10-K 1 ande2016123110-k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016          
Commission file number 000-20557
 
 
THE ANDERSONS, INC.
(Exact name of the registrant as specified in its charter)
 
 
OHIO
 
34-1562374
(State of incorporation
or organization)
 
(I.R.S. Employer
Identification No.)
1947 Briarfield Boulevard, Maumee, Ohio
 
43537
(Address of principal executive offices)
 
(Zip Code)
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.    Yes  ý No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨ No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
Accelerated Filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the registrant's voting stock which may be voted by persons other than affiliates of the registrant was $944.2 million as of June 30, 2016, 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 approximately 28.2 million common shares outstanding, no par value, at February 24, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 2017, 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 15, 2017.




THE ANDERSONS, INC.
Table of Contents
 
 
Page No.
PART I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Item 16. Form 10-K Summary
Signatures
Exhibits


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Part I.

Item 1. Business

Company Overview

The Andersons, Inc. (the "Company") is a diversified company rooted in agriculture. Founded in Maumee, Ohio in 1947, the Company conducts business across North America in the grain, ethanol, plant nutrient and rail sectors. The Company also produces turf and cob products and has a consumer retailing presence.

Segment Descriptions

The Company's operations are classified into five reportable business segments: Grain, Ethanol, Rail, Plant Nutrient, and Retail. Each of these segments is organized based upon the nature of products and services offered. See Note 13 to the Consolidated Financial Statements in Item 8 for information regarding business segments.

Grain Group

The Grain business primarily operates grain elevators in various states in the U.S. Corn Belt. Income is earned on grain bought and sold or “put thru” the elevator, grain that is purchased and conditioned for resale, and space income. Space income consists of appreciation or depreciation in the basis value of grain held and represents the difference between the cash price of a commodity in one of the Company's facilities and an exchange traded futures price (“basis”); appreciation or depreciation between the future exchange contract months (“spread”); and grain stored for others upon which storage fees are earned. The Grain business also offers a number of unique grain marketing, risk management and corn origination services to its customers and affiliated ethanol facilities for which it collects fees.

The Company has a lease and marketing 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-owned facilities as well as the adjacent Company-owned facilities in Maumee and Toledo. The lease of the Cargill-owned facilities covers approximately 6%, or 8.7 million bushels, of the Company's total storage space.

Grain prices are not predetermined, so sales are negotiated by the Company's merchandising staff. The principal grains sold by the Company are corn, soybeans and wheat. Approximately 97% of grain sales by the Company in 2016 were purchased by U.S. grain processors and feeders, and approximately 3% 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. Grain shipments from our facilities are by rail, truck, 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. In addition, grain is transported via truck for direct ship transactions where producers sell grain to the Company but have it delivered directly to the end user.

The Company's grain operations rely principally on forward purchase contracts with producers, dealers and commercial 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 Chicago Mercantile Exchange (“the CME”).

The Company competes in the sale of grain with other public and private grain brokers, elevator operators and farmer 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 for the purchase of grain is generally local or regional in scope, although there are some large national and international companies that maintain regional grain purchase and storage facilities. Significant portions of grain bushels purchased and sold are done so using forward contracts.

The grain handling business is seasonal in nature in that the largest portion of the principal grains are harvested and delivered from the farm and commercial elevators in July, October and November although a significant portion of the principal grains are bought, sold and handled throughout the year.

Fixed price purchase and sale commitments as well as grain held in inventory expose the Company to risks related to adverse changes in market prices. Grain prices are typically comprised of two components, futures prices on the CME and local basis adjustments. The Company manages the futures price risk by entering into exchange-traded futures and option contracts with

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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. The Company has policies that provide key controls over its risk management practices. These policies include a description of the objectives of the programs and review of position limits by key management outside of the trading function on a daily basis along 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 its counterparties 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 generally offset in the statement of operations by, losses and gains in the value of the Company's futures positions.

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 33% of the 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 some of the same risks as the Company's grain and ethanol businesses. LTG also trades in 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, along with LTG, also established joint ventures and purchased a grain and food-bean handler and agronomy input provider with 12 locations across Ontario, Canada and Minnesota. These investments are accounted for under the equity method. The Company periodically enters into transactions with these joint ventures as disclosed in Note 12 to the Consolidated Financial Statements in Item 8.

Ethanol Group

The Ethanol Group has ownership interests in four 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 Iowa, Indiana, Michigan, and Ohio and have combined nameplate capacity of 330 million gallons of ethanol. The Group purchases and sells ethanol, offers facility operations, risk management, and ethanol and corn oil marketing services to the ethanol plants it invests in and operates.
The Company holds an 85% interest in The Andersons Denison Ethanol LLC ("TADE"), which is a consolidated entity that was acquired on May 1, 2012. The Company holds a 55% interest in The Andersons Albion Ethanol LLC (“TAAE”) and a 39% 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. All operating ethanol LLC investments, except TADE, are accounted for using the equity method of accounting.

The Company has a management agreement with each of the LLCs. As part of these agreements, the Ethanol Group runs the day-to-day operations of the plants and provides all administrative functions. The Company is compensated for these services based on a fixed cost plus an indexed annual increase determined by a consumer price index. Additionally, the Company has entered into agreements with each of the unconsolidated LLCs under which it has the exclusive right to act as supplier for

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100% of the corn used by the LLCs in the production of ethanol. For this service, the Company receives a fee for each bushel of corn sold. The Company has entered into marketing agreements with each of the ethanol LLCs. Under the ethanol marketing agreements, the Company purchases 100% of the ethanol produced by TAAE, TACE and TADE and 50% of the ethanol produced by TAME at the same price it will resell the ethanol to external customers. The Ethanol Group receives a fee for each gallon of ethanol sold to external customers sourced from these LLCs. Under the distillers dried grains ("DDG") and corn oil marketing agreements, the Company markets the DDG and corn oil and receives a fee on units sold.

Plant Nutrient Group

The Plant Nutrient Group is a leading manufacturer, distributor and retailer of agricultural and related plant nutrients, corncob-based products, and pelleted lime and gypsum products in the U.S. Corn Belt, Florida and Puerto Rico. The Group provides warehousing, packaging and manufacturing services to basic nutrient producers and other distributors. The Group also manufactures and distributes a variety of industrial products throughout the U.S. and Puerto Rico including nitrogen reagents for air pollution control systems used in coal-fired power plants, and water treatment and dust abatement products.

In its plant nutrient businesses, the Company competes with regional and local cooperatives, wholesalers and retailers, predominantly publicly owned 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 is based largely on depth of product offering, price, location and service. Sales and warehouse shipments of agricultural nutrients are heaviest in the spring and fall.

Wholesale Nutrients - The Wholesale Nutrients business manufactures, stores, and distributes dry and liquid agricultural nutrients, and pelleted lime and gypsum products annually. The major nutrient products sold by the business principally contain nitrogen, phosphate, potassium and sulfur. Product lines include base nutrients which are typically bought and sold as commodities and value add products which support more sustainable farming practices and command higher margins. The distribution and sales channels for both types of nutrients are shared within the Wholesale Nutrients business.

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 farmers.

Cob Products - Corncob-based products are manufactured for a variety of uses including laboratory animal bedding and private-label cat litter, as well as absorbents, blast cleaners, carriers and polishers. The products are distributed throughout the United States and Canada and into Europe and Asia. The principal sources for corncobs are seed corn producers.

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 and lawn service applicators. The Company also produces and sells fertilizer and control products to various markets.

Rail Group

The Company's Rail Group leases, repairs, and sells various types of railcars, locomotives and barges. In addition, the Rail Group offers fleet management services to private railcar owners.

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 barges serving a broad customer base. The Company operates in both the new and used car markets, allowing the Company to diversify its fleet both in terms of car types, industries and age of cars, as well as repairing and refurbishing used cars for specific markets and customers.

A significant portion of the railcars, locomotives and barges 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 assets from financial intermediaries and leasing those same assets to the end-users) or non-recourse arrangements (in which the Company is not subject to any lease arrangement related to the assets, but provides management services to the owner of the assets). The Company generally holds purchase options on most assets owned by financial intermediaries. We are under contract to provide maintenance services for many of the Rail Group assets 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, locomotive and barge positions at December 31, 2016.


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In the case of our off-balance sheet Rail Group assets, the Company's risk management philosophy is to match-fund the lease commitments where possible. Match-funding (in relation to 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 Rail Group assets that are on our balance sheet.

Competition for marketing and fleet maintenance services is based primarily on price, service ability, and access to both used equipment and third-party financing. Repair facility competition is based primarily on price, quality and location.

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 is A Store Like No Other 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 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 majority of the Company's non-perishable merchandise is received at a distribution center located in Maumee, Ohio.

In January 2017, the Company announced the decision to close all remaining retail operations in the first half of 2017.

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, 2016, the Company had 2,176 full-time and 822 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 affected by United States government programs, which include acreage control and price support programs of the USDA. In regards to our investments in ethanol production facilities, the U.S. government has mandated a ten percent blend for motor fuel gasoline sold.

The U.S. Food and Drug Administration (“FDA”) has developed bioterrorism prevention regulations for food facilities, which require that we register our grain operations with the FDA, provide prior notice of any imports of food or other agricultural commodities coming into the United States and maintain records to be made available upon request that identifies the immediate previous sources and immediate subsequent recipients of our grain commodities.

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. Compliance with environmental laws and regulations did not materially affect our earnings or competitive position in 2016.

In addition, the Company continues to assess the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and has concluded that the Company is not a major swap dealer or major swap participant. New federal regulations, studies and reports addressing all of the major areas of the new law, including the regulation of swaps and derivatives, are in the process of being finalized and adopted and we will continue to monitor these developments.

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

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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.

Item 1A. Risk Factors

Our operations are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in this Form 10-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 businesses buy, sell and hold inventories of agricultural input and output commodities, some of which are readily traded on commodity futures exchanges. 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 grain business in rapidly rising markets. In our Plant Nutrient business, 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 that the ethanol LLCs use to produce ethanol and co-products is corn. As a result, an increase in the price of corn in the absence of a corresponding increase in petroleum based fuel prices will typically decrease ethanol margins thus adversely affecting financial results in the ethanol LLCs. At certain levels, corn prices may make ethanol uneconomical to produce for fuel markets. The price of corn is influenced by weather conditions and other factors affecting crop yields, shift in acreage allocated to corn versus other major crops and general economic 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 income generated from our investments in ethanol LLCs. 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 ethanol operations until corn is available on economical terms, which would have an adverse effect on 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 all of the risks that 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 component of our grain inventory and contracts. (Basis is defined as the difference between the local cash price of a commodity and the corresponding 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, basis moves on a large grain position can significantly impact the profitability of the Grain business.

Our futures, options and over-the-counter contracts are subject to margin calls. If there are large movements 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 the volatility of the prices of commodities upon which we rely will be successful and any sudden change in the price of these commodities could have an adverse effect on our business and results of operations.

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 within the LLCs. The prices for and availability of natural gas are subject to 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 the operations of the ethanol facilities.

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Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect future results of operations and financial position.

Gasoline and oil - 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 petroleum based gasoline. As a result, ethanol prices will be influenced by the supply and demand for gasoline and oil and our future results of operations and financial position may be adversely affected if gasoline and oil demand or price changes.

Potash, phosphate and nitrogen - Raw materials used by the Plant Nutrient business include potash, phosphate and nitrogen, for which prices can be volatile driven by global and local supply and 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 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. Other regulations are applicable generally to all our businesses and corporate functions, including, without limitation, those promulgated under the Internal Revenue Code, the Affordable Care Act, the Employee Retirement Income Security Act (ERISA) and other employment and health care related laws, federal and state securities laws, and the US Patriot Act. 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 an adverse effect on our business. We cannot assure that we have been, or will at all times be, in compliance with all environmental requirements, or that we will not incur 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 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 and required levels of ethanol in gasoline through the Renewable Fuel Standards as administered by the EPA. 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 and other foreign countries' regulations could limit our sales opportunities and create additional credit risk associated with export brokers if shipments are rejected at their destination.

The compliance burden and impact on our operations and profitability as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations have imposed additional regulatory tasks which took effect in 2014, although the full burden of the Act is not yet fully-known as regulatory rule making is not yet completed. These efforts to change the regulation of financial markets may subject users of derivatives to extensive oversight and regulation by the Commodities Futures Trading Commission (CFTC). Such initiatives could impose significant additional costs on us, including operating and compliance costs, and could materially affect the availability, as well as the cost and terms, of certain transactions. New federal regulations have come into effect, while other anticipated regulations, studies and reports, including the regulation of swaps and derivatives, are still in the process of being finalized and adopted and we will continue to monitor these developments. Any of these matters could have an adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Rail - Our Rail business is subject to regulation by the American Association of Railroads and the Federal Railroad Administration. These agencies regulate rail operations with respect to health and safety matters. New regulatory rulings could negatively impact financial results through higher maintenance costs or reduced economic value of railcar assets.


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The Rail business is also subject to risks associated with the demands and restrictions of the Class I 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 business and it can increase maintenance costs. In addition, a shift in the railroads' 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 an 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) and locomotives. 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.

Similarly, our marine assets and operations are subject to rules and regulations relating to safety, citizenship, emissions, ballast discharges, and other environmental and operational matters enforced by various federal and state agencies, including the Maritime Administration of the U.S. Department of Transportation, the U.S. Coast Guard, and the U.S. Environmental Protection Agency (“EPA”). If we fail to comply with these rules and regulations, we could be prohibited from operating or leasing marine assets in the U.S. market, and under certain circumstances, could incur severe fines and penalties, including potential limitations on operations or forfeitures of assets.

Plant Nutrient - Our Plant Nutrient business manufactures certain agricultural nutrients and uses potentially hazardous materials. All products containing pesticides, fungicides and herbicides must be registered with the 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 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 business, planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs and the producer's perception of demand. 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 repair business, major design improvements to loading, unloading and transporting of certain products can render existing (especially old) equipment obsolete.

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 business. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is dependent on various factors. 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 the 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.

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.


9



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 in which we 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 businesses 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 to not perform on their obligation.

Our grain, ethanol, and plant nutrient businesses are geographically concentrated in the Eastern Corn Belt. Localized weather and other market factors may have a disproportionate impact on our business compared to our competitors.

A significant portion of the assets in the Company have exposure to conditions in the Eastern Corn Belt. In this region, adverse weather during the fertilizer application, planting, and harvest seasons can have negative impacts on our Grain and Plant Nutrient businesses. Higher basis levels in the Eastern Corn Belt can increase the input costs of our Ethanol facilities relative to other market participants that do not have the same geographic concentration.

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 and equity method investments are subject to risks beyond our control.

We currently have investments in numerous limited liability companies. By operating a business through this arrangement, we do not have control over operating decisions as we would if we owned the business outright. Specifically, we cannot act on major business initiatives without the consent of the other investors, who may not always be in agreement with our ideas.

The Company may not be able to effectively integrate future businesses it acquires.

We continuously look for opportunities to enhance our existing businesses 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 an 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 operational 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 grain dust were to explode at one of our elevators 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, or may face external threats, which may affect the Company's ability to conduct its business.


10



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, human resources 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 or power outages, 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. Our security measures may also be breached due to employee error, malfeasance, or otherwise. In addition, although the systems have been refreshed periodically, portions of the infrastructure are 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.
Additionally, outside parties may attempt to destroy critical information, or fraudulently induce employees, third-party service providers, or users to disclose sensitive information in order to gain access to our data or our users' data. As a response, the Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to Company data or accounts. On an annual basis, these technologies and processes that relate to credit card information are reviewed by a third-party Payment Card Industry qualified security assessor. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. We cannot assure our ability to prevent, repel or mitigate the effects of such an attack by outside parties. The Company relies on third parties to maintain and process certain information which could be subject to breach or unauthorized access to Company or employee information. Any such breach or unauthorized access could result in an inability to perform critical functions, significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our services that could potentially have an adverse effect on our business.
The Company's design and implementation of a new Enterprise Resource Planning system could face significant difficulties.

In early 2012, the Company began the design and implementation of a new Enterprise Resource Planning ("ERP") system, requiring significant capital and human resources to deploy. The system will be more expensive and take longer to fully implement than originally planned, including increased capital investment, higher fees and expenses of third parties, delayed deployment scheduling, and more on-going maintenance expense once implemented. The ultimate costs and schedules are not yet known. If for any reason this implementation is not successful, the Company could be required to expense rather than capitalize related amounts. Beyond cost and scheduling, potential flaws in the implementation of an ERP system may pose risks to the Company's ability to operate successfully and efficiently. These risks include, without limitation, inefficient use of employees, distractions to the Company's core businesses, adverse customer reactions, loss of key information, delays in decision making, as well as unforeseen additional costs due to the inability to integrate vital information processes.

Unauthorized disclosure of sensitive or confidential customer information could harm the Company's business and standing with our customers.
The protection of our customer, employee and Company data is critical to us. The Company relies on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal information. Despite the security measures the Company has in place, its facilities and systems, and those of its third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by the Company or its vendors, could damage our reputation, expose us to risk of litigation and liability, disrupt our operations and harm our business.



Item 1B. Unresolved Staff Comments

The Company has no unresolved staff comments.





11



Item 2. Properties

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)
 
(tons)
 
(tons)
Canada
 
140

 

 

Florida
 

 
3

 
22

Illinois
 
10,831

 
55

 
11

Indiana
 
26,544

 
145

 
141

Iowa
 
2,600

 

 
69

Michigan
 
28,789

 
70

 
48

Minnesota
 

 

 
47

Nebraska
 
12,272

 

 
45

Ohio
 
42,483

 
186

 
65

Puerto Rico
 

 

 
23

Tennessee
 
16,135

 

 

Texas
 
1,412

 

 

Wisconsin
 

 
29

 
77

 
 
141,206

 
488

 
548


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 90% of the total storage capacity is owned, while the remaining 10% of the total capacity is leased from third parties.

The Plant Nutrient Group's wholesale nutrient and farm center properties consist mainly of fertilizer warehouse and formulation and packaging facilities for dry and liquid fertilizers. The Company owns 98% of the dry and liquid storage facilities.

Retail Store Properties
Name
 
Location
 
Square Feet
Maumee Store
 
Maumee, OH
 
166,000
Toledo Store
 
Toledo, OH
 
162,000
Sawmill Store
 
Columbus, OH
 
169,000
Brice Store
 
Columbus, OH
 
159,000
Distribution Center (1)
 
Maumee, OH
 
245,000
(1) Facility leased

The lease for the distribution center is an operating lease with several renewal options and provides for minimum aggregate annual lease payments approximating $0.8 million for 2017. This lease expires in 2018 and we do not intend to renew it.

In January 2017, the Company announced the planned closure of all four retail stores in the first half of 2017. These properties are owned by the Company so no lease termination charges apply. These properties will continue to be held until suitable buyers can be identified or alternate uses can be found.

Other Properties

The Company owns an ethanol facility in Denison, Iowa with a nameplate capacity of 55 million gallons. The Company owns lawn fertilizer production facilities in Maumee, Ohio, Bowling Green, Ohio, Montgomery, Alabama, and Mocksville, North Carolina. It also owns a corncob processing and storage facility in Delphi, Indiana and two cob facilities located in Central Illinois which were closed in the fourth quarter of 2016. The Company leases a lawn fertilizer warehouse facility in Toledo,

12



Ohio. The Company operates 16 railcar repair facilities and one fabrication shop throughout the country, primarily in the Midwest, South, and West.

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 build-to-suit financing arrangement. The lease on our previous administrative building expired at the end of 2016. The Company owns approximately 2,084 acres of land on which the above properties and facilities are located and approximately 412 acres of farmland and land held for 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.

Item 3. Legal Proceedings

The Company is 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 liabilities 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.

Item 4. Mine Safety

Not applicable.


13



Executive Officers of the Registrant

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, 2017) are presented in the table below.
Name
Position
Age
Year Assumed
 
 
 
 
Daniel T. Anderson
President, Retail Group
President, Retail Group and Vice President, Corporate Operations Services
61
2015
2009
Valerie Blanchett
Vice President, Human Resources
Vice President, Human Resources, Food Ingredients and Systems (Cargill)
55
2016
2010
Patrick E. Bowe
President and Chief Executive Officer
Corporate Vice President, Food Ingredients and Systems (Cargill)
58
2015
2007
Naran U. Burchinow
Senior Vice President, General Counsel and Secretary
63
2005
James C. Burmeister
Vice President, Finance and Treasurer
Vice President of Finance, Roofing and Asphalt Business (Owens-Corning)
Vice President, Internal Audit (Owens-Corning)
49
2015
2013
2011
John Granato
Chief Financial Officer
Principal - Finance & Operations (Global Infrastructure Partners)
51
2012
2009
Michael S. Irmen
President, Ethanol Group
Vice President and General Manager, Ethanol Group
Vice President, Commodities and Risk, Ethanol Group
63
2016
2015
2012
Corbett Jorgenson
President, Grain Group
Vice President, Transportation and Logistics Americas (Cargill)
Senior Vice President, Commercial Lead, AgHorizons USA (Cargill)
42
2016
2015
2014
Anthony Lombardi
Chief Information Officer
Vice President, Global Business Services and Chief Information Officer (Armstrong World Industries)
58
2016
2010

Anne G. Rex
Vice President, Corporate Controller
Assistant Controller
52
2012
2002
Rasesh H. Shah
President, Rail Group
62
1999
Tamara S. Sparks
Vice President, Financial Planning & Analysis
Vice President, Corporate Business /Financial Analysis
48
2015
2007
William J. Wolf
President, Plant Nutrient Group
Vice President of Supply & Merchandising, Plant Nutrient Group
59
2012
2008


14



Part II.


Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

The Common Shares of The Andersons, Inc. trade on the Nasdaq Global Select Market under the symbol “ANDE.” On February 18, 2014, the Company effected a three-for-two stock split to its outstanding shares as of January 21, 2014. All share, dividend and per share information set forth in this 10-K has been retroactively adjusted to reflect the stock split.

Shareholders

At February 13, 2017, there were approximately 28.2 million common shares outstanding, 1,244 shareholders of record and approximately 11,676 shareholders for whom security firms acted as nominees.

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 2016 and 2015.
 
2016
 
2015
 
High
 
Low
 
High
 
Low
Quarter Ended
 
 
 
 
 
 
 
March 31
$32.24
 
$24.01
 
$53.33
 
$39.41
June 30
$36.46
 
$25.94
 
$47.10
 
$39.00
September 30
$38.30
 
$34.40
 
$39.22
 
$31.97
December 31
$44.80
 
$34.50
 
$38.49
 
$30.70

The Company's transfer agent and registrar is Computershare Investor Services, LLC, 2 North LaSalle Street, Chicago, IL 60602. Telephone: 312-588-4991.

Dividends

The Company has declared and paid consecutive quarterly dividends since the end of 1996, its first year of trading on the Nasdaq market. Dividends paid from January 2015 to January 2017 are as follows:
Payment Date
 
Amount
1/23/2015
 
$0.1400
4/22/2015
 
$0.1400
7/22/2015
 
$0.1400
10/22/2015
 
$0.1400
1/25/2016
 
$0.1550
4/22/2016
 
$0.1550
7/22/2016
 
$0.1550
10/24/2016
 
$0.1550
1/25/2017
 
$0.1600

While the Company's objective is to pay a quarterly cash dividend, dividends are subject to Board of Director approval.












15



Equity Plans

The following table gives information as of December 31, 2016 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
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
969,457 (1)

$
35.33

945,367 (2)

Equity compensation plans not approved by security holders



(1)
This number includes 325,000 Non-Qualified Stock Options (“Options”), 117,868 total shareholder return-based performance share units, 303,854 earnings per share-based performance share units, and 222,735 restricted shares outstanding under The Andersons, Inc. 2014 Long-Term Performance Compensation Plan. This number does not include any shares related to the Employee Share Purchase Plan. The Employee Share Purchase Plan allows employees to purchase common shares at the lower of the market value on the beginning or end of the calendar year through payroll withholdings. These purchases are completed as of December 31.
(2)
This number includes 137,394 Common Shares available to be purchased under the Employee Share Purchase Plan and 807,973 shares available under equity compensation plans.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In October 2014, the Board approved the repurchase of shares at a value not to exceed $50.0 million. The Company repurchased approximately 1.2 million shares, exhausting the October 2014 authorization amount in 2015.

No shares were repurchased in 2016.































16



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.
Lowe's Companies, Inc.
Archer-Daniels-Midland Co.
The Greenbrier Companies, Inc.
GATX Corp.
The Scott's Miracle-Gro Company
Ingredion Incorporated
 

The graph assumes a $100 investment in The Andersons, Inc. Common Shares on December 31, 2011 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.


ande2014123110kcharta01a02.jpg


 
Base Period
Cumulative Returns
 
December 31, 2011
2012
2013
2014
2015
2016
The Andersons, Inc.
$
100.00

$
99.69

$
209.39

$
188.75

$
114.18

$
164.28

NASDAQ U.S.
100.00

117.45

164.57

188.84

201.98

219.89

Peer Group Index
100.00

127.21

172.59

223.57

221.29

240.72


17



Item 6. Selected Financial Data

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, 2016 are derived from the Consolidated 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.
(in thousands, except for per share and ratios and other data)
For the years ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Operating results
 
 
 
 
 
 
 
 
 
Sales and merchandising revenues (a)
$
3,924,790

 
$
4,198,495

 
$
4,540,071

 
$
5,604,574

 
$
5,272,010

Gross profit
345,506

 
375,838

 
397,139

 
365,225

 
358,005

Equity in earnings of affiliates
9,721

 
31,924

 
96,523

 
68,705

 
16,487

Other income, net (b)
14,775

 
46,472

 
31,125

 
14,876

 
14,725

Net income (loss)
14,470

 
(11,322
)
 
122,645

 
95,702

 
75,565

Net income (loss) attributable to The Andersons, Inc.
11,594

 
(13,067
)
 
109,726

 
89,939

 
79,480

Financial position
 
 
 
 
 
 
 
 
 
Total assets
2,232,849

 
2,359,101

 
2,364,692

 
2,273,556

 
2,182,304

Working capital
258,350

 
241,485

 
226,741

 
229,451

 
304,346

Long-term debt (c)
397,065

 
436,208

 
298,638

 
371,150

 
407,176

Long-term debt, non-recourse (c)

 

 

 
4,063

 
20,067

Total equity
790,697

 
783,739

 
824,049

 
724,421

 
611,445

 
 
 
 
 
 
 
 
 
 
Cash flows / liquidity
 
 
 
 
 
 
 
 
 
Cash flows from (used in) operations
39,585

 
154,134

 
(10,071
)
 
337,188

 
328,482

Depreciation and amortization
84,325

 
78,456

 
62,005

 
55,307

 
48,977

Cash invested in acquisitions (d)

 
(128,549
)
 
(20,037
)
 
(15,252
)
 
(220,257
)
Purchase of investments (e)
(2,523
)
 
(938
)
 
(238
)
 
(49,251
)
 

Investments in property, plant and equipment
(77,740
)
 
(72,469
)
 
(59,675
)
 
(46,786
)
 
(69,274
)
Net proceeds from (investment in) Rail Group assets (f)
(28,579
)
 
(38,407
)
 
(57,968
)
 
4,648

 
(20,397
)
EBITDA (g)
123,949

 
85,219

 
254,992

 
219,917

 
195,180

 
 
 
 
 
 
 
 
 
 
Per share data (h)
 
 
 
 
 
 
 
 
 
Net income (loss) - basic
0.41

 
(0.46
)
 
3.85

 
3.20

 
2.85

Net income (loss) - diluted
0.41

 
(0.46
)
 
3.84

 
3.18

 
2.82

Dividends declared
0.6250

 
0.5750

 
0.4700

 
0.4300

 
0.4000

Year-end market value
44.70

 
31.63

 
53.14

 
59.45

 
28.60

 
 
 
 
 
 
 
 
 
 
Ratios and other data
 
 
 
 
 
 
 
 
 
Net income attributable to The Andersons, Inc. return on beginning equity attributable to The Andersons, Inc.
1.5
%
 
(1.6
)%
 
15.6
%
 
15.1
%
 
15.2
%
Funded long-term debt to equity ratio (i)
0.5-to-1

 
0.6-to-1

 
0.4-to-1

 
0.5-to-1

 
0.7-to-1

Weighted average shares outstanding (000's)
28,193

 
28,288

 
28,367

 
27,986

 
27,784

Effective tax rate
32.3
%
 
2.1
 %
 
33.4
%
 
36.0
%
 
37.1
%
(a) Includes sales of $854.6 million in 2016, $872.1 million in 2015, $1,064.4 million in 2014, $1,333.2 million in 2013, and $1,359.4 million in 2012 pursuant to marketing and origination agreements between the Company and the unconsolidated ethanol LLCs.
(b) Includes $23.1 million for the gain on dilution and partial share redemption of the LTG investment in 2015 and $17.1 million for the gain on partial share redemption of LTG in 2014.
(c) Excludes current portion of long-term debt. The increase in non-recourse debt in 2012 is related to the debt issued by TADE.
(d) During 2015, the Company acquired 100% of the stock of Kay Flo Industries, Inc. During 2012, the Company acquired the assets of Green Plains Grain, TADE, Mt. Pulaski and 100% of the stock of New Eezy Gro.
(e) During 2013, the Company and LTG established 50/50 joint ventures to acquire 100% of the stock of Thompsons Limited and its related U.S. operating company.
(f) Represents the net of purchases of Rail Group assets offset by proceeds on sales of Rail Group assets.
(g) Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP measure. It is one of the measures the Company uses to evaluate its liquidity. The Company believes that EBITDA provides additional information important to investors and others

18



in determining its ability to meet debt service obligations. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles. 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 the Company, excludes some, but not all, items that affect net income, it may not be comparable to EBITDA or similarly titled measures used by other companies.
(h) Earnings per share are calculated based on Income attributable to The Andersons, Inc.
(i) 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.
 
For the years ended December 31,
(in thousands)
2016
 
2015
 
2014
 
2013
 
2012
Net income (loss) attributable to The Andersons, Inc.
$
11,594

 
$
(13,067
)
 
$
109,726

 
$
89,939

 
$
79,480

Add:
 
 
 
 
 
 
 
 
 
Provision for income taxes
6,911

 
(242
)
 
61,501

 
53,811

 
44,568

Interest expense
21,119

 
20,072

 
21,760

 
20,860

 
22,155

Depreciation and amortization
84,325

 
78,456

 
62,005

 
55,307

 
48,977

EBITDA
123,949

 
85,219

 
254,992

 
219,917

 
195,180

Add/(subtract):
 
 
 
 
 
 
 
 
 
 Benefit (provision) for income taxes
(6,911
)
 
242

 
(61,501
)
 
(53,811
)
 
(44,568
)
Interest expense
(21,119
)
 
(20,072
)
 
(21,760
)
 
(20,860
)
 
(22,155
)
Goodwill impairment

 
56,166

 

 

 

Asset impairment
9,107

 
285

 
3,090

 

 

Realized gains on Rail Group assets and related leases
(11,019
)
 
(13,281
)
 
(15,830
)
 
(19,366
)
 
(23,665
)
Gain on sale of investments in affiliates
(685
)
 
(22,881
)
 
(17,055
)
 

 

Deferred income taxes
6,030

 
27,279

 
21,815

 
40,374

 
16,503

Excess tax benefit from share-based payment arrangement
13

 
(1,299
)
 
(1,806
)
 
(1,001
)
 
(162
)
Equity in earnings of unconsolidated affiliates, net of distributions received
14,766

 
(677
)
 
28,749

 
(50,953
)
 
8,134

Noncontrolling interest in income (loss) of affiliates
2,876

 
1,745

 
12,919

 
5,763

 
(3,915
)
Changes in working capital and other
(77,422
)
 
41,408

 
(213,684
)
 
217,125

 
203,130

Net cash provided by (used in) operations
$
39,585

 
$
154,134

 
$
(10,071
)
 
$
337,188

 
$
328,482


The Company has included its Computation of Earnings to Fixed Charges in Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 10-K as Exhibit 12.


19



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The following “Management's Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements which relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by these forward-looking statements. You are urged to carefully consider these risks and 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
Our operations are organized, managed and classified into five reportable business segments: Grain, Ethanol, Plant Nutrient, Rail, and Retail. Each of these segments is based on the nature of products and services offered.
The agricultural commodity-based business is one in which changes in selling prices generally move in relationship to changes in purchase prices. Therefore, increases or decreases in prices of the agricultural commodities that the business deals in will have a relatively equal impact on sales and cost of sales and a much less significant impact on gross profit. As a result, changes in sales for the period may not necessarily be indicative of the overall performance of the business and more focus should be placed on changes to gross profit.

Grain Group
Total grain storage capacity is approximately 150 million bushels as of December 31, 2016 compared to 164 million bushels at December 31, 2015. Storage decreased due to the sale of assets in Iowa during 2016. Grain inventories on hand at December 31, 2016 were 108.4 million bushels, of which 0.9 million bushels were stored for others. This compares to 119.8 million bushels on hand at December 31, 2015, of which 3.4 million bushels were stored for others.
2016 performance in the Grain Group reflected challenges in core grain assets, as well as lower returns from affiliates. The 2015 harvest saw significant challenges in the Eastern Corn Belt where many of our facilities are located and the limited opportunities for space income during the first nine months of 2016. In the fourth quarter of 2016, we saw significantly better production in our core regions which has allowed us to purchase grain at more typical prices.
Additionally, performance at one of our equity method grain affiliates was challenged due to weakness in the export market for DDGs as well as losses on trading positions during periods of market volatility in the first half of the year.
Corn acre planting estimates for 2017 are approximately 90 to 93 million acres, which is down modestly from the 94 million planted in 2016. Soybean acres to be planted are estimated at approximately 87 to 90 million acres, which is up compared to the 83 million planted in 2016. Additionally, we are expecting a decline in acres dedicated to wheat in 2017. The high wheat stocks on hand in domestic storage facilities, combined with wheat's ability to be stored for long periods of time have provided strong storage rates for the Company in 2016 which shifts incentive for production to other grains.
Assuming yields in the areas the Company does business are consistent with trends, this should create a good base for the Company's Grain Group in 2017 with combined corn and soybean acreage ranging from flat to a small increase. In 2017, our Grain Group will also continue its focus on driving profitable growth and enhancing risk management and grain marketing services.

Ethanol Group
The Ethanol Group continued to execute well, realizing high levels of production and exercising effective risk management throughout the year. Some weakness in margins on co-products, such as DDG, occurred in the second half of the year due to lower international demand as well as localized elevated levels of vomitoxin in the 2016 corn crop. Higher gasoline demand, improved demand and prices for DDG in relation to corn price, and an ample corn supply are factors that could potentially improve margins going into 2017.
Volumes shipped for the years ended December 31, 2016 and 2015 were as follows:

20



 
Twelve months ended December 31,
(in thousands)
2016
 
2015
Ethanol (gallons shipped)
295,573

 
301,009

E-85 (gallons shipped)
37,709

 
35,432

Corn Oil (pounds shipped)
14,794

 
15,557

DDG (tons shipped)
164

 
168

The above table shows only shipped volumes that flow through the Company's sales revenues. Total ethanol, DDG, and corn oil production by the unconsolidated LLCs are higher, however, the portion of this volume that is sold directly to their customers is excluded here.
Construction is nearing completion of a project to double the ethanol production capacity of our facility in Albion, Michigan. Albion is positioned in an attractive market for supply of corn and demand for ethanol. The group expects to complete the expansion on time and on budget in the first half of 2017.

Plant Nutrient Group
While the Plant Nutrient Group experienced a slight increase in volumes for the year, it was primarily due to activity from the first full year of sales following the acquisition of Kay Flo Industries, Inc. in the second quarter of 2015. Looking at second half sales between 2015 and 2016 which included the impact of this acquisition in both periods, sales volume declined approximately 7 percent.
Total storage capacity at our wholesale nutrient and farm center facilities was approximately 489 thousand tons for dry nutrients and approximately 547 thousand tons for liquid nutrients at December 31, 2016.
During the fourth quarter of 2016, the Plant Nutrient business closed one of its cob facilities in Mt. Pulaski, IL and recorded an asset impairment charge of approximately $2.3 million.
We have seen modest signs of improvement in fertilizer shipments in the early weeks of 2017 compared to the prior year and anticipate this trend will continue if current expectations for the planting season are met.
Tons shipped by product line (including sales and service tons) for the years ended December 31, 2016 and 2015 were as follows:
(in thousands)
Twelve months ended December 31,
 
2016
 
2015
Wholesale Nutrients - Base Nitrogen, Phosphorus, Potassium (NPK)
1,246

 
1,234

Wholesale Nutrients - Value Add products
491

 
398

Other (Includes Farm Center, Turf, and Cob tons)
553

 
604

Total tons
2,290

 
2,236


Rail Group
The Rail Group experienced a decline in financial results from its base leasing business in 2016. This included the impact of higher than normal lease settlement activity in the previous year as well as decreases in lease utilization rates and higher storage costs on idle cars. Rail Group assets under management (owned, leased or managed for financial institutions in non-recourse arrangements) at December 31, 2016 were 23,236 compared to 23,180 at December 31, 2015. The average utilization rate (Rail Group assets under management that are in lease service, exclusive of those managed for third-party investors) is 87.8% for the year ended December 31, 2016 which is 4.6 percentage points lower than the prior year.
For the year ended December 31, 2016, Rail had gains on sales of Rail Group assets and related leases in the amount of $11.0 million compared to $13.3 million of gains on sales of Rail Group assets and related leases for the year ended December 31, 2015.
In 2017, the Group will continue to focus on ways to strategically grow the rail fleet in a challenged leasing environment and continue to look for opportunities to open new repair facilities and other adjacent businesses. We also anticipate future repair business related to new U.S. Department of Transportation rules affecting tank cars across the country.





21



Retail Group
The retail industry is highly competitive. Our stores compete with a variety of retail merchandisers, including home centers, department and hardware stores, as well as local and national grocers.

In January 2017, the Company announced that the Retail segment will be closed in the first half of 2017 and incurred asset impairment charges of $6.5 million in the fourth quarter of 2016.

Other
Our “Other” represents corporate functions that provide support and services to the operating segments. The results contained within this group include expenses and benefits not allocated back to the operating segments, including a significant portion of our ERP project and the settlement charges from the termination of our defined benefit pension plan in 2015.

Operating Results

The following discussion focuses on the operating results as shown in the Consolidated Statements of Operations with a separate discussion by segment. Additional segment information is included in Note 13 to the Company's Consolidated Financial Statements in Item 8.
 
Year ended December 31,
(in thousands)
2016
 
2015
 
2014
Sales and merchandising revenues
$
3,924,790

 
$
4,198,495

 
$
4,540,071

Cost of sales and merchandising revenues
3,579,284

 
3,822,657

 
4,142,932

Gross profit
345,506

 
375,838

 
397,139

Operating, administrative and general expenses
318,395

 
337,829

 
315,791

Pension settlement

 
51,446

 

Asset impairment
9,107

 
285

 
3,090

Goodwill impairment

 
56,166

 

Interest expense
21,119

 
20,072

 
21,760

Equity in earnings of affiliates
9,721

 
31,924

 
96,523

Other income, net
14,775

 
46,472

 
31,125

Income (loss) before income taxes
21,381

 
(11,564
)
 
184,146

Income attributable to noncontrolling interests
2,876

 
1,745

 
12,919

Income (loss) before income taxes attributable to The Andersons, Inc.
$
18,505

 
$
(13,309
)
 
$
171,227


Comparison of 2016 with 2015

Grain Group
 
Year ended December 31,
(in thousands)
2016
 
2015
Sales and merchandising revenues
$
2,357,171

 
$
2,483,643

Cost of sales and merchandising revenues
2,249,089

 
2,359,998

Gross profit
108,082

 
123,645

Operating, administrative and general expenses
112,507

 
121,833

Goodwill impairment

 
46,422

Interest expense
7,955

 
5,778

Equity in earnings of affiliates
(8,746
)
 
14,703

Other income, net
5,472

 
26,229

Income (loss) before income taxes
(15,654
)
 
(9,456
)
Loss attributable to noncontrolling interests
(3
)
 
(10
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
(15,651
)
 
$
(9,446
)


22



Operating results for the Grain Group decreased $6.2 million compared to full year 2015 results. Sales and merchandising revenues decreased $126.5 million compared to 2015. This was partially offset by a decrease of cost of sales and merchandising revenues of $110.9 million for a net unfavorable gross profit impact of approximately $15.6 million. The decrease was driven by $6.0 million in gross profit reduction from the 2016 sale of underperforming assets in Iowa as well as $4.4 million of decrease in margins on sale of grain. We also saw a significant decline in opportunities for basis appreciation compared to 2015 for a negative gross profit variance of $14.2 million compared to the prior year. This was caused by a poor harvest causing elevated basis levels in the fourth quarter of 2015. These items were partially offset by $4.5 million of increased income from blending operations, $3.9 million of increased earnings on risk management fees, and a $1.7 million favorable variance on trading income.

Operating, administrative and general expenses were $9.3 million lower than in 2015. The decrease was primarily due to $8.2 million in reduced costs from the sale of Iowa facilities with cost reductions in labor and benefits at remaining facilities accounting for an additional $1.7 million. The decreases were offset by $2.7 million of additional allocation charges, including amortization and support costs for the company's new Enterprise Resource Planning system.

The Grain Group recognized a goodwill impairment charge of $46.4 million in 2015 driven by compressed margins over the past several years and anticipated unfavorable operating conditions in domestic and global commodity markets, including oil and ethanol, as well as foreign currency exchange impacts.

Equity in earnings of affiliates decreased $23.4 million due to the reduced operating results of Lansing Trade Group ("LTG") and Thompsons Limited. The declines were largely driven by reduced performance at LTG caused by historically soft margins at grain handling facilities. Also included in our equity results is a charge of $1.5 million (our proportional share) related to an LTG debt refinancing completed in the fourth quarter of 2016. This refinancing should result in lower relative interest charges in future years.

Other income decreased $20.3 million, which is attributable to a prior year gain of $23.1 million from equity ownership transactions in LTG which reduced our ownership from 39 percent to 31 percent.

Ethanol Group
 
Year ended December 31,
(in thousands)
2016
 
2015
Sales and merchandising revenues
$
544,556

 
$
556,188

Cost of sales and merchandising revenues
524,252

 
531,864

Gross profit
20,304

 
24,324

Operating, administrative and general expenses
11,211

 
11,594

Interest expense
35

 
70

Equity in earnings of affiliates
18,467

 
17,221

Other income, net
77

 
377

Income before income taxes
27,602

 
30,258

Income attributable to noncontrolling interests
2,879

 
1,755

Income (loss) before income taxes attributable to The Andersons, Inc.
$
24,723

 
$
28,503


Operating results for the Ethanol Group decreased $3.8 million from full year 2015 results. Sales and merchandising revenues decreased $11.6 million which was partially offset by a decrease in cost of sales and merchandising revenues of $7.6 million for a net gross profit impact of $4.0 million. The decline in revenues and associated cost of sales is largely driven by a three percent decline in average ethanol sales price and a fifteen percent decline in average DDG sales price compared to the prior year. While corn and natural gas costs declined during the year, we also saw a nine percent decrease in DDG sales prices realized relative to the value of the corn feedstock. Marketing fees received from our joint venture due to a renegotiated operating agreement.

Equity in earnings of affiliates increased $1.2 million from prior year and represents an increase in income from investments in three unconsolidated ethanol LLCs. Throughout the year, the ethanol facilities' productivity and output remained strong, and the increase in earnings is primarily attributable to modest increases in average margins compared to the prior year.




23



Plant Nutrient Group
 
Year ended December 31,
(in thousands)
2016
 
2015
Sales and merchandising revenues
$
725,176

 
$
848,338

Cost of sales and merchandising revenues
603,045

 
728,798

Gross profit
122,131

 
119,540

Operating, administrative and general expenses
102,892

 
105,478

Asset impairment
2,331

 

Goodwill impairment

 
9,744

Interest expense
6,448

 
7,243

Other income, net
3,716

 
3,046

Income (loss) before income taxes attributable to The Andersons, Inc.
$
14,176

 
$
121


Operating results for the Plant Nutrient Group increased $14.1 million compared to full year 2015 results. Sales and merchandising revenues decreased $123 million primarily due to lower base nutrient prices throughout the year. Volumes were up two percent, however the impact on revenues from that increase was minimal. Cost of sales and merchandising revenues decreased $126 million, in line with the decline in revenues. Margins did improve modestly due to the impact of prior year Kay Flo inventory being stepped up to fair value at acquisition causing margin compression in the second half of 2015. Total gross profit increased by $2.8 million.

Operating, administrative, and general expenses decreased $2.6 million from the prior year. This included a reduction in labor and benefits of $3.4 million and maintenance reductions of $1.2 million. Smaller reductions were realized in a number of other categories as part of our overall cost control efforts. These items were partially offset by a $3.4 million increase in depreciation and amortization, largely due to the full-year impact of the Kay Flo acquisition. The prior year included goodwill impairment charges of $9.7 million for our Farm Center and Cob businesses due to reduced volumes over the past several years while the current year included $2.3 million of asset impairments associated with the closure of a cob processing facility.

Rail Group
 
Year ended December 31,
(in thousands)
2016
 
2015
Sales and merchandising revenues
$
163,658

 
$
170,848

Cost of sales and merchandising revenues
107,729

 
103,161

Gross profit
55,929

 
67,687

Operating, administrative and general expenses
18,971

 
25,650

Asset impairment
287

 
285

Interest expense
6,461

 
7,006

Other income, net
2,218

 
15,935

Income (loss) before income taxes attributable to The Andersons, Inc.
$
32,428

 
$
50,681


Operating results for the Rail Group decreased $18.3 million compared to the full year 2015 results. Sales and merchandising revenues decreased $7.2 million. The decrease was driven by a five percentage point decrease in average lease utilization rates during the year as well as a reduction in car sales compared to 2015. Cost of sales and merchandising revenues increased $4.6 million due to higher storage costs associated with our reduced utilization rates as well as a periodic revision to our repair overhead rates which increased the amount of cost absorption. As a result of these factors, Rail gross profit declined $11.8 million compared to the prior year.

Operating expenses decreased by $6.7 million, largely due to the impact of higher overhead rates noted above. Other income decreased $13.7 million, primarily due to higher than normal lease settlement activity in the prior year.







24



Retail Group
 
Year ended December 31,
(in thousands)
2016
 
2015
Sales and merchandising revenues
$
134,229

 
$
139,478

Cost of sales and merchandising revenues
95,169

 
98,836

Gross profit
39,060

 
40,642

Operating, administrative and general expenses
41,430

 
41,298

Asset impairment
6,489

 

Interest expense
496

 
356

Other income, net
507

 
557

Income (loss) before income taxes attributable to The Andersons, Inc.
$
(8,848
)
 
$
(455
)

Operating results for the Retail Group declined $8.4 million compared to the prior year. The largest contributors to this decline were a $6.5 million impairment of long-lived assets as well as approximately $0.7 million of incremental cost associated with closing the segment's specialty food store in the fourth quarter of 2016. Customer count declined 4 percent compared to the prior year.

In January 2017, the Company announced that the Retail segment will be closed in the first half of 2017. We expect to incur incremental severance and shut-down costs in the range of $9 to $14 million as well as future gains or losses on the disposition of property, however the timing and amounts of those asset sales is not known at this point.

Other
 
Year ended December 31,
(in thousands)
2016
 
2015
Sales and merchandising revenues
$

 
$

Cost of sales and merchandising revenues

 

Gross profit

 

Operating, administrative and general expenses
31,384

 
31,976

Pension settlement

 
51,446

Interest expense (income)
(276
)
 
(381
)
Equity in earnings of affiliates

 

Other income, net
2,785

 
328

Income (loss) before income taxes attributable to The Andersons, Inc.
$
(28,323
)
 
$
(82,713
)

The net corporate operating loss (costs not allocated back to the business units) decreased $54.4 million to a loss of $28.3 million for 2016. The most significant decrease was due to the prior year $51.4 million settlement charge for the termination of the defined benefit pension plan.

Income Taxes
Income tax expense of $6.9 million was provided at 32.3%. In 2015, an income tax benefit of $0.2 million was provided at 2.1%. The lower effective tax rate in 2015 relative to the loss before income taxes was due primarily to a goodwill write-off that did not provide a corresponding tax benefit.


25



Comparison of 2015 with 2014

Grain Group
 
Year ended December 31,
(in thousands)
2015
 
2014
Sales and merchandising revenues
$
2,483,643

 
$
2,682,038

Cost of sales and merchandising revenues
2,359,998

 
2,550,909

Gross profit
123,645

 
131,129

Operating, administrative and general expenses
121,833

 
110,221

Asset impairment

 
3,090

Interest expense
5,778

 
8,785

Equity in earnings of affiliates
14,703

 
27,643

Other income, net
26,229

 
21,450

Income before income taxes
(9,456
)
 
58,126

Loss attributable to noncontrolling interests
(10
)
 
(10
)
Income (loss) before income taxes attributable to The Andersons, Inc.
$
(9,446
)
 
$
58,136


Operating results for the Grain Group decreased $67.6 million compared to full year 2014 results. Sales and merchandising revenues decreased $198 million compared to 2014 due to a decrease in commodity prices which was partially offset by a 12 percent increase in bushels sold as a result of the Auburn Bean & Grain acquisition in late 2014. Average prices for bushels sold during the year decreased by 13 percent for corn and 17 percent for soybeans compared to 2014. Cost of sales and merchandising revenues decreased $191 million following the decrease in average commodity prices and increase in bushels sold noted above. Gross profit decreased $7.5 million due to declines of $1.2 million from blending operations, $7.6 million from space income, and $9.6 million from the negative financial impact on risk management positions resulting from weather-induced market volatility. This was partially offset by gross profit increases of $1.4 million for merchandising fees and $5.4 million in higher margins on contracted sales.

Operating, administrative, and general expenses were $11.6 million higher than 2014 largely due to a $7.2 million increase in labor and benefits. The grain group also recognized a goodwill impairment charge of $46.4 million driven by compressed margins over the past several years and anticipated unfavorable operating conditions in domestic and global commodity markets, including oil and ethanol, as well as foreign exchange impacts. Equity in earnings of affiliates decreased $12.9 million due to reduced operating results of LTG and Thompsons Limited. It also includes our share ($2.8 million) of a correction of a prior period accounting error at Lansing Trade Group. Other income increased $4.8 million, which is attributable to a $6.0 million increase in gain from equity ownership transactions in LTG compared to the prior year. During the current year, our ownership interest was reduced from 39% to 31% resulting in a gain of $23.1 million whereas in the prior year out ownership was reduced from 48% to 39% resulting in a gain of $17.1 million.

Ethanol Group
 
Year ended December 31,
(in thousands)
2015
 
2014
Sales and merchandising revenues
$
556,188

 
$
765,939

Cost of sales and merchandising revenues
531,864

 
717,882

Gross profit
24,324

 
48,057

Operating, administrative and general expenses
11,594

 
11,719

Interest expense
70

 
255

Equity in earnings (loss) of affiliates
17,221

 
68,880

Other income, net
377

 
223

Income (loss) before income taxes
30,258

 
105,186

Income (loss) attributable to noncontrolling interests
1,755

 
12,929

Income (loss) before income taxes attributable to The Andersons, Inc.
$
28,503

 
$
92,257


Operating results for the Ethanol Group decreased $63.8 million compared to full year 2014 results. Sales and merchandising and service fee revenues decreased $210 million, with over 90 percent of the decrease related to ethanol sales. While ethanol

26



gallons sold increased over two percent, average ethanol prices decreased 27 percent. DDG volumes remained flat but revenues decreased 20 percent compared to the prior year due to a lower price per ton. Cost of sales and merchandising revenues decreased $186 million following the decrease in average corn, ethanol, and DDG prices. Gross profit decreased $23.7 million and is attributed to the decrease in ethanol and DDG prices relative to corn prices which caused margin compression.

Equity in earnings of affiliates decreased $51.7 million from prior year and represents a reduction of income from investments in three unconsolidated ethanol LLCs. Throughout the year, the ethanol facilities' productivity and output remained strong, however earnings declined due to the same factors that caused a decrease in consolidated gross profit. The decrease in income attributable to noncontrolling interests is a direct result of the lower earnings at our consolidated ethanol facility that has noncontrolling interest owners.

Plant Nutrient Group
 
Year ended December 31,
(in thousands)
2015
 
2014
Sales and merchandising revenues
$
848,338

 
$
802,333

Cost of sales and merchandising revenues
728,798

 
685,394

Gross profit
119,540

 
116,939

Operating, administrative and general expenses
105,478

 
91,519

Interest expense
7,243

 
5,278

Equity in earnings of affiliates

 

Other income, net
3,046

 
4,372

Income (loss) before income taxes attributable to The Andersons, Inc.
$
121

 
$
24,514


Operating results for the Plant Nutrient Group decreased $24.4 million compared to full year 2014 results. Sales and merchandising revenues increased $46 million due to $51 million in sales at the Kay Flo Industries facilities acquired during 2015. Revenues in the legacy business were flat. Volumes were up five percent, however this was due primarily to tons sold by facilities acquired in recent acquisitions. Cost of sales and merchandising revenues increased $43.4 million, also primarily due to the acquisition activity noted above. The acquired facilities offset by a modest decline in legacy business resulted in a $2.6 million increase to gross profit compared to the prior year.

Operating, administrative, and general expenses increased $14.0 million from the prior year, of which $13.8 million related to the 2015 acquisition of Kay Flo Industries. Of those costs, $4.9 million were non-recurring acquisition related items, including cost of sales increases as a result of inventory purchase accounting adjustments. Goodwill impairment charges of $9.7 million for our Farm Center and Cob businesses were recorded due to reduced volumes over the past several years. Other income decreased $1.3 million in 2015 due to the settlement of a legal claim during the third quarter of 2014 which did not repeat in the current year.

Rail Group
 
Year ended December 31,
(in thousands)
2015
 
2014
Sales and merchandising revenues
$
170,848

 
$
148,954

Cost of sales and merchandising revenues
103,161

 
89,192

Gross profit
67,687

 
59,762

Operating, administrative and general expenses
25,650

 
24,164

Asset impairment
285

 

Interest expense
7,006

 
7,247

Other income, net
15,935

 
3,094

Income (loss) before income taxes attributable to The Andersons, Inc.
$
50,681

 
$
31,445


Operating results for the Rail Group increased $19.2 million compared to the full year 2014 results. Sales and merchandising revenues increased $21.9 million. The increase was driven by an increase in lease revenue of $15.7 million and an increase in repair revenue of $4.8 million due to higher productivity in 2015. Cost of sales and merchandising revenues increased $14.0 million, primarily as a result of higher leasing activity. As a result of these factors, Rail gross profit increased $7.9 million over the prior year.

27




Operating expenses increased modestly by $1.5 million which was largely due to higher maintenance charges from moving additional railcars into service. Interest expense remained flat compared to the prior year. Other income increased $12.8 million due to higher than normal lease settlement activity in 2015.

Retail Group
 
Year ended December 31,
(in thousands)
2015
 
2014
Sales and merchandising revenues
$
139,478

 
$
140,807

Cost of sales and merchandising revenues
98,836

 
99,555

Gross profit
40,642

 
41,252

Operating, administrative and general expenses
41,298

 
42,161

Interest expense
356

 
666

Other income, net
557

 
955

Income (loss) before income taxes attributable to The Andersons, Inc.
$
(455
)
 
$
(620
)

Operating results for the Retail Group improved slightly from the same period last year with a 1.3 percent decrease in customer count and 1.5 percent decrease in margins offset by effective cost controls and a modest increase in sales volume per customer.

Other
 
Year ended December 31,
(in thousands)
2015
 
2014
Sales and merchandising revenues
$

 
$

Cost of sales and merchandising revenues

 

Gross profit

 

Operating, administrative and general expenses
31,976

 
36,007

Interest income
(381
)
 
(471
)
Equity in earnings of affiliates

 

Other income, net
328

 
1,031

Income (loss) before income taxes attributable to The Andersons, Inc.
$
(82,713
)
 
$
(34,505
)

The net corporate operating loss (costs not allocated back to the business units) increased $48.2 million to a loss of $82.7 million for 2015. The most significant increase was a $51.4 million settlement charge for the termination of the defined benefit pension plan. Excluding this item, corporate expenses were down $3.2 million primarily due to the impact of lower corporate incentive compensation.

Income Taxes
Income tax benefit of $0.2 million was provided at 2.1%. In 2014, income tax expense of $61.5 million was provided at 33.4%. The decrease in the effective tax rate was due primarily to $11.8 million of the goodwill write-off that did not provide a corresponding tax benefit.




28



Liquidity and Capital Resources

Working Capital

At December 31, 2016, the Company had working capital of $258.4 million, an increase of $16.9 million from the prior year. This increase was attributable to changes in the following components of current assets and current liabilities:
(in thousands)
December 31,
2016
 
December 31,
2015
 
Variance
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
62,630

 
$
63,750

 
$
(1,120
)
Restricted cash
471

 
451

 
20

Accounts receivables, net
194,698

 
170,912

 
23,786

Inventories
682,747

 
747,399

 
(64,652
)
Commodity derivative assets – current
45,447

 
49,826

 
(4,379
)
Deferred income taxes

 
6,772

 
(6,772
)
Other current assets
72,133

 
90,412

 
(18,279
)
Total current assets
1,058,126

 
1,129,522

 
(71,396
)
Current Liabilities:
 
 
 
 
 
Short-term debt
29,000

 
16,990

 
12,010

Trade and other payables
581,826

 
668,788

 
(86,962
)
Customer prepayments and deferred revenue
48,590

 
66,762

 
(18,172
)
Commodity derivative liabilities – current
23,167

 
37,387

 
(14,220
)
Accrued expenses and other current liabilities
69,648

 
70,324

 
(676
)
Current maturities of long-term debt
47,545

 
27,786

 
19,759

Total current liabilities
799,776

 
888,037

 
(88,261
)
Working capital
$
258,350

 
$
241,485

 
$
16,865


In comparison to the prior year, current assets slightly decreased primarily as a result of lower inventory levels driven by decreasing commodity prices. Accounts receivable are also up, largely as a result of timing of payments from a major customer around period end. See the discussion below on additional sources and uses of cash for an understanding of the change in cash from prior year. Other current assets decreased primarily due to the final redemption of our investment and accrued dividends in Iowa Northern Railway in the current year.

Current liabilities decreased primarily as a result of lower payables as well as lower customer prepayments and deferred revenue related to declining commodity prices. This was offset by higher short-term borrowings and higher current maturities of long-term debt as principal payments become due in 2017.

Sources and Uses of Cash 2016 compared to 2015

Operating Activities and Liquidity

Our operating activities provided cash of $39.6 million in 2016 compared to cash provided by operations of $154.1 million in 2015. The significant change in operating cash flows in 2016 relates primarily to the changes in working capital, particularly accounts receivable and accounts payable as discussed above, which were partly offset by reduced inventory balances. Additionally, while net income has improved compared to the prior year, our operating cash flows are down since the loss incurred in the prior year included significant non-cash charges related to goodwill impairment and the settlement of our defined benefit pension plan.

In 2016, the Company received refunds, net of taxes paid, of $10.6 million, compared to $4.9 million of taxes paid, net of refunds received, in 2015. The Company makes quarterly estimated tax payments based on year to date annualized taxable income. The net refunds received in 2016 are primarily due to a $12.0 million refund of overpaid 2015 Federal income taxes.




29



Investing Activities

Investing activities used $28.2 million in 2016 compared to $238.5 million used in 2015. The decrease in cash used for investing activities is primarily driven by the 2015 acquisition of Kay Flo Industries, Inc. for $128.5 million. In addition, a portion of 2016 spending relates to purchases of Rail Group assets in the amount of $85.3 million, which is lower than the prior year. These purchases of Rail Group assets were partially offset in the current year by proceeds from the sale of Rail Group assets in the amount of $56.7 million, however net spend on Rail assets is still down from the prior year. The current year results include cash received of $15.0 million primarily from the redemption of our investment in IANR as well as proceeds from the sale of facilities in Iowa totaling $54.3 million which reduce our net outflow from investing activities. Capital spending for 2016 on property, plant and equipment includes: Grain - $21.4 million; Ethanol - $2.3 million; Plant Nutrient - $15.2 million; Rail - $4.3 million; Retail - $0.4 million and $34.1 million in corporate / enterprise resource planning project spending.
  
We expect to spend approximately $105 million in 2017 on conventional property, plant and equipment which includes estimated 2017 capital spending for the continuing project to replace current technology with an enterprise resource planning system. An additional $158 million is estimated to be spent on the purchase and capitalized modifications of railcars and barges with related sales or financings of $133 million.

Financing Arrangements

Net cash used in financing activities was $12.5 million in 2016, compared to $33.4 million provided in 2015. The change in financing activity is primarily the result of significant debt issuance in the prior year to fund the Kay Flo acquisition which was partly offset by the 2015 completion of our $50 million share repurchase program.

We have significant amounts of committed short-term lines of credit available to finance working capital, primarily inventories, margin calls on commodity contracts and accounts receivable. We are party to a borrowing arrangement with a syndicate of banks that provides a total of $871.3 million in borrowing capacity, including $21.3 million in non-recourse debt of The Andersons Denison Ethanol LLC. Of that total, we had $779.6 million remaining available for borrowing at December 31, 2016. Peak short-term borrowings were $412.0 million on January 6, 2016. Typically, the Company's highest borrowing occurs in the first half of the year due to seasonal inventory requirements in the fertilizer and retail businesses.

We paid $17.4 million in dividends in 2016 compared to $15.9 million in 2015. We paid $0.155 per common share for the dividends paid in January, April, July and October 2016, and $0.14 per common share for the dividends paid in January, April, July and October 2015. On December 16, 2016, we declared a cash dividend of $0.16 per common share, payable on January 24, 2017 to shareholders of record on January 3, 2017.

Proceeds from the sale of treasury shares to employees and directors were $1.0 million and $0.5 million for 2016 and 2015, respectively.

Certain of our long-term borrowings include covenants that, among other things, impose minimum levels of equity and limitations on additional debt. We are in compliance with all such covenants as of December 31, 2016. In addition, certain of our long-term borrowings are collateralized by first mortgages on various facilities or are collateralized by railcar assets. Our non-recourse long-term debt is collateralized by ethanol plant assets.

Because we are a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on our profitability. In addition, periods of high grain prices and / or unfavorable market conditions could require us to make additional margin deposits on our exchange traded futures contracts. Conversely, in periods of declining prices, we receive a return of cash.

We believe our sources of liquidity will be adequate to fund our operations, capital expenditures and payments of dividends in the foreseeable future.

Sources and Uses of Cash 2015 compared to 2014

Operating Activities and Liquidity

Our operating activities provided cash of $154.1 million in 2015 compared to cash used by operations of $10.1 million in 2014. The significant change in operating cash flows in 2015 relates primarily to the changes in working capital, particularly inventory, discussed above, partially offset by lower operating results.

30




In 2015, the Company paid income taxes, net of refunds received, of $4.9 million compared to $36.8 million in 2014. The Company makes quarterly estimated tax payments based on year to date annualized taxable income. The decrease in income taxes paid in 2015 from 2014 is primarily due to decreased current income tax expense and overpayments related to 2014 taxes that were applied to 2015 estimated tax payments.

Investing Activities

Investing activities used $238.5 million in 2015 compared to $89.7 million used in 2014. The increase in cash used for investing activities is primarily driven by the 2015 acquisition of Kay Flo Industries, Inc. for $128.5 million. In addition, a large portion of the remaining 2015 spending relates to purchases of Rail Group assets in the amount of $115.0 million. Purchases of Rail Group assets was only partially offset in the current year by proceeds from the sale of Rail Group assets in the amount of $76.6 million. Capital spending for 2015 on property, plant and equipment includes: Grain - $26.9 million; Ethanol - $7.2 million; Plant Nutrient - $14.4 million; Rail - $3.0 million; Retail - $1.0 million and $20.0 million in corporate / enterprise resource planning project spending.
  
We expect to spend approximately $122 million in 2016 on conventional property, plant and equipment which includes estimated 2016 capital spending for the continuing project to replace current technology with an enterprise resource planning system and completing construction on a new corporate headquarters building. An additional $140 million is estimated to be spent on the purchase and capitalized modifications of railcars and barges with related sales or financings of $116 million.

Financing Arrangements

Net cash provided by financing activities was $33.4 million in 2015, compared to $94.6 million used in 2014. The cash provided in 2015 was primarily driven by the issuance of long-term debt associated with our acquisition activity during the year, partly offset by the completion of our $50 million share repurchase program.

We have significant amounts of committed short-term lines of credit available to finance working capital, primarily inventories, margin calls on commodity contracts and accounts receivable. We are party to a borrowing arrangement with a syndicate of banks that provides a total of $873.8 million in borrowing capacity, including $23.8 million in non-recourse debt of The Andersons Denison Ethanol LLC. Of that total, we had $721.7 million remaining available for borrowing at December 31, 2015. Peak short-term borrowings to date were $308.5 million on March 31, 2015. Typically, the Company's highest borrowing occurs in the spring due to seasonal inventory requirements in the fertilizer and retail businesses.

We paid $15.9 million in dividends in 2015 compared to $12.5 million in 2014. We paid $0.14 per common share for the dividends paid in January, April, July and October 2015, and $0.11 per common share for the dividends paid in January, April, July and October 2014. On October 30, 2015, we declared a cash dividend of $0.155 per common share, payable on January 25, 2016 to shareholders of record on January 4, 2016.

Proceeds from the sale of treasury shares to employees and directors were $0.5 million and $1.5 million for 2015 and 2014, respectively. During 2015, we issued approximately 174 thousand shares and share units and 325 thousand options to employees and directors under our equity-based compensation plans.


















31



Contractual Obligations

Future payments due under contractual obligations at December 31, 2016 are as follows:
 
Payments Due by Period

(in thousands)
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
 
Total
Long-term debt
$
47,247

 
$
101,682

 
$
78,351

 
$
219,415

 
$
446,695

Interest obligations (a)
16,722

 
28,143

 
22,412

 
50,641

 
117,918

Operating leases (b)
28,609

 
36,221

 
19,699

 
18,417

 
102,946

Purchase commitments (c)
826,662

 
48,183

 

 

 
874,845

Other long-term liabilities (d)
2,493

 
5,097

 
5,257

 
18,899

 
31,746

Total contractual cash obligations
$
921,733

 
$
219,326

 
$
125,719

 
$
307,372

 
$
1,574,150

(a) Future interest obligations are calculated based on interest rates in effect as of December 31, 2016 for the Company's variable rate debt and do not include any assumptions on expected borrowings, if any, under the short-term line of credit.
(b) Approximately 54% of the operating lease commitments above relate to Rail Group assets that the Company leases from financial intermediaries. See “Off-Balance Sheet Transactions” below.
(c) Includes the amounts related to purchase obligations in the Company's operating units, including $628 million for the purchase of grain from producers and $181 million for the purchase of ethanol from the ethanol joint ventures. There are also forward grain and ethanol sales contracts to consumers and traders and the net of these forward contracts are offset by exchange-traded futures and options contracts or over-the-counter contracts. See the narrative description of businesses for the Grain and Ethanol Groups in Item 1 of this Annual Report on Form 10-K for further discussion.
(d) Other long-term liabilities include estimated obligations under our retiree healthcare programs and principal and interest payments for the financing arrangement on our new headquarters. Obligations under the retiree healthcare programs are not fixed commitments and will vary depending on various factors, including the level of participant utilization and inflation. Our estimates of postretirement payments through 2021 have considered recent payment trends and actuarial assumptions.

At December 31, 2016, we had standby letters of credit outstanding of $32.5 million, as well as $0.2 million that was outstanding on a non-recourse basis.


32



Off-Balance Sheet Transactions

Our Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. We lease assets from financial intermediaries through sale-leaseback transactions, the majority of which involve operating leases. Rail Group assets we own or lease from a financial intermediary are generally leased to a customer under an operating lease. We also arrange non-recourse lease transactions under which we sell assets to a financial intermediary, and assign the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, we generally provide ongoing maintenance and management services for the financial intermediary, and receive a fee for such services. On most of the assets, we hold an option to purchase the assets at the end of the lease.

The following table describes our Rail Group asset positions at December 31, 2016.
Method of Control
Financial Statement
 
Units
Owned-railcars available for sale
On balance sheet – current
 
551

Owned-railcar assets leased to others
On balance sheet – non-current
 
15,272

Railcars leased from financial intermediaries
Off balance sheet
 
4,267

Railcars – non-recourse arrangements
Off balance sheet
 
3,041

Total Railcars
 
 
23,131

Locomotive assets leased to others
On balance sheet – non-current
 
36

Locomotives leased from financial intermediaries
Off balance sheet
 
4

Total Locomotives
 
 
40

Barge assets leased to others
On balance sheet – non-current
 

Barge assets leased from financial intermediaries
Off balance sheet
 
65

Total Barges
 
 
65


In addition, we manage approximately 418 railcars for third-party customers or owners for which we receive a fee.

We have future lease payment commitments aggregating $55.2 million for the Rail Group assets we lease from financial intermediaries under various operating leases. Remaining lease terms vary with none exceeding fifteen years. Where appropriate, we utilize non-recourse arrangements in order to minimize credit risk. Refer to Note 14 to the Company's Consolidated Financial Statements in Item 8 for more information on our 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. Management evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on 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 our accounting estimates are considered critical, as they are important to the depiction of the Company's financial statements 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 Statements in Item 8 describes our significant accounting policies which should be read in conjunction with our critical accounting estimates.

Management believes that the accounting for grain inventories and commodity derivative contracts, including adjustments for counterparty risk, and impairment of long-lived assets and equity method investments involve significant estimates and assumptions in the preparation of the Consolidated Financial Statements.

Grain Inventories and Commodity Derivative Contracts

Grain inventories are stated at their net realizable value, which approximates estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company marks to market all 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

33



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 quarterly assessment of non-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 cost of sales and merchandising revenues in the statement of income.

Impairment of Long-Lived Assets, Goodwill, and Equity Method Investments

The Company's business segments are each highly capital intensive and require significant investment. 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. 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, using quantitative analyses. Goodwill is tested for impairment at the reporting unit level, which is the operating segment or one level below the operating segment. The quantitative review for impairment takes into account our estimates of future 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. These factors are discussed in more detail in Note 4, Goodwill and Intangible Assets.

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. Other than consideration of past and current performance, these reviews take into account forecasted earnings which are based on management's estimates of future performance.


34



Item 7a. Quantitative and Qualitative Disclosures about Market Risk

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 inventories, related purchase and sale contracts, exchange-traded futures, and over-the-counter contracts. The fair value of the position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures market prices. The Company has established controls to manage and limit risk exposure, which consists of daily review of position limits and effects of potential market price moves on those positions.

A sensitivity analysis has been prepared to estimate the Company's exposure to market risk of its net commodity position. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in quoted market prices. The result of this analysis, which may differ from actual results, is as follows:
 
December 31,
(in thousands)
2016
 
2015
Net commodity position
$
(2,166
)
 
$
(7,406
)
Market risk
(217
)
 
(741
)

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. 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)
2016
 
2015
Fair value of long-term debt, including current maturities
$
450,940

 
$
467,703

Fair value in excess of carrying value
3,116

 
3,708

Market risk
8,833

 
7,678


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.

35



Item 8. Financial Statements and Supplementary Data

The Andersons, Inc.
Index to Financial Statements

Report of Independent Registered Public Accounting Firms - Deloitte & Touche LLP / PricewaterhouseCoopers LLP - US and Canada / Crowe Chizek LLP
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
Schedule II - Consolidated Valuation and Qualifying Accounts


36




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of The Andersons, Inc.
We have audited the accompanying consolidated balance sheets of The Andersons, Inc. and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Lansing Trade Group, LLC as of and for the years ended December 31, 2016 and 2015 or Lux JV Treasury Holding Company S.à r.l as of and for the year ended December 31, 2016, the Company’s investments in which are accounted for by use of the equity method. The accompanying consolidated financial statements of the Company include its equity investment in Lansing Trade Group, LLC of $89 million and $102 million as of December 31, 2016 and 2015 and Lux JV Treasury Holding Company S.à r.l of $46 million as of December 31, 2016, and its equity in (losses) earnings in Lansing Trade Group, LLC of ($9.9) million and $12 million for the years ended December 31, 2016 and 2015 and Lux JV Treasury Holding Company S.à.r.l of $1.2 million for the year ended December 31, 2016. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Lansing Trade Group, LLC as of and for the years ended December 31, 2016 and 2015 and Lux JV Treasury Holding Company S.à r.l as of and for the year ended December 31, 2016, is based solely on the reports 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of The Andersons, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits and (as to the amounts included for Lansing Trade Group, LLC for 2016 and 2015 and Lux JV Treasury Holding Company S.à r.l for 2016) the reports of the other auditors, such financial statement schedule for the years ended December 31, 2016 and 2015, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting based on our audit.

/s/ Deloitte & Touche LLP
Cleveland, Ohio
March 1, 2017


37



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Managers
Lansing Trade Group, LLC
Overland Park, Kansas

We have audited the accompanying consolidated balance sheets of Lansing Trade Group, LLC and Subsidiaries (the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of comprehensive income, equity and cash flows for each of the years in the three-year period ended December 31, 2016 (not included herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Lux JV Treasury Holding Company S.à.r.l., an entity in which Lansing Trade Group, LLC has an investment in and accounts for under the equity method of accounting, for which Lansing Trade Group, LLC reflects an investment of $42.9 million and $43.7 million as of December 31, 2016 and 2015, respectively, and equity in earnings of affiliates of $2.6 million, $2.9 million, and $4.3 million for each of the years in the three-year period ended December 31, 2016, respectively. The financial statements of Lux JV Treasury Holding Company S.à.r.l. were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to the amounts included for Lux JV Treasury Holding Company S.à.r.l., is based solely on the report of the other auditors.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from 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 audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of, December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.




Crowe Chizek LLP

Elkhart, Indiana
February 27, 2017

















38




February 17, 2017



Report of Independent Registered Public Accounting Firm
To the Board of Managers of
Lux JV Treasury Holding Company S.à r.l.

We have audited the accompanying consolidated balance sheet of Lux JV Treasury Holding Company S.à r.l. and its subsidiaries as of December 31, 2016 and December 31, 2015 and the related consolidated statements of income and retained earnings and cash flows for the years ended December 31, 2016, 2015 and 2014 (not included herein). Management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audits 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. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lux JV Treasury Holding Company S.à r.l. and its subsidiaries as of December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for the years ended December 31, 2016, 2015 and 2014 in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, Lux JV Treasury Holding Company S.à r.l. retrospectively changed its method of presentation of debt issuance costs due to the adoption of ASU 2015-03, Presentation of Debt Issuance Costs, in December 2016.

/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants

London, Ontario

39




Report of Independent Registered Public Accounting Firm

To Shareholders and Board of Directors
of The Andersons, Inc.


In our opinion, based on our audits and the report of other auditors, the consolidated statements of operations, of comprehensive income, of equity and of cash flows for the period ended December 31, 2014 present fairly, in all material respects, the results of operations and cash flows of The Andersons, Inc. and its subsidiaries for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 2014 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Lansing Trade Group, LLC, an entity in which The Andersons, Inc. accounts for under the equity method of accounting, for which The Andersons, Inc. financial statements reflects equity in earnings of affiliates of $23.3 million for the year ended December 31, 2014. The consolidated financial statements of Lansing Trade Group, LLC were audited by other auditors whose report thereon has been furnished to us, and our opinion on the consolidated financial statements 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 of these statements 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. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP
Toledo, OH
March 2, 2015, except for the effects of the change in the composition of reportable segments discussed in Note 13 (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s 2015 annual report on Form 10-K, as to which the date is February 29, 2016


40




The Andersons, Inc.
Consolidated Balance Sheets
(In thousands)
 
December 31,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
62,630

 
$
63,750

Restricted cash
471

 
451

Accounts receivable, less allowance for doubtful accounts of $7,706 in 2016; $6,938 in 2015
194,698

 
170,912

Inventories (Note 2)
682,747

 
747,399

Commodity derivative assets – current (Note 6)
45,447

 
49,826

Deferred income taxes (Note 8)

 
6,772

Other current assets
72,133

 
90,412

Total current assets
1,058,126

 
1,129,522

Other assets:
 
 
 
Commodity derivative assets – noncurrent (Note 6)
100

 
412

Goodwill (Note 4)
63,934

 
63,934

Other intangible assets, net (Note 4)
106,100

 
120,240

Other assets
10,411

 
9,515

Equity method investments
216,931

 
242,107

 
397,476

 
436,208

Rail Group assets leased to others, net (Note 3)
327,195

 
338,111

Property, plant and equipment, net (Note 3)
450,052

 
455,260

Total assets
$
2,232,849

 
$
2,359,101


41



The Andersons, Inc.
Consolidated Balance Sheets (continued)
(In thousands)
 
December 31,
2016
 
December 31,
2015
Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Short-term debt (Note 5)
$
29,000

 
$
16,990

Trade and other payables
581,826

 
668,788

Customer prepayments and deferred revenue
48,590

 
66,762

Commodity derivative liabilities – current (Note 6)
23,167

 
37,387

Accrued expenses and other current liabilities
69,648

 
70,324

Current maturities of long-term debt (Note 5)
47,545

 
27,786

Total current liabilities
799,776

 
888,037

Other long-term liabilities
27,833

 
18,176

Commodity derivative liabilities – noncurrent (Note 6)
339

 
1,063

Employee benefit plan obligations (Note 7)
35,026

 
45,805

Long-term debt, less current maturities (Note 5)
397,065

 
436,208

Deferred income taxes (Note 8)
182,113

 
186,073

Total liabilities
1,442,152

 
1,575,362

Commitments and contingencies (Note 14)

 

Shareholders’ equity:
 
 
 
Common shares, without par value (63,000 shares authorized; 29,430 shares issued in 2016; 29,353 shares issued in 2015)
96

 
96

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

 

Additional paid-in-capital
222,910

 
222,848

Treasury shares, at cost (1,201 in 2016; 1,397 in 2015)
(45,383
)
 
(52,902
)
Accumulated other comprehensive loss
(12,468
)
 
(20,939
)
Retained earnings
609,206

 
615,151

Total shareholders’ equity of The Andersons, Inc.
774,361

 
764,254

Noncontrolling interests
16,336

 
19,485

Total equity
790,697

 
783,739

Total liabilities and equity
$
2,232,849

 
$
2,359,101

The Notes to Consolidated Financial Statements are an integral part of these statements.


42




The Andersons, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
 
 
Year ended December 31,
 
2016
 
2015
 
2014
Sales and merchandising revenues
$
3,924,790

 
$
4,198,495

 
$
4,540,071

Cost of sales and merchandising revenues
3,579,284

 
3,822,657

 
4,142,932

Gross profit
345,506

 
375,838

 
397,139

Operating, administrative and general expenses
318,395

 
337,829

 
315,791

Pension settlement

 
51,446

 

Asset impairment
9,107

 
285

 
3,090

Goodwill impairment

 
56,166

 

Interest expense
21,119

 
20,072

 
21,760

Other income:
 
 
 
 
 
Equity in earnings of affiliates, net
9,721

 
31,924

 
96,523

Other income, net
14,775

 
46,472

 
31,125

Income (loss) before income taxes
21,381

 
(11,564
)
 
184,146

Income tax provision (benefit)
6,911

 
(242
)
 
61,501

Net income (loss)
14,470

 
(11,322
)
 
122,645

Net income attributable to the noncontrolling interests
2,876

 
1,745

 
12,919

Net income (loss) attributable to The Andersons, Inc.
$
11,594

 
$
(13,067
)
 
$
109,726

Per common share:
 
 
 
 
 
Basic earnings (loss) attributable to The Andersons, Inc. common shareholders
$
0.41

 
$
(0.46
)
 
$
3.85

Diluted earnings (loss) attributable to The Andersons, Inc. common shareholders
$
0.41

 
$
(0.46
)
 
$
3.84

Dividends declared
$
0.6250

 
$
0.5750

 
$
0.4700

The Notes to Consolidated Financial Statements are an integral part of these statements.


43





The Andersons, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
 
 
Year ended December 31,
 
2016
 
2015
 
2014
Net income (loss)
$
14,470

 
$
(11,322
)
 
$
122,645

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Recognition of gain on sale or change in fair value of debt securities (net of income tax of $74, $0 and $4,685)
(126
)
 

 
(7,735
)
Change in unrecognized actuarial gain (loss) and prior service cost (net of income tax of $(4,355), $(24,746) and $12,866)
7,447

 
40,736

 
(21,243
)
Foreign currency translation adjustments (net of income tax of $0, $82 and $947)
1,039

 
(7,333
)
 
(4,709
)
Cash flow hedge activity (net of income tax of $(72), $(154) and $(166))
111

 
253

 
273

Other comprehensive income (loss)
8,471

 
33,656

 
(33,414
)
Comprehensive income
22,941

 
22,334

 
89,231

Comprehensive income attributable to the noncontrolling interests
2,876

 
1,745

 
12,919

Comprehensive income attributable to The Andersons, Inc.
$
20,065

 
$
20,589

 
$
76,312

The Notes to Consolidated Financial Statements are an integral part of these statements.


44



The Andersons, Inc.
Consolidated Statements of Cash Flows
(In thousands)
 
Year ended December 31,
 
2016
 
2015
 
2014
Operating Activities
 
 
 
 
 
Net income (loss)
$
14,470

 
$
(11,322
)
 
122,645

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization
84,325

 
78,456

 
62,005

Bad debt expense
1,191

 
3,302

 
1,183

Equity in earnings of affiliates, net of dividends
14,766

 
(677
)
 
28,749

Gain on sale of investments in affiliates
(685
)
 
(22,881
)
 
(17,055
)
Gains on sales of Rail Group assets and related leases
(11,019
)
 
(13,281
)
 
(15,830
)
Loss on sales of property, plant and equipment
18

 
2,079

 
2,079

Excess tax benefit from share-based payment arrangement
13

 
(1,299
)
 
(1,806
)
Deferred income taxes
6,030

 
27,279

 
21,815

Stock based compensation expense
6,987

 
1,899

 
8,581

Pension settlement charge, net of cash contributed

 
48,344

 

Goodwill impairment charge

 
56,166