The Andersons, Inc. - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

Indicate by check ü 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 þ No o

Indicate by check ü whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The registrant had 7.5 million common shares outstanding, no par value, at July 29, 2005.

THE ANDERSONS, INC.

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

     See notes to condensed consolidated financial statements

     See notes to condensed consolidated financial statements

Diluted earnings per share in the first half of 2005 excludes the impact of approximately 96 thousand employee stock options, respectively, as such options were antidilutive. There were no antidilutive options in 2004.

The Company made contributions to its defined benefit pension plan of $1.4 million and $1.5 million in the first half of 2005 and 2004, respectively. The Company currently expects to make a contribution of approximately $9.5 million for 2005, well in excess of the required minimum contribution.

The postretirement benefit plan is not funded. Company contributions in the quarter represent actual claim payments and insurance premiums for covered retirees. In the first half of 2005 and 2004, payments of $0.9 million and $0.4 million, respectively, were made. In both periods, retiree contributions for coverage was approximately $0.1 million.

The following Management’s Discussion and Analysis contains various “forward-looking statements” which reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words “believe,” “expect,” “anticipate,” “will” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: weather; supply and demand of commodities including grains, fertilizer and other basic raw materials; market prices for grains and the potential for increased margin requirements; environmental and governmental policies; competition; economic conditions; risks associated with acquisitions; actions of insurers in regard to the Company’s July grain facility fire, interest rates; and income taxes.

Our critical accounting estimates, as described in our 2004 Form 10-K, have not materially changed during the first half of 2005.

Sales and merchandising revenues for the three months ended June 30, 2005 totaled $365.1 million, a decrease of $9.4 million, or 3%, from the second quarter of 2004. Sales in the Agriculture Group were down $12.9 million, or 5%. Grain sales were down $29.5 million, or 19%, due to a 20% decrease in the average price per bushel sold, partially offset by a 1% increase in volume. Last year’s excellent crop has increased grain stocks over that of the prior year and this has resulted in a reduction in commodity prices. Receipts of grain into Company facilities continue to slightly exceed both expectations and the prior year. Sales of fertilizer in the plant nutrient division were up $16.6 million, or 16%, due to a 19% increase in the average price per ton sold slightly

offset by a 3% decrease in volume. Much of the price increase relates to escalation in prices of the basic raw materials, primarily nitrogen, phosphates and potassium. Generally these increases can be passed through to customers although price increases may also reduce demand at the producer level. Revenues in both the grain and fertilizer businesses are significantly impacted by the market price of the commodities being sold.

Merchandising revenues in the Agriculture Group were down $1.4 million, or 17%, due to an 11% decrease in grain space income during the second quarter of 2005 as compared to the second quarter of 2004. Space income is earned on grain held for our account or for our customers and includes storage fees earned and appreciation in the value of grain owned. Grain inventories on hand at June 30, 2005 were 44.8 million bushels, of which 6.4 million bushels were stored for others. This compares to 32.4 million bushels on hand at June 30, 2004, of which 12.1 million bushels were stored for others. Merchandising revenues were also negatively impacted by a decrease in income earned on storing fertilizer for others and a 20% reduction in acres to which fertilizer was applied resulting from the sale of two farm center facilities after the second quarter of 2004.

On July 1, 2005, two explosions and a resulting fire occurred in a grain storage and loading facility operated by the Company and located on the Maumee River in Toledo, Ohio. There were no employees on site at the time and fortunately, no injuries; however, some grain at the facility was destroyed along with damage to storage capacity and the conveyor systems. The facility, although leased, was insured by the Company. The Company also carried insurance on inventories and business interruption with a total deductible of $0.25 million. The Company is in the process of reclaiming grain and making plans for repair, however, there is some expectation that 2005 results will be negatively impacted due to the decreased availability of storage space and boat-loading capacity until repairs are completed after the 2005 harvest. One result of this incident was the need to purchase registered wheat warehouse receipts in July that had been sold in June due to the inability to ship grain stored in this facility. The Company anticipates some logistical challenges during the fall 2005 harvest due to the reduction in capacity, the inability to segregate grains to facilities and the loss of the use of a grain dryer and boat-loading facility. Certain of the insurance proceeds will likely not be available to the Company until 2006, while the business losses will be incurred primarily in 2005.

Dry weather in late June and early July negatively impacted corn and soybean condition in the Company’s primary region (Indiana, Illinois, Ohio and Michigan). As of this filing, the percentage of corn rated good to excellent in the four states ranges from 13% in Illinois to 75% in Michigan. For the same week in 2004, the percentage of corn rated good to excellent in the same four state area ranged from 52% to 83%. Soybean quality ranged from a low of 23% in Illinois rated good or excellent to a high of 75% in Michigan. For the same week in 2004, the percentage of soybeans rated good to excellent in the same four state area ranged from 55% to 78%. Regular rains through the remaining growing season may result in some improvement in crop quality, but the Company does not expect the 2005 harvest to equal the 2004 levels. Certain areas within the region continue to project good crops as the dry conditions have not been widespread.

Poor weather in this same region through the end of August can significantly affect yields and negatively impact the quantity and quality of grain handled and stored. The winter wheat harvest, which is virtually complete, resulted in good yields and crop quality as delivered to the Company’s facilities; however, 16% fewer acres of winter wheat were harvested in 2005 compared to the 2004 wheat crop. Wheat makes up less than 20% of the total grain bushels handled by the Company.

The Company expects to begin construction of a 55 million gallon-per-year ethanol production facility adjacent to its Albion, Michigan grain facility. Aggregate costs to construct this facility could approximate $90 million and the Company is expecting investment by one or more outside investors. Although this project is moving forward, completion is contingent upon several items, including final determination of state and local tax incentives.

The Company is continuing its investigation into other possible opportunities in the ethanol industry and may increase its involvement in 2005 through additional investments in stand-alone facilities, investments in holding companies or contracts to provide services to new or existing facilities. One additional site that the Company is actively exploring for construction of a 110 million gallon ethanol plant is adjacent to its Clymers, Indiana grain facility. No decision has yet been made about construction on this site, but the Company anticipates some level of outside investment if this proposed facility moves forward.

If the projected growth of the ethanol industry occurs, it could impact the Company’s grain business in potentially significant ways. It is expected to increase demand for corn, with resulting higher prices and increased competition. In certain situations, our grain business could be negatively impacted if there are new ethanol plants constructed in our region and near our existing facilities that would compete for locally available corn. Conversely, providing grain origination services and distillers dried grain marketing services to the ethanol industry is a potential growth opportunity for our grain trading operations. We also believe that the increase in demand for corn to serve the growing ethanol industry will force a reduction in the plantings of other crops, which would positively impact the plant nutrient division by increasing demand for nitrogen, phosphates and potassium. The growth of corn is more dependent on these fertilizer products than soybeans or wheat.

The Rail Group had a $4.5 million, or 35%, increase in revenues. Of the increase, $3.2 million was generated from increased leasing revenue in the Company’s lease fleet. Revenue on car sales was down $0.3 million and revenue for the railcar repair and fabrication shops was up $1.6 million. Railcars under management (owned, leased or managed for financial institutions in non-recourse arrangements) at June 30, 2005 were 17,957 compared to 13,495 at June 30, 2004. The railcar utilization rate (railcars under management in lease service, exclusive of railcars managed for third party investors) increased to 95% at June 30, 2005.

Lease renewals have continued at a high level due to car shortages throughout the industry. The number of new leases, acquired leases and / or renewals completed in the second quarter of 2005 is significantly higher than in the second quarter of 2004. Additionally, the average rent and lease term in the 2005 second quarter are each greater than the 2004 second quarter. The Company plans to continue increasing its investment in railcars and fleet management services throughout 2005. In April, the Company began offering railcar repair services in Mississippi (previously repair services were conducted in Maumee, Ohio and Darlington, South Carolina, as well as by some mobile units). The railcar repair business is also an opportunity for future growth.

The Processing Group had a $0.4 million, or 1%, increase in sales resulting from increased sales of cob products. The lawn business had a slight decrease in sales when compared to the second quarter of 2004. In the consumer and industrial lawn businesses, where we serve as contract manufacturer for several large “brand” companies, a private label manufacturer and also manufacture our own brands, volume was down 7% and the average price per ton sold down 3%.

The professional lawn business had an 11% increase in sales, resulting from a 14% increase in the average price per ton sold, partially offset by a 3% decrease in volume. The volume decrease was in the lower margin lawn care operator segment. Tons sold in the professional market include higher margin tons sold for golf course application and lower margin tons sold to lawn care operators. The cob-based business sales increase of 22% was due to a 9% increase in volume along with an 11% increase in the average price per ton sold.

The Company constantly evaluates the near and long-term prospects of its businesses, and the most efficient use of its assets. While reaffirming its commitment to the professional sector of the lawn products industry, the group is reassessing its strategic position within the consumer and industrial lawn business as well as options for assets employed serving that market.

The Company performed impairment tests on long-lived assets and goodwill of the lawn division of the Processing Group in the second quarter because of changes in the customer base and the decrease in revenues and gross profit in the consumer / industrial business of the lawn division. No impairment was identified.

The Retail Group had a $0.1 million, or less than 1%, decrease in same-store sales in the second quarter of 2005 when compared to the second quarter of 2004. Columbus market stores had increases while Toledo and Lima area stores had decreases. Part of the sales decrease resulted from Easter (historically a holiday driving significantly increased sales) falling in the first quarter of 2005 when it fell in the second quarter of 2004. A fresh meat market was opened in one of the Columbus market stores which resulted in some sales increases due to additional customer traffic in the wine and specialty foods departments, in spite of the timing of the Easter holiday. The average sale per customer increased approximately 3%, however, customer counts were down 3%. The 2005 spring nursery, lawn and garden business has been especially strong when compared to a weak

2004 season. We expect an increase in competition in the third quarter in both the Columbus and Toledo, Ohio markets.

Gross profit for the second quarter of 2005 totaled $53.0 million for the Company, a decrease of $3.1 million, or 5%, from the second quarter of 2004. The majority of this decrease resulted from changes in absorption costing implemented in one area of the Company as described below.

Gross profit in the Agriculture Group was down $4.3 million, resulting primarily from a second quarter change in the absorption costing of wholesale fertilizer tons manufactured and warehoused representing a $2.8 million reclassification of costs from operating, administrative and general expenses to cost of sales. Without the reclassification, gross profit in the Plant Nutrient Division would show an increase of $1.8 million over the 2004 second quarter which resulted from our ability to pass on raw material commodity cost increases. Other items impacting gross profit were the $1.4 million decrease in merchandising revenues mentioned previously and a slight decrease in gross profit on grain sales.

Gross profit in the Rail Group increased $1.7 million, or 25%. Lease fleet income increased by $1.3 million and the remainder of the increase was generated by the railcar repair and fabrication shops.

Gross profit for the Processing Group decreased $0.7 million, or 12%, due to decreased volumes and margin in the consumer / industrial segment of the lawn businesses. The margin decrease resulted primarily from increased costs of certain raw materials that could not be recovered from customers due to pricing arrangements. Gross profit in the professional business was slightly higher in spite of a 3% reduction in volume. Raw material cost increases can be passed on to professional customers. Costs have risen due primarily to the increased cost of urea (nitrogen) and other raw materials. Cob business gross profit also increased slightly on volume increases.

Gross profit in the Retail Group increased $0.2 million, or 1%, from the second quarter of 2004. This was primarily due to a change in the mix of products sold when compared to prior year.

Operating, administrative and general expenses for the first quarter of 2005 totaled $35.9 million, a $2.3 million, or 6%, decrease from the second quarter of 2004. As described previously, approximately $2.8 million of the 2005 expense reduction is related to a

reclassification of overhead costs from expense to cost of sales for certain manufactured and stored fertilizer inventory within the Agriculture Group. Without this reclassification, operating, administrative and general expenses would be $0.5 million, or 1% higher, that the same quarter in 2004. Areas of significant increase include professional and contract services, health care and pension benefit costs and increased performance incentives in certain areas. $0.3 million of expense was incurred in the second quarter of 2004 for facilities that were sold by the Company.

Interest expense for the second quarter of 2005 was $3.2 million, a $0.5 million, or 17%, increase from 2004. Average 2005 daily short-term borrowings were 31% lower than in the second quarter of 2004, however, the average daily short-term interest rate nearly doubled to 3.5% for the same time period. The Company reduced its non-recourse debt by $3.0 million and issued $1.5 million of new non-recourse debt in the second quarter of 2005, while recourse debt decreased by $1.0 in the quarter. Long-term interest expense increased 9% due to the new issuance and as the result of increases in variable rates.

As a result, pretax income of $15.4 million for the second quarter of 2005 was $1.1 million lower than pretax income of $16.5 million recognized in the second quarter of 2004. Income taxes of $5.1 million were provided at an expected 2005 effective annual rate of 36.7% less a reduction of $0.6 million related to state deferred tax liabilities associated with the State of Ohio. On June 30, 2005, the State of Ohio enacted legislation that repealed the Ohio franchise tax, phasing out the tax over five years. Accordingly, the deferred tax liabilities associated with the State of Ohio were decreased to reflect the phase out of the Ohio franchise tax. The Ohio franchise tax has been replaced by a Commercial Activity Tax that is based on gross receipts and will not be accounted for as an income tax. In the second quarter of 2004, income tax expense of $6.4 million was provided at 38.9%. The Company’s actual 2004 effective tax rate was 36.4%.

Sales and merchandising revenues for the six months ended June 30, 2005 totaled $623.8 million, a decrease of $25.1 million, or 4%, from the first half of 2004. Sales of grain and fertilizer in the Agriculture Group were down $33.0 million, or 8%. Grain sales were down $58.3 million, or 19%, due to a 20% decrease in average price per bushel sold with no change in volumes. The strong 2004 harvest and resulting increase in supply has reduced the selling price for all major grains. Sales of fertilizer in the plant nutrient division were up $25.3 million, or 19%, due to a 21% increase in the average price per ton sold partially offset by a 2% decrease in volume. Much of the price increase relates to escalation in prices of the basic raw materials, primarily nitrogen, phosphates and potassium. Generally, these increases can be passed through to customers, although price increases may also drive decreases in volume.

Merchandising revenues in the Agriculture Group were up $0.3 million, or 2%, due to increases in grain space income, partially offset by decreases in storage and application income in the plant nutrient division. Space income is earned on grain held for our account or for our customers and includes storage fees earned and appreciation in the value of grain owned.

The Rail Group had an $11.1 million, or 46%, increase in sales. This increase included a $9.1 million increase in lease fleet revenue partially offset by a $0.6 million decrease in sales of railcars to customers or financial institutions. The lease fleet revenue increase is a direct result of increases in the number of cars managed along with continued increases in lease rates. Sales in the railcar repair and fabrication shops increased $2.7 million.

The Processing Group had a $3.9 million, or 5%, decrease in sales resulting primarily from a 9% decrease in volume, partially offset by a 5% increase in the average price per ton sold. In the professional lawn business, serving the golf course and lawn care operator markets, sales increased by $1.9 million due to an increase in the average price per ton sold of 13% from the first half of 2004, partially offset by a reduction in volume of 6%. In the consumer and industrial lawn businesses, where we serve as contract manufacturer for several large “brand” companies, a private label manufacturer and also manufacture our own brands, volume was down 14% with no change in the average price per ton sold. The cob-based businesses, a much smaller component of the Processing Group, had a $1.0 million, or 19%, increase in sales primarily due to a 9% increase in the average price per ton sold and a 9% increase in volume.

The Retail Group had a $0.4 million, or less than 1%, increase in same-store sales in the first half of 2005 when compared to the first half of 2004. Both the Columbus and Lima Ohio markets showed increases and the Toledo Ohio stores had a decrease of less than 1%.

Gross profit for the first half of 2005 totaled $93.0 million for the Company, an increase of $0.8 million, or 1%, from the first half of 2004. The Agriculture Group had a $2.2 million, or 5%, decrease in gross profit, resulting primarily to the reduction in gross profit on sales in the plant nutrient division due to a $2.8 million reclassification of manufacturing and warehousing costs for certain wholesale fertilizer products from operating, administrative and general expenses to cost of sales. Without the reclassification, gross profit in the Plant Nutrient Division would show an increase of nearly $2.0 million which resulted from our ability to pass on raw material commodity cost increases. This reduction in gross profit was offset by the increased merchandising revenues mentioned previously and a slight increase in gross profit on grain sales.

Gross profit in the Rail Group increased $5.2 million, or 43%. This increase included a $4.5 million increase in lease fleet income, a $0.9 million increase in gross profit in the repair and fabrication shops, and a slight decrease in gross profit on car sales.

Gross profit for the Processing Group decreased $2.7 million, or 20%. The decrease was almost entirely from the lawn business and was related to the overall 12% decrease in volume coupled with a 10% increase in average cost per ton. Within the lawn business, nearly all of the gross profit decrease was in the consumer / industrial segment with only a slight reduction in the professional segment. The cob-based business experienced a $0.1 million, or 5%, increase in gross profit on increased volume.

Gross profit in the Retail Group increased $0.5 million, or 2%, from the first six months of 2004. This was due to a slight increase in sales along with favorable results from the stores’ annual physical inventory taken in the first quarter.

Operating, administrative and general expenses for the first half of 2005 totaled $72.8 million, a decrease of $0.1 million from the first six months of 2004. As described previously, in 2005, expenses of approximately $2.8 million were reclassified to cost of sales in the second quarter of 2005. Without this reclassification, operating, administrative and general expenses would be $2.7 million, or 4% higher, than the same period in 2004. Included in this increase is an adjustment for $0.6 million made in the first quarter of 2005 to correct errors in measuring the Company’s pension and postretirement benefit expense that occurred from 2001 through 2004. Additional significant increases occurred in current period benefit expense ($0.8 million additional from 2005 pension and health care claims) and professional services.

Interest expense for the first half of 2005 was $6.1 million, a $0.7 million, or 14%, increase from 2004. Average 2005 daily short-term borrowings were 42% lower than the first six months of 2004 and the average daily short-term interest rate increased from 1.8% for the first six months of 2004 to 3.3% for the first six months of 2005. Long-term interest for the period increased 12%, primarily due to additional borrowings (both recourse and non-recourse) made at various times in 2004 and 2005.

As a result, the pretax income of $17.0 million for the first half of 2005 was 6% higher than the pretax income of $16.1 million recognized in the first half of 2004. Income taxes of $5.7 million were provided at an expected 2005 effective annual rate of 36.7% less a one-time reduction of $0.6 million related to state deferred tax liabilities associated with the State of Ohio. The phase out of the Ohio franchise tax and its replacement by the gross receipts based Commercial Activity Tax was described previously. In the first half of 2004, income tax expense was provided at 38.9%. The Company’s actual 2004 full-year effective tax rate was 36.4%.

The Company’s operations used cash of $6.9 million in the first half of 2005, a change from providing cash of $49.5 million in the first half of 2004. In 2004, there was a significant amount of cash generated from the sale of grain inventory due to market conditions. In 2005, the Company carried a high level of inventory into the third quarter which did not generate the same level of cash. In addition, the Company has used cash of $13.6 million to meet margin calls at June 30, 2005 which it did not have at June 30, 2004. This variation in cash provided by and used in operating activities is not uncommon due to the nature of the Company’s commodity businesses. Net working capital at June 30, 2005 was $81.0 million, a $24.8 million decrease from December 31, 2004 and an $11.6 million decrease from June 30, 2004. The Company purchased approximately 1,600 railcars and related leases in June 2005 (classified as long-term assets) for $26.4 million and expects to sell or finance many of these assets in the third quarter.

The Company has significant short-term lines of credit available to finance working capital, primarily inventories and accounts receivable. The Company is party to a borrowing arrangement with a syndicate of banks, which provides the Company with $100 million in short-term lines of credit and an additional $100 million in a three-year line of credit. In addition, the amended agreements include a flex line allowing the company to increase the available short-term line by $50 million. The Company had

drawn $69.9 million on its short-term line of credit at June 30, 2005. Peak short-term borrowing for the Company to date is $119.8 million on March 30, 2005. Typically, the Company’s highest borrowing occurs in the spring due to seasonal inventory requirements in the fertilizer and retail businesses, credit sales of fertilizer and a customary reduction in grain payables due to the cash needs and market strategies of grain customers.

The Company utilizes interest rate contracts to manage a portion of its interest rate risk on both its short and long-term debt and lease commitments. At June 30, 2005, the net fair value of these derivative financial instruments (primarily interest rate swaps and interest rate caps) was less than $0.1 million and was recorded in the consolidated balance sheet.

Cash dividends of $0.075 per common share were paid for the first three quarters of 2004 and a dividend of $0.08 was paid for the fourth quarter of 2004 and the first two quarters of 2005. A cash dividend of $0.085 per common share was declared on July 1, 2005 and was paid on July 22, 2005. The Company made income tax payments of $3.1 million in the first half of 2005 and expects to make payments totaling approximately $7.3 million for the remainder of 2005. During the first half of 2005, the Company issued approximately 90 thousand shares to employees under its share compensation plans.

Total conventional capital spending for 2005 on property, plant and equipment is expected to approximate $21.3 million and is expected to include $2.7 million for expansion and improvements in Agriculture Group facilities, $2.0 million for an upgraded point-of-sale system for our retail stores and $0.5 million for expansion of operations in the Rail Group. The remaining amount of $16.1 million will be spent on numerous assets and projects; no single such project expecting to cost more than $0.5 million. This forecasted spending does not include any expected repairs to the Toledo grain facility damaged in the events of July 1 as the Company expects to receive insurance proceeds to cover such repairs. In addition, the Company spent $54.7 million on railcars and related leases and anticipates that spending for the purchase of additional railcars and capitalized modifications to railcars that may then be sold, financed off-balance sheet or owned by the Company for lease to customers will continue at or near these levels for the remainder of the year. The Company received $19.7 million from the sale or financing of these assets and anticipates additional sales or financings in the third and fourth quarters of 2005. If the Company elects to move forward with building an ethanol plant in Albion, Michigan and / or another site, some portion of the approximate $90 million estimated cost will likely be spent in 2005. It is anticipated that investment in any ethanol production facility would include other investors.

The Company increased its equity investment in Lansing Grain Company, LLC in February 2005 by investing an additional $0.9 million. Also in the first quarter the Company invested $1.0 million in Iroquois Bio-Energy LLC.

Certain of the Company’s long-term borrowings include provisions that impose minimum levels of working capital and equity, impose limitations on additional debt and require

that grain inventory positions be substantially hedged. The Company was in compliance with all provisions at June 30, 2005. In addition, certain of the long-term borrowings are secured by first mortgages on various facilities or are collateralized by railcar assets. The non-recourse long-term debt issued in February 2004 is collateralized by railcar and locomotive assets held by three wholly-owned bankruptcy-remote entities. Additional non-recourse debt was issued in the second quarter of 2005, also collateralized by specific railcar assets and related leases.

Because the Company is a significant consumer of short-term debt in peak seasons and the majority of this is variable rate debt, increases in interest rates could have a significant impact on the profitability of the Company. In addition, periods of high grain prices and/or unfavorable market conditions could require the Company to make additional margin deposits on its CBOT futures contracts. The marketability of the Company’s grain inventories and the availability of short-term lines of credit enhance the Company’s liquidity. In the opinion of management, the Company’s liquidity is adequate to meet short-term and long-term needs.

     Future payments due under debt and lease obligations as of June 30, 2005 are as follows:

The Company had standby letters of credit outstanding of $24.3 million at June 30, 2005, of which $8.3 million is a credit enhancement for industrial revenue bonds included in the contractual obligations table above.

The Company’s grain inventories include the value of forward purchase contracts to buy grain. These contracts are marked to the market price and require performance in future periods. The terms of these contracts are consistent with industry standards.

Approximately 77% of the operating lease commitments above relate to 5,403 railcars and 30 locomotives that the Company leases from financial intermediaries. See the following section on Off-Balance Sheet Transactions.

The Company is subject to various loan covenants highlighted previously. The Company is and has been in compliance with its covenants; noncompliance could result in default and acceleration of long-term debt payments. The Company does not anticipate noncompliance with its covenants.

The Company’s Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. The Company leases railcars from financial intermediaries through sale-leaseback transactions, the majority of which involve operating leasebacks. Railcars owned by the Company, or leased by the Company from a financial intermediary, are generally leased to a customer under an operating lease. The Company also arranges non-recourse lease transactions under which it sells railcars or locomotives to a financial intermediary, and assigns the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, the Company generally provides ongoing railcar maintenance and management services for the financial intermediary, and receives a fee for such services. On most of the railcars and locomotives that are not on its balance sheet, the Company holds an option to purchase at the end of the lease.

The following table describes the railcar and locomotive positions at June 30, 2005:

In addition, the Company manages 837 railcars for third-party customers or owners for which it receives a fee.

The Company has future lease payment commitments aggregating $59.5 million for the railcars leased by the Company from financial intermediaries under various operating leases. Remaining lease terms vary with none exceeding 7 years. As of June 30, 2005, the majority of these railcars have been leased to customers over similar terms. The segment manages risk by match funding (which means matching terms between the lease to the customer and the funding arrangement with the financial intermediary), where possible, and ongoing evaluation of lessee credit worthiness. In addition, the Company prefers non-recourse lease transactions, whenever possible, in order to minimize its credit risk.

Included in the above car counts are 6,235 railcars and 41 locomotives owned outright by subsidiaries of TOP CAT Holding Company LLC, a wholly-owned subsidiary of The Andersons, Inc., and included in the balance sheet. These assets are included in bankruptcy-remote entities whose debt is non-recourse to the Company and looks solely to the railcar and locomotive assets for collateral.

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.

The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as weather, plantings, government (domestic and foreign) farm programs and policies, changes in global demand created by population growth and higher standards of living, and global production of similar and competitive

crops. To reduce price risk caused by market fluctuations, the Company follows a policy of hedging its inventories and related purchase and sale contracts. The instruments used are exchange-traded futures and options contracts that function as hedges. The market value of exchange-traded futures and options used for hedging has a high, but not perfect correlation, to the underlying market value of grain inventories and related purchase and sale contracts. The less correlated portion of inventory and purchase and sale contract market value (known as basis) is much less volatile than the overall market value of exchange-traded futures and tends to follow historical patterns. The Company manages this less volatile risk using its daily grain position report to constantly monitor its position relative to the price changes in the market. The Company’s accounting policy for its futures and options hedges, as well as the underlying inventory positions and purchase and sale contracts, is to mark them to the market price daily and include gains and losses in the statement of income in sales and merchandising revenues.

A sensitivity analysis has been prepared to estimate the Company’s exposure to market risk of its commodity position (exclusive of basis risk). The Company’s daily net commodity position consists of inventories, related purchase and sale contracts and exchange-traded 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. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices. The result of this analysis, which may differ from actual results, is as follows:

The fair value of the Company’s long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. In addition, the Company has derivative interest rate contracts recorded in its balance sheet at their fair values. The fair value of these contracts is estimated based on quoted market termination values. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates, is summarized below:

The Company is not organized with one Chief Financial Officer. Our Vice President, Controller and CIO is responsible for all accounting and information technology decisions while our Vice President, Finance and Treasurer is responsible for all treasury functions and financing decisions. Each of them, along with the President and Chief Executive Officer (“Certifying Officers”), are responsible for evaluating our disclosure controls and procedures. These named Certifying Officers have evaluated our disclosure controls and procedures as defined in the rules of the Securities and Exchange Commission, as of June 30, 2005 and have determined that such controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our Certifying Officers are primarily responsible for the accuracy of the financial information that is presented in this report. To meet their responsibility for financial reporting, they have established internal controls and procedures which they believe are adequate to provide reasonable assurance that the Company’s assets are protected from loss. These procedures are reviewed by the Company’s internal auditors in order to monitor compliance. In addition, our Board of Director’s Audit Committee, which is composed entirely of independent directors, meets regularly with each of management and internal audit to review accounting, auditing and financial matters.

There were no significant changes in internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting during the second quarter of 2005.

The Company previously disclosed its receipt of a notice of alleged violation of certain City of Toledo Municipal code environmental regulations in connection with stormwater drainage from potentially contaminated soil at the Company’s Toledo, Ohio port facility, and its submission of a surface water drainage plan to address the concerns raised in the notice. The Company has been advised by regulatory authorities that its proposed surface water drainage plan has been approved, and the City of Toledo, Department of Public Utilities, Division of Environmental Services has advised the Company that no orders or findings will be issued in connection with its notice of alleged violation. The Company is keeping local authorities apprised of its implementation schedule, and is in the process of securing consent from needed landowners. Management has no reason to believe that implementation of the approved surface water drainage plan should materially affect the Company’s operations.

     The annual meeting of the shareholders of The Andersons, Inc. was held on May 6, 2005 to elect ten directors, approve the 2005 long-term performance compensation plan and to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent auditors. Results of the voting follow:

     On April 1, 2005, the Company granted stock options at $31 per share to its officers, directors and other members of management and performance share units (PSU’s) to its officers. The Company also granted restricted shares to employees who were not executive officers. These grants were made under the Company’s Long-Term Performance Compensation Plan. These grants were made as follows to the named executive officers, all officers as a group, directors and all other employees.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.