets - current | $ | 37,560 | $ | 226,216 | ||||
Forward commodity contracts included in Commodity derivative assets - noncurrent | 2,289 | 18,113 | ||||||
Forward commodity contracts included in Commodity derivative liabilities - current | (15,874 | ) | (57,621 | ) | ||||
Forward commodity contracts included in Commodity derivative liabilities - noncurrent | (1,519 | ) | (3,279 | ) | ||||
Regulated futures and options contracts included in Commodity derivatives (a) | (23,367 | ) | (105,030 | ) | ||||
Over-the-counter contracts included in Commodity derivatives (a) | 2,887 | (41,300 | ) | |||||
|
|
|
| |||||
Total estimated fair value of commodity derivatives | $ | 1,976 | $ | 37,099 | ||||
|
|
|
| |||||
| (a) | The fair value of futures, options and over-the-counter contracts are offset by cash collateral posted or received and included as a net amount in the Consolidated Balance Sheets. |
The gains included in the Company’s Consolidated Statements of Income and the line items in which they are located for the years ended December 31, 2011 and 2010 are as follows:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Gains (losses) on commodity derivatives included in sales and merchandising revenues | $ | 131,209 | $ | (53,942 | ) | |||
At December 31, 2011, the Company had the following bushels of grain commodity derivative contracts and gallons of ethanol derivative contracts outstanding (on a gross basis):
Commodity | Number of bushels (in thousands) | Number of tons (in thousands) | Number of gallons (in thousands) | |||||||||
Non-exchange traded: | ||||||||||||
Corn | 200,072 | — | — | |||||||||
Soybeans | 10,568 | — | — | |||||||||
Wheat | 6,593 | — | — | |||||||||
Oats | 11,581 | — | — | |||||||||
Ethanol | — | — | 239,240 | |||||||||
Other | — | 98 | — | |||||||||
|
|
|
|
|
| |||||||
Subtotal | 228,814 | 98 | 239,240 | |||||||||
|
|
|
|
|
| |||||||
Exchange traded: | ||||||||||||
Corn | 96,500 | — | — | |||||||||
Soybeans | 16,570 | — | — | |||||||||
Wheat | 46,935 | — | — | |||||||||
Oats | 1,715 | — | — | |||||||||
Ethanol | — | — | 29,463 | |||||||||
Other | — | — | 10 | |||||||||
|
|
|
|
|
| |||||||
Subtotal | 161,720 | — | 29,473 | |||||||||
|
|
|
|
|
| |||||||
Total | 390,534 | 98 | 268,713 | |||||||||
|
|
|
|
|
| |||||||
Interest Rate Derivatives
The Company periodically enters into interest rate contracts to manage interest rate risk on borrowing or financing activities. One of the Company’s long-term interest rate swaps is recorded in other long-term liabilities and is designated as a cash flow hedge; accordingly, changes in the fair value of this instrument are recognized in other comprehensive income. The terms of the swap match the terms of the underlying debt instrument. The deferred derivative gains and losses on the interest rate swap are reclassified into income over the term of the underlying hedged items. For each of the years ended December 31, 2011, 2010 and 2009, the Company reclassified less than $0.1 million of accumulated other comprehensive loss into earnings. The Company expects to reclassify less than $0.1 million of accumulated other comprehensive loss into earnings in the next twelve months.
The Company has other interest rate contracts that are not designated as hedges. While the Company considers all of its interest rate derivative positions to be effective economic hedges of specified risks, these interest rate contracts are recorded on the balance sheet in other current assets or liabilities (if short-term in nature) or in other assets or other long-term liabilities (if non-current in nature) and changes in fair value are recognized currently in income as interest expense.
The following table presents the open interest rate contracts at December 31, 2011:
Interest Rate Hedging Instrument | Year Entered | Year of Maturity | Initial Notional Amount (in millions) | Hedged Item | Interest Rate | |||||||
| Short-term | ||||||||||||
Caps | 2011 | 2012 | $ | 80.0 | Interest rate component of debt – not accounted for as a hedge | 0.60% to 3.42% | ||||||
| Long-term | ||||||||||||
Swap | 2005 | 2016 | $ | 4.0 | Interest rate component of an operating lease – not accounted for as a hedge | 5.23% | ||||||
Swap | 2006 | 2016 | $ | 14.0 | Interest rate component of debt – accounted for as cash flow hedge | 5.95% | ||||||
Cap | 2011 | 2014 | $ | 20.0 | Interest rate component of debt – not accounted for as a hedge | 1.36% | ||||||
Cap | 2011 | 2013 | $ | 40.0 | Interest rate component of debt – not accounted for as a hedge | 1.62% to 1.65% | ||||||
At December 31, 2011 and 2010, the Company had recorded the following amounts for the fair value of the Company’s interest rate derivatives:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
| Derivatives not designated as hedging instruments | ||||||||
Interest rate contracts included in other assets | $ | 31 | $ | 6 | ||||
Interest rate contracts included in other long term liabilities | (372 | ) | (368 | ) | ||||
|
|
|
| |||||
Total fair value of interest rate derivatives not designated as hedging instruments | $ | (341 | ) | $ | (362 | ) | ||
|
|
|
| |||||
| Derivatives designated as hedging instruments | ||||||||
Interest rate contract included in other long term liabilities | $ | (1,856 | ) | $ | (1,768 | ) | ||
|
|
|
| |||||
Total fair value of interest rate derivatives designated as hedging instruments | $ | (1,856 | ) | $ | (1,768 | ) | ||
|
|
|
| |||||
The losses included in the Company’s Consolidated Statements of Income and the line item in which they are located for interest rate derivatives not designated as hedging instruments are as follows:
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Interest expense | $ | (232 | ) | $ | (133 | ) | ||
The losses included in the Company’s Consolidated Statements of Equity and the line item in which they are located for interest rate derivatives designated as hedging instruments are as follows:
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Accumulated other comprehensive loss | $ | (88 | ) | $ | (229 | ) | ||
Foreign Currency Derivatives
The Company holds a zero cost foreign currency collar to hedge the change in conversion rate between the Canadian dollar and the U.S. dollar for railcar leases in Canada. This zero cost collar, which is being accounted for as a cash flow hedge, has an initial notional amount of $6.8 million and places a floor and ceiling on the Canadian dollar to U.S. dollar exchange rate at $0.9875 and $1.069, respectively. Changes in the fair value of this derivative are included as a component of other comprehensive income or loss. The terms of the collar match the underlying lease agreements and therefore any ineffectiveness is considered immaterial.
At December 31, 2011 and 2010, the Company had recorded the following amount for the fair value of the Company’s foreign currency derivatives:
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Foreign currency contract included in other assets | $ | — | $ | (26 | ) | |||
The gains (losses) included in the Company’s Consolidated Statements of Equity and the line item in which they are located for foreign currency derivatives designated as hedging instruments are as follows:
| Year ended December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Accumulated other comprehensive loss | $ | 26 | $ | (68 | ) | |||
Swaptions
In 2011, the Company entered into two $10 million swaptions for Rail purchase options on sale leaseback transactions to manage the risk of higher interest rates in the future. The effective dates of the options to enter into a swap are September 28, 2012 and 2013. The swaptions are recorded at fair value and are marked-to-market each reporting period, with the change recorded in income as interest expense.
At December 31, 2011 and 2010, the Company had recorded the following amount for the fair value of the Company’s swaptions:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Swaptions included in other assets | $ | 19 | $ | — | ||||
The losses included in the Company’s Consolidated Statements of Income and the line item in which they are located for swaptions are as follows:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Interest expense | $ | (328 | ) | $ | — | |||
5. Earnings per Share
Unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and shall beare included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Company’s nonvested restricted stock are considered participating securities since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest. The two-class method became effective for the Company for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of the two class method did not impact the reported amounts of basic or diluted earnings per share for the year ended December 31, 2008.
| Year ended | ||||||||||||
| December 31, | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Net income attributable to The Andersons, Inc. | $ | 64,662 | $ | 38,351 | $ | 32,900 | ||||||
| Less: Distributed and undistributed earnings allocated to nonvested restricted stock | 204 | 122 | 90 | |||||||||
| Earnings available to common shareholders | $ | 64,458 | $ | 38,229 | $ | 32,810 | ||||||
Earnings per share — basic: | ||||||||||||
| Weighted average shares outstanding — basic | 18,356 | 18,190 | 18,068 | |||||||||
| Earnings per common share — basic | $ | 3.51 | $ | 2.10 | $ | 1.82 | ||||||
Earnings per share — diluted: | ||||||||||||
| Weighted average shares outstanding — basic | 18,356 | 18,190 | 18,068 | |||||||||
| Effect of dilutive options | 151 | 179 | 295 | |||||||||
| Weighted average shares outstanding — diluted | 18,507 | 18,369 | 18,363 | |||||||||
| Earnings per common share — diluted | $ | 3.48 | $ | 2.08 | $ | 1.79 | ||||||
Net income attributable to The Andersons, Inc. Less: Distributed and undistributed earnings allocated to nonvested restricted stock Earnings available to common shareholders Earnings per share – basic: Weighted average shares outstanding – basic Earnings per common share – basic Earnings per share – diluted: Weighted average shares outstanding – basic Effect of dilutive options Weighted average shares outstanding – diluted Earnings per common share – diluted Year ended December 31, (in thousands, except per share data) 2011 2010 2009 $ 95,106 $ 64,662 $ 38,351 369 204 122 $ 94,737 $ 64,458 $ 38,229 18,457 18,356 18,190 $ 5.13 $ 3.51 $ 2.10 18,457 18,356 18,190 162 151 179 18,619 18,507 18,369 $ 5.09 $ 3.48 $ 2.08
There were no antidilutive equity instruments at December 31, 2011, 2010 2009 or 2008.
52
| B4 | O’Malley | Total | ||||||||||
| Current assets | $ | 44,428 | $ | 4,097 | $ | 48,525 | ||||||
| Intangible assets | 350 | 1,375 | 1,725 | |||||||||
| Goodwill | 2,850 | 1,231 | 4,081 | |||||||||
| Property, plant and equipment | 1,879 | 5,959 | 7,838 | |||||||||
| Other long-term assets | 1,005 | 111 | 1,116 | |||||||||
| Current liabilities | (15,383 | ) | (4,864 | ) | (20,247 | ) | ||||||
| Other long-term liabilities | — | (126 | ) | (126 | ) | |||||||
| Total purchase price (a) | $ | 35,129 | $ | 7,783 | $ | 42,912 | ||||||
53
54
| December 31, | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Sales | $ | 4,707,422 | $ | 3,436,192 | $ | 5,032,466 | ||||||
| Gross profit | 133,653 | 106,755 | 86,522 | |||||||||
| Income from continuing operations | 59,046 | 37,439 | 16,935 | |||||||||
| Net income | 57,691 | 37,757 | 16,914 | |||||||||
| Current assets | 697,371 | 472,707 | ||||||||||
| Non-current assets | 352,441 | 363,287 | ||||||||||
| Current liabilities | 550,463 | 370,624 | ||||||||||
| Non-current liabilities | 115,735 | 124,046 | ||||||||||
| Noncontrolling interest | 31,294 | 25,059 | ||||||||||
| % ownership at | ||||||||||||||||
| December 31, 2010 | December 31, | |||||||||||||||
| (in thousands) | (direct and indirect) | 2010 | 2009 | 2008 | ||||||||||||
| The Andersons Albion Ethanol LLC | 50 | % | $ | 3,916 | $ | 5,735 | $ | 2,534 | ||||||||
| The Andersons Clymers Ethanol LLC | 38 | % | 5,318 | 2,965 | 8,112 | |||||||||||
| The Andersons Marathon Ethanol LLC | 50 | % | 1,117 | 2,936 | (15,511 | ) | ||||||||||
| Lansing Trade Group LLC | 52 | % | 15,133 | 5,781 | 8,776 | |||||||||||
| Other | 7%-33 | % | 523 | 46 | 122 | |||||||||||
| Total | $ | 26,007 | $ | 17,463 | $ | 4,033 | ||||||||||
55
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| The Andersons Albion Ethanol LLC | $ | 31,048 | $ | 28,911 | ||||
| The Andersons Clymers Ethanol LLC | 37,496 | 33,705 | ||||||
| The Andersons Marathon Ethanol LLC | 34,929 | 33,813 | ||||||
| Lansing Trade Group LLC | 70,143 | 59,648 | ||||||
| Other | 1,733 | 1,283 | ||||||
| Total | $ | 175,349 | $ | 157,360 | ||||
| December 31, | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Sales and revenues | $ | 531,452 | $ | 474,724 | $ | 541,448 | ||||||
| Purchases of product | 454,314 | 411,423 | 428,067 | |||||||||
| Lease income (a) | 5,341 | 5,442 | 5,751 | |||||||||
| Labor and benefits reimbursement (b) | 10,760 | 10,195 | 9,800 | |||||||||
| Accounts receivable at December 31 (c) | 14,991 | 13,641 | 9,773 | |||||||||
| Accounts payable at December 31 (d) | 13,930 | 18,069 | 19,084 | |||||||||
56
| (in thousands) | December 31, 2010 | |||||||||||||||
| Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash and cash equivalents | $ | 29,219 | $ | — | $ | — | $ | 29,219 | ||||||||
| Commodity derivatives, net | — | 171,023 | 12,406 | 183,429 | ||||||||||||
| Net margin deposit assets | 61,559 | (41,300 | ) | — | 20,259 | |||||||||||
| Net margin deposit liabilities | — | — | — | — | ||||||||||||
| Convertible preferred securities | — | — | 15,790 | 15,790 | ||||||||||||
| Other assets and liabilities (a) | 17,983 | — | (2,156 | ) | 15,827 | |||||||||||
| Total | $ | 108,761 | $ | 129,723 | $ | 26,040 | $ | 264,524 | ||||||||
| (in thousands) | December 31, 2009 | |||||||||||||||
| Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash and cash equivalents | $ | 145,929 | $ | — | $ | — | $ | 145,929 | ||||||||
| Commodity derivatives, net | — | (257 | ) | 1,948 | 1,691 | |||||||||||
| Net margin deposit assets | 28,836 | (1,824 | ) | — | 27,012 | |||||||||||
| Net margin deposit liabilities | — | (1,965 | ) | — | (1,965 | ) | ||||||||||
| Other assets and liabilities (a) | 8,441 | — | (1,763 | ) | 6,678 | |||||||||||
| Total | $ | 183,206 | $ | (4,046 | ) | $ | 185 | $ | 179,345 | |||||||
57
| 2010 | 2009 | |||||||||||||||||||
| Interest | Convertible | Commodity | Interest | Commodity | ||||||||||||||||
| rate | Preferred | derivatives, | rate | derivatives, | ||||||||||||||||
| (in thousands) | derivatives | Securities | net | derivatives | net | |||||||||||||||
| Asset (liability) at December 31, | $ | (1,763 | ) | $ | — | $ | 1,948 | $ | (2,367 | ) | $ | 5,114 | ||||||||
| Investment in debt securities | — | 13,100 | — | — | — | |||||||||||||||
| Unrealized gains (losses) included in earnings | (132 | ) | — | (1,519 | ) | 158 | (2,944 | ) | ||||||||||||
| Unrealized gain (loss) included in other comprehensive income | (297 | ) | — | — | 354 | — | ||||||||||||||
| Increase in estimated fair value of investment in debt securities included in other comprehensive income | — | 2,690 | — | — | — | |||||||||||||||
| New contracts entered into | 36 | — | — | 92 | — | |||||||||||||||
| Transfers from level 2 | — | — | 11,977 | — | 416 | |||||||||||||||
| Contracts cancelled, transferred to accounts receivable | — | — | — | — | (638 | ) | ||||||||||||||
| Asset (liability) at December 31, | $ | (2,156 | ) | $ | 15,790 | $ | 12,406 | $ | (1,763 | ) | $ | 1,948 | ||||||||
58
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Grain | $ | 497,267 | $ | 268,648 | ||||
| Agricultural fertilizer and supplies | 90,182 | 80,194 | ||||||
| Lawn and garden fertilizer and corncob products | 32,954 | 32,036 | ||||||
| Retail merchandise | 24,416 | 24,066 | ||||||
| Railcar repair parts | 2,058 | 2,601 | ||||||
| Other | 312 | 300 | ||||||
| $ | 647,189 | $ | 407,845 | |||||
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Land | $ | 15,424 | $ | 15,191 | ||||
| Land improvements and leasehold improvements | 45,080 | 42,495 | ||||||
| Buildings and storage facilities | 141,349 | 129,625 | ||||||
| Machinery and equipment | 181,650 | 162,810 | ||||||
| Software | 10,306 | 10,202 | ||||||
| Construction in progress | 2,572 | 2,624 | ||||||
| 396,381 | 362,947 | |||||||
| Less accumulated depreciation and amortization | 245,349 | 230,659 | ||||||
| $ | 151,032 | $ | 132,288 | |||||
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Railcar assets leased to others | $ | 234,667 | $ | 241,681 | ||||
| Less accumulated depreciation | 66,184 | 62,527 | ||||||
| $ | 168,483 | $ | 179,154 | |||||
59
| Accumulated | ||||||||||||||
| (in thousands) | Group | Original Cost | Amortization | Net Book Value | ||||||||||
December 31, 2010 | ||||||||||||||
| Amortized intangible assets | ||||||||||||||
| Acquired customer list | Rail | $ | 3,462 | $ | 3,299 | $ | 163 | |||||||
| Acquired customer list | Plant Nutrient | 3,846 | 670 | 3,176 | ||||||||||
| Acquired customer list | Grain & Ethanol | 1,250 | 150 | 1,100 | ||||||||||
| Acquired non-compete agreement | Plant Nutrient | 1,250 | 594 | 656 | ||||||||||
| Acquired non-compete agreement | Grain & Ethanol | 175 | 11 | 164 | ||||||||||
| Acquired marketing agreement | Plant Nutrient | 1,604 | 619 | 985 | ||||||||||
| Acquired supply agreement | Plant Nutrient | 4,846 | 926 | 3,920 | ||||||||||
| Acquired grower agreement | Grain & Ethanol | 300 | 75 | 225 | ||||||||||
| Patents and other | Various | 943 | 401 | 542 | ||||||||||
| Lease intangible | Rail | 1,673 | 633 | 1,040 | ||||||||||
| $ | 19,349 | $ | 7,378 | $ | 11,971 | |||||||||
December 31, 2009 | ||||||||||||||
| Amortized intangible assets | ||||||||||||||
| Acquired customer list | Rail | $ | 3,462 | $ | 3,267 | $ | 195 | |||||||
| Acquired customer list | Plant Nutrient | 3,846 | 251 | 3,595 | ||||||||||
| Acquired non-compete agreement | Plant Nutrient | 1,250 | 344 | 906 | ||||||||||
| Acquired marketing agreement | Plant Nutrient | 1,604 | 439 | 1,165 | ||||||||||
| Acquired supply agreement | Plant Nutrient | 4,846 | 386 | 4,460 | ||||||||||
| Patents and other | Various | 943 | 275 | 668 | ||||||||||
| $ | 15,951 | $ | 4,962 | $ | 10,989 | |||||||||
60
| December 31, | ||||||||||||
| (in thousands, except percentages) | 2010 | 2009 | 2008 | |||||||||
| Maximum amount borrowed | $ | 305,000 | $ | 92,700 | $ | 666,900 | ||||||
| Weighted average interest rate | 3.69 | % | 2.89 | % | 3.48 | % | ||||||
| December 31, | ||||||||
| (in thousands, except percentages) | 2010 | 2009 | ||||||
| Note payable, 4.80%, payable at maturity, due 2011 | $ | 17,000 | $ | 92,000 | ||||
| Note payable, 4.80%, payable at maturity, due 2012 | 25,000 | — | ||||||
| Note payable, 4.80% , payable at maturity, due 2013 | 25,000 | — | ||||||
| Note payable, 4.80%, payable at maturity, due 2014 | 25,000 | — | ||||||
| Note payable, 6.12%, payable at maturity, due 2015 | 61,500 | 61,500 | ||||||
| Note payable, 6.78%, payable at maturity due 2018 | 41,500 | 41,500 | ||||||
| Note payable, variable rate (2.82% at December 31, 2010), payable $110 monthly plus interest, due 2012 (a) | 10,031 | 11,252 | ||||||
| Note payable, variable rate (1.88% at December 31, 2010), payable in increasing amounts ($875 annually at December 31, 2010) plus interest, due 2023 (a) | 14,590 | 15,440 | ||||||
| Note payable, variable rate (1.06% at December 13, 2010), payable $58 monthly plus interest, due 2016 (a) | 10,850 | 11,550 | ||||||
| Note payable, 6.48%, payable $291 quarterly, due 2016 (a) | — | 6,607 | ||||||
| Note payable, 8.5%, payable $15 monthly, due 2016 | 1,242 | 1,309 | ||||||
| Industrial development revenue bonds: | ||||||||
| Variable rate (3.00% at December 31, 2010), due 2019 (a) | 4,650 | 4,650 | ||||||
| Variable rate (3.03% at December 31, 2010), due 2025 (a) | 3,100 | 3,100 | ||||||
| Variable rate (2.59% at December 31, 2010), due 2017 (a) | 9,000 | — | ||||||
61
| December 31, | ||||||||
| (in thousands, except percentages) | 2010 | 2009 | ||||||
| Debenture bonds, 4.00% to 6.50%, due 2011 through 2020 | 36,887 | 45,595 | ||||||
| Other notes payable and bonds | 8 | 108 | ||||||
| 285,358 | 294,611 | |||||||
| Less current maturities | 21,683 | 5,855 | ||||||
| $ | 263,675 | $ | 288,756 | |||||
| December 31, | ||||||||
| (in thousands, except percentages) | 2010 | 2009 | ||||||
| Note Payable, 5.96%, payable $218 monthly plus interest, due 2013 | $ | 14,550 | $ | 21,641 | ||||
| Note Payable, 6.37%, payable $24 monthly, due 2014 | 1,405 | 1,640 | ||||||
| Note Payable, 7.06%, payable $2 monthly, due 2011 | 36 | 1,069 | ||||||
| 15,991 | 24,350 | |||||||
| Less current maturities | 2,841 | 5,080 | ||||||
| $ | 13,150 | $ | 19,270 | |||||
62
| Year ended December 31 | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 22,288 | $ | 4,848 | $ | 11,441 | ||||||
| State and local | 3,613 | 828 | (31 | ) | ||||||||
| Foreign | 1,156 | (176 | ) | 932 | ||||||||
| $ | 27,057 | $ | 5,500 | $ | 12,342 | |||||||
| Deferred: | ||||||||||||
| Federal | $ | 13,558 | $ | 15,638 | $ | 4,110 | ||||||
| State and local | 595 | 1,833 | (121 | ) | ||||||||
| Foreign | (1,948 | ) | (1,041 | ) | 135 | |||||||
| $ | 12,205 | $ | 16,430 | $ | 4,124 | |||||||
| Total: | ||||||||||||
| Federal | $ | 35,846 | $ | 20,486 | $ | 15,551 | ||||||
| State and local | 4,208 | 2,661 | (152 | ) | ||||||||
| Foreign | (792 | ) | (1,217 | ) | 1,067 | |||||||
| $ | 39,262 | $ | 21,930 | $ | 16,466 | |||||||
| Year ended December 31 | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| U.S. income | $ | 106,184 | $ | 64,359 | $ | 43,086 | ||||||
| Foreign | (2,041 | ) | (2,863 | ) | 3,477 | |||||||
| $ | 104,143 | $ | 61,496 | $ | 46,563 | |||||||
63
| Year ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Statutory U.S. federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| Increase (decrease) in rate resulting from: | ||||||||||||
| Effect of qualified domestic production deduction | (1.1 | ) | (0.4 | ) | (0.2 | ) | ||||||
| Effect of Patient Protection and Affordable Care Act | 1.4 | — | — | |||||||||
| State and local income taxes, net of related federal taxes | 2.5 | 2.8 | (1.0 | ) | ||||||||
| Effect of noncontrolling interest in pass-through entity | (0.1 | ) | (0.7 | ) | 2.1 | |||||||
| Other, net | — | (1.0 | ) | (0.5 | ) | |||||||
| Effective tax rate | 37.7 | % | 35.7 | % | 35.4 | % | ||||||
| December 31 | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment and railcar assets leased to others | $ | (64,392 | ) | $ | (56,883 | ) | ||
| Prepaid employee benefits | (12,724 | ) | (11,172 | ) | ||||
| Investments | (20,242 | ) | (16,511 | ) | ||||
| Other | (3,877 | ) | (3,828 | ) | ||||
| (101,235 | ) | (88,394 | ) | |||||
| Deferred tax assets: | ||||||||
| Employee benefits | 32,463 | 29,848 | ||||||
| Accounts and notes receivable | 2,212 | 6,192 | ||||||
| Inventory | 7,056 | 4,348 | ||||||
| Deferred expenses | 10,036 | 7,176 | ||||||
| Net operating loss carryforwards | 1,207 | 1,918 | ||||||
| Other | 2,425 | 4,018 | ||||||
| Total deferred tax assets | 55,399 | 53,500 | ||||||
| Valuation allowance | — | (960 | ) | |||||
| 55,399 | 52,540 | |||||||
| Net deferred tax liabilities | $ | (45,836 | ) | $ | (35,854 | ) | ||
64
| (in thousands) | ||||
| Balance at January 1, 2008 | $ | 1,332 | ||
| Additions based on tax positions related to the current year | 66 | |||
| Additions based on tax positions related to prior years | 204 | |||
| Reductions for settlements with taxing authorities | (361 | ) | ||
| Reductions as a result of a lapse in statute of limitations | (514 | ) | ||
| Balance at December 31, 2008 | 727 | |||
| Additions based on tax positions related to the current year | 28 | |||
| Additions based on tax positions related to prior years | (25 | ) | ||
| Reductions for settlements with taxing authorities | (153 | ) | ||
| Reductions as a result of a lapse in statute of limitations | (259 | ) | ||
| Balance at December 31, 2009 | 318 | |||
| Additions based on tax positions related to the current year | 20 | |||
| Additions based on tax position related to prior years | 474 | |||
| Reductions as a result of a lapse in statute of limitations | (198 | ) | ||
| Balance at December 31, 2010 | $ | 614 | ||
65
| 2010 | 2009 | 2008 | ||||||||||
| Risk free interest rate | 1.96 | % | 1.89 | % | 2.24 | % | ||||||
| Dividend yield | 1.10 | % | 3.18 | % | 0.67 | % | ||||||
| Volatility factor of the expected market price of the Company’s common shares | .560 | .520 | .410 | |||||||||
| Expected life for the options (in years) | 4.10 | 4.10 | 4.10 | |||||||||
66
| Weighted-Average | Weighted-Average | Aggregate Intrinsic | ||||||||||||||
| Shares | Exercise | Remaining | Value | |||||||||||||
| (000)’s | Price | Contractual Term | ($000) | |||||||||||||
| Options & SOSARs outstanding at January 1, 2010 | 907 | $ | 30.69 | |||||||||||||
| SOSARs granted | 127 | 32.75 | ||||||||||||||
| Options exercised | (151 | ) | 15.87 | |||||||||||||
| Options & SOSARs cancelled / forfeited | (32 | ) | 37.34 | |||||||||||||
| Options and SOSARs outstanding at December 31, 2010 | 851 | $ | 33.38 | 1.95 | $ | 5,406 | ||||||||||
| Vested and expected to vest at December 31, 2010 | 848 | $ | 33.40 | 1.95 | $ | 5,372 | ||||||||||
| Options exercisable at December 31, 2010 | 568 | $ | 37.15 | 1.16 | $ | 2,010 | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Total intrinsic value of options exercised during the year ended December 31 (000’s) | $ | 2,724 | $ | 2,127 | $ | 6,384 | ||||||
| Total fair value of shares vested during the year ended December 31 (000’s) | $ | 3,084 | $ | 4,145 | $ | 533 | ||||||
| Weighted average fair value of options granted during the year ended December 31 | $ | 13.75 | $ | 3.80 | $ | 15.26 | ||||||
| Weighted-Average | ||||||||
| Nonvested Shares | Shares (000)’s | Grant-Date Fair Value | ||||||
| Nonvested at January 1, 2010 | 61 | $ | 28.07 | |||||
| Granted | 19 | 32.75 | ||||||
| Vested | (15 | ) | 40.92 | |||||
| Forfeited | (1 | ) | 26.27 | |||||
| Nonvested at December 31, 2010 | 64 | $ | 26.52 | |||||
| 2010 | 2009 | 2008 | ||||||||||
| Total fair value of shares vested during the year ended December 31 (000’s) | $ | 566 | $ | 109 | $ | 20 | ||||||
| Weighted average fair value of restricted shares granted during the year ended December 31 | $ | 32.75 | $ | 11.02 | $ | 46.06 | ||||||
67
| Weighted-Average | ||||||||
| Nonvested Shares | Shares (000)’s | Grant-Date Fair Value | ||||||
| Nonvested at January 1, 2010 | 106 | $ | 27.10 | |||||
| Granted | 36 | 32.69 | ||||||
| Vested | (9 | ) | 41.68 | |||||
| Forfeited | (9 | ) | 37.92 | |||||
| Nonvested at December 31, 2010 | 124 | $ | 26.90 | |||||
| 2010 | 2009 | 2008 | ||||||||||
| Weighted average fair value of PSUs granted during the year ended December 31 | $ | 32.69 | $ | 10.81 | $ | 46.24 | ||||||
68
| 2010 | 2009 | 2008 | ||||||||||
Employee Share Purchase Plan | ||||||||||||
| Risk free interest rate | 0.47 | % | 0.37 | % | 3.34 | % | ||||||
| Dividend yield | 1.10 | % | 2.06 | % | 0.73 | % | ||||||
| Volatility factor of the expected market price of the Company’s common shares | .544 | .673 | .470 | |||||||||
| Expected life for the options (in years) | 1.00 | 1.00 | 1.00 | |||||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Rental and service income — operating leases | $ | 60,700 | $ | 73,575 | $ | 87,445 | ||||||
| Rental expense | $ | 20,023 | $ | 24,271 | $ | 23,695 | ||||||
69
| Future Rental and | Future | |||||||
| Service Income - | Minimum Rental | |||||||
| (in thousands) | Operating Leases | Payments | ||||||
| | Year ended December 31, | | | |||||||
| 2011 | $ | 45,618 | $ | 18,507 | ||||
| 2012 | 30,595 | 11,828 | ||||||
| 2013 | 20,867 | 8,244 | ||||||
| 2014 | 13,533 | 5,795 | ||||||
| 2015 | 10,030 | 5,619 | ||||||
| Future years | 20,431 | 15,484 | ||||||
| $ | 141,074 | $ | 65,477 | |||||
70
The Company provides full-time employees with pension benefits under defined benefit and defined contribution plans. The measurement date for all plans is December 31. The Company’s expense for its defined contribution plans amounted to $7.8 million in 2011, $5.3 million in 2010 and $3.3 million in 2009 and $2.7 million in 2008.2009. The Company also provides certain health insurance benefits to employees as well as retirees.
The Company has both funded and unfunded noncontributory defined benefit pension plans. The plans provide defined benefits based on years of service and average monthly compensation using a career average formula. During the third quarter of 2009, the Company announced that it would be freezing its defined benefit plan as of July 1, 2010 for all of its non-retail line of business employees. Pension benefits for the retail line of business employees were frozen at December 31, 2006. As a resultPension benefits for the non-retail line of this curtailment, the Company recorded a gain of $4.1 million to pension expense in the Company’s Consolidated Statements of Income in 2009. The net gain consisted of $4.3 million of remaining prior service cost and a $0.2 million curtailment loss thatbusiness employees were recorded in accumulated other comprehensive loss.
The Company also has postretirement health care benefit plans covering substantially all of its full time employees hired prior to January 1, 2003. These plans are generally contributory and include a cap on the Company’s share for most retirees.
In March 2010, the Patient Protection and Affordable Care Act (“PPACA”) was signed into law. One of the provisions of the PPACA eliminates the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. As a result, the Company was required to make an adjustment to its deferred tax asset associated with its postretirement benefit plan in the amount of $1.4 million.million for the year ended December 31, 2010. The offset to this adjustment iswas included in the provision for income taxes on the Company’s Consolidated Statements of Income.
Obligation and Funded Status
Following are the details of the obligation and funded status of the pension and postretirement benefit plans:
| Pension | Postretirement | |||||||||||||||
| Benefits | Benefits | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Change in benefit obligation | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 74,875 | $ | 67,686 | $ | 21,294 | $ | 19,792 | ||||||||
| Service cost | 1,614 | 2,861 | 465 | 412 | ||||||||||||
| Interest cost | 4,339 | 4,001 | 1,213 | 1,155 | ||||||||||||
| Actuarial (gains)/losses | 12,120 | 6,739 | 2,383 | 654 | ||||||||||||
| Participant contributions | — | — | 444 | 382 | ||||||||||||
| Retiree drug subsidy received | — | — | 118 | 87 | ||||||||||||
| Benefits paid | (2,345 | ) | (2,050 | ) | (1,324 | ) | (1,188 | ) | ||||||||
| Plan curtailment | — | (4,362 | ) | — | — | |||||||||||
| Benefit obligation at end of year | $ | 90,603 | $ | 74,875 | $ | 24,593 | $ | 21,294 | ||||||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 70,423 | $ | 51,209 | $ | — | $ | — | ||||||||
| Actual gains (loss) on plan assets | 9,852 | 15,214 | — | — | ||||||||||||
| Company contributions | 6,167 | 6,050 | 880 | 806 | ||||||||||||
| Participant contributions | — | — | 444 | 382 | ||||||||||||
| Benefits paid | (2,345 | ) | (2,050 | ) | (1,324 | ) | (1,188 | ) | ||||||||
| Fair value of plan assets at end of year | $ | 84,097 | $ | 70,423 | $ | — | $ | — | ||||||||
| Funded status of plans at end of year | $ | (6,506 | ) | $ | (4,452 | ) | $ | (24,593 | ) | $ | (21,294 | ) | ||||
71
(in thousands) | Pension Benefits | Postretirement Benefits | ||||||||||||||
| Change in benefit obligation | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Benefit obligation at beginning of year | $ | 90,603 | $ | 74,875 | $ | 24,593 | $ | 21,294 | ||||||||
Service cost | — | 1,614 | 555 | 465 | ||||||||||||
Interest cost | 4,578 | 4,339 | 1,285 | 1,213 | ||||||||||||
Actuarial (gains)/losses | 16,363 | 12,120 | 6,020 | 2,383 | ||||||||||||
Participant contributions | — | — | 478 | �� | 444 | |||||||||||
Retiree drug subsidy received | — | — | 202 | 118 | ||||||||||||
Benefits paid | (1,568 | ) | (2,345 | ) | (1,575 | ) | (1,324 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Benefit obligation at end of year | $ | 109,976 | $ | 90,603 | $ | 31,558 | $ | 24,593 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| (in thousands) | Pension Benefits | Postretirement Benefits | ||||||||||||||
| Change in plan assets | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Fair value of plan assets at beginning of year | $ | 84,097 | $ | 70,423 | $ | — | $ | — | ||||||||
Actual gains (loss) on plan assets | (91 | ) | 9,852 | — | — | |||||||||||
Company contributions | 5,167 | 6,167 | 1,097 | 880 | ||||||||||||
Participant contributions | — | — | 478 | 444 | ||||||||||||
Benefits paid | (1,568 | ) | (2,345 | ) | (1,575 | ) | (1,324 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Fair value of plan assets at end of year | $ | 87,605 | $ | 84,097 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Funded status of plans at end of year | $ | (22,371 | ) | $ | (6,506 | ) | $ | (31,558 | ) | $ | (24,593 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Accrued expenses | $ | (210 | ) | $ | (72 | ) | $ | (1,196 | ) | $ | (1,163 | ) | ||||
| Employee benefit plan obligations | (6,296 | ) | (4,380 | ) | (23,397 | ) | (20,131 | ) | ||||||||
| Net amount recognized | $ | (6,506 | ) | $ | (4,452 | ) | $ | (24,593 | ) | $ | (21,294 | ) | ||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| (in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Accrued expenses | $ | (213 | ) | $ | (210 | ) | $ | (1,211 | ) | $ | (1,196 | ) | ||||
Employee benefit plan obligations | (22,158 | ) | (6,296 | ) | (30,347 | ) | (23,397 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net amount recognized | $ | (22,371 | ) | $ | (6,506 | ) | $ | (31,558 | ) | $ | (24,593 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Following are the details of the pre-tax amounts recognized in accumulated other comprehensive loss at December 31, 2010:
| Pension | Postretirement | |||||||||||||||
| Benefits | Benefits | |||||||||||||||
| Unamortized | Unamortized | Unamortized | Unamortized | |||||||||||||
| Actuarial | Prior Service | Actuarial | Prior Service | |||||||||||||
| (in thousands) | Net Losses | Costs | Net Losses | Costs | ||||||||||||
| Balance at beginning of year | $ | 33,259 | $ | — | $ | 9,066 | $ | (3,580 | ) | |||||||
| Amounts arising during the period | 7,719 | — | 2,383 | — | ||||||||||||
| Amounts recognized as a component of net periodic benefit cost | (1,817 | ) | — | (688 | ) | 510 | ||||||||||
| Balance at end of year | $ | 39,161 | $ | — | $ | 10,761 | $ | (3,070 | ) | |||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| (in thousands) | Unamortized Actuarial Net Losses | Unamortized Prior Service Costs | Unamortized Actuarial Net Losses | Unamortized Prior Service Costs | ||||||||||||
Balance at beginning of year | $ | 39,161 | $ | — | $ | 10,761 | $ | (3,070 | ) | |||||||
Amounts arising during the period | 22,691 | — | 6,020 | — | ||||||||||||
Amounts recognized as a component of net periodic benefit cost | (940 | ) | — | (901 | ) | 543 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of year | $ | 60,912 | $ | — | $ | 15,880 | $ | (2,527 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during the next fiscal year are as follows:
| (in thousands) | Pension | Postretirement | Total | |||||||||
| Prior service cost | $ | — | $ | (540 | ) | $ | (540 | ) | ||||
| Net actuarial loss | 893 | 840 | 1,733 | |||||||||
| (in thousands) | Pension | Postretirement | Total | |||||||||
Prior service cost | $ | — | $ | (543 | ) | $ | (543 | ) | ||||
Net actuarial loss | 1,799 | 1,306 | 3,105 | |||||||||
The accumulated benefit obligations related to the Company’s defined benefit pension plans are $90.4$110.0 million and $74.3$90.4 million as of December 31, 2011 and 2010, and 2009, respectively.
Amounts applicable to the Company’s defined benefit plans with accumulated benefit obligations in excess of plan assets are as follows:
| (in thousands) | 2010 | 2009 | ||||||
| Projected benefit obligation | $ | 90,603 | $ | 74,875 | ||||
| Accumulated benefit obligation | $ | 90,357 | $ | 74,267 | ||||
72
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Projected benefit obligation | $ | 109,976 | $ | 90,603 | ||||
Accumulated benefit obligation | $ | 109,976 | $ | 90,357 | ||||
| Expected Pension | Expected Postretirement | Medicare Part D | ||||||||||
| Year | Benefit Payout | Benefit Payout | Subsidy | |||||||||
| 2011 | $ | 5,444 | $ | 1,349 | $ | (154 | ) | |||||
| 2012 | 5,968 | 1,426 | (177 | ) | ||||||||
| 2013 | 5,521 | 1,515 | (204 | ) | ||||||||
| 2014 | 5,865 | 1,598 | (228 | ) | ||||||||
| 2015 | 6,145 | 1,675 | (259 | ) | ||||||||
| 2016-2020 | 30,221 | 9,419 | (1,853 | ) | ||||||||
Year | Expected Pension Benefit Payout | Expected Postretirement Benefit Payout | Medicare Part D Subsidy | |||||||||
2012 | $ | 3,784 | $ | 1,372 | $ | (161 | ) | |||||
2013 | 3,980 | 1,455 | (187 | ) | ||||||||
2014 | 4,346 | 1,547 | (209 | ) | ||||||||
2015 | 5,036 | 1,638 | (236 | ) | ||||||||
2016 | 5,279 | 1,723 | (267 | ) | ||||||||
2017-2021 | 31,164 | 10,040 | (1,903 | ) | ||||||||
Following are components of the net periodic benefit cost for each year:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
| Service cost | $ | 1,614 | $ | 2,861 | $ | 2,666 | $ | 465 | $ | 412 | $ | 374 | ||||||||||||
| Interest cost | 4,339 | 4,001 | 3,614 | 1,213 | 1,155 | 1,125 | ||||||||||||||||||
| Expected return on plan assets | (5,451 | ) | (4,356 | ) | (5,037 | ) | — | — | — | |||||||||||||||
| Amortization of prior service cost | — | (392 | ) | (619 | ) | (511 | ) | (511 | ) | (511 | ) | |||||||||||||
| Recognized net actuarial loss | 1,817 | 3,503 | 945 | 691 | 624 | 611 | ||||||||||||||||||
| Curtailment gain | — | (4,132 | ) | — | — | — | — | |||||||||||||||||
| Net periodic benefit cost | $ | 2,319 | $ | 1,485 | $ | 1,569 | $ | 1,858 | $ | 1,680 | $ | 1,599 | ||||||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| Weighted Average Assumptions | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Used to Determine Benefit Obligations at Measurement Date | ||||||||||||||||||||||||
| Discount rate (a) | 5.20 | % | 5.70 | % | 6.10 | % | 5.30 | % | 5.80 | % | 6.10 | % | ||||||||||||
| Rate of compensation increases | 3.50 | % | 3.50 | % | 4.50 | % | — | — | — | |||||||||||||||
Used to Determine Net Periodic Benefit Cost for Years ended December 31 | ||||||||||||||||||||||||
| Discount rate (b) | 5.70 | % | 6.10 | % | 6.30 | % | 5.80 | % | 6.10 | % | 6.40 | % | ||||||||||||
| Expected long-term return on plan assets | 8.00 | % | 8.25 | % | 8.25 | % | — | — | — | |||||||||||||||
| Rate of compensation increases | 3.50 | % | 4.50 | % | 4.50 | % | — | — | — | |||||||||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||
Service cost | $ | — | $ | 1,614 | $ | 2,861 | $ | 555 | $ | 465 | $ | 412 | ||||||||||||
Interest cost | 4,578 | 4,339 | 4,001 | 1,285 | 1,213 | 1,155 | ||||||||||||||||||
Expected return on plan assets | (6,236 | ) | (5,451 | ) | (4,356 | ) | — | — | — | |||||||||||||||
Amortization of prior service cost | — | — | (392 | ) | (543 | ) | (511 | ) | (511 | ) | ||||||||||||||
Recognized net actuarial loss | 940 | 1,817 | 3,503 | 901 | 691 | 624 | ||||||||||||||||||
Curtailment gain | — | — | (4,132 | ) | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net periodic benefit cost | $ | (718 | ) | $ | 2,319 | $ | 1,485 | $ | 2,198 | $ | 1,858 | $ | 1,680 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Following are weighted average assumptions of pension and postretirement benefits for each year:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Used to Determine Benefit Obligations at Measurement Date | ||||||||||||||||||||||||
Discount rate (a) | 4.30 | % | 5.20 | % | 5.70 | % | 4.30 | % | 5.30 | % | 5.80 | % | ||||||||||||
Rate of compensation increases | N/A | 3.50 | % | 3.50 | % | — | — | — | ||||||||||||||||
Used to Determine Net Periodic Benefit Cost for Years ended December 31 | ||||||||||||||||||||||||
Discount rate (b) | 5.20 | % | 5.70 | % | 6.10 | % | 5.30 | % | 5.80 | % | 6.10 | % | ||||||||||||
Expected long-term return on plan assets | 7.75 | % | 8.00 | % | 8.25 | % | — | — | — | |||||||||||||||
Rate of compensation increases | 3.50 | % | 3.50 | % | 4.50 | % | — | — | — | |||||||||||||||
| (a) | In 2011, 2010 and 2009, the calculated discount rate for the unfunded pension plan was different than the defined benefit pension plan. The calculated rate for the supplemental employee retirement plan was 3.20%, 4.20% and 6.00% in 2011, 2010 and 2009, respectively. |
| (b) | In 2011 and 2010, the calculated discount rate for the unfunded pension plan was different than the defined benefit pension plan. The calculated rate for the supplemental employee retirement plan was 4.20% and 6.00% in | |
73
The expected long-term return on plan assets was determined based on the current asset allocation and historical results from plan inception. OurThe expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on oura goal of earning the highest rate of return while maintaining risk at acceptable levels and is disclosed in the Plan Assets section of this Note. The plan strives to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio.
Assumed Health Care Cost Trend Rates at Beginning of Year
| 2010 | 2009 | |||||||
| Health care cost trend rate assumed for next year | 8.0 | % | 8.5 | % | ||||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.0 | % | 5.0 | % | ||||
| Year that the rate reaches the ultimate trend rate | 2017 | 2017 | ||||||
| 2011 | 2010 | |||||||
Health care cost trend rate assumed for next year | 7.5 | % | 8.0 | % | ||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.0 | % | 5.0 | % | ||||
Year that the rate reaches the ultimate trend rate | 2017 | 2017 | ||||||
The assumed health care cost trend rate has an effect on the amounts reported for postretirement benefits. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
| One-Percentage-Point | ||||||||
| (in thousands) | Increase | Decrease | ||||||
| Effect on total service and interest cost components in 2010 | $ | (19 | ) | $ | 17 | |||
| Effect on postretirement benefit obligation as of December 31, 2010 | (146 | ) | 121 | |||||
| One-Percentage-Point | ||||||||
| (in thousands) | Increase | Decrease | ||||||
Effect on total service and interest cost components in 2011 | $ | (18 | ) | $ | 16 | |||
Effect on postretirement benefit obligation as of December 31, 2011 | (164 | ) | 140 | |||||
Plan Assets
The Company’s pension plan weighted average asset allocations at December 31 by asset category, are as follows:
| Asset Category | 2010 | 2009 | ||||||
| Equity securities | 68 | % | 74 | % | ||||
| Fixed income securities | 31 | % | 24 | % | ||||
| Cash and equivalents | 1 | % | 2 | % | ||||
| 100 | % | 100 | % | |||||
| Asset Category | 2011 | 2010 | ||||||
Equity securities | 57 | % | 68 | % | ||||
Fixed income securities | 41 | % | 31 | % | ||||
Cash and equivalents | 2 | % | 1 | % | ||||
|
|
|
| |||||
| 100 | % | 100 | % | |||||
|
|
|
| |||||
The plan assets are allocated within the broader asset categories in investments that focus on more specific sectors. Within equity securities, subcategories include large cap growth, large cap value, small cap growth, small cap value, and internationally focused investment funds. These funds are judged in comparison to benchmark indexes that best match their specific category. Within fixed income securities, the funds are invested in a broad cross section of securities to ensure diversification. These include treasury, government agency, corporate, securitization, high yield, global, emerging market and other debt securities.
The investment policy and strategy for the assets of the Company’s funded defined benefit plan includes the following objectives:
ensure superior long-term capital growth and capital preservation;
74
reduce the level of the unfunded accrued liability in the plan; and
| Percentage of Total Portfolio Market Value | ||||||||||||
| Minimum | Maximum | Single Security | ||||||||||
| Equity based | 30 | % | 70 | % | <5 | % | ||||||
| Fixed income based | 20 | % | 70 | % | <5 | % | ||||||
| Cash and equivalents | 1 | % | 5 | % | <5 | % | ||||||
| Alternative Investments | 0 | % | 20 | % | <5 | % | ||||||
Equity based Fixed income based Cash and equivalents Alternative investments Percentage of Total Portfolio Market
Value Minimum Maximum Single
Security 30 % 70 % <5 % 20 % 70 % <5 % 1 % 5 % <5 % 0 % 20 % <5 %
The following table presents the fair value of the assets (by asset category) in the Company’s defined benefit pension plan at December 31, 2010.
| (in thousands) | ||||||||||||||||
| Assets | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Mutual funds | $ | 12,119 | $ | — | $ | — | $ | 12,119 | ||||||||
| Money market fund | — | 793 | — | 793 | ||||||||||||
| Equity funds | — | 45,502 | — | 45,502 | ||||||||||||
| Fixed income funds | — | 25,683 | — | 25,683 | ||||||||||||
| Total | $ | 12,119 | $ | 71,978 | $ | — | $ | 84,097 | ||||||||
December 31, 2011
| $00,000 | $00,000 | $00,000 | $00,000 | |||||||||||||
(in thousands) Assets | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Mutual funds | $ | 10,773 | $ | — | $ | — | $ | 10,773 | ||||||||
Money market fund | — | 1,659 | — | 1,659 | ||||||||||||
Equity funds | — | 39,573 | — | 39,573 | ||||||||||||
Fixed income funds | — | 35,600 | — | 35,600 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 10,773 | $ | 76,832 | $ | — | $ | 87,605 | ||||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2010
| $00,000 | $00,000 | $00,000 | $00,000 | |||||||||||||
(in thousands) Assets | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Mutual funds | $ | 12,119 | $ | — | $ | — | $ | 12,119 | ||||||||
Money market fund | — | 793 | — | 793 | ||||||||||||
Equity funds | — | 45,502 | — | 45,502 | ||||||||||||
Fixed income funds | — | 25,683 | — | 25,683 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 12,119 | $ | 71,978 | $ | — | $ | 84,097 | ||||||||
|
|
|
|
|
|
|
| |||||||||
There is no equity or debt of the Company included in the assets of the defined benefit plan.
Cash Flows
The Company expects to make contributions to the defined benefit pension plan of up to $3.0 million in 2011.2012. The Company reserves the right to contribute more or less than this amount. For the year ended December 31, 2010,2011, the Company contributed $6.0$5.0 million to the defined benefit pension plan.
7. Segment Information
During the first quarter of 2011, management separated the segment previously reported as Grain & Ethanol into two separate reportable segments for external financial reporting. The Company evaluated the impact of this change on the recoverability of goodwill and no impairment charge was necessary. Corresponding items of segment information for earlier periods have been reclassified to conform to current year presentation.
The Company’s operations include six reportable business segments that are distinguished primarily on the basis of products and services offered. The Grain business includes grain merchandising, the operation of terminal grain elevator facilities and the investment in Lansing Trade Group, LLC (“LTG”). The Ethanol business purchases and sells ethanol and also manages the ethanol production facilities organized as limited liability companies (“ethanol LLCs”) in which the Company has investments and various service contracts for these investments.
Rail operations include the leasing, marketing and fleet management of railcars and locomotives, railcar repair and metal fabrication. The Plant Nutrient business manufactures and distributes agricultural inputs, primarily fertilizer, to dealers and farmers. Turf & Specialty operations include the production and distribution of turf care and corncob-based products. The Retail business operates large retail stores, a specialty food market, a distribution center and a lawn and garden equipment sales and service shop. Included in “Other” are the corporate level amounts not attributable to an operating segment.
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. Capital expenditures include additions to property, plant and equipment, software and intangible assets.
| $0,000,000 | $0,000,000 | $0,000,000 | ||||||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Revenues from external customers | ||||||||||||
Grain | $ | 2,849,358 | $ | 1,936,813 | $ | 1,734,574 | ||||||
Ethanol | 641,546 | 468,639 | 419,404 | |||||||||
Plant Nutrient | 690,631 | 619,330 | 491,293 | |||||||||
Rail | 107,459 | 94,816 | 92,789 | |||||||||
Turf & Specialty | 129,716 | 123,549 | 125,306 | |||||||||
Retail | 157,621 | 150,644 | 161,938 | |||||||||
Other | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 4,576,331 | $ | 3,393,791 | $ | 3,025,304 | ||||||
|
|
|
|
|
| |||||||
| $0,000,000 | $0,000,000 | $0,000,000 | ||||||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Inter-segment sales | ||||||||||||
Grain | $ | 2 | $ | 3 | $ | 9 | ||||||
Ethanol | — | — | — | |||||||||
Plant Nutrient | 16,527 | 13,517 | 12,245 | |||||||||
Rail | 593 | 637 | 634 | |||||||||
Turf & Specialty | 2,062 | 1,636 | 1,504 | |||||||||
Retail | — | — | — | |||||||||
Other | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 19,184 | $ | 15,793 | $ | 14,392 | ||||||
|
|
|
|
|
| |||||||
| $0,000,000 | $0,000,000 | $0,000,000 | ||||||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Equity in earnings (loss) of affiliates | ||||||||||||
Grain | $ | 23,748 | $ | 15,648 | $ | 5,816 | ||||||
Ethanol | 17,715 | 10,351 | 11,636 | |||||||||
Plant Nutrient | (13 | ) | 8 | 8 | ||||||||
Rail | — | — | — | |||||||||
Turf & Specialty | — | — | — | |||||||||
Retail | — | — | — | |||||||||
Other | — | — | 3 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 41,450 | $ | 26,007 | $ | 17,463 | ||||||
|
|
|
|
|
| |||||||
Other income, net Grain Ethanol Plant Nutrient Rail Turf & Specialty Retail Other Total Year ended December 31, (in thousands) 2011 2010 2009 $ 2,462 $ 2,557 $ 2,030 159 176 289 704 1,298 1,755 2,866 4,502 485 880 1,335 1,131 638 608 683 213 1,176 1,958 $ 7,922 $ 11,652 $ 8,331
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Interest expense (income) | ||||||||||||
Grain | $ | 13,277 | $ | 6,686 | $ | 8,735 | ||||||
Ethanol | 1,048 | 1,629 | 628 | |||||||||
Plant Nutrient | 3,517 | 3,901 | 3,933 | |||||||||
Rail | 5,677 | 4,928 | 4,468 | |||||||||
Turf & Specialty | 1,381 | 1,604 | 1,429 | |||||||||
Retail | 899 | 1,039 | 961 | |||||||||
Other | (543 | ) | 78 | 534 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 25,256 | $ | 19,865 | $ | 20,688 | ||||||
|
|
|
|
|
| |||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Income (loss) before income taxes | ||||||||||||
Grain | $ | 87,288 | $ | 64,374 | $ | 33,777 | ||||||
Ethanol | 23,344 | 17,013 | 17,577 | |||||||||
Plant Nutrient | 38,267 | 30,062 | 11,294 | |||||||||
Rail | 9,778 | 107 | (1,034 | ) | ||||||||
Turf & Specialty | 2,000 | 3,443 | 4,735 | |||||||||
Retail | (1,520 | ) | (2,534 | ) | (2,843 | ) | ||||||
Other | (12,998 | ) | (8,541 | ) | (3,225 | ) | ||||||
Noncontrolling interest | 1,719 | 219 | 1,215 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 147,878 | $ | 104,143 | $ | 61,496 | ||||||
|
|
|
|
|
| |||||||
| December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Identifiable assets | ||||||||||||
Grain | $ | 883,395 | $ | 978,273 | $ | 451,056 | ||||||
Ethanol | 148,975 | 121,207 | 145,985 | |||||||||
Plant Nutrient | 240,543 | 208,548 | 205,968 | |||||||||
Rail (b) (c) | 246,188 | 196,149 | 194,748 | |||||||||
Turf & Specialty | 69,487 | 62,643 | 63,353 | |||||||||
Retail | 52,018 | 52,430 | 45,696 | |||||||||
Other | 93,517 | 80,140 | 177,585 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 1,734,123 | $ | 1,699,390 | $ | 1,284,391 | ||||||
|
|
|
|
|
| |||||||
| (a) | Rail acquired 100% of newly issued cumulative convertible preferred shares in the amount of $13.1 million in 2010. |
| (b) | Rail also had purchases of railcars in the amount of $64.2 million, $18.4 million and $25.0 million in 2011, 2010 and 2009, respectively. |
Capital expenditures Grain Ethanol Plant Nutrient Rail Turf & Specialty Retail Other Total Year ended December 31, (in thousands) 2011 2010 2009 $ 24,284 $ 10,343 $ 6,129 — — 16 13,296 7,631 6,610 1,478 927 297 2,089 2,237 1,305 1,230 8,827 1,157 1,785 932 1,046 $ 44,162 $ 30,897 $ 16,560
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Cash invested in affiliates | ||||||||||||
Ethanol | $ | — | $ | 395 | $ | 1,100 | ||||||
Plant Nutrient | 21 | — | — | |||||||||
Other | 100 | — | 100 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 121 | $ | 395 | $ | 1,200 | ||||||
|
|
|
|
|
| |||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Acquisition of businesses | ||||||||||||
Grain | $ | — | $ | 39,293 | $ | — | ||||||
Plant Nutrient | 2,365 | — | 30,480 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 2,365 | $ | 39,293 | $ | 30,480 | ||||||
|
|
|
|
|
| |||||||
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Depreciation and amortization | ||||||||||||
Grain | $ | 9,625 | $ | 7,580 | $ | 5,161 | ||||||
Ethanol | 382 | 371 | 371 | |||||||||
Plant Nutrient | 9,913 | 10,225 | 8,665 | |||||||||
Rail | 14,780 | 15,107 | 15,967 | |||||||||
Turf & Specialty | 1,801 | 2,032 | 2,314 | |||||||||
Retail | 2,770 | 2,400 | 2,286 | |||||||||
Other | 1,566 | 1,198 | 1,256 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 40,837 | $ | 38,913 | $ | 36,020 | ||||||
|
|
|
|
|
| |||||||
Grain sales for export to foreign markets amounted to $164.8 million, $267.3 million and $312.7 million in 2011, 2010 and 2009, respectively. Revenues from leased railcars in Canada totaled $13.3 million, $9.1 million and $12.4 million in 2011, 2010 and 2009, respectively. The net book value of the leased railcars at December 31, 2011 and 2010 was $29.0 million and $22.0 million, respectively. Lease revenue on railcars in Mexico totaled $0.4 million in 2011, $0.3 million in 2010 and $0.3 million in 2009.
8. Related Parties
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.
In January 2003, the Company became a minority investor in LTG, which focuses on grain merchandising as well as trading related to the energy and biofuels industry. The Company has increased its investment in LTG over time. As a result of share redemptions by LTG, the Company’s ownership percentage in LTG increased to 52% during the second quarter of 2010. Even though the Company holds a majority of the outstanding shares, all major operating decisions of LTG are made by LTG’s Board of Directors and the Company does not have a majority of the board seats. In addition, based on the terms of the operating agreement between LTG and its owners, the minority shareholders have substantive participating rights that allow them to effectively participate in the decisions made in the ordinary course of business that are significant to LTG. Due to these factors, the Company does not have control over LTG and therefore accounts for this investment under the equity method. The Company sells and purchases both grain and ethanol with LTG in the ordinary course of business on terms similar to sales and purchases with unrelated customers.
In 2005, the Company became a minority investor in The Andersons Albion Ethanol LLC (“TAAE”). TAAE is a producer of ethanol and its co-product distillers dried grains (“DDG”) at its 55 million gallon-per-year ethanol production facility in Albion, Michigan. The Company operates the facility under a management contract and provides corn origination, ethanol and DDG marketing and risk management services for which it is separately compensated. The Company also leases its Albion, Michigan grain facility to TAAE. During the third quarter of 2010, the Company purchased 59 additional units of TAAE from one of its investors. This purchase gives the Company 5,001 units, or a 50.01% ownership interest. While the Company holds a majority of the outstanding units of TAAE, a super-majority vote is required for all major operating decisions of TAAE based on the terms of the Operating Agreement. The Company has concluded that the super-majority vote requirement gives the minority shareholders substantive participating rights and therefore consolidation for book purposes is not appropriate. The Company accounts for its investment in TAAE under the equity method of accounting.
In 2006, the Company became a minority investor in The Andersons Clymers Ethanol LLC (“TACE”). TACE is also a producer of ethanol and its co-product DDG at a 110 million gallon-per-year ethanol production facility in Clymers, Indiana. The Company operates the facility under a management contract and provides corn origination, ethanol and DDG marketing and risk management services for which it is separately compensated. The Company also leases its Clymers, Indiana grain facility to TACE.
In 2006, the Company became a 50% investor in The Andersons Marathon Ethanol LLC (“TAME”). TAME is also a producer of ethanol and its co-product DDG at a 110 million gallon-per-year ethanol production facility in Greenville, Ohio. In January 2007, the Company transferred its 50% share in TAME to The Andersons Ethanol Investment LLC (“TAEI”), a consolidated subsidiary of the Company, of which a third party owns 34% of the shares. The Company operates the facility under a management contract and provides corn origination, ethanol and DDG marketing and risk management services for which it is separately compensated. In 2009 TAEI invested an additional $1.1 million in TAME, retaining a 50% ownership interest.
The Company has marketing agreements with the three ethanol LLCs under which the Company purchases and markets the ethanol produced to external customers. As compensation for these marketing services, the Company earns a fee on each gallon of ethanol sold. For two of the LLCs, the Company purchases 100% of the ethanol produced and then sells it to external parties. For the third LLC, the Company buys only a portion of the ethanol produced. The Company acts as the principal in these ethanol sales transactions to external parties as the Company has ultimate responsibility of performance to the external parties. Substantially all of these purchases and subsequent sales are executed through forward contracts on matching terms and, outside of the fee the Company earns for each gallon sold, the Company does not recognize any gross profit on the sales transactions. For the years ended December 31, 2011, 2010 and 2009, revenues recognized for the sale of ethanol purchased from related parties were $678.8 million, $482.6 million and $402.1 million, respectively. In addition to the ethanol marketing agreements, the Company holds corn origination agreements, under which the Company originates 100% of the corn used in production for each ethanol LLC.
For this service, the Company receives a unit based fee. Similar to the ethanol sales described above, the Company acts as a principal in these transactions, and accordingly, records revenues on a gross basis. For the years ended December 31, 2011, 2010 and 2009, revenues recognized for the sale of corn under these agreements were $706.6 million, $445.6 million and $404.2 million, respectively. As part of the corn origination agreements, the Company also markets the ethanol DDG produced by the entities. For this service the Company receives a unit based fee. The Company does not purchase any of the DDG from the ethanol entities; however, as part of the agreement, the Company guarantees payment by the customer for DDG sales where the Company has identified the buyer. At December 31, 2011 and 2010, the three ethanol entities had a combined receivable balance for DDG of $7.8 million and $6.8 million, respectively, of which only $3,000 and $15,000, respectively, was more than thirty days past due. The Company has concluded that the fair value of this guarantee is inconsequential.
From time to time, the Company enters into derivative contracts with certain of its related parties, including the ethanol LLCs and LTG, for the purchase and sale of corn and ethanol, for similar price risk mitigation purposes and on similar terms as the purchase and sale of derivative contracts it enters into with unrelated parties. At December 31, 2011, the fair value of derivative contracts with related parties was a gross asset and liability of $0.6 million and $1.9 million, respectively.
The following table presents aggregate summarized financial information of LTG, TAAE, TACE and TAME as they qualified as significant subsidiaries in the aggregate. LTG was the only equity method investment that qualified as a significant subsidiary individually for the years ended December 31, 2011 and 2010.
| December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Sales | $ | 6,938,345 | $ | 4,707,422 | $ | 3,436,192 | ||||||
Gross profit | 168,383 | 133,653 | 106,755 | |||||||||
Income from continuing operations | 90,510 | 59,046 | 37,439 | |||||||||
Net income | 87,673 | 57,691 | 37,757 | |||||||||
Current assets | 707,400 | 697,371 | ||||||||||
Non-current assets | 336,554 | 352,441 | ||||||||||
Current liabilities | 514,671 | 550,463 | ||||||||||
Non-current liabilities | 100,315 | 115,735 | ||||||||||
Noncontrolling interest | 26,799 | 31,294 | ||||||||||
The following table summarizes income earned from the Company’s equity method investees by entity:
| (in thousands) | % ownership at December 31, 2011 (direct and indirect) | 2011 | December 31, 2010 | 2009 | ||||||||||
The Andersons Albion Ethanol LLC | 50% | $ | 5,285 | $ | 3,916 | $ | 5,735 | |||||||
The Andersons Clymers Ethanol LLC | 38% | 4,341 | 5,318 | 2,965 | ||||||||||
The Andersons Marathon Ethanol LLC | 50% | 8,089 | 1,117 | 2,936 | ||||||||||
Lansing Trade Group, LLC | 52% * | 23,558 | 15,133 | 5,781 | ||||||||||
Other | 7%-33% | 177 | 523 | 46 | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | 41,450 | $ | 26,007 | $ | 17,463 | ||||||||
|
|
|
|
|
| |||||||||
| * | This does not consider restricted management units which once vested will reduce the ownership percentage by approximately 2%. |
Total distributions received from unconsolidated affiliates were $17.8 million for the year ended December 31, 2011. The balance in retained earnings at December 31, 2011 that represents undistributed earnings of the Company’s equity method investments is $66.5 million.
The following table presents the Company’s investment balance in each of its equity method investees by entity:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
The Andersons Albion Ethanol LLC | $ | 32,829 | $ | 31,048 | ||||
The Andersons Clymers Ethanol LLC | 40,001 | 37,496 | ||||||
The Andersons Marathon Ethanol LLC | 43,019 | 34,929 | ||||||
Lansing Trade Group, LLC | 81,209 | 70,143 | ||||||
Other | 2,003 | 1,733 | ||||||
|
|
|
| |||||
Total | $ | 199,061 | $ | 175,349 | ||||
|
|
|
| |||||
Investment in Debt Securities
During the second quarter of 2010, the Company paid $13.1 million to acquire 100% of newly issued cumulative convertible preferred shares of Iowa Northern Railway Corporation (“IANR”), which operates a short-line railroad in Iowa. As a result of this investment, the Company has a 49.9% voting interest in IANR, with the remaining 50.1% voting interest held by the common shareholders. The preferred shares purchased by the Company have certain rights associated with them, including voting, dividends, liquidation, redemption and conversion. Dividends accrue to the Company at a rate of 14% annually whether or not declared by IANR and are cumulative in nature. The Company can convert its preferred shares into common shares of IANR at any time, but the shares cannot be redeemed until after five years. This investment is accounted for as “available-for-sale” debt securities in accordance with ASC 320 and is carried at estimated fair value in other noncurrent assets on the Company’s Consolidated Balance Sheets. The estimated fair value of the Company’s investment in IANR as of December 31, 2011 was $20.4 million. Dividends received for the year ended December 31, 2011 were $0.9 million.
Based on the Company’s assessment, IANR is considered a variable interest entity (VIE). Since the Company does not possess the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, it is not considered to be the primary beneficiary of IANR and therefore does not consolidate IANR. The decisions that most significantly impact the economic performance of IANR are made by IANR’s Board of Directors. The Board of Directors has five directors; two directors from the Company, two directors from the common shareholders and one independent director who is elected by unanimous decision of the other four directors. The vote of four of the five directors is required for all key decisions.
The Company’s current maximum exposure to loss related to IANR is $22.3 million, which represents the Company’s investment at fair value plus unpaid accrued dividends to date of $1.9 million. The Company does not have any obligation or commitments to provide additional financial support to IANR.
In the ordinary course of business, the Company will enter into related party transactions with each of the investments described above, along with other related parties. The following table sets forth the related party transactions entered into for the time periods presented:
| December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Sales and revenues | $ | 864,216 | $ | 531,452 | $ | 474,724 | ||||||
Purchases of product | 636,144 | 454,314 | 411,423 | |||||||||
Lease income (a) | 6,128 | 5,431 | 5,442 | |||||||||
Labor and benefits reimbursement (b) | 10,784 | 10,760 | 10,195 | |||||||||
Other expenses (c) | 192 | — | — | |||||||||
Accounts receivable at December 31 (d) | 14,730 | 14,991 | 13,641 | |||||||||
Accounts payable at December 31 (e) | 24,530 | 13,930 | 18,069 | |||||||||
| (a) | Lease income includes the lease of the Company’s Albion, Michigan and Clymers, Indiana grain facilities as well as certain railcars to the various LLCs and IANR. |
| (b) | The Company provides all operational labor to the ethanol LLCs and charges them an amount equal to the Company’s costs of the related services. |
| (c) | Other expenses include payments to IANR for repair shop rent and use of their railroad reporting mark. |
| (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. |
The Company has a processing agreement with Midwest Renewable Energy, LLC (“MRE”) through its acquisition of B4 Grain, Inc. which was completed on December 31, 2010. The agreement stipulates that the Company supplies a sufficient quantity of corn to MRE to allow for ethanol processing at full capacity which the Company will then market on their behalf. The Company has evaluated all of the applicable criteria for an entity subject to consolidation under the provisions of ASC 810-10-15 and has concluded that MRE is considered a VIE. However, as the Company does not have the power to direct the activities that most significantly impact MRE’s economic performance, and does not have the obligation to absorb the losses or right to receive the benefits of MRE, it is not the primary beneficiary of MRE. Therefore, consolidation is not required under the variable interest model. There is no significant risk of loss to the Company relating to this VIE as the Company does not have any equity at risk or obligation to provide additional financial support to MRE.
9. Fair Value Measurements
Generally accepted accounting principles defines fair value as an exit price and also establishes a framework for measuring fair value. An exit price represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is used, which prioritizes the inputs used in measuring fair value as follows:
Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 inputs: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
Level 3 inputs: Unobservable inputs (e.g., a reporting entity’s own data).
In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011 and 2010.
| (in thousands) | December 31, 2011 | |||||||||||||||
Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | $ | 183 | $ | — | $ | — | $ | 183 | ||||||||
Commodity derivatives, net | 43,503 | 22,876 | 2,467 | 68,846 | ||||||||||||
Convertible preferred securities (b) | — | — | 20,360 | 20,360 | ||||||||||||
Other assets and liabilities (a) | 24,875 | — | (2,178 | ) | 22,697 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 68,561 | $ | 22,876 | $ | 20,649 | $ | 112,086 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| (in thousands) | December 31, 2010 | |||||||||||||||
Assets (liabilities) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | $ | 213 | $ | — | $ | — | $ | 213 | ||||||||
Commodity derivatives, net | 61,559 | 129,723 | 12,406 | 203,688 | ||||||||||||
Convertible preferred securities (b) | — | — | 15,790 | 15,790 | ||||||||||||
Other assets and liabilities (a) | 17,983 | — | (2,156 | ) | 15,827 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 79,755 | $ | 129,723 | $ | 26,040 | $ | 235,518 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| (a) | Included in other assets and liabilities is restricted cash, interest rate and foreign currency derivatives, swaptions and deferred compensation assets. |
| (b) | Recorded in “Other noncurrent assets” on the Company’s Consolidated Balance Sheets |
Level 1 commodity derivatives reflect the fair value of the futures and options contracts that the Company holds, net of the cash collateral that the Company has in its margin account.
A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:
| 2011 | 2010 | |||||||||||||||||||||||
| (in thousands) | Interest rate derivatives and swaptions | Convertible preferred securities | Commodity derivatives, net | Interest rate derivatives | Convertible preferred securities | Commodity derivatives, net | ||||||||||||||||||
Asset (liability) at December 31, | $ | (2,156 | ) | $ | 15,790 | $ | 12,406 | $ | (1,763 | ) | $ | — | $ | 1,948 | ||||||||||
Investment in debt securities | — | — | — | — | 13,100 | — | ||||||||||||||||||
Gains (losses) included in earnings | (560 | ) | — | (9,109 | ) | (132 | ) | — | (1,519 | ) | ||||||||||||||
Unrealized gains (losses) included in other comprehensive income | (62 | ) | — | — | (297 | ) | — | — | ||||||||||||||||
Increase in estimated fair value of investment in debt securities included in other comprehensive income | — | 4,570 | — | — | 2,690 | — | ||||||||||||||||||
New contracts entered into | 600 | — | — | 36 | — | — | ||||||||||||||||||
Transfers to level 2 | — | — | (1,234 | ) | — | — | — | |||||||||||||||||
Transfers from level 2 | — | — | 404 | — | — | 11,977 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Asset (liability) at December 31, | $ | (2,178 | ) | $ | 20,360 | $ | 2,467 | $ | (2,156 | ) | $ | 15,790 | $ | 12,406 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company’s convertible preferred securities are measured at fair value using a combination of the income and market approaches. Specifically, the income approach incorporates the use of the Discounted Cash Flow method, whereas the Market Approach incorporates the use of the Guideline Public Company method. Application of the Discounted Cash Flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future. The assumptions input into this method are estimated annual cash flows for a specified estimation period, the discount rate, and the terminal value at the end of the estimation period. In the Guideline Public Company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. A comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.
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). Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a significant input to fair value for the majority of these commodity contracts.
However, in situations where the Company believes that nonperformance risk exists, based on past or present experience with a customer or knowledge of the customer’s operations or financial condition, the Company classifies these commodity contracts as Level 3 in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of these contracts.
Fair Values of Financial Instruments
75
| (in thousands) | Carrying Amount | Fair Value | ||||||
2010: | ||||||||
| Fixed rate long-term notes payable | $ | 196,242 | $ | 199,292 | ||||
| Long-term notes payable, non-recourse | 15,991 | 16,157 | ||||||
| Debenture bonds | 36,887 | 39,991 | ||||||
| $ | 249,120 | $ | 255,440 | |||||
2009: | ||||||||
| Fixed rate long-term notes payable | $ | 214,207 | $ | 219,904 | ||||
| Long-term notes payable, non-recourse | 24,350 | 24,629 | ||||||
| Debenture bonds | 45,595 | 46,307 | ||||||
| $ | 284,152 | $ | 290,840 | |||||
| (in thousands) | Carrying Amount | Fair Value | ||||||
2011: | ||||||||
Fixed rate long-term notes payable | $ | 179,160 | $ | 186,918 | ||||
Long-term notes payable, non-recourse | 954 | 966 | ||||||
Debenture bonds | 29,483 | 30,666 | ||||||
|
|
|
| |||||
| $ | 209,597 | $ | 218,550 | |||||
|
|
|
| |||||
2010: | ||||||||
Fixed rate long-term notes payable | $ | 196,242 | $ | 199,292 | ||||
Long-term notes payable, non-recourse | 15,991 | 16,157 | ||||||
Debenture bonds | 36,887 | 39,991 | ||||||
|
|
|
| |||||
| $ | 249,120 | $ | 255,440 | |||||
|
|
|
| |||||
The fair values of the Company’s cash equivalents, accounts receivable, and accounts payable approximate their carrying values as they are close to maturity.
10. Debt
15. DerivativesBorrowing Arrangements
The Company maintains a borrowing arrangement with a syndicate of banks, which was amended on December 7, 2011, and provides the Company with $735 million (“Line A”) in short-term lines of credit and $115 million (“Line B”) in long-term lines of credit. It also provides the Company with $90 million in letters of credit. Any amounts outstanding on letters of credit will reduce the amount available on the lines of credit. The Company had standby letters of credit outstanding of $35.1 million at December 31, 2011. As of December 31, 2011, $71.5 million in borrowings was outstanding on Line A and no borrowings were outstanding on Line B. Borrowings under the line of credit bear interest at variable interest rates, which are based off LIBOR plus an applicable spread. The maturity date for Line A is December 2014 and September 2015 for Line B. Draw downs that are less than 90 days are recorded net in the Consolidated Statements of Cash Flows.
The long-term portion of the syndicate line can be drawn on and the resulting debt considered long-term when used for long-term purposes such as replacing long-term debt that is maturing, funding the purchase of long-term assets, or increasing permanent working capital when needed. The expectation at the time of drawing is that it will be kept open until more permanent replacement debt is secured, until other long-term assets are sold, or earnings are generated to pay it down.
The Company drew $20.0 million on the long-term syndicate line at the end of the first quarter, and again in the second quarter of 2011 as a partial replacement for $25.0 million in long-term private placement debt that was becoming a current maturity and another $17.0 million that was maturing. In the second half of the year, a combination of reduced borrowings due to a drop in commodity prices, increasing earnings and working capital, and lower capital spending than originally planned resulted in pay down of a
significant amount of long-term debt. Total payments of long-term debt are $104.0 million year-to-date.
At December 31, 2011, the Company had a total of $743.4 million available for borrowing under its lines of credit.
The following information relates to short-term borrowings:
| December 31, | ||||||||||||
| (in thousands, except percentages) | 2011 | 2010 | 2009 | |||||||||
Maximum amount borrowed | $ | 601,500 | $ | 305,000 | $ | 92,700 | ||||||
Weighted average interest rate | 2.73 | % | 3.69 | % | 2.89 | % | ||||||
Long-Term Debt
Recourse Debt
Long-term debt consists of the following:
| December 31, | ||||||||
| (in thousands, except percentages) | 2011 | 2010 | ||||||
Note payable, 4.80%, payable at maturity, due 2011 | $ | — | $ | 17,000 | ||||
Note payable, 4.55%, payable at maturity, due 2012 | 25,000 | 25,000 | ||||||
Note payable, 5.52 %, payable at maturity, due 2013 | 25,000 | 25,000 | ||||||
Note payable, 6.10%, payable at maturity, due 2014 | 25,000 | 25,000 | ||||||
Note payable, 6.12%, payable at maturity, due 2015 | 61,500 | 61,500 | ||||||
Note payable, 6.78%, payable at maturity due 2018 | 41,500 | 41,500 | ||||||
Note payable, variable rate (2.82% at December 31, 2010), payable $110 monthly plus interest, due 2012 (a) | — | 10,031 | ||||||
Note payable, variable rate (1.65% at December 31, 2011), payable in increasing amounts ($875 annually at December 31, 2011) plus interest, due 2023 (a) | 13,715 | 14,590 | ||||||
Note payable, variable rate (1.09% at December 31, 2011), payable $58 monthly plus interest, due 2016 (a) | 10,150 | 10,850 | ||||||
Note payable, 8.5%, payable $15 monthly, due 2016 (a) | 1,160 | 1,242 | ||||||
Industrial development revenue bonds: | ||||||||
Variable rate (2.76% at December 31, 2011), due 2017 (a) | 8,881 | 9,000 | ||||||
Variable rate (2.19% at December 31, 2011), due 2019 (a) | 4,650 | 4,650 | ||||||
Variable rate (2.25% at December 31, 2011), due 2025 (a) | 3,100 | 3,100 | ||||||
Variable rate (1.87% at December 31, 2011), due 2036 (a) | 21,000 | — | ||||||
Debenture bonds, 4.00% to 6.5%, due 2011 through 2021 | 29,483 | 36,887 | ||||||
Other notes payable and bonds | — | 8 | ||||||
|
|
|
| |||||
| 270,139 | 285,358 | |||||||
Less: current maturities | 32,051 | 21,683 | ||||||
|
|
|
| |||||
| $ | 238,088 | $ | 263,675 | |||||
|
|
|
| |||||
| (a) | Debt is collateralized by first mortgages on certain facilities and related equipment or other assets with a book value of $41.6 million |
The Company called certain issues of debenture bonds earning a rate of interest of 6% or higher during the fourth quarter of 2011. The total amount called was $18.3 million. At December 31, 2011, the Company had $8.9 million of five-year term debenture bonds bearing interest at 3.0% and $2.7 million of ten-year term debenture bonds bearing interest at 4.25% available for sale under an existing registration statement.
The Company’s operating results are affected by changesshort-term and long-term borrowing agreements include both financial and non-financial covenants that, among other things, require the Company at a minimum to commodity prices. maintain:
tangible net worth of not less than $300 million
current ratio net of hedged inventory of not less than 1.25 to 1
debt to capitalization ratio of not more than 70%
asset coverage ratio of not more than 70%
interest coverage ratio of not less than 2.75 to 1
The Company has established “unhedged” grain position limits (the amountwas in compliance with all covenants at and during the years ended December 31, 2011 and 2010.
The aggregate annual maturities of grain, either owned or contracted for, that does not have an offsetting derivative contract to lock inlong-term debt are as follows: 2012 — $32.1 million; 2013 — $27.2 million; 2014 — $29.6 million; 2015 — $70.0 million; 2016 — $16.5 million; and $94.8 million thereafter.
Non-Recourse Debt
The Company’s non-recourse long-term debt consists of the price). To reduce the exposure to market price risk on grain owned and forward grain and ethanol purchase and sale contracts,following:
| December 31, | ||||||||
| (in thousands, except percentages) | 2011 | 2010 | ||||||
Note payable, 5.96%, payable $218 monthly plus interest, due 2013 | $ | — | $ | 14,550 | ||||
Note payable, 6.37%, payable $24 monthly, due 2014 | 954 | 1,405 | ||||||
Note payable, 7.06%, payable $2 monthly, due 2011 | — | 36 | ||||||
|
|
|
| |||||
| 954 | 15,991 | |||||||
Less: current maturities | 157 | 2,841 | ||||||
|
|
|
| |||||
| $ | 797 | $ | 13,150 | |||||
|
|
|
| |||||
In 2005, The Andersons Rail Operating I (“TARO I”), a wholly-owned subsidiary of the Company, enters into regulated commodity futures contracts, primarily via regulated exchanges such as the CME and, to a lesser extent, via over-the-counter contracts with various counterparties. The Company’s forward contracts are for physical delivery of the commodityissued $41 million in a future period. Contracts to purchase grain from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of grain to processors or other consumers generally do not extend beyond one year. The terms of the contracts for the purchase and sale of grain and ethanol are consistent with industry standards. The Company, although to a lesser extent, also enters into option contractsnon-recourse long-term debt for the purpose of providing pricing featurespurchasing 2,293 railcars and related leases from the Company. The balance outstanding on the TARO I non-recourse long-term debt at December 31, 2010 was $14.6 million. The full amount of the note was paid off prior to itsDecember 31, 2011.
The aggregate annual maturities of non-recourse, long-term debt are as follows: 2012 — $0.2 million; 2013 — $0.2 million; 2014 — $0.6 million and $0.0 million thereafter.
Interest paid (including interest on short-term lines of credit) amounted to $25.2 million, $20.0 million and $20.0 million in 2011, 2010 and 2009, respectively.
11. Commitments and Contingencies
Railcar leasing activities:
The Company is a lessor of railcars. The majority of railcars are leased to customers and to manage price risk on its own inventory.
Many of the receipt or postingCompany’s leases provide for renewals. The Company also generally holds purchase options for railcars it has sold and leased-back from a financial intermediary, and railcars sold in non-recourse lease transactions. These purchase options are for stated amounts which are determined at the inception of cash collateral on the balance sheet as commodity derivative assets or liabilities, as appropriate,lease and accounts for them at estimated fair value,are intended to approximate the same method it uses to value its grain inventory. The estimated fair value of the commodity futuresapplicable railcars at the date for which such purchase options can be exercised.
Lease income from operating leases (with the Company as lessor) to customers (including month to month and options contracts that requireper diem leases) and rental expense for railcar operating leases (with the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received) within margin deposits or accrued expensesCompany as lessee) were as follows:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Rental and service income – operating leases | $ | 68,124 | $ | 60,700 | $ | 73,575 | ||||||
|
|
|
|
|
| |||||||
Rental expense | $ | 16,303 | $ | 20,023 | $ | 24,271 | ||||||
|
|
|
|
|
| |||||||
Lease income recognized under per diem arrangements (described in Note 1) totaled $2.9 million, $2.6 million and other current liabilities on the balance sheet, as appropriate. Management determines fair value based on exchange-quoted prices and$3.9 million in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk.
76
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Forward commodity contracts included in Commodity derivative assets — current | $ | 226,216 | $ | 24,255 | ||||
| Forward commodity contracts included in Commodity derivative assets — noncurrent | 18,113 | 3,137 | ||||||
| Forward commodity contracts included in Commodity derivative liabilities — current | (57,621 | ) | (24,871 | ) | ||||
| Forward commodity contracts included in Commodity derivative liabilities — noncurrent | (3,279 | ) | (830 | ) | ||||
| Regulated futures and options contracts included in Margin deposits (a) | (105,030 | ) | (11,354 | ) | ||||
| Over-the-counter contracts included in Margin deposits (a) | (41,300 | ) | (1,824 | ) | ||||
| Over-the-counter contracts included in accrued expenses and other current liabilities | — | (4,193 | ) | |||||
| Total estimated fair value of commodity derivatives | $ | 37,099 | $ | (15,680 | ) | |||
Future minimum rentals and service income for all noncancelable railcar operating leases greater than one year are as follows:
| (in thousands) | Future Rental and Service Income – Operating Leases | Future Minimum Rental Payments | ||||||
Year ended December 31, | ||||||||
2012 | $ | 53,848 | $ | 12,575 | ||||
2013 | 39,435 | 9,014 | ||||||
2014 | 26,676 | 6,572 | ||||||
2015 | 19,756 | 6,396 | ||||||
2016 | 14,704 | 6,174 | ||||||
Future years | 22,923 | 10,230 | ||||||
|
|
|
| |||||
| $ | 177,342 | $ | 50,961 | |||||
|
|
|
| |||||
The Company also arranges non-recourse lease transactions under which it sells railcars or locomotives to financial intermediaries and assigns the related operating lease on a non-recourse basis. The Company generally provides ongoing railcar maintenance and management services for the financial intermediaries, and receives a fee for such services when earned. Management and service fees earned in 2011, 2010 and 2009 were $2.8 million, $2.9 million and $3.0 million, respectively.
Other leasing activities:
The Company, as a lessee, leases real property, vehicles and other equipment under operating leases. Certain of Incomethese agreements contain lease renewal and purchase options. The Company also leases excess property to third parties. Net rental expense under these agreements was $6.3 million, $5.6 million and $5.1 million in 2011, 2010 and 2009, respectively. Future minimum lease payments (net of sublease income commitments) under agreements in effect at December 31, 2011 are as follows: 2012 — $4.2 million; 2013 — $3.0 million; 2014 — $1.8 million; 2015 — $1.3 million; 2016 — $0.4 million; and $1.4 million thereafter.
In addition to the line itemsabove, the Company leases its Albion, Michigan and Clymers, Indiana grain elevators under operating leases to two of its ethanol joint ventures. The Albion, Michigan grain elevator lease expires in which they are located2056. The initial term of the Clymers, Indiana grain elevator lease ends in 2014 and provides for 5 renewals of 7.5 years each. Lease income for the years ended December 31, 2011, 2010 and 2009 was $1.9 million, $1.8 million and $1.8 million, respectively.
Litigation activities:
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 a charge to income. 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 range of loss for all outstanding claims that are considered reasonably possible of occurring is not significant. There are several pending claims for which the question of loss or the range of loss cannot be estimated at this time, among them the investigation of the Maumee River in Toledo Ohio with which we are cooperating.
In 2011, the Company received a trial verdict in the amount of $3.2 million in a civil suit, for which both the Company and the defendant have subsequently filed appeals. No income has been recorded to-date due to uncertainty of the final amount and overall collectability of any amount against the defendant.
12. Goodwill and Intangible Assets
The Company has goodwill of $12.5 million included in other assets on the Consolidated Balance Sheets. Goodwill includes $5.0 million in the Grain business, $6.8 million in the Plant Nutrient business and $0.7 million in the Turf & Specialty business. The total amount of goodwill in the Plant Nutrient business includes $1.7 million goodwill from the 2011 acquisition discussed in Note 16, Business Acquisitions.
Goodwill is tested annually for impairment as of December 31 or whenever events or circumstances change that would indicate that an impairment of goodwill may be present. There have been no goodwill impairment charges historically. In 2010, the reporting units’ fair value significantly exceeded its carrying value. In the fourth quarter of 2011, the Company performed a qualitative goodwill impairment analysis. In performing this qualitative assessment of goodwill, management has considered the following relevant events and circumstances:
Macroeconomic conditions including, but not limited to deterioration in general economic conditions, limitation on accessing capital, or other developments in equity and credit markets;
Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a change in the market for an entity’s products or services, or a regulatory or political development;
Cost factors such as increases in commodity prices, raw materials, labor, or other costs that have a negative effect on earnings and cash flows;
Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers and;
Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
There is a certain degree of uncertainty associated with the key assumptions used. Potential events or changes in circumstances that could reasonably be expected to negatively affect the key assumptions include significant volatility in commodity prices or raw material prices and unanticipated changes in the economy or industries within which the businesses operate. When considering all factors in totality, management believes it is more likely than not that the fair value of goodwill exceeds its carrying amount, and as such, no further analysis was required for purposes of testing goodwill for impairment.
The Company’s intangible assets are included in other assets and are as follows:
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| (Loss)/gain on commodity derivatives included in sales and merchandising revenues | $ | (53,942 | ) | $ | 45,707 | |||
| (in thousands) | Group | Original Cost | Accumulated Amortization | Net Book Value | ||||||||||
December 31, 2011 | ||||||||||||||
Amortized intangible assets | ||||||||||||||
Acquired customer list | Rail | $ | 3,462 | $ | 3,331 | $ | 131 | |||||||
Acquired customer list | Plant Nutrient | 4,096 | 1,098 | 2,998 | ||||||||||
Acquired customer list | Grain | 1,250 | 433 | 817 | ||||||||||
Acquired non-compete agreement | Plant Nutrient | 1,319 | 847 | 472 | ||||||||||
Acquired non-compete agreement | Grain | 175 | 46 | 129 | ||||||||||
Acquired marketing agreement | Plant Nutrient | 1,607 | 825 | 782 | ||||||||||
Acquired supply agreement | Plant Nutrient | 4,846 | 1,443 | 3,403 | ||||||||||
Acquired grower agreement | Grain | 300 | 175 | 125 | ||||||||||
Patents and other | Various | 943 | 474 | 469 | ||||||||||
Lease intangible | Rail | 2,222 | 1,433 | 789 | ||||||||||
|
|
|
|
|
| |||||||||
| $ | 20,220 | $ | 10,105 | $ | 10,115 | |||||||||
|
|
|
|
|
| |||||||||
December 31, 2010 | ||||||||||||||
Amortized intangible assets | ||||||||||||||
Acquired customer list | Rail | $ | 3,462 | $ | 3,299 | $ | 163 | |||||||
Acquired customer list | Plant Nutrient | 3,846 | 670 | 3,176 | ||||||||||
Acquired customer list | Grain | 1,250 | 150 | 1,100 | ||||||||||
Acquired non-compete agreement | Plant Nutrient | 1,250 | 594 | 656 | ||||||||||
Acquired non-compete agreement | Grain | 175 | 11 | 164 | ||||||||||
Acquired marketing agreement | Plant Nutrient | 1,604 | 619 | 985 | ||||||||||
Acquired supply agreement | Plant Nutrient | 4,846 | 926 | 3,920 | ||||||||||
Acquired grower agreement | Grain | 300 | 75 | 225 | ||||||||||
Acquired patents and other | Various | 943 | 401 | 542 | ||||||||||
Lease intangible | Rail | 1,673 | 633 | 1,040 | ||||||||||
|
|
|
|
|
| |||||||||
| $ | 19,349 | $ | 7,378 | $ | 11,971 | |||||||||
|
|
|
|
|
| |||||||||
Amortization expense for intangible assets was $2.8 million, $2.4 million and $1.2 million for 2011, 2010 and 2009, respectively. Expected future annual amortization expense is as follows: 2012 — $2.8 million; 2013 — $1.6 million; 2014 — $1.2 million; 2015 — $1.0 million; and 2016 — $0.9 million.
13. Income Taxes
Income tax provision applicable to continuing operations consists of the following:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
Current: | ||||||||||||
Federal | $ | 39,015 | $ | 22,288 | $ | 4,848 | ||||||
State and local | 5,603 | 3,613 | 828 | |||||||||
Foreign | 962 | 1,156 | (176 | ) | ||||||||
|
|
|
|
|
| |||||||
| $ | 45,580 | $ | 27,057 | $ | 5,500 | |||||||
|
|
|
|
|
| |||||||
Deferred: | ||||||||||||
Federal | $ | 5,281 | $ | 13,558 | $ | 15,638 | ||||||
State and local | 553 | 595 | 1,833 | |||||||||
Foreign | (361 | ) | (1,948 | ) | (1,041 | ) | ||||||
|
|
|
|
|
| |||||||
| $ | 5,473 | $ | 12,205 | $ | 16,430 | |||||||
|
|
|
|
|
| |||||||
Total: | ||||||||||||
Federal | $ | 44,296 | $ | 35,846 | $ | 20,486 | ||||||
State and local | 6,156 | 4,208 | 2,661 | |||||||||
Foreign | 601 | (792 | ) | (1,217 | ) | |||||||
|
|
|
|
|
| |||||||
| $ | 51,053 | $ | 39,262 | $ | 21,930 | |||||||
|
|
|
|
|
| |||||||
Income before income taxes from continuing operations consists of the following:
| Year ended December 31, | ||||||||||||
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
U.S. income | $ | 146,420 | $ | 106,184 | $ | 64,359 | ||||||
Foreign | 1,458 | (2,041 | ) | (2,863 | ) | |||||||
|
|
|
|
|
| |||||||
| $ | 147,878 | $ | 104,143 | $ | 61,496 | |||||||
|
|
|
|
|
| |||||||
A reconciliation from the statutory U.S. federal tax rate to the effective tax rate follows:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Statutory U.S. federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (decrease) in rate resulting from: | ||||||||||||
Effect of qualified domestic production deduction | (1.6 | ) | (1.1 | ) | (0.4 | ) | ||||||
Effect of Patient Protection and Affordable Care Act | — | 1.4 | — | |||||||||
State and local income taxes, net of related federal taxes | 2.7 | 2.5 | 2.8 | |||||||||
Other, net | (1.6 | ) | (0.1 | ) | (1.7 | ) | ||||||
|
|
|
|
|
| |||||||
Effective tax rate | 34.5 | % | 37.7 | % | 35.7 | % | ||||||
|
|
|
|
|
| |||||||
Income taxes paid in 2011 were $48.9 million. Income taxes paid in 2010 were $24.8 million. Income tax refunds of $24.2 million were received in 2009.
Significant components of the Company’s deferred tax liabilities and assets are as follows:
| December 31, | ||||||||
| (in thousands) | 2011 | 2010 | ||||||
Deferred tax liabilities: | ||||||||
Property, plant and equipment and railcar assets leased to others | $ | (72,997 | ) | $ | (64,392 | ) | ||
Prepaid employee benefits | (15,419 | ) | (12,724 | ) | ||||
Investments | (23,262 | ) | (20,242 | ) | ||||
Other | (3,205 | ) | (3,877 | ) | ||||
|
|
|
| |||||
| (114,883 | ) | (101,235 | ) | |||||
|
|
|
| |||||
Deferred tax assets: | ||||||||
Employee benefits | 42,482 | 32,463 | ||||||
Accounts and notes receivable | 1,909 | 2,212 | ||||||
Inventory | 6,326 | 7,056 | ||||||
Deferred expenses | 16,022 | 10,036 | ||||||
Net operating loss carryforwards | 1,299 | 1,207 | ||||||
Other | 3,688 | 2,425 | ||||||
|
|
|
| |||||
Total deferred tax assets | 71,726 | 55,399 | ||||||
Valuation allowance | — | — | ||||||
|
|
|
| |||||
| 71,726 | 55,399 | |||||||
|
|
|
| |||||
Net deferred tax liabilities | $ | (43,157 | ) | $ | (45,836 | ) | ||
|
|
|
| |||||
On December 31, 2011 the Company had $13.9 million in state net operating loss carryforwards that expire from 2017 to 2023. A deferred tax asset of $0.6 million has been recorded with respect to state net operating loss carryforwards. No valuation allowance has been established because based on all available evidence, the Company concluded it is more likely than not that it will realize the deferred tax asset. On December 31, 2010 the Company had recorded a $0.6 million deferred tax asset and no valuation allowance with respect to state net operating loss carryforwards.
On December 31, 2011, the following bushels and gallons outstanding (on a gross basis)Company had $2.9 million in cumulative Canadian net operating losses that expire from 2029 to 2031. A deferred tax asset of $0.7 million has been recorded with respect to Canadian net operating loss carryforwards. No valuation allowance has been established because based on all commodity derivative contracts:
| Number of bushels | Number of tons | Number of gallons | ||||||||||
| Commodity | (in thousands) | (in thousands) | (in thousands) | |||||||||
| Corn | 352,367 | — | — | |||||||||
| Soybeans | 22,465 | — | — | |||||||||
| Wheat | 14,416 | — | — | |||||||||
| Oats | 8,824 | — | — | |||||||||
| Soymeal | — | 20 | — | |||||||||
| Ethanol | — | — | 368,030 | |||||||||
| Other | 306 | — | — | |||||||||
| Total | 398,378 | 20 | 368,030 | |||||||||
77
| Interest Rate | Initial | |||||||||||||||||||
| Hedging | Notional Amount | Interest | ||||||||||||||||||
| Instrument | Year Entered | Year of Maturity | (in millions) | Hedged Item | Rate | |||||||||||||||
Short-term | ||||||||||||||||||||
| Cap | 2009 | 2011 | $ | 10.0 | Interest rate component of debt — not accounted for as a hedge | 2.92 | % | |||||||||||||
| Cap | 2009 | 2011 | $ | 10.0 | Interest rate component of debt — not accounted for as a hedge | 2.92 | % | |||||||||||||
Long-term | ||||||||||||||||||||
| Swap | 2005 | 2016 | $ | 4.0 | Interest rate component of an operating lease — not accounted for as a hedge | 5.23 | % | |||||||||||||
| Swap | 2006 | 2016 | $ | 14.0 | Interest rate component of debt — accounted for as cash flow hedge | 5.95 | % | |||||||||||||
| Cap | 2009 | 2012 | $ | 10.0 | Interest rate component of debt — not accounted for as a hedge | 3.42 | % | |||||||||||||
| Cap | 2010 | 2012 | $ | 10.0 | Interest rate component of debt — not accounted for as a hedge | 2.75 | % | |||||||||||||
On December 31, 2011, the following amountsCompany had recorded a $2.0 million deferred tax asset related to U.S. foreign tax credit carryforwards that expire from 2020 through 2022. No valuation allowance has been established because based on all available evidence, the Company concluded it is more likely than not that it will realize the deferred tax asset. On December 31, 2010, the Company had $0.8 million in U.S. foreign credit carryforwards that expire in 2020 and 2021 and no valuation allowance with respect to the foreign credit carryforwards.
The Company accounts for utilization of windfall tax benefits based on tax law ordering and considered only the direct effects of stock-based compensation for purposes of measuring the windfall at settlement of an award. During 2011, there was no cash resulting from the exercise of awards and the Company realized no tax benefit from the exercise of awards. For 2010, the amount of cash resulting from the exercise of awards was $0.2 million and the tax benefit the Company realized from the exercise of awards was $0.8 million.
The Company or one of its subsidiaries files income tax returns in the U.S., various foreign jurisdictions and various state and local jurisdictions. The Company is no longer subject to examinations by U.S. tax authorities for years before 2007 and is no longer subject to examinations by foreign jurisdictions for years before 2006. The Company is no longer subject to examination by state tax authorities in most states for tax years before 2008.
A reconciliation of the January 1, 2009 to December 31, 2011 amount of unrecognized tax benefits is as follows:
| (in thousands) | ||||
Balance at January 1, 2009 | $ | 727 | ||
Additions based on tax positions related to the current year | 28 | |||
Reductions based on tax positions related to prior years | (25 | ) | ||
Reductions for settlements with taxing authorities | (153 | ) | ||
Reductions as a result of a lapse in statute of limitations | (259 | ) | ||
|
| |||
Balance at December 31, 2009 | 318 | |||
Additions based on tax positions related to the current year | 20 | |||
Additions based on tax positions related to prior years | 474 | |||
Reductions as a result of a lapse in statute of limitations | (198 | ) | ||
|
| |||
Balance at December 31, 2010 | 614 | |||
Additions based on tax positions related to the current year | — | |||
Additions based on tax positions related to prior years | 43 | |||
Reductions as a result of a lapse in statute of limitations | (22 | ) | ||
|
| |||
Balance at December 31, 2011 | $ | 635 | ||
|
| |||
The unrecognized tax benefits at December 31, 2011 are associated with positions taken on state income tax returns, and would decrease the Company’s effective tax rate if recognized. The Company does not anticipate any significant changes during 2012 in the amount of unrecognized tax benefits.
The Company has elected to classify interest and penalties as interest expense and penalty expense, respectively, rather than as income tax expense. The Company has $0.2 million accrued for the payment of interest and penalties at December 31, 2011. The net interest and penalties expense for 2011 is $0.1 million benefit, due to the reduction in uncertain tax positions and associated release of previously recorded interest and penalties. The Company had $0.3 million accrued for the payment of interest and penalties at December 31, 2010. The net interest and penalties expense for 2010 was $0.1 million.
14. Stock Compensation Plans
The Company’s 2005 Long-Term Performance Compensation Plan, dated May 6, 2005 (the “LT Plan”), authorizes the Board of Directors to grant options, stock appreciation rights, performance shares and share awards to employees and outside directors for up to 400,000 of the Company’s common shares plus 426,000 common shares that remained available under a prior plan. In 2008, shareholders approved an additional 500,000 of the Company’s common shares to be available under the LT Plan. As of December 31, 2011, approximately 396,000 shares remain available for grant under the LT Plan. Options granted have a maximum term of 10 years.
Stock-based compensation expense for all stock-based compensation awards are based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award. Total compensation expense recognized in the Consolidated Statement of Income for all stock compensation programs was $4.1 million, $2.6 million and $2.7 million in 2011, 2010 and 2009, respectively.
Stock Only Stock Appreciation Rights (“SOSARs”) and Stock Options
Beginning in 2006, the Company discontinued granting options to directors and management and instead began granting SOSARs. SOSARs granted to directors and management personnel under the LT Plan beginning in 2008 have a term of five-years and have three year graded vesting. The SOSARs granted in 2006 and 2007 have a term of five years and vest after three years. SOSARs granted under the LT Plan are structured as fixed grants with the exercise price equal to the market value of the underlying stock on the date of the grant. The related compensation expense is recognized on a straight-line basis over the service period.
Beginning in 2011, the Company replaced the SOSAR equity awards with full value Restricted Stock Awards (“RSAs”). No SOSAR equity awards were granted in 2011.
The fair value for SOSARs granted in previous years was estimated at the date of grant, using a Black-Scholes option pricing model with the weighted average assumptions listed below. Volatility was estimated based on the historical volatility of the Company’s common shares over the past five years. The average expected life was based on the contractual term of the award and expected employee exercise and post-vesting employment termination trends. The risk-free rate is based on U.S. Treasury issues with a term equal to the expected life assumed at the date of grant. Forfeitures are estimated at the date of grant based on historical experience.
| 2011 | 2010 | 2009 | ||||||||||
Risk free interest rate | — | 1.96 | % | 1.89 | % | |||||||
Dividend yield | — | 1.10 | % | 3.18 | % | |||||||
Volatility factor of the expected market price of the Company’s common shares | — | .560 | .520 | |||||||||
Expected life for the options (in years) | — | 4.10 | 4.10 | |||||||||
A reconciliation of the number of SOSARs and stock options outstanding and exercisable under the Long-Term Performance Compensation Plan as of December 31, 2011, and changes during the period then ended is as follows:
| Shares (000’s) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value (000’s) | |||||||||||||
Options & SOSARs outstanding at January 1, 2011 | 851 | $ | 33.38 | |||||||||||||
SOSARs granted | — | — | ||||||||||||||
Options exercised | (329 | ) | 35.66 | |||||||||||||
Options & SOSARs cancelled / forfeited | (19 | ) | 41.65 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Options and SOSARs outstanding at December 31, 2011 | 503 | $ | 31.56 | 1.81 | $ | 6,380 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Vested and expected to vest at December 31, 2011 | 501 | $ | 31.58 | 1.80 | $ | 6,352 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Options exercisable at December 31, 2011 | 363 | $ | 34.57 | 1.41 | $ | 3,597 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
| 2011 | 2010 | 2009 | ||||||||||
Total intrinsic value of options exercised during the year ended December 31 (000’s) | $ | 3,817 | $ | 2,724 | $ | 2,127 | ||||||
|
|
|
|
|
| |||||||
Total fair value of shares vested during the year ended December 31 (000’s) | $ | 816 | $ | 3,084 | $ | 4,145 | ||||||
|
|
|
|
|
| |||||||
Weighted average fair value of options granted during the year ended December 31 | $ | — | $ | 13.75 | $ | 3.80 | ||||||
|
|
|
|
|
| |||||||
As of December 31, 2011, there was $0.1 million of total unrecognized compensation cost related to stock options and SOSARs granted under the LT Plan. That cost is expected to be recognized over the next 0.17 years.
Restricted Stock Awards
The LT Plan permits awards of restricted stock. These shares carry voting and dividend rights; however, sale of the shares is restricted prior to vesting. Restricted shares have a three year vesting period. Total restricted stock expense is equal to the market value of the Company’s common shares on the date of the award and is recognized over the service period. In 2011, there were 46,862 shares issued to members of management and directors.
A summary of the status of the Company’s nonvested restricted shares as of December 31, 2011, and changes during the period then ended, is presented below:
| Nonvested Shares | Shares (000)’s | Weighted- Average Grant- Date Fair Value | ||||||
Nonvested at January 1, 2011 | 64 | $ | 26.52 | |||||
Granted | 47 | 47.80 | ||||||
Vested | (17 | ) | 45.49 | |||||
Forfeited | (1 | ) | 40.81 | |||||
|
|
|
| |||||
Nonvested at December 31, 2011 | 93 | $ | 33.54 | |||||
|
|
|
| |||||
| 2011 | 2010 | 2009 | ||||||||||
Total fair value of shares vested during the year ended December 31 (000’s) | $ | 1,367 | $ | 566 | $ | 109 | ||||||
|
|
|
|
|
| |||||||
Weighted average fair value of restricted shares granted during the year ended December 31 | $ | 47.80 | $ | 32.75 | $ | 11.02 | ||||||
|
|
|
|
|
| |||||||
As of December 31, 2011, there was $1.3 million of total unrecognized compensation cost related to nonvested restricted shares granted under the LT Plan. That cost is expected to be recognized over the next 2.0 years.
Performance Share Units (“PSUs”)
The LT Plan also allows for the award of PSUs. Each PSU gives the participant the right to receive common shares dependent on the achievement of specified performance results over a three calendar year performance period. At the end of the performance period, the number of shares of stock issued will be determined by adjusting the award upward or downward from a target award. Fair value of PSUs issued is based on the market value of the Company’s common shares on the date of the award. The related compensation expense is recognized over the performance period when achievement of the award is probable and is adjusted for changes in the number of shares expected to be issued if changes in performance are expected. In 2011 there were 77,025 PSUs issued to members of management. Currently, the Company is accounting for the awards granted in 2009, 2010 and 2011 at 40%, 100%, and 100%, respectively, of the maximum amount available for issuance.
PSUs Activity
A summary of the status of the Company’s PSUs as of December 31, 2011, and changes during the period then ended, is presented below:
| Nonvested Shares | Shares (000)’s | Weighted- Average Grant- Date Fair Value | ||||||
Nonvested at January 1, 2011 | 124 | $ | 26.90 | |||||
Granted | 77 | 47.80 | ||||||
Vested | — | — | ||||||
Forfeited | (36 | ) | 44.97 | |||||
|
|
|
| |||||
Nonvested at December 31, 2011 | 165 | $ | 32.73 | |||||
|
|
|
| |||||
| 2011 | 2010 | 2009 | ||||||||||
Weighted average fair value of PSUs granted during the year ended December 31 | $ | 47.80 | $ | 32.69 | $ | 10.81 | ||||||
|
|
|
|
|
| |||||||
As of December 31, 2011, there was $2.9 million of total unrecognized compensation cost related to nonvested PSUs granted under the LT Plan. That cost is expected to be recognized over the next 2.0 years.
Employee Share Purchase Plan (the “ESP Plan”)
The Company’s 2004 ESP Plan allows employees to purchase common shares through payroll withholdings. The Company has approximately 266,000 common shares remaining available for issuance to and purchase by employees under this plan. The ESP Plan also contains an option component. The purchase price per share under the ESP Plan is the lower of the market price at the beginning or end of the year. The Company records a liability for withholdings not yet applied towards the purchase of common stock.
The fair value of the Company’s interest rate derivatives:
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
Derivatives not designated as hedging instruments | ||||||||
| Interest rate contracts included in other assets | $ | 6 | $ | 55 | ||||
| Interest rate contracts included in deferred income and other long term liabilities | (368 | ) | (320 | ) | ||||
| Total fair value of interest rate derivatives not designated as hedging instruments | $ | (362 | ) | $ | (265 | ) | ||
Derivatives designated as hedging instruments | ||||||||
| Interest rate contract included in deferred income and other long term liabilities | $ | (1,768 | ) | $ | (1,540 | ) | ||
| Total fair value of interest rate derivatives designated as hedging instruments | $ | (1,768 | ) | $ | (1,540 | ) | ||
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Interest expense | $ | (133 | ) | $ | 158 | |||
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Accumulated other comprehensive loss | $ | (229 | ) | $ | 893 | |||
78
| December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Foreign currency contract included in other assets | $ | (26 | ) | $ | 42 | |||
| Year ended December 31, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Accumulated other comprehensive loss | $ | (68 | ) | $ | (539 | ) | ||
79
| 2011 | 2010 | 2009 | ||||||||||
Employee Share Purchase Plan | ||||||||||||
Risk free interest rate | 0.27 | % | 0.47 | % | 0.37 | % | ||||||
Dividend yield | 1.21 | % | 1.10 | % | 2.06 | % | ||||||
Volatility factor of the expected market price of the Company’s common shares | .340 | .544 | .673 | |||||||||
Expected life for the options (in years) | 1.00 | 1.00 | 1.00 | |||||||||
| (in thousands) | Grain & | Plant | ||||||||||||||||||||||||||
| 2010 | Ethanol | Rail | Nutrient | Turf & Specialty | Retail | Other | Total | |||||||||||||||||||||
Revenues from external customers | $ | 2,405,452 | $ | 94,816 | $ | 619,330 | $ | 123,549 | $ | 150,644 | $ | — | $ | 3,393,791 | ||||||||||||||
Inter-segment sales | 3 | 637 | 13,517 | 1,636 | — | — | 15,793 | |||||||||||||||||||||
Equity in earnings of affiliates | 25,999 | — | 8 | — | — | — | 26,007 | |||||||||||||||||||||
Other income, net | 2,733 | 4,502 | 1,298 | 1,335 | 608 | 1,176 | 11,652 | |||||||||||||||||||||
Interest expense | 8,315 | 4,928 | 3,901 | 1,604 | 1,039 | 78 | 19,865 | |||||||||||||||||||||
Operating income (loss) (a) | 81,387 | 107 | 30,062 | 3,443 | (2,534 | ) | (8,541 | ) | 103,924 | |||||||||||||||||||
Income attributable to noncontrolling interest | (219 | ) | — | — | — | — | — | (219 | ) | |||||||||||||||||||
Income before income taxes | 81,606 | 107 | 30,062 | 3,443 | (2,534 | ) | (8,541 | ) | 104,143 | |||||||||||||||||||
Identifiable assets | 1,099,480 | 196,149 | 208,548 | 62,643 | 52,430 | 80,140 | 1,699,390 | |||||||||||||||||||||
Capital expenditures | 10,343 | 927 | 7,631 | 2,237 | 8,827 | 932 | 30,897 | |||||||||||||||||||||
Railcar expenditures | — | 18,354 | — | — | — | — | 18,354 | |||||||||||||||||||||
Cash invested in affiliates | 395 | — | — | — | — | — | 395 | |||||||||||||||||||||
Acquisition of businesses | 39,293 | — | — | — | — | — | 39,293 | |||||||||||||||||||||
Investment in convertible preferred securities | — | 13,100 | — | — | — | — | 13,100 | |||||||||||||||||||||
Depreciation and amortization | 7,951 | 15,107 | 10,225 | 2,032 | 2,400 | 1,198 | 38,913 | |||||||||||||||||||||
| (in thousands) | Grain & | Plant | ||||||||||||||||||||||||||
| 2009 | Ethanol | Rail | Nutrient | Turf & Specialty | Retail | Other | Total | |||||||||||||||||||||
| Revenues from external customers | $ | 2,153,978 | $ | 92,789 | $ | 491,293 | $ | 125,306 | $ | 161,938 | $ | — | $ | 3,025,304 | ||||||||||||||
| Inter-segment sales | 9 | 634 | 12,245 | 1,504 | — | — | 14,392 | |||||||||||||||||||||
| Equity in earnings of affiliates | 17,452 | — | 8 | — | — | 3 | 17,463 | |||||||||||||||||||||
| Other income, net | 2,319 | 485 | 1,755 | 1,131 | 683 | 1,958 | 8,331 | |||||||||||||||||||||
| Interest expense | 9,363 | 4,468 | 3,933 | 1,429 | 961 | 534 | 20,688 | |||||||||||||||||||||
| Operating income (loss) (a) | 51,354 | (1,034 | ) | 11,294 | 4,735 | (2,843 | ) | (3,225 | ) | 60,281 | ||||||||||||||||||
| Income attributable to noncontrolling interest | (1,215 | ) | — | — | — | — | — | (1,215 | ) | |||||||||||||||||||
| Income before income taxes | 52,569 | (1,034 | ) | 11,294 | 4,735 | (2,843 | ) | (3,225 | ) | 61,496 | ||||||||||||||||||
| Identifiable assets | 597,041 | 194,748 | 205,968 | 63,353 | 45,696 | 177,585 | 1,284,391 | |||||||||||||||||||||
| Capital expenditures | 6,145 | 297 | 6,610 | 1,305 | 1,157 | 1,046 | 16,560 | |||||||||||||||||||||
| Railcar expenditures | — | 24,965 | — | — | — | — | 24,965 | |||||||||||||||||||||
| Cash invested in affiliates | 1,100 | — | — | — | — | 100 | 1,200 | |||||||||||||||||||||
| Acquisition of businesses | — | — | 30,480 | — | — | — | 30,480 | |||||||||||||||||||||
| Depreciation and amortization | 5,532 | 15,967 | 8,665 | 2,314 | 2,286 | 1,256 | 36,020 | |||||||||||||||||||||
80
| (in thousands) | Grain & | Plant | ||||||||||||||||||||||||||
| 2008 | Ethanol | Rail | Nutrient | Turf & Specialty | Retail | Other | Total | |||||||||||||||||||||
| Revenues from external customers | $ | 2,411,144 | $ | 133,898 | $ | 652,509 | $ | 118,856 | $ | 173,071 | $ | — | $ | 3,489,478 | ||||||||||||||
| Inter-segment sales | 15 | 439 | 17,189 | 1,270 | — | — | 18,913 | |||||||||||||||||||||
| Equity in earnings of affiliates | 4,027 | — | 6 | — | — | — | 4,033 | |||||||||||||||||||||
| Other income, net | 4,751 | 526 | 893 | 446 | 692 | (1,138 | ) | 6,170 | ||||||||||||||||||||
| Interest expense | 18,667 | 4,154 | 5,616 | 1,522 | 886 | 394 | 31,239 | |||||||||||||||||||||
| Operating income (loss) (a) | 43,587 | 19,782 | (12,325 | ) | 2,321 | 843 | (4,842 | ) | 49,366 | |||||||||||||||||||
| Loss attributable to noncontrolling interest | 2,803 | — | — | — | — | — | 2,803 | |||||||||||||||||||||
| Income before income taxes | 40,784 | 19,782 | (12,325 | ) | 2,321 | 843 | (4,842 | ) | 46,563 | |||||||||||||||||||
| Identifiable assets | 575,589 | 198,109 | 266,785 | 70,988 | 50,605 | 146,697 | 1,308,773 | |||||||||||||||||||||
| Capital expenditures | 5,317 | 682 | 10,481 | 2,018 | 924 | 893 | 20,315 | |||||||||||||||||||||
| Railcar expenditures | 19,066 | 78,923 | — | — | — | — | 97,989 | |||||||||||||||||||||
| Cash invested in affiliates | 41,350 | — | — | — | — | 100 | 41,450 | |||||||||||||||||||||
| Depreciation and amortization | 4,377 | 13,915 | 5,901 | 2,228 | 2,218 | 1,128 | 29,767 | |||||||||||||||||||||
81
The following is a summary of the unaudited quarterly results of operations for 20102011 and 2009.
| Net Income | ||||||||||||||||||||
| attributable to The | Earnings Per | Earnings Per | ||||||||||||||||||
| Quarter Ended | Net Sales | Gross Profit | Andersons, Inc. | Share-Basic | Share-Diluted | |||||||||||||||
2010 | ||||||||||||||||||||
| March 31 | $ | 721,998 | $ | 58,550 | $ | 12,265 | $ | 0.67 | $ | 0.66 | ||||||||||
| June 30 | 810,999 | 87,554 | 25,169 | 1.37 | 1.36 | |||||||||||||||
| September 30 | 706,825 | 53,109 | 1,394 | 0.08 | 0.08 | |||||||||||||||
| December 31 | 1,153,969 | 82,466 | 25,834 | 1.40 | 1.39 | |||||||||||||||
| Year | $ | 3,393,791 | $ | 281,679 | $ | 64,662 | 3.51 | 3.48 | ||||||||||||
2009 | ||||||||||||||||||||
| March 31 | $ | 697,392 | $ | 61,374 | $ | 4,952 | $ | 0.27 | $ | 0.27 | ||||||||||
| June 30 | 810,954 | 73,334 | 15,918 | 0.87 | 0.87 | |||||||||||||||
| September 30 | 601,000 | 51,010 | 1,250 | 0.07 | 0.07 | |||||||||||||||
| December 31 | 915,958 | 69,788 | 16,231 | 0.89 | 0.88 | |||||||||||||||
| Year | $ | 3,025,304 | $ | 255,506 | $ | 38,351 | 2.10 | 2.08 | ||||||||||||
(in thousands, except for per common share data) Quarter Ended | Sales and merchandising revenues | Gross profit | Net income attributable to The Andersons, Inc. | Earnings per share- basic | Earnings per share- diluted | |||||||||||||||
| 2011 | ||||||||||||||||||||
March 31 | $ | 1,001,674 | $ | 78,685 | $ | 17,266 | $ | 0.93 | $ | 0.93 | ||||||||||
June 30 | 1,338,167 | 122,772 | 45,218 | 2.44 | 2.42 | |||||||||||||||
September 30 | 938,660 | 64,964 | 10,925 | 0.59 | 0.59 | |||||||||||||||
December 31 | 1,297,830 | 86,431 | 21,697 | 1.17 | 1.17 | |||||||||||||||
|
|
|
|
|
| |||||||||||||||
Year | $ | 4,576,331 | $ | 352,852 | $ | 95,106 | 5.13 | 5.09 | ||||||||||||
|
|
|
|
|
| |||||||||||||||
| 2010 | ||||||||||||||||||||
March 31 | $ | 721,998 | $ | 58,550 | $ | 12,265 | $ | 0.67 | $ | 0.66 | ||||||||||
June 30 | 810,999 | 87,554 | 25,169 | 1.37 | 1.36 | |||||||||||||||
September 30 | 706,825 | 53,109 | 1,394 | 0.08 | 0.08 | |||||||||||||||
December 31 | 1,153,969 | 82,466 | 25,834 | 1.40 | 1.39 | |||||||||||||||
|
|
|
|
|
| |||||||||||||||
Year | $ | 3,393,791 | $ | 281,679 | $ | 64,662 | 3.51 | 3.48 | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Net income per share is computed independently for each of the quarters presented. As such, the summation of the quarterly amounts may not equal the total net income per share reported for the year.
82
On October 31, 2011, the Company completed the purchase of Immokalee Farmers Supply, Inc., which serves the specialty vegetable producers in Southwest Florida, for a total purchase price of $3.0 million, which includes a $0.6 million payable recorded in other long-term liabilities and is based on future performance of the acquired company.
On December 31, 2010, the Company acquired the assets of B4 Grain, Inc. (“B4”), for a purchase price of $35.1 million, including cash paid through December 31, 2010 of $31.5 million. B4 has three grain elevators located in Nebraska, two of which are owned and have a combined storage capacity of 1.9 million bushels and another that is leased with storage capacity of 1.1 million bushels. B4’s focus is on their direct ship program, which complements the Company’s existing direct ship program that it is currently expanding.
The goodwill recognized as a result of the O’Malley and B4 acquisitions is $1.2 million and $2.9 million, respectively, and relates to expected synergies from combining operations.
The summarized purchase price allocation for the two 2010 acquisitions is as follows:
| B4 | O’Malley | Total | ||||||||||
Current assets | $ | 44,428 | $ | 4,097 | $ | 48,525 | ||||||
Intangible assets | 350 | 1,375 | 1,725 | |||||||||
Goodwill | 2,850 | 1,231 | 4,081 | |||||||||
Property, plant and equipment | 1,879 | 5,959 | 7,838 | |||||||||
Other long-term assets | 1,005 | 111 | 1,116 | |||||||||
Current liabilities | (15,383 | ) | (4,864 | ) | (20,247 | ) | ||||||
Other long-term liabilities | — | (126 | ) | (126 | ) | |||||||
|
|
|
|
|
| |||||||
Total purchase price (a) | $ | 35,129 | $ | 7,783 | $ | 42,912 | ||||||
|
|
|
|
|
| |||||||
| (a) | Of the $35.1 million purchase price for B4, $0.8 million remained in accounts payable and a $2.8 million earn-out provision remained in other-long term liabilities in the Company’s balance sheet at December 31, 2010. |
Approximately $1.1 million of the O’Malley intangible assets (which include customer lists and a non-compete agreement) are being amortized over 5 years. The other $0.3 million (which consists of a grower’s list) is being amortized over 3 years.
The B4 intangible assets include $0.1 million for a non-compete agreement and $0.3 million for a customer list. The non-compete agreement is being amortized over 5 years and the customer list is being amortized over 3 years. The purchase agreement for B4 includes an earn-out provision. The prior owners of B4 have the ability to receive an additional $3.5 million if certain income levels are achieved over the next five years. The estimated fair value of this contingent liability is $2.8 million and is recorded in other long-term liabilities in the Company’s balance sheet. In addition to the $2.8 million of contingent consideration, there is an additional $0.8 million of the initial purchase price that remained unpaid at December 31, 2010. This is recorded in accounts payable in the Company’s balance sheet.
17. Subsequent Events
On January 31, 2012, the Company announced the purchase of 100% of the stock of New Eezy Gro, Inc. for a purchase price of $15.5 million plus working capital in the amount of $1.4 million. New Eezy Gro is a manufacturer and wholesale marketer of specialty agricultural nutrients and industrial products and will become a part of the Company’s Plant Nutrient Group. The purchase price allocation will not be available prior to the filing of this Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
The Company is not organized with one Chief Financial Officer. Our Vice President, Corporate Controller and CIO is responsible for all accounting and information technology decisions while our Vice President, Finance and Treasurer is responsible for all treasury, insurance and credit functions and financing decisions. Each of them, along with the President and Chief Executive Officer (“Certifying Officers”), are responsible for evaluating our disclosure controls and procedures. These named Certifying Officers have evaluated our disclosure controls and procedures as defined in the rules of the Securities and Exchange Commission, as of December 31, 2010,2011, and have determined that such controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control overOver Financial Reporting is included in Item 8 on page 39.
There were no significant changes in internal control over financial reporting that occurred during the fourth quarter of 2010,2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
For information with respect to the executive officers of the registrant, see “Executive Officers of the Registrant” included in Part I of this report. For information with respect to the Directors of the registrant, see “Election of Directors” in the Proxy Statement for the Annual Meeting of the Shareholders to be held on May 6, 201111, 2012 (the “Proxy Statement”), which is incorporated herein by reference; for information concerning 1934 Securities and Exchange Act Section 16(a) Compliance, see such section in the Proxy Statement, incorporated herein by reference.
The information set forth under the caption “Executive Compensation” in the Proxy Statement is incorporated herein by reference.
The information set forth under the caption “Share Ownership” and “Executive Compensation —– Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.
The information set forth under the caption “Review, Approval or Ratification of Transactions with Related Persons” in the Proxy Statement is incorporated herein by reference.
83
PART IV
| (a) (1) | The |
| (2) | The following consolidated financial statement schedule is included in Item 15(d): |
| Page | ||||||
II. | Consolidated Valuation and Qualifying Accounts - years ended December 31, 2011, 2010 | |||||
| 96 | ||||||
All other schedules for which provisions are made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted.
| (3) | Exhibits: |
| 2.1 | Agreement and Plan of Merger, dated April 28, 1995 and amended as of September 26, 1995, by and between The Andersons Management Corp. and The Andersons. (Incorporated by reference to Exhibit 2.1 to Registration Statement No. 33-58963). | ||
| 3.1 | Articles of Incorporation. (Incorporated by reference to Exhibit 3(d) to Registration Statement No. 33-16936). | ||
| 3.4 | Code of Regulations of The Andersons, Inc. (Incorporated by reference to Exhibit 3.4 to Registration Statement No. 33-58963). | ||
| 4.1 | Form of Indenture dated as of October 1, 1985, between The Andersons, Inc. and Ohio Citizens Bank, as Trustee (Incorporated by reference to Exhibit 4 (a) in Registration Statement No. 33-819) | ||
| 4.3 | Specimen Common Share Certificate. (Incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-58963). | ||
| 4.4 | The Seventeenth Supplemental Indenture dated as of August 14, 1997, between The Andersons, Inc. and The Fifth Third Bank, successor Trustee to an Indenture between The Andersons and Ohio Citizens Bank, dated as of October 1, 1985. (Incorporated by reference to Exhibit 4.4 to The Andersons, Inc. | ||
| 4.5 | Loan Agreement dated October 30, 2002 and amendments through the | ||
| 10.1 | Management Performance Program. * (Incorporated by reference to Exhibit 10(a) to the Predecessor Partnership’s Form 10-K dated December 31, 1990, File No. 2-55070). | ||
84
| 10.3 | The Andersons, Inc. 2004 Employee Share Purchase Plan * (Incorporated by reference to Appendix B to the Proxy Statement for the May 13, 2004 Annual Meeting). |
| 10.4 | Marketing Agreement between The Andersons, Inc. and Cargill, Incorporated dated June 1, 1998 (Incorporated by reference from Form 10-Q for the quarter ended June 30, 2003). | ||
| 10.5 | Lease and Sublease between Cargill, Incorporated and The Andersons, Inc. dated June 1, 1998 (Incorporated by reference from Form 10-Q for the quarter ended June 30, 2003). | ||
| 10.6 | Amended and Restated Marketing Agreement between The Andersons, Inc.; The Andersons Agriculture Group LP; and Cargill, Incorporated dated June 1, 2003 (Incorporated by reference from Form 10-Q for the quarter ended June 30, 2003). | ||
| 10.7 | Amendment to Lease and Sublease between Cargill, Incorporated; The Andersons Agriculture Group LP; and The Andersons, Inc. dated July 10, 2003 (Incorporated by reference from Form 10-Q for the quarter ended June 30, 2003). | ||
| 10.15 | Management Agreement, dated as of December 29, 2005, made by The Andersons Rail Operating I, LLC and The Andersons, Inc., as Manager (Incorporated by reference from Form 8-K filed January 5, 2006). | ||
| 10.16 | Servicing Agreement, dated as of December 29, 2005, made by The Andersons Rail Operating I, LLC and The Andersons, Inc., as Servicer (Incorporated by reference from Form 8-K filed January 5, 2006). | ||
85
| 10.18 | The Andersons, Inc. Long-Term Performance Compensation Plan dated May 6, 2005* (Incorporated by reference to Appendix A to the Proxy Statement for the May 6, 2005 Annual Meeting). | |||
| 10.26 | Form of Stock Only Stock Appreciation Rights Agreement (Incorporated by reference from Form 10-Q filed May 10, 2007) | |||
| 10.29 | Note Purchase Agreement, dated March 27, 2008, between The Andersons, Inc., as borrowers, and several purchases with Wells Fargo Capital Markets acting as agent (Incorporated by reference from Form 8-K filed March 27, 2008). | |||
| 10.31 | Form of Stock Only Stock Appreciation Rights Agreement (Incorporated by reference from Form 10-Q filed May 9, 2008). | |||
86
| 10.34 | Form of Change in Control and Severance Participation Agreement (Incorporated by reference from Form 8-K filed January 13, 2009). | |||
| 10.35 | Change in Control and Severance Policy (Incorporated by reference from Form 8-K filed January 13, 2009). | |||
| 10.36 | Form of Performance Share Award Agreement (Incorporated by reference from Form 8-K filed March 6, 2009). | |||
| 10.37 | Form of Stock Only Stock Appreciation Rights Agreement (Incorporated by reference from Form 8-K filed March 6, 2009). | |||
| 10.38 | Form of Stock Only Stock Appreciation Rights Agreement | |||
| 10.40 | Amended and Restated Note Purchase Agreement, dated February 26, 2010, between The Andersons, Inc., as borrower, and Co-Bank, one of the lenders to the original agreement (Incorporated by reference from Form 8-K filed March 5, 2010). | ||
| 10.46 | Form of Restricted Share Award Agreement (Incorporated by reference from Form 10-Q filed May 5, 2011). | ||
| 10.47 | Form of Performance Share Unit Agreement (Incorporated by reference from Form 10-Q filed May 5, 2011). | ||
| 10.48 | Fourth Amended and Restated Loan Agreement, dated December | ||
| 12 | Computation of Ratio of Earnings to Fixed Charges (filed herewith). | ||
| 21 | Consolidated Subsidiaries of The Andersons, Inc. | ||
87
| 23.1 | Consent of Independent Registered Public Accounting Firm. | ||
| 23.2 | Consent of Independent Registered Public Accounting Firm. | ||
| 31.1 | Certification of President and Chief Executive Officer under Rule 13(a)-14(a)/15d-14(a). | ||
| 31.2 | Certification of Vice President, Corporate Controller | ||
| 31.3 | Certification of Vice President, Finance and Treasurer under Rule 13(a)-14(a)/15d-14(a). | ||
| 32.1 | Certifications Pursuant to 18 U.S.C. Section 1350. | ||
| * | Management contract or compensatory plan. |
The Company agrees to furnish to the Securities and Exchange Commission a copy of any long-term debt instrument or loan agreement that it may request.
| (b) | Exhibits: | |
The exhibits listed in Item 15(a)(3) of this report, and not incorporated by reference, follow “Financial Statement Schedule” referred to in (c) below.
| (c) | Financial Statement Schedule |
The financial statement schedule listed in 15(a)(2) follows “Signatures.”
88
| THE ANDERSONS, INC. (Registrant) | ||||
| By | ||||
/s/ Michael J. Anderson | ||||
| Michael J. Anderson | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | Signature | Title | Date | ||||||||||
/s/ Michael J. Anderson | Chairman of the Board | /s/ John T. Stout, Jr. | Director | 2/27/12 | |||||||||||
| Michael J. Anderson | President and Chief Executive Officer (Principal Executive Officer) | John T. Stout, Jr. | |||||||||||||
/s/ Anne G. Rex Anne G. Rex | Vice President, Corporate Controller | 2/27/12 | /s/ Donald L. Mennel Donald L. Mennel | Director | 2/27/12 | ||||||||||
(Principal Accounting Officer) | |||||||||||||||
/s/ Nicholas C. Conrad | Vice President, Finance & Treasurer (Principal Financial Officer) | 2/27/12 | /s/ David L. David L. | Director | |||||||||||
/s/ Gerard M. Anderson | Director | /s/ Ross W. Manire | Director | 2/27/12 | |||||||||||
| Gerard M. Anderson | Ross W. Manire | ||||||||||||||
/s/ Robert J. King, Jr. | Director | /s/ Jacqueline F. Woods | Director | 2/27/12 | |||||||||||
| Robert J. King, Jr. | Jacqueline F. Woods | ||||||||||||||
/s/ Catherine M. Kilbane | Director | ||||||||||||||
| Catherine M. Kilbane | |||||||||||||||
89
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
| Additions | ||||||||||||||||||||
| Transferred to | ||||||||||||||||||||
| Balance at | Charged to | Allowance for | Balance at | |||||||||||||||||
| (in thousands) | Beginning of | Costs and | Notes | (1) | End of | |||||||||||||||
| Description | Period | Expenses | Receivable | Deductions | Period | |||||||||||||||
| Allowance for Doubtful Accounts Receivable — Year ended December 31 | ||||||||||||||||||||
| 2010 | $ | 8,753 | $ | 8,678 | $ | (101 | ) | $ | (11,646 | ) | $ | 5,684 | ||||||||
| 2009 | 13,584 | 4,973 | (7,889 | ) | (1,915 | ) | 8,753 | |||||||||||||
| 2008 | 4,545 | 8,710 | 31 | 298 | 13,584 | |||||||||||||||
| Allowance for Doubtful Notes Receivable — Year ended December 31 | ||||||||||||||||||||
| 2010 | $ | 7,950 | $ | 38 | $ | 101 | $ | (7,835 | ) | $ | 254 | |||||||||
| 2009 | 134 | — | 7,889 | (73 | ) | 7,950 | ||||||||||||||
| 2008 | 339 | — | (31 | ) | (174 | ) | 134 | |||||||||||||
| (in thousands) | Additions | |||||||||||||||||||
Description | Balance at beginning of period | Charged to costs and expenses | Transferred from (to) allowance for notes receivable | (1) Deductions | Balance at end of period | |||||||||||||||
Allowance for doubtful accounts receivable – Year ended December 31 | ||||||||||||||||||||
2011 | $ | 5,684 | $ | (187 | ) | $ | 46 | $ | (744 | ) | $ | 4,799 | ||||||||
2010 | 8,753 | 8,678 | (101 | ) | (11,646 | ) | 5,684 | |||||||||||||
2009 | 13,584 | 4,973 | (7,889 | ) | (1,915 | ) | 8,753 | |||||||||||||
Allowance for doubtful notes receivable – Year ended December 31 | ||||||||||||||||||||
2011 | $ | 254 | $ | — | $ | (46 | ) | $ | — | $ | 208 | |||||||||
2010 | 7,950 | 38 | 101 | (7,835 | ) | 254 | ||||||||||||||
2009 | 134 | — | 7,889 | (73 | ) | 7,950 | ||||||||||||||
| (1) | Uncollectible accounts written off, net of recoveries and adjustments to estimates for the allowance accounts. |
90
EXHIBIT INDEX
Exhibit | |||
| 12 | Computation of Ratio of Earnings to Fixed Charges | ||
| 21 | Consolidated Subsidiaries of The Andersons, Inc. | ||
| 23.1 | Consent of Independent Registered Public Accounting Firm | ||
| 23.2 | Consent of Independent Registered Public Accounting Firm | ||
| 31.1 | Certification of President and Chief Executive Officer under Rule 13(a)-14(a)/15d-14(a) | ||
| 31.2 | Certification of Vice President, Corporate Controller | ||
| 31.3 | Certification of Vice President, Finance and Treasurer under Rule 13(a)-14(a)/15d-14(a) | ||
| 32.1 | Certifications Pursuant to 18 U.S.C. Section 1350 | ||
91
97