Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-20557
 
 
THE ANDERSONS, INC.
(Exact name of the registrant as specified in its charter)
 
 
OHIO
 
34-1562374
(State of incorporation
or organization)
 
(I.R.S. Employer
Identification No.)
1947 Briarfield Boulevard, Maumee, Ohio
 
43537
(Address of principal executive offices)
 
(Zip Code)
(419) 893-5050
(Telephone Number)
 (Former name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
Accelerated Filer
¨
Non-accelerated filer
¨

Smaller reporting company
¨
Emerging growth company
¨

 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The registrant had approximately 28.3 million common shares outstanding, no par value, at July 27, 2018.


Table of Contents

THE ANDERSONS, INC.
INDEX
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
PART II. OTHER INFORMATION
 


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Part I. Financial Information


Item 1. Financial Statements

The Andersons, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)(In thousands)
 
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
58,611

 
$
34,919

 
$
18,934

Restricted cash

 

 
1,033

Accounts receivable, net
218,476

 
183,238

 
186,331

Inventories (Note 2)
495,611

 
648,703

 
463,205

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

 
30,702

 
11,619

Other current assets
42,648

 
63,790

 
59,873

Assets held for sale
9,816

 
37,859

 
10,028

Total current assets
879,421

 
999,211

 
751,023

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

 
310

 
1,191

Goodwill
6,024

 
6,024

 
23,105

Other intangible assets, net
105,289

 
112,893

 
113,492

Other assets, net
26,888

 
12,557

 
8,686

Equity method investments
232,159

 
223,239

 
215,794

 
371,368

 
355,023

 
362,268

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

 
423,443

 
375,092

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

 
384,677

 
423,042

Total assets
$
2,117,788

 
$
2,162,354

 
$
1,911,425


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Table of Contents

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

 
$
22,000

 
$
124,000

Trade and other payables
282,221

 
503,571

 
267,194

Customer prepayments and deferred revenue
16,103

 
59,710

 
15,113

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

 
29,651

 
18,104

Accrued expenses and other current liabilities
74,512

 
69,579

 
69,256

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

 
54,205

 
62,482

Total current liabilities
656,696

 
738,716

 
556,149

Other long-term liabilities
30,325

 
33,129

 
34,441

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

 
825

 
334

Employee benefit plan obligations
26,131

 
26,716

 
36,837

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

 
418,339

 
354,066

Deferred income taxes
118,864

 
121,730

 
181,806

Total liabilities
1,270,798

 
1,339,455

 
1,163,633

Commitments and contingencies (Note 14)

 

 

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

 
96

 
96

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

 

 

Additional paid-in-capital
223,259

 
224,622

 
222,261

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

 
633,496

 
570,406

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

 
815,202

 
739,825

Noncontrolling interests
29,105

 
7,697

 
7,967

Total equity
846,990

 
822,899

 
747,792

Total liabilities and equity
$
2,117,788

 
$
2,162,354

 
$
1,911,425

See Notes to Condensed Consolidated Financial Statements


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Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)(In thousands, except per share data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Sales and merchandising revenues
$
911,402

 
$
993,662

 
$
1,547,141

 
$
1,845,678

Cost of sales and merchandising revenues
820,928

 
905,828

 
1,392,962

 
1,681,386

Gross profit
90,474

 
87,834

 
154,179

 
164,292

Operating, administrative and general expenses
59,853

 
69,544

 
124,110

 
151,089

Asset impairment
6,272

 

 
6,272

 

Goodwill impairment

 
42,000

 

 
42,000

Interest expense
7,825

 
5,988

 
14,824

 
12,088

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

 
6,385

 
13,376

 
4,507

Other income, net
2,828

 
4,248

 
4,514

 
11,743

Income (loss) before income taxes
29,155

 
(19,065
)
 
26,863

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

 
7,652

 
7,432

 
5,117

Net income (loss)
21,413

 
(26,717
)
 
19,431

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

 
$
(26,653
)
 
$
19,829

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

 
$
(0.94
)
 
$
0.70

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

 
$
(0.94
)
 
$
0.70

 
$
(1.05
)
Dividends declared
$
0.165

 
$
0.160

 
$
0.330

 
$
0.320

See Notes to Condensed Consolidated Financial Statements


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Table of Contents

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

 
$
(26,717
)
 
$
19,431

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

 

 
(87
)
 

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

 

 
51

 

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

 
(2,273
)
 
1,473

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

Comprehensive income (loss)
 
20,054

 
(26,746
)
 
16,784

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

 
$
(26,682
)
 
$
17,182

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


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

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

 
42,878

Bad debt expense (recovery)
(837
)
 
839

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

 
2,935

Goodwill impairment

 
42,000

 Asset impairment
6,272

 

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

Inventories
151,095

 
213,064

Commodity derivatives
34,850

 
27,670

Other assets
17,552

 
10,629

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

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

 
9,390

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

 
14,434

Purchase of investments

 
(2,429
)
Other

 
437

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

 
93,941

Proceeds from issuance of long-term debt
50,000

 
15,175

Proceeds from long-term financing arrangement

 
10,396

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

 

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

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

 
65,690

Decrease in cash and cash equivalents
23,692

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

 
62,630

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

 
$
18,934

See Notes to Condensed Consolidated Financial Statements

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Table of Contents

The Andersons, Inc.
Condensed Consolidated Statements of Equity
(Unaudited)(In thousands, except per share data)
 
Common
Shares
 
Additional
Paid-in
Capital
 
Treasury
Shares
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2016
$
96

 
$
222,910

 
$
(45,383
)
 
$
(12,468
)
 
$
609,206

 
$
16,336

 
$
790,697

Net income (loss)
 
 
 
 
 
 
 
 
(29,742
)
 
(10
)
 
(29,752
)
Other comprehensive income (loss)
 
 
 
 
 
 
475

 
 
 
 
 
475

Other change in noncontrolling interest
 
 
 
 
 
 
 
 
 
 
(8,359
)
 
(8,359
)
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $(323) (122 shares)
 
 
(654
)
 
4,386

 
 
 
 
 
 
 
3,732

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

 
52

 
 
 
(57
)
 
 
 

Balance at June 30, 2017
$
96

 
$
222,261

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

 
$
7,967

 
$
747,792

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
96

 
$
224,622

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

 
$
7,697

 
$
822,899

Net income (loss)
 
 
 
 
 
 
 
 
19,829

 
(398
)
 
19,431

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

 
21,806

Adoption of accounting standard, net of income tax of $2,869
 
 
 
 
 
 
 
 
(8,441
)
 
 
 
(8,441
)
Stock awards, stock option exercises and other shares issued to employees and directors, net of income tax of $(0) (120 shares)
 
 
(1,363
)
 
4,631

 
 
 
 
 
 
 
3,268

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


 
120

 
 
 
(120
)
 
 
 

Balance at June 30, 2018
$
96

 
$
223,259

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

 
$
29,105

 
$
846,990

See Notes to Condensed Consolidated Financial Statements


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Table of Contents

The Andersons, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1. Basis of Presentation and Consolidation
These Condensed Consolidated Financial Statements include the accounts of The Andersons, Inc. and its wholly owned and controlled subsidiaries (the “Company”). All intercompany accounts and transactions are eliminated in consolidation.
Investments in unconsolidated entities in which the Company has significant influence, but not control, are accounted for using the equity method of accounting.
In the opinion of management, all adjustments consisting of normal and recurring items considered necessary for the fair presentation of the results of operations, financial position, and cash flows for the periods indicated have been made. The results in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. An unaudited Condensed Consolidated Balance Sheet as of June 30, 2017 has been included as the Company operates in several seasonal industries.
The Condensed Consolidated Balance Sheet data at December 31, 2017 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in The Andersons, Inc. Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).
New Accounting Standards
Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12 Targeted Improvements to Accounting for Hedging Activities. This standard simplifies the recognition and presentation of changes in the fair value of hedging instruments and, among other things, eliminates the requirement to separately measure and record hedge ineffectiveness. The ASU is effective for annual periods beginning December 15, 2018, with early adoption permitted. The Company adopted ASU 2017-12 during the second quarter of 2018 noting the effects of this standard on our condensed consolidated financial statements were not material. There was no transition impact.
Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (ASC 606). The FASB issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10 ASU 2016-12 and ASU 2016-20, respectively.  The core principle of the new revenue standard is that an entity recognizes revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the standard in the current period using the modified retrospective method. As a result of the adoption we recognized a cumulative catch-up transition adjustment in beginning retained earnings at January 1, 2018 for non-recourse financing transactions that were open as of December 31, 2017. This resulted in a $25.6 million increase in Rail Group net assets, $34.0 million increase in financing liabilities and deferred tax liabilities and $8.4 million decrease to retained earnings. See Note 7 for further detail.
Leasing
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). ASC 842 supersedes the current accounting for leases. The new standard, while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (ii) eliminates current real estate specific lease provisions, (iii) modifies the lease classification criteria and (iv) aligns many of the underlying lessor model principles with those in the new revenue standard. ASC 842 is effective for fiscal years beginning after December 15, 2018, and interim periods within. Early adoption is permitted, however the Company does not plan to early adopt. The new standard is effective for the Company beginning January 1, 2019 and must be adopted using either the modified retrospective approach, which requires application of the new guidance at the beginning of the earliest comparative period presented or the optional alternative approach, which requires application of the new guidance at the beginning of the standard’s effective date.

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The Company expects this standard to have the effect of bringing certain off balance-sheet rail assets onto the balance sheet along with a corresponding liability for the associated obligations. Additionally, we have other arrangements currently classified as operating leases which will be recorded as a right of use asset and corresponding liability on the balance sheet. We are currently evaluating the impact these changes will have on the Consolidated Financial Statements.

Other applicable standards

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings in their consolidated financial statements. This guidance is effective for fiscal years beginning after December 15, 2018. We have evaluated the impact of this new standard on our consolidated financial statements and do not expect the impact to be material. Early adoption is permitted, but the Company has not chosen to do so at this time.

In May 2017, the FASB issued ASU 2017-09 Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. Under this standard, if the vesting conditions, fair value, and classification of the awards are the same immediately before and after the modification an entity would not apply modification accounting. The FASB then issued ASU 2018-07 which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company has adopted these standards during the year, noting no impact as the Company has not made any modifications to our stock compensation awards.

In March 2017, the FASB issued ASU 2017-07 Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires that the service cost component be reported in the same line item as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit costs should be presented in the income statement separately from the service cost component and outside of income from operations if that subtotal is presented. The Company has adopted this standard in the first quarter using the retrospective approach and prior periods have been recast to reflect this change, noting the amounts are immaterial.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This standard clarifies how companies present and classify certain cash receipts and payments in the statement of cash flows. The Company has adopted this standard in the first quarter noting the impact is immaterial.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This update changes the accounting for credit losses on loans and held-to-maturity debt securities and requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. This includes allowances for trade receivables. The Company has not historically incurred significant credit losses and does not currently anticipate circumstances that would lead to a CECL approach differing from the Company's existing allowance estimates in a material way. The guidance is effective for fiscal years beginning after December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted, but the Company does not plan to do so.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The FASB issued subsequent amendments to the initial guidance in February 2018 and March 2018 within ASU 2018-03 and ASU 2018-04, respectively. This standard provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The Company has adopted this standard in the first quarter noting the impact is immaterial.



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

 
$
505,217

 
$
373,863

Ethanol and co-products
22,828

 
11,003

 
14,041

Plant nutrients and cob products
82,230

 
126,962

 
69,365

Retail merchandise

 

 
906

Railcar repair parts
5,435

 
5,521

 
5,030

 
$
495,611

 
$
648,703

 
$
463,205


Inventories on the Condensed Consolidated Balance Sheets at June 30, 2018, December 31, 2017 and June 30, 2017 do not include 0.1 million, 1.0 million and 0.8 million bushels of grain, respectively, held in storage for others. The Company does not have title to the grain and is only liable for any deficiencies in grade or shortage of quantity that may arise during the storage period. Management has not experienced historical losses on any deficiencies and does not anticipate material losses in the future.

3. Property, Plant and Equipment
The components of Property, plant and equipment, net are as follows:
(in thousands)
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Land
$
29,579

 
$
22,388

 
$
23,566

Land improvements and leasehold improvements
68,384

 
69,127

 
71,236

Buildings and storage facilities
280,226

 
284,820

 
298,077

Machinery and equipment
377,202

 
373,127

 
382,321

Construction in progress
37,456

 
7,502

 
7,372

 
792,847

 
756,964

 
782,572

Less: accumulated depreciation
384,272

 
372,287

 
359,530

 
$
408,575

 
$
384,677

 
$
423,042

Depreciation expense on property, plant and equipment was $23.2 million and $24.1 million for the six months ended June 30, 2018 and 2017, respectively. Additionally, depreciation expense on property, plant and equipment was $11.5 million and $12.0 million for the three months ended June 30, 2018 and 2017, respectively.
In June 2018, the Company recorded charges totaling $1.6 million for impairment of property, plant and equipment in the Grain segment related to assets that have been reclassified as assets held for sale at June 30, 2018. In December 2017, the Company recorded charges totaling $10.9 million for impairment of property, plant and equipment in the Grain segment, of which $5.6 million relates to assets that are deemed held and used and $5.3 million related to assets that have been reclassified as assets held for sale at December 31, 2017. The Company wrote down the value of these assets to the extent their carrying amounts exceeded fair value. The Company classified the significant assumptions used to determine the fair value of the impaired assets as Level 3 inputs in the fair value hierarchy.
Rail Group Assets
The components of Rail Group assets leased to others are as follows:
(in thousands)
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Rail Group assets leased to others
$
564,555

 
$
531,391

 
$
482,524

Less: accumulated depreciation
106,131

 
107,948

 
107,432

 
$
458,424

 
$
423,443

 
$
375,092


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Depreciation expense on Rail Group assets leased to others amounted to $12.2 million and $9.7 million for the six months ended June 30, 2018 and 2017, respectively. Additionally, depreciation expense on Rail Group assets leased to others amounted to $6.0 million and $5.0 million for the three months ended June 30, 2018 and 2017, respectively.
In June 2018, the Company recorded charges totaling $4.7 million related to Rail Group assets leased to others that have been reclassified as assets held for sale at June 30, 2018. The Company classified the significant assumptions used to determine the fair value of the impaired assets as Level 3 inputs in the fair value hierarchy.

4. Debt

The Company has a line of credit agreement with a syndicate of banks. The agreement provides for a credit facility of $800 million. Total borrowing capacity for the Company under all lines of credit is currently at $950.0 million, including subsidiary debt that is non-recourse to the Company of $15.0 million for The Andersons Denison Ethanol LLC ("TADE"), $70.0 million for ELEMENT LLC and $65.0 million for The Andersons Railcar Leasing Company LLC. At June 30, 2018, the Company had a total of $642.1 million available for borrowing under its lines of credit. The Company's borrowing capacity is reduced by a combination of outstanding borrowings and letters of credit. The Company was in compliance with all financial covenants as of June 30, 2018.

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

 
$

 
$

Short-term Debt – Recourse
185,000

 
22,000

 
124,000

Total Short-term Debt
$
185,000

 
$
22,000

 
$
124,000

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

 
$

 
$

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

 
54,205

 
62,482

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

 
$
54,205

 
$
62,482

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

 
$

 
$

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

 
418,339

 
354,066

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

 
$
418,339

 
$
354,066


5. Derivatives
The Company’s operating results are affected by changes to commodity prices. The Grain and Ethanol businesses have established “unhedged” position limits (the amount of a commodity, either owned or contracted for, that does not have an offsetting derivative contract to lock in the price). To reduce the exposure to market price risk on commodities owned and forward grain and ethanol purchase and sale contracts, the Company enters into exchange traded commodity futures and options contracts and over-the-counter forward and option contracts with various counterparties. These contracts are primarily traded via the regulated CME. The Company’s forward purchase and sales contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.

All these contracts meet the definition of derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company accounts for its commodity derivatives at estimated fair value. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company

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classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.

Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in cost of sales and merchandising revenues.

Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a future, option or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Condensed Consolidated Balance Sheets.
The following table presents at June 30, 2018December 31, 2017 and June 30, 2017, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash posted/received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within current or noncurrent commodity derivative assets (or liabilities) on the Condensed Consolidated Balance Sheets:
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
(in thousands)
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
 
Net
derivative
asset
position
 
Net
derivative
liability
position
Collateral paid (received)
$
(52,888
)
 
$

 
$
1,351

 
$

 
$
15,452

 
$

Fair value of derivatives
68,244

 

 
17,252

 

 
(12,835
)
 

Balance at end of period
$
15,356

 
$

 
$
18,603

 
$

 
$
2,617

 
$


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

 
$
1,022

 
$
626

 
$
36

 
$
125,601

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

 

 

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

 
$
1,008

 
$
(85,160
)
 
$
(3,202
)
 
$
(33,095
)
 
December 31, 2017
(in thousands)
Commodity Derivative Assets - Current
 
Commodity Derivative Assets - Noncurrent
 
Commodity Derivative Liabilities - Current
 
Commodity Derivative Liabilities - Noncurrent
 
Total
Commodity derivative assets
$
36,929

 
$
311

 
$
489

 
$
1

 
$
37,730

Commodity derivative liabilities
(7,578
)
 
(1
)
 
(30,140
)
 
(826
)
 
(38,545
)
Cash collateral
1,351

 

 

 

 
1,351

Balance sheet line item totals
$
30,702

 
$
310

 
$
(29,651
)
 
$
(825
)
 
$
536


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

 
$
1,201

 
$
4,404

 
$
2

 
$
31,708

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

 

 

 

 
15,452

Balance sheet line item totals
$
11,619

 
$
1,191

 
$
(18,104
)
 
$
(334
)
 
$
(5,628
)

The net pre-tax gains and losses on commodity derivatives not designated as hedging instruments included in the Company’s Condensed Consolidated Statements of Operations and the line items in which they are located for the three and six months ended June 30, 2018 and 2017 are as follows:
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Gains (losses) on commodity derivatives included in cost of sales and merchandising revenues
$
45,844

 
$
(41,873
)
 
$
20,608

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

 

 

 

Soybeans
49,208

 

 

 

Wheat
11,163

 

 

 

Oats
36,612

 

 

 

Ethanol

 
332,761

 


 

Corn oil

 

 
6,158

 

Other
82

 
1,500

 

 
77

Subtotal
370,044

 
334,261

 
6,158

 
77

Exchange traded:
 
 
 
 
 
 
 
Corn
133,730

 

 

 

Soybeans
45,775

 

 

 

Wheat
48,105

 

 

 

Oats
1,190

 

 

 

Ethanol

 
140,364

 

 

Subtotal
228,800

 
140,364

 

 

Total
598,844

 
474,625

 
6,158

 
77


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December 31, 2017
Commodity (in thousands)
Number of Bushels
 
Number of Gallons
 
Number of Pounds
 
Number of Tons
Non-exchange traded:
 
 
 
 
 
 
 
Corn
218,391

 


 


 

Soybeans
18,127

 

 

 

Wheat
14,577

 

 

 

Oats
25,953

 

 

 

Ethanol

 
197,607

 

 

Corn oil

 

 
6,074

 

Other
47

 

 

 
97

Subtotal
277,095

 
197,607

 
6,074

 
97

Exchange traded:
 
 
 
 
 
 
 
Corn
82,835

 

 

 

Soybeans
37,170

 

 

 

Wheat
65,640

 

 

 

Oats
1,345

 

 

 

Ethanol

 
39,438

 

 

Other

 
840

 

 

Subtotal
186,990

 
40,278

 

 

Total
464,085

 
237,885

 
6,074

 
97

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

 

 

 

Soybeans
31,532

 

 

 

Wheat
7,340

 

 

 

Oats
41,526

 

 

 

Ethanol

 
256,518

 

 

Corn oil

 

 
4,658

 

Other
90

 
500

 

 
100

Subtotal
264,685

 
257,018

 
4,658

 
100

Exchange traded:
 
 
 
 
 
 
 
Corn
94,895

 

 

 

Soybeans
27,470

 

 

 

Wheat
43,925

 

 

 

Oats
2,290

 

 

 

Ethanol

 
3,990

 

 

Other

 
840

 

 
60

Subtotal
168,580

 
4,830

 

 
60

Total
433,265

 
261,848

 
4,658

 
160


Interest Rate and Other Derivatives

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a

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

 
654

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

 

Interest rate contract included in Other assets
155

 

 

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

 
$
(17
)
 
$
1,141

 
$
372

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

 
(1,535
)
 
767

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

 

 
67

 


As of June 30, 2018 the Company had one outstanding interest rate derivative, with a notional amount of $40 million and a maturity date of March 2021, that was designated as a cash flow hedge of interest rate risk. The gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.


6. Employee Benefit Plans

The following are components of the net periodic benefit cost for the pension and postretirement benefit plans maintained by the Company for the three and six months ended June 30, 2018 and 2017:
 
Pension Benefits
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Interest cost
$
32

 
$
39

 
$
65

 
$
78

Recognized net actuarial loss
61

 
63

 
122

 
126

Benefit cost
$
93

 
$
102

 
$
187

 
$
204


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

 
$
106

 
$
162

 
$
229

Interest cost
190

 
282

 
377

 
582

Amortization of prior service cost
(228
)
 

 
(456
)
 

Benefit cost
$
37

 
$
388

 
$
83

 
$
811


7. Revenue

Many of the Company’s revenues are generated from contracts that are outside the scope of ASC 606 and thus are accounted for under other accounting standards. Specifically, many of the Company's Grain and Ethanol sales contracts are derivatives under ASC 815, Derivatives and Hedging and the Rail Group's leasing revenue is accounted for under ASC 840, Leases. The breakdown of revenues between ASC 606 and other standards is as follows:
(in thousands)
Three months ended June 30, 2018
 
Six months ended June 30, 2018
Revenues under ASC 606
$
356,883

 
$
550,533

Revenues under ASC 840
26,228

 
52,257

Revenues under ASC 815
528,291

 
944,351

Total Revenues
$
911,402

 
$
1,547,141


The remainder of this note applies only to those revenues that are accounted for under ASC 606.
Disaggregation of revenue
The following tables disaggregate revenues under ASC 606 by major product/service line:
 
Three months ended June 30, 2018
(in thousands)
Grain
 
Ethanol
 
Plant Nutrient
 
Rail
 
Total
Specialty nutrients
$

 
$

 
$
94,281

 
$

 
$
94,281

Primary nutrients

 

 
200,288

 

 
200,288

Service
3,381

 
2,760

 
2,412

 
9,308

 
17,861

Co-products

 
32,462

 

 

 
32,462

Other
292

 

 
6,124

 
5,575

 
11,991

Total
$
3,673

 
$
35,222

 
$
303,105

 
$
14,883

 
$
356,883

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

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

 
$

 
$
169,359

 
$

 
$
169,359

Primary nutrients

 

 
253,507

 

 
253,507

Service
7,799

 
5,305

 
2,621

 
17,425

 
33,150

Co-products

 
59,108

 

 

 
59,108

Other
502

 

 
13,235

 
21,672

 
35,409

Total
$
8,301

 
$
64,413

 
$
438,722

 
$
39,097

 
$
550,533



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Approximately 6% of revenues accounted for under ASC 606 are recorded over time which primarily relates to service revenues noted above.
Specialty and primary nutrients
The Company sells several different types of specialty nutrient products, including: low-salt liquid starter fertilizers, micro-nutrients and other specialty lawn products. These products can be sold through the wholesale distribution channels as well as directly to end users at the farm center locations. Similarly, the Company sells several different types of primary nutrient products, including: nitrogen, phosphorus and potassium. These products may be purchased and re-sold as is or sold as finished goods resulting from a blending and manufacturing process. The contracts associated with specialty and primary nutrients generally have just a single performance obligation, as the Company has elected the accounting policy to consider shipping and handling costs as fulfillment costs. Revenue is recognized when control of the product has passed to the customer. Payment terms generally range from 0 - 30 days.
Service
Service revenues primarily relate to the railcar repair business. The Company owns several railcar repair shops which repair railcars through specific contracts with customers or by operating as an agent for a particular railroad to repair cars that are on its rail line per Association of American Railroads (“AAR”) standards. These contracts contain a single performance obligation which is to complete the requested and/or required repairs on the railcars. As the customer simultaneously receives and consumes the benefit of the repair work we perform, revenue for these contracts is recognized over time. The Company uses an input-based measure of progress using costs incurred to total expected costs as that is the measure that most faithfully depicts our progress towards satisfying our performance obligation. Upon completion of the work, the invoice is sent to the customer, with payment terms that generally range from 0 - 30 days.
Co-products
In addition to the ethanol sales contracts that are considered derivative instruments, the Ethanol Group sells several other co-products that remain subject to ASC 606, including E-85, DDGs, syrups and renewable identification numbers (“RINs”). RINs are credits for compliance with the Environmental Protection Agency's Renewable Fuel Standard program and are created by renewable fuel producers. Contracts for these co-products generally have a single performance obligation, as the Company has elected the accounting policy to consider shipping and handling costs as fulfillment costs. Revenue is recognized when control of the product has passed to the customer which follows shipping terms on the contract. Payment terms generally range from 5 - 15 days.
Contract balances
The opening and closing balances of the Company’s contract liabilities are as follows:
(in thousands)
Contract liabilities
Balance at January 1, 2018
$
25,520

Balance at March 31, 2018
67,715

Balance at June 30, 2018
10,047


The difference between the opening and closing balances of the Company’s contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. Contract liabilities relate to the Plant Nutrient business for payments received in advance of fulfilling our performance obligations under our customer contracts. Due to seasonality of this business, contract liabilities were built up in the first quarter. In the second quarter, the change in liabilities is due to revenue recognized in the current period relating to the liability.

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Impact of New Revenue Guidance on Financial Statement Line Items
The following table compares the reported condensed consolidated balance sheet, as of June 30, 2018, to the pro forma amounts had the previous guidance been in effect:
 
Balance Sheet
 
June 30, 2018
(in thousands)
As Reported
 
ASC 606 Impact
 
Pro forma as if the previous accounting guidance was in effect
Cash and cash equivalents and restricted cash
$
58,611

 
$

 
$
58,611

Accounts receivable, net
218,476

 

 
218,476

Inventories
495,611

 
158

 
495,769

Commodity derivative assets - current
54,259

 

 
54,259

Other current assets
52,464

 
(202
)
 
52,262

Other noncurrent assets
371,368

 

 
371,368

Rail Group assets leased to others, net
458,424

 
(24,131
)
 
434,293

Property, plant and equipment, net
408,575

 

 
408,575

     Total assets
2,117,788


(24,175
)
 
2,093,613

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

 
(2,922
)
 
195,778

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

 

 
356,733

Commodity derivative liabilities - current
85,160

 

 
85,160

Customer prepayments and deferred revenue
16,103

 

 
16,103

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

 

 
33,527

Employee benefit plan obligations
26,131

 

 
26,131

Long-term debt, less current maturities
435,580

 
(32,597
)
 
402,983

Deferred income taxes
118,864

 
2,869

 
121,733

     Total liabilities
1,270,798

 
(32,650
)
 
1,238,148

Retained earnings
635,438

 
8,475

 
643,913

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

 

 
211,552

     Total equity
846,990

 
8,475

 
855,465

     Total liabilities and equity
2,117,788

 
(24,175
)
 
2,093,613


Total reported assets were $24.2 million greater than on the pro forma balance sheet, which assumes the previous guidance remained in effect as of June 30, 2018. This was largely due to the Rail Group assets that were recorded on the balance sheet on January 1, 2018 as part of the cumulative catch-up adjustment upon the adoption of ASC 606.
Total reported liabilities were $32.7 million greater than on the pro forma balance sheet, which assumes the previous guidance remained in effect as of June 30, 2018. This was largely due to the financing obligation and deferred taxes related to the Rail Group assets that were recorded on the balance sheet on January 1, 2018 as part of the cumulative catch-up adjustment upon the adoption of ASC 606.

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

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

 
$
185,276

 
$
1,096,678

Cost of sales and merchandising revenues
820,928

 
185,765

 
1,006,693

Gross profit
90,474

 
(489
)
 
89,985

Operating, administrative and general expenses
59,853

 

 
59,853

Asset impairment
6,272

 

 
6,272

Interest expense
7,825

 
(395
)
 
7,430

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

 

 
9,803

Other income, net
2,828

 

 
2,828

Income (loss) before income taxes
29,155

 
(94
)
 
29,061

Income tax provision
7,742

 
(16
)
 
7,726

Net income (loss)
21,413

 
(78
)
 
21,335

Net income attributable to the noncontrolling interests
(116
)
 

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

 
$
(78
)
 
$
21,451

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

 
$
349,465

 
$
1,896,606

Cost of sales and merchandising revenues
1,392,962

 
350,415

 
1,743,377

Gross profit
154,179

 
(950
)
 
153,229

Operating, administrative and general expenses
124,110

 

 
124,110

Asset impairment
6,272

 

 
6,272

Interest expense
14,824

 
(798
)
 
14,026

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

 

 
13,376

Other income, net
4,514

 

 
4,514

Income (loss) before income taxes
26,863

 
(152
)
 
26,711

Income tax provision
7,432

 
(38
)
 
7,394

Net income (loss)
19,431

 
(114
)
 
19,317

Net income attributable to the noncontrolling interests
(398
)
 

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

 
$
(114
)
 
$
19,715


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Table of Contents

The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2018 due to the adoption of ASC 606 on January 1, 2018 compared to the results that would have been reported if the Company had continued to recognize revenues under ASC 605:
While grain origination agreements, and their related sales contracts, will be accounted for under ASC 815, we are still required to evaluate the principal versus agent guidance in ASC 606 to determine whether realized gains or losses should be presented on a gross or net basis in the consolidated statements of operations upon physical settlement. The Company has determined that it is the agent in certain origination arrangements within our Grain Group and therefore realized gains or losses will be presented under ASC 606. Since these transactions now being recorded on a net basis, revenues and related cost of sales would have been $183.1 million and $345.0 million higher under the previous guidance for the three and six months ended June 30, 2018, respectively.

ASC 606 requires certain Rail Group assets and related financing obligations to be recorded on the balance sheet as these transactions no longer qualify as sales as a result of the existence of repurchase options within the sales contracts. The result of this change primarily impacts geography within the income statement, as lease expense to the financial institution is replaced with a combination of depreciation and interest expense.

The net impact of accounting for revenue under the new guidance had an immaterial impact on net income (loss) and no impact on the Company's earnings per common share for the three and six months ended June 30, 2018.
The adoption of ASC 606 had an immaterial on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at period end. The guidance provides certain practical expedients that limit this requirement. The Company has various contracts that meet the following practical expedients provided by ASC 606:
The performance obligation is part of a contract that has an original expected duration of one year or less.
The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met.

Contract costs
The company has elected to apply the practical expedient and accordingly recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in Operating, administrative and general expenses.
Significant judgments
In making its determination of standalone selling price, the Company maximizes its use of observable inputs.  Standalone selling price, once established, is then used to allocate total consideration proportionally to the various performance obligations, if applicable, within a contract.
To estimate variable consideration, the Company applies both the “expected value” method and “most likely amount” method based on the form of variable consideration, according to which method would provide the best prediction.  The expected value method involves a probability-weighted determination of the expected amount, whereas the most likely amount method identifies the single most likely outcome in a range of possible amounts.  However, once a method has been applied to one form of variable consideration, it is applied consistently throughout the contract term.
The primary types of variable consideration present in the Company’s contracts are product returns, volume rebates and the CPI index.  The overall impact of this variable consideration is not material.
Practical expedients
The Company has elected to apply the following practical expedients provided by ASC 606:
Future performance obligations - see discussion above.
Contract costs - see discussion above.
Shipping and handling activities - see discussion above.

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Sales tax presentation - the Company has elected to exclude from the transaction price all sales taxes that are assessed by a governmental authority that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.
Modified retrospective approach - see discussion in Note 1 regarding adoption elections.

8. Income Taxes

On a quarterly basis, the Company estimates the effective tax rate expected to be applicable for the full year and makes changes if necessary based on new information or events. The estimated annual effective tax rate is forecast based on actual historical information and forward-looking estimates and is used to provide for income taxes in interim reporting periods. The Company also recognizes the tax impact of certain unusual or infrequently occurring items, such as the effects of changes in tax laws or rates and impacts from settlements with tax authorities, discretely in the quarter in which they occur.

For the three months ended June 30, 2018, the Company recorded income tax expense of $7.7 million at an effective tax rate of 26.6%. The annual effective tax rate differs from the statutory U.S. Federal tax rate due to the impact of state income taxes, nondeductible compensation, and permanent tax differences from equity method investments. The net increase in effective tax rate for the three months ended June 30, 2018 resulted from in the period ended June 30, 2017 the Company had a loss before income taxes after a goodwill write-off which did not provide a corresponding tax benefit. This was offset by the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the U.S. tax reform. For the three months ended June 30, 2017, the Company recorded an income tax expense of $7.7 million at an effective tax rate of (40.1)%.

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

The Company’s accounting for certain elements of the Tax Act was incomplete as of the period ended December 31, 2017, and remains incomplete as of June 30, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax
Act, the Company recorded a provisional discrete net tax benefit of $73.5 million in the period ended December 31, 2017. This provisional estimate consists of a net expense of $1.4 million for the one-time transition tax and a net benefit of $74.9 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the
transition tax, the Company must determine the amount of post-1986 accumulated earnings and profits of the relevant
subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the Company was able to make a
reasonable estimate of the transition tax, the Company continues to gather additional information to more precisely compute the final amount. Likewise, while the Company was able to make a reasonable estimate of the impact of the reduction to the
corporate tax rate, its rate may be affected by other analysis related to the Tax Act, including, but not limited to, the state tax
effect of adjustments made to federal temporary differences. Due to the complexity of the new global intangible low-taxed
income ("GILTI") tax rules, the company is continuing to evaluate this provision of the Tax Act and the application of ASC
740. Under GAAP, the Company is allowed to make an accounting policy choice to either (i) treat taxes due on future U.S.
inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method"); or (ii)
factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection
of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis and potential future
modifications to existing structures, which are not currently known. The Company has not made a policy decision regarding
whether to record deferred taxes on GILTI. The Company will continue to analyze the full effects of the Tax Act on its Consolidated Financial Statements.



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9. Accumulated Other Comprehensive Loss

The following tables summarize the after-tax components of accumulated other comprehensive income (loss) attributable to the Company for the three and six months ended June 30, 2018 and 2017:
 
 
 
 
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)

 
 
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
(in thousands)
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Investment in Convertible Preferred Securities
 
Defined Benefit Plan Items
 
Total
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Investment in Convertible Preferred Securities
 
Defined Benefit Plan Items
 
Total
Beginning Balance
 
$

 
$
(8,866
)
 
$
257

 
$
4,621

 
$
(3,988
)
 
$

 
$
(7,716
)
 
$
344

 
$
4,672

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

 
(1,123
)
 

 
(119
)
 
$
(1,191