EX-13 3 l99076aexv13.txt EXHIBIT 13 ANNUAL REPORT . . . THE ANDERSONS 2002 ANNUAL REPORT TABLE OF CONTENTS Financial Highlights 1 Letter to Shareholders 2-4 Agriculture Group 6-7 Processing Group 8-9 Rail Group 10-11 Retail Group 12-13 Selected Financial Data 14 Report of Independent Accountants 15 Consolidated Financial Statements 16-19 Management's Discussion & Analysis 20-23 Notes to Consolidated Financial Statements 24-36 Officers & Directors Data Inside Back
[Pie Chart] [Pie Chart] [Bar Chart] 2002 BEGINNING 2002 OPERATING INCOME REVENUES ALLOCATED CAPITAL YEAR: $1.1 BILLION (AS OF (1/1/02) TOTAL: $19.8 MILLION TOTAL: $202 MILLION Agriculture 70.8% 39.9% $19.0 Processing 10.6% 21.7% (1.3) Rail 1.7% 19.4% 1.5 Retail 16.9% 19.0% 4.0 Other -- -- (3.4) ---------------------------------------------------------------------------------- 100.0% 100.0% $19.8 ==================================================================================
2002 ACCOMPLISHMENTS - Earned a record $1.79 per diluted share vs. $1.21 per diluted share in 2001 - Shareholders enjoyed a 30% total return - Revenues grew 9% to $1.1 billion - Strong cash flow added working capital and reduced long-term debt - Plant Nutrient achieved a record performance and Grain had its second best year ever - Signed letter of intent to form an LLC with Lansing Grain Company - Railcar utilization rate improved 10% in 2002 - Retail's income grew by 114% in 2002 - Retail added fresh meat in Toledo and Woodville and started reset of Woodville store - Achieved significant turnaround in Processing Group through improved efficiencies and cost reductions - Created an alliance with Powerspan Corp., developer of multi-pollutant control technology for power plants, to produce and market electro-catalytic oxidation fertilizer co-products. - Joined ICG Commerce's e-Procurement services to improve purchasing efficiencies The Andersons, Inc. (Nasdaq: ANDE) is a diversified agribusiness and retailing company with annual revenues of $1.1 billion. The company, which began operations in Maumee, Ohio in 1947 with one grain elevator and 500,000 bushels of storage capacity, today has four operating groups: AGRICULTURE, PROCESSING, RAIL and RETAIL. For more in-depth information about the company, please visit our website at www.andersonsinc.com. FINANCIAL HIGHLIGHTS
(in thousands, except for per share and performance data) 2002 2001 % CHANGE --------------- ----------------- ---------------- OPERATIONS Grain sales & revenues $ 583,254 $ 480,219 21.5% Fertilizer, retail & other sales 492,580 504,408 (2.3%) --------------- ----------------- TOTAL SALES & REVENUES $1,075,834 $ 984,627 9.3% =============== ================= Gross profit - grain $ 51,180 $ 52,029 (1.6%) Gross profit - fertilizer, retail & other 114,196 107,316 6.4% --------------- ----------------- TOTAL GROSS PROFIT $ 165,376 $ 159,345 3.8% =============== ================= Other income / gains (net) $ 3,741 $ 3,841 (2.6%) Income before income taxes and cumulative effect of accounting change 19,834 11,931 66.2% Net income 13,319 8,857 50.4% Effective tax rate 32.8% 24.2% 35.5% Weighted average shares outstanding 7,283 7,281 -- PER SHARE DATA Net income - basic $1.83 $1.22 50.0% Net income - diluted 1.79 1.21 47.9% Dividends paid 0.26 0.26 -- Year end market value 12.70 10.00 27.0% PERFORMANCE Pretax return on beginning equity 20.9% 13.3% Net income return on beginning equity 14.0% 9.9% Funded long-term debt to equity ratio .80-TO-1 .96-TO-1 Number of employees 2,958 3,035 EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA) Income before income taxes and cumulative effect of accounting change $19,834 $11,931 Depreciation and amortization 14,314 14,264 Interest 9,812 11,570 --------------- ----------------- EBITDA 43,960 37,765 Interest to carry grain inventories (3,398) (4,065) --------------- ----------------- EBITDA (net of interest to carry grain inventories) $40,562 $33,700 =============== =================
1 Shareholders and friends, The Andersons celebrated its 55TH year of growth and success in 2002 with a record-setting performance. Net income was $13.3 million or $1.79 per diluted share for 2002 compared to $8.9 million or $1.21 per diluted share in 2001. Total revenues of $1.1 billion for 2002 rose 9% above revenues reported in 2001. Our shareholders have enjoyed excellent total returns (market price plus dividends) over the past two years - 30% in 2002 and 19% in 2001. Equity investors are returning to essential and basic industries for protection and long-term value as a result of the slowing economy, poor equity markets, and low bond interest rates. Agribusiness has been a good alternative for investors in these trying times. The company's record performance and tight control over capital spending in 2002 strengthened our balance sheet. As a result, all measurements of working capital and leverage have improved. We are at our targeted long-term funded debt-to-equity ratio of 0.8 to 1. Your company is committed to deliver quality, integrity, honesty, and fairness in its products, services, and reporting. We are also committed to creating value for our customers, shareholders, communities and employees. We are stewards of precious resources, we endeavor to honor God, and be respectful of each other in our efforts. Since we are a company of people engaged in these pursuits, we have featured a few of our 3,000 employees in the 2002 annual report. Our PEOPLE make it happen! We only wish we could feature more of them. The AGRICULTURE GROUP achieved its second best operating performance, finishing slightly behind its 2001 performance. While grain production in the region was below average due to last year's wet planting and summer drought conditions, margin on grain sales was strong. Overall, earnings from grain storage were lower than 2001. The Plant Nutrient Division (formerly the Wholesale Fertilizer and Farm Center Divisions) reported a 7% increase in fertilizer sales volume. Attention to expenses, inventory positions, margin control and facility utilization were key to their success. The other three business units all reported significant improvement for 2002. The RETAIL GROUP reported 114% higher income in 2002 over that reported in 2001. Retail achieved slightly higher sales, but most significant improvement came from vigilant attention to gross profit and operating expenses. Lower railcar lease rates and the slowing economy continue to impact the RAIL GROUP. However, with improved fleet utilization and reduced carrying costs, Rail reported its best performance since 1999. The PROCESSING GROUP made the most significant turn around. Although not yet in the black, improved plant utilization, better control over raw material costs and right sizing the business all played a part in Processing's improved performance in 2002. On the CORPORATE side, we were blessed with lower interest rates, but burdened with higher employee benefit and insurance costs. In spite of these higher costs, we kept a purposeful tight rein on operating, administrative and general expenses, which in total were slightly below those of 2001. For more details on last year's performance, see the business review pages in this report. The prospects for 2003 are good. At this point we do not believe we can exceed the record performance we had in 2002; however, we expect to capitalize on many of the competencies we have built over the last 55 years. We have always stated our performance will reflect the cyclical 2 and seasonal nature of our industries. The weak 2002 harvest will negatively impact 2003 income, but these are expected road bumps we manage through from time to time. It comes with the industry. We have a long history of physical handling, storing, maintaining, formulating, transporting and financial management of bulk materials. Our experience has provided us with the opportunity to enhance those bulk materials into value added products and services that provide solutions for our customers. Our strategic financial goals include increasing market value, specific growth objectives for each Group and attaining targeted levels of income by 2005. Achieving these goals is more than asset and cost control alone. It requires finding the future products and services to serve current and new customers who will be the future source of sales and profit. The AGRICULTURE GROUP, which includes the Grain Division and Plant Nutrient Division (PND), forms our largest investment and the base on which most of our other businesses were created. We continue to believe population growth, demand for improved diets and higher standards of living will benefit those invested in the U.S. agriculture system, including The Andersons. The Grain Division ended 2002 with 56 million bushels of grain in storage, which is a good starting point. However, with last year's poor harvest, we are predicting lower storage income for 2003 as we expect grain inventory to be shipped earlier than usual. On the positive side, winter wheat plantings in our region are estimated to be 2.9 million acres, 23% above last year, which should provide opportunities in 2003. Higher corn prices should also encourage producers to increase plantings in 2003, and higher corn production offers us more margin opportunity than on soybeans. Grain supply and demand are directly impacted by good growing conditions in our marketing region; consequently, much of 2003's performance is dependent on the fall harvest. Producers make huge investments in the next growing season - inputs, rent, equipment, land, etc. To help them make complex decisions about crop production and marketing, we offer our Crop Revenue Profiler(R) software program. This software program integrates the variables of crop insurance and government programs with our grain marketing philosophy to help producers achieve a more predictable result, thus reducing the impact of volatile crop prices. When our customers are successful, it enhances our profitability. We continue to develop our progressive grain marketing tools, such as Freedom ContractsSM, to assist producers in pricing decisions. In 2002 we began taking these contracts and marketing ideas outside our historic marketing region. What we call "portable originations" has been a way to contract with and serve customers without physically handling the grain. In addition, we have developed web-based customer contracts, statements and other information to help customers track and manage their contract positions. In 2003, the Grain Division became a minority investor in Lansing Grain Company LLC, which is a 77-year old grain trading business with offices in Michigan, Minnesota, and Kansas. This investment should benefit both parties as we serve different market sectors and geographic regions. The Plant Nutrient Division's focus is on consistent, dependable year-round logistics and supply. Higher grain prices and the newly signed U.S. Farm Bill are positive signs for PND in 2003. Cash flow at the producer level is reported to be strong, which should allow producers to buy the 3 necessary inputs for the 2003 planting season. The division continues to add capacity and re-capitalize existing assets to provide customers with a complete line of nutrient inputs and services. In addition, PND is investing more time and talent to serve the specialty agriculture, industrial and non-agricultural markets. Several new products introduced in the past year include liquid roadway and runway de-icers and anti-icers, specialty biological nutrients for wastewater treatment and specialty nutrients for agriculture. In the RAIL GROUP, railcar prices and lease rates are beginning to stabilize, which is a positive sign for 2003. Although new railcar production has been cut dramatically in recent years, there is usually demand for less expensive rebuilt-cars. We are positioned to meet this demand with rolling stock and our railcar repair and fabrication shops. Not only can these facilities repair and rebuild cars, it can also design and build bulkheads, gates, and hatches to match customer demand. With capabilities both in the railcar repair and fabrication business, it's easier to meet customer needs in the lease business. Our goal is to be the Total Rail Solutions(SM) provider for our railcar customers. Plans are for Rail to add a new repair facility in South Carolina in 2003. Rail had 5,699 railcars under management at the end of 2002, 5% more than in 2001. In addition, we have 51 locomotives under management. We ended 2002 with 85% of the railcars under management in service. This is up 10% from 2001, a huge improvement. Our utilization objective in 2003 is to be at 90%. We continue to believe this business can grow at a 20% annual rate for the near future. We have found opportunities by purchasing railcars with attached leases from investors looking to re-balance or modify their portfolios. With the sluggish economy, our focus is on short-term lease deals (where the largest demand is), diligent management of railcars, monitoring credit quality, valuation and positions, and stepping up our sales and marketing efforts. The PROCESSING GROUP made a sizable turnaround in 2002 and expects to be in the black in 2003. The business was reorganized to capture efficiencies in the areas of marketing, operations, and reporting/systems. We are implementing a cost system and are studying total IT systems needs. We have better control over ingredient costs by sourcing raw material earlier, margins have improved, and we are paying very close attention to working capital usage. We still have more work to do in order to get Processing to achieve an acceptable return. Lawn fertilizer shipments increased 3% in 2002, and they are expected to grow 3% in 2003. The "big box retail" consumer lawn fertilizer business is dynamic. However, because these larger customers have greater demands, change can be rewarding or painful. We have successfully served this market for decades and continue to believe we have opportunity to profitably add value as a private label supplier to the industry. For 2003 we landed a new international private label for U.S. distribution and expect this relationship to grow in future years. Our professional turf business, Andersons Golf Products(TM), has stabilized and is expected to grow by 8% in 2003. Our goal for this business is to increase distribution to New England and the Southeastern U.S. 4 The Processing Group's other businesses, cob-based carriers and animal bedding/litter products, were modestly profitable in 2002. There are a number of new products being tested in the marketplace that show promise for 2003. Our RETAIL GROUP'S focus on MORE FOR YOUR HOME(R) is paying off as noted by their 2002 improved performance. The addition of a fresh meat market in the Maumee Store was such a huge success that we added similar markets to the Toledo and Woodville stores. The addition complements our deli, bakery, produce and wine offerings and gives customers the convenience of one-stop food shopping. We are now considering fresh meat markets for our Central Ohio stores as well. This year we are rolling out a new shopping concept at our Woodville store designed to increase the average per-customer sale. The new store concept features a floor plan that improves customer flow and significantly increases the number of merchandise end-caps to more prominently feature selected merchandise. Margins are up in 2002 as a result of vigilant control over markdowns. We will focus on inventory turns, in-stock performance, labor utilization efficiency and improved technologies in 2003. The most important issue for Retail is growth - will there be a seventh store? We have been evaluating our long-term growth potential, testing site selection models and investigating a few specific sites. We expect to finalize a decision in 2003. On the ADMINISTRATIVE front we have been watchful of our operating, administrative and general expenses, developing and extending our use of ERP systems and technology, and intensifying strategic sourcing and procurement efforts to find more efficient and less expensive business practices. Interest expense improved by $1.8 million in 2002, mainly from lower interest rates. As a result of the lower interest rate environment, we made a number of capital market moves that we believe will benefit the company in 2003 and beyond. In November, we completed a $200 million short and long-term credit line syndicated with six major banks. In addition, we restructured our long-term debt, increasing the fixed rate portion to 90% of the total outstanding. Net working capital is up by 7%. Capital spending was managed very closely and as a result, operating cash flow was strong, all of which strengthened the year-end balance sheet. Our balance sheet has grown to over $469 million in total assets. Most of the asset growth is in grain inventories. Contrary to the way most non-commodity businesses operate, high grain inventories are generally a positive indicator for the near future. In our remaining businesses, we are striving to use working capital more efficiently. We expected an improvement in operating income in 2002 and that was accomplished. We thank our 3,000 hard working, creative and dedicated employees who provide extraordinary products and service to our customers. 5 We are grateful to them, to our customers and suppliers, and to you our shareholders. We believe in honesty, integrity, and mutual respect for our employees, customers and shareholders. These values will prevail at The Andersons. One final note. We want to extend our thanks to two long-time board members, Don Anderson and Rick Anderson, who are stepping down this year. Their dedication and guidance for the past 14 years have been invaluable. In the future, the board's governance / nominating committee will be seeking candidates to fill these two vacancies. Their choices will reflect The Andersons' commitment to a diversified board with a majority of non-management directors that represent a wide range of interests and business philosophies. Sincerely /s/ Mike Mike Anderson, CEO & President /s/ Dick Dick Anderson, Chairman of the Board WITH THANKS Don Anderson Director, 1988-2002 One of the six children of our founder Harold Anderson, Don's career with the company started at its inception in 1947 and continued to his retirement in 1996 as Director of Science. For the last 15 years Don has shared his wisdom and expertise as a member of our Board of Directors. Don is stepping down from the Board this year. We want to express our sincere thank you to him for his many years of service and dedication to The Andersons. Rick Anderson Director, 1988-2002 Rick joined The Andersons in 1986 and has been a member of the Board of Directors for the last 15 years. Although Rick will no longer be a member of our Board, he continues to serve the Company as President of the Processing Group. Thank you to Rick for his contributions and service to The Andersons Board of Directors and for his continued leadership of our Processing Group. 6 AGRICULTURE GROUP The AGRICULTURE GROUP operates grain elevators and plant nutrient formulation and distribution facilities in Ohio, Michigan, Indiana and Illinois. The group's elevators receive large quantities of grain and oilseeds (primarily corn, soybeans and wheat) from farms and country elevators in the region, store and condition it, then market it via rail or ship to domestic and export processors. The plant nutrient distribution facilities formulate and market large volumes of dry and liquid agricultural nutrients to dealers, distributors and company-owned farm centers. The group is a formulator of technologically advanced, environmentally friendly, liquid anti-icers for use in runway and roadway applications. In 2002, the Agriculture Group's operating income was $19 million, the second highest performance in its 55-year history, topped only by the record set in 2001. Total revenues of $762 million in 2002 were almost $100 million higher than the previous year. The drought that affected grain production in the region this past summer broke a five-year string of relatively good growing seasons in the eastern corn belt. Fewer bushels were delivered to the group's elevators, and ending corn, soybean and wheat stocks in the U.S. also declined. As a result, the group's earnings from storing grain were lower than they were in 2001. Demand from grain processors remained strong resulting in double-digit percentage price increases, excellent margins, and increased gross profit from handling and conditioning grain. The group also experienced earnings growth from its emerging AgriPartners(R) Plus, Gold and Platinum service businesses, offering various information, marketing, crop insurance programs and licensing agreements to producers and elevators throughout the corn belt. The Plant Nutrient Division's wholesale tonnage volume increased in 2002 and gross margins remained strong. As a result, this business experienced growth in revenues, gross profit and operating income, surpassing its previous earnings record. Market share gains were achieved in its core plant nutrient formulation and distribution business through a strong customer focus, an excellent market position with basic manufacturers and strategically located assets. Twenty percent growth was achieved in the industrial and specialty agricultural customer sector as well. The group's farm centers again achieved a modest operating profit for the year. Custom application acreage increased in 2002, and expenses were pared by consolidating some locations to improve efficiency. A sizable portion of the Company's total spending on plant and equipment in 2002 was allocated to the Agriculture Group. In addition to numerous facility recapitalization projects, significant investments were made to improve the loadout and grain-cleaning capabilities of its river elevator in Toledo and to increase the storage capacity three-fold at its fertilizer terminal in Lordstown, Ohio to better serve the group's growing customer base in eastern Ohio, Pennsylvania and western New York. Early in 2003, the group also completed a joint venture transaction with Lansing Grain, a grain trading company, to form a new limited liability company that will serve as a platform for future growth initiatives. [Bar Charts]
1998 1999 2000 2001 2002 SALES & REVENUES $829 $674 $648 $663 $762 OPERATING INCOME 6.7 6.1 14.3 19.8 19.0 UNIT VOLUMES Grain Bushel Receipts (Millions) 157 158 156 155 142 Grain Bushels Shipped (Millions) 204 182 165 165 180 Wholesale Fertilizer Sales and Service Tons (000) 1,201 1,293 1,306 1,360 1,423 Farm Center Application Acres (000) 333 552 479 475 491
7 PROCESSING GROUP The PROCESSING GROUP manufactures turf and ornamental plant fertilizer and control products for sale by major retailers in the U.S. and is the industry's leading supplier of premium turf-care products for golf courses and other professional markets. It also produces corncob-based chemical and feed ingredient carriers, animal bedding, cat litter and ice-melter products. The group operates facilities in Maumee and Bowling Green, Ohio; Montgomery, Alabama; Pottstown, Pennsylvania; and Delphi, Indiana. Total revenues were $114 million in 2002, slightly higher than the $113 million realized in 2001. The group's bottom line reflected a significantly larger improvement, reducing the prior year loss by more than $6 million. The volume of turf fertilizer sold in the U.S. in 2002 was negatively impacted by the unusually dry summer throughout much of the country. The group's turf business was able to achieve a 3 percent increase in volume for the year, however, with growth in total sales to consumer and industrial accounts more than offsetting lower volumes going into professional markets. Average gross margins improved due to lower ingredient costs, primarily nitrogen, and a noticeable shift from straight fertilizers to higher-margin control products. Retailers across the country continued to focus on controlling in-store inventories and just-in-time delivery of product to their stores. Sales of turf-care products to the golf course market were hurt when the number of golf rounds played in the U.S. declined for the third straight year. Late in the year, the Processing Group began shipping a new line of turf-care products that consumers will begin to see on a major retailer's shelves in 2003. The group's other businesses, primarily the manufacturing of cob-based chemical and feed ingredient carriers, animal bedding and litter products, achieved modest bottom-line improvement in 2002. [Bar Charts]
1998 1999 2000 2001 2002 SALES & REVENUES $ 76.4 $ 85.0 $ 107.4 $ 112.8 $114.3 OPERATING INCOME (LOSS) $ 2.8 $ (0.1) $ (3.5) $ (7.7) $ (1.3)
8 RAIL GROUP The RAIL GROUP sells and leases railcars and locomotives. It also repairs and reconfigures various types of railcars to meet customer specifications, and operates a custom steel-fabrication business. The group's rail marketing business has grown significantly in recent years and now has approximately 5,700 railcars and 51 locomotives under management. The fleet consists of covered hopper cars, boxcars, open top hopper cars, gondolas, and tank cars. The group leases its rolling stock to shippers, railroads and fleet owners in a wide range of industries throughout North America. The group's total revenues were $18.7 million in 2002. This was $12.4 million, or 40 percent, below the $31.1 million generated in 2001. Revenues from railcar and locomotive leasing and the group's two shops increased in the past year, but the absence of any significant car sales in 2002 caused total revenues to decline. The fleet of cars managed by this group continued to grow in 2002. Significant improvement was also achieved in the utilization rate of the railcar fleet from 75 percent in 2001 to 85 percent at the end of 2002, following two successive years of decline. Because of the overall fleet growth and improved fleet utilization, more cars were in income-producing service, fewer cars were out of service, and total leasing income increased. Operating income also improved in 2002 primarily because of the writedown of the value of certain railcars during 2001. In total, the group achieved an operating income of $1.6 million in 2002, an improvement of $1.9 million from the operating loss of $0.3 million reported for 2001. Although no noticeable rebound has yet emerged in car values and lease rates for some types of railcars, two areas which have been in a cyclical downturn for the past three years, the group has positioned itself well and demonstrated its ability to achieve income growth through a well-managed leasing program. The railcar repair shop and the fabrication shop performed well in 2002. The integration of these shops with the rail marketing business continues to bear fruit. As the Rail Group strives to be a Total Rail Solutions(SM) provider for its customers, some exciting opportunities are emerging. In component manufacturing, for example, the group has the ability to design a component, manufacture it, install it on a car, then lease the refurbished car to a customer. As the group continues to build the lease fleet, it is taking care to diversify it in terms of lease duration, car types, industries, customers and geographic dispersion. The Rail Group will continue to monitor credit quality of its customers diligently, and to match fund assets and liabilities as much as possible to effectively manage risk. [Bar Charts]
1998 1999 2000 2001 2002 SALES & REVENUES $ 50.4 $ 55.3 $ 19.0 $ 31.1 $ 18.7 OPERATING INCOME (LOSS) $ 4.4 $ 4.2 $ 1.0 $ (0.3) $ 1.6 CARS UNDER MANAGEMENT Railcars 4,082 4,420 4,815 5,432 5,699 Locomotives -- 30 30 51 51
9 RETAIL GROUP The RETAIL GROUP operates six large stores in Ohio; three in the Toledo area, two in Columbus and one in Lima. Four are stand-alone facilities with in-store selling space of 130,000 or more square feet each. The other two are slightly smaller mall-based units. The goal of the Retail Group is to serve the needs of homeowners more effectively than competing home centers and mass merchants. The group's central message to the retail customer is MORE FOR YOUR HOME(R). The product offering includes a broad array of traditional home center merchandise- plumbing, electrical and building supplies, hardware, tools, kitchen and bath design, flooring, paint and lighting products. In addition to these, the stores feature lawn and garden products, extensive lines of housewares and domestics, workwear, pet supplies, automotive supplies and sporting goods. Each store also has an Uncommon Market(TM) with a unique offering of high quality foods including produce, a deli, a bakery, specialty gourmet foods, frozen and fresh meats, and one of the largest selections of fine wines in the Midwest. Despite the general sluggishness reported by retailers across the country, total sales for the Retail Group grew by 1.8% this year, from $178 million in 2001 to $181 million in 2002. Operating income of $4.0 million for the year was more than double the $1.9 million realized in 2001. Although the number of shoppers in the group's stores last year was virtually unchanged from a year ago, the average amount purchased by customers was higher and average gross margins also improved from year-earlier levels. The addition of a fresh meat business in two more stores in 2002 was received enthusiastically by customers. All three Toledo-area stores now offer this new product category. In addition, above-average growth was achieved in several Uncommon Market(TM) product categories, most notably produce, deli and specialty foods. The Retail Group also continued to focus heavily on operational improvements in 2002. Total store labor hours were again reduced from year-earlier levels without a reduction in customer service levels. In-stock performance showed gains, exceeding 2001's monthly levels throughout the year. Total in-stock performance was the highest it has been in the six years this metric has been measured. In addition to numerous facility recapitalization projects, the Retail Group made a significant investment to upgrade the already very successful garden center at the Toledo store. It also began a major remodeling project at another store to test a concept that will improve product accessibility for customers and greatly increase the number of promotional displays throughout the store. Constant attention to product mix enhancements and operational efficiency are driven by the group's desire to out-perform the competition in the customer's total shopping experience. [Bar charts]
1998 1999 2000 2001 2002 SALES & REVENUES Retail $ 174 $ 181 $ 184 $ 178 $ 181 OPERATING INCOME Retail $ 1.7 $ 2.6 $ 3.2 $ 1.9 $ 4.0
10 SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998 (in thousands, except for per common share data) Operating Results Total sales & revenues $1,075,834 $ 984,627 $ 961,122 $1,005,922 $1,140,445 Net income 13,319(a) 8,857(a) 10,078(b) 8,379 9,752 Per common share data: Earnings - diluted 1.79 1.21 1.34 1.03 1.20 Dividends paid 0.26 0.26 0.24 0.20 0.16 Balance Sheet Data Total assets (c) $ 469,815 $ 458,324 $ 442,965 $ 379,663 $ 362,663 Working capital 80,830 75,228 55,260 67,939 65,898 Long-term debt (d) 84,272 91,316 80,159 74,127 71,565 Shareholders' equity 104,840 94,934 89,836 84,805 82,734
(a) Gains of $0.3 million ($0.2 million after tax) for insurance settlements are included in each of 2002 and 2001 (b) Gains of $2.1 million for an insurance settlement and $1.0 million on the sale of a business are Included ($2.0 million after tax). (c) Includes restatement of pension asset for all years presented (d) Excludes current portion. QUARTERLY FINANCIAL DATA AND MARKET FOR COMMON STOCK
(in thousands, except for Net Income (Loss) Common Share Quote per common share data) ----------------------------------------- Gross Per Share- Dividends Net Sales Profit Amount Basic High Low Declared ------------------------------------------------------------------------------- Quarter Ended 2002 March 31 $ 214,831 $ 36,020 $ 1,609 $ 0.22 $ 10.40 $ 9.35 $ 0.065 June 30 301,098 49,083 8,760 1.20 13.75 10.12 0.065 September 30 204,722 34,475 (84) (0.01) 13.60 11.76 0.065 December 31 355,183 45,798 3,034 0.42 13.00 11.38 0.070 ------------------------------------ ----------- Year $1,075,834 $ 165,376 $13,319 1.83 $ 0.265 ==================================== =========== 2001 March 31 $ 218,007 $ 35,115 $ (815) $ (0.11) $ 8.94 $ 8.03 $ 0.065 June 30 273,064 48,260 7,274 1.00 8.88 7.50 0.065 September 30 186,518 31,314 (1,905) (0.26) 10.00 7.72 0.065 December 31 307,038 44,656 4,303 0.60 10.00 8.51 0.065 ------------------------------------ ----------- Year $ 984,627 $ 159,345 $ 8,857 1.22 $ 0.260 ==================================== ===========
Report of Independent Accountants To the Board of Directors and Shareholders of The Andersons, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of shareholders' equity, as presented on pages 16 through 19 and pages 24 through 36, present fairly, in all material respects, the financial position of The Andersons, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Toledo, Ohio January 27, 2003 1 The Andersons, Inc. Consolidated Statements of Income
YEAR ENDED DECEMBER 31 (in thousands, except per common share data) 2002 2001 2000 -------------------------------------------------------- Sales and merchandising revenues $ 1,075,834 $ 984,627 $ 961,122 Cost of sales and merchandising revenues 910,458 825,282 804,159 --------------------------------------------------- Gross profit 165,376 159,345 156,963 Operating, administrative and general expenses 139,471 139,685 137,839 Interest expense 9,812 11,570 11,829 Other income / gains: Other income (net) 3,439 3,503 3,989 Gain on insurance settlements 302 338 2,088 Gain on sale of business -- -- 992 --------------------------------------------------- Income before income taxes and cumulative effect of accounting change 19,834 11,931 14,364 Income tax provision 6,515 2,889 4,286 --------------------------------------------------- Income before cumulative effect of accounting change 13,319 9,042 10,078 Cumulative effect of change in accounting principle, net of income tax benefit -- (185) -- --------------------------------------------------- Net income $ 13,319 $ 8,857 $ 10,078 =================================================== Per common share: Basic earnings $ 1.83 $ 1.22 $ 1.34 =================================================== Diluted earnings $ 1.79 $ 1.21 $ 1.34 =================================================== Dividends paid $ 0.26 $ 0.26 $ 0.24 ===================================================
The Notes to Consolidated Financial Statements on pages 21-32 are an integral part of these statements. 2 The Andersons, Inc. Consolidated Balance Sheets
DECEMBER 31 (in thousands) 2002 2001 ------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,095 $ 5,697 Accounts and notes receivable: Trade receivables, less allowance for doubtful accounts of $3,014 in 2002; $2,701 in 2001 59,800 51,080 Margin deposits -- 3,756 ------------------------------------- 59,800 54,836 Inventories 256,275 238,291 Railcars available for sale 550 11,932 Deferred income taxes 3,491 3,963 Prepaid expenses and other current assets 11,675 11,954 ------------------------------------- Total current assets 337,886 326,673 Other assets: Pension asset 5,828 4,248 Other assets and notes receivable, less allowance for doubtful notes receivable of $222 in 2002; $472 in 2001 5,794 5,344 Investments in and advances to affiliates 969 956 ------------------------------------- 12,591 10,548 Railcar assets leased to others, net 26,399 26,102 Property, plant and equipment, net 92,939 95,001 ------------------------------------- $469,815 $458,324 ===================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 70,000 $ 82,600 Accounts payable for grain 75,422 66,968 Other accounts payable 60,285 50,996 Customer prepayments and deferred income 21,970 22,683 Accrued expenses 19,604 17,824 Current maturities of long-term debt 9,775 10,374 ------------------------------------- Total current liabilities 257,056 251,445 Deferred income 717 2,209 Other long-term liabilities 381 223 Employee benefit plan obligations 12,198 9,550 Long-term debt, less current maturities 84,272 91,316 Deferred income taxes 10,351 8,647 ------------------------------------- Total liabilities 364,975 363,390 Shareholders' equity: Common shares, without par value Authorized -- 25,000 shares Issued -- 8,430 shares at stated value of $0.01 per share 84 84 Additional paid-in capital 66,662 66,431 Treasury shares, at cost (1,258 in 2002; 1,174 in 2001) (12,558) (10,687) Accumulated other comprehensive loss (815) (964) Unearned compensation (73) (83) Retained earnings 51,540 40,153 ------------------------------------- 104,840 94,934 ------------------------------------- $469,815 $458,324 =====================================
The Notes to Consolidated Financial Statements on pages 21-32 are an integral part of these statements. 3 The Andersons, Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 (in thousands) 2002 2001 2000 -------------------------------------------- OPERATING ACTIVITIES Net income $13,319 $ 8,857 $10,078 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 14,314 14,264 13,119 Provision for losses on accounts and notes receivable 353 224 911 Cumulative effect of accounting change, net of income tax benefit -- 185 -- Gain on insurance settlements (302) (338) (2,088) Gain on sale of business -- -- (992) Gain on sale of property, plant and equipment (406) (336) (35) Realized and unrealized (gains) losses on railcars (179) 1,172 (110) Deferred income tax provision (benefit) 2,709 (539) 2,242 Other 91 368 111 -------------------------------------------- Cash provided by operations before changes in operating assets and 29,899 23,857 23,236 liabilities Changes in operating assets and liabilities: Accounts and notes receivable (5,249) 2,080 (6,984) Inventories (17,984) (26,428) (35,811) Prepaid expenses and other assets (474) (117) (3,604) Accounts payable for grain 8,454 (500) (1,415) Other accounts payable and accrued expenses 8,603 (5,000) 6,274 -------------------------------------------- Net cash provided by (used in) operating activities 23,249 (6,108) (18,304) INVESTING ACTIVITIES Purchases of property, plant and equipment (9,834) (9,155) (16,189) Purchases of railcars (8,203) (21,790) (16,245) Purchase of U.S. ProTurf(R)and other business assets -- -- (16,311) Proceeds from sale of railcars 15,985 15,376 3,821 Proceeds from sale of property, plant and equipment 598 951 240 Proceeds from insurance settlements 302 338 2,346 Proceeds from sale of business -- -- 2,133 -------------------------------------------- Net cash used in investing activities (1,152) (14,280) (40,205) FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings (12,600) 11,300 26,300 Proceeds from issuance of long-term debt 22,333 23,250 194,723 Payments of long-term debt (29,976) (10,845) (187,417) Change in overdrafts 2,866 (7,796) 17,827 Payment of debt issue costs (634) -- -- Proceeds from sale of treasury shares under stock compensation plans 840 332 363 Dividends paid (1,903) (1,907) (1,819) Purchase of treasury shares (2,625) (1,387) (3,944) -------------------------------------------- Net cash provided by (used in) financing activities (21,699) 12,947 46,033 -------------------------------------------- Increase (decrease) in cash and cash equivalents 398 (7,441) (12,476) Cash and cash equivalents at beginning of year 5,697 13,138 25,614 -------------------------------------------- Cash and cash equivalents at end of year $ 6,095 $ 5,697 $ 13,138 ============================================ NONCASH INVESTING ACTIVITIES Acquisition of intangible assets in exchange for long-term debt $ 3,879 =============
The Notes to Consolidated Financial Statements on pages 21-32 are an integral part of these statements. 4 The Andersons, Inc. Consolidated Statements of Shareholders' Equity
Accumulated Additional Other Common Paid-in Treasury Comprehensive Unearned Retained (in thousands) Shares Capital Shares Loss Compensation Earnings Total ------ ---------- -------- ------------- ------------ --------- ----- Balances at January 1, 2000 $ 84 $ 67,227 $ (7,158) $ (144) $ (158) $ 24,954 $ 84,805 ---------- Net income 10,078 10,078 Other comprehensive income: Minimum pension liability, net of $0.1 million income taxes 144 144 ---------- Comprehensive income 10,222 Stock awards, stock option exercises, and other shares issued to employees and directors (130 shares) (96) 607 (148) 363 Issuance of shares to complete acquisition (643) 643 -- Amortization of unearned compensation 228 228 Purchase of treasury shares (477 shares) (3,944) (3,944) Dividends declared ($0.245 per common share) (1,838) (1,838) -------- --------- ------- ------- ------ -------- ---------- Balances at December 31, 2000 84 66,488 (9,852) -- (78) 33,194 89,836 ---------- Net income 8,857 8,857 Other comprehensive income (loss): Cumulative effect of accounting change (1,172) (1,172) Other 208 208 ---------- Comprehensive income 7,893 Stock awards, stock option exercises, and other shares issued to employees and directors, net of tax (62 shares) (57) 552 (163) 332 Amortization of unearned compensation 158 158 Purchase of treasury shares (166 shares) (1,387) (1,387) Dividends declared ($0.26 per common share) (1,898) (1,898) -------- --------- ------- ------- ------ -------- ---------- Balances at December 31, 2001 84 66,431 (10,687) (964) (83) 40,153 94,934 ---------- Net income 13,319 13,319 Other comprehensive income: Cash flow hedge activity, net of income tax of $0.5 million 149 149 ---------- Comprehensive income 13,468 Stock awards, stock option exercises, and other shares issued to employees and directors, net of income tax of $0.3 million (132 shares) 231 754 (145) 840 Amortization of unearned compensation 155 155 Purchase of treasury shares (216 shares) (2,625) (2,625) Dividends declared ($0.265 per common share) (1,932) (1,932) -------- --------- ------- ------- ------ -------- ---------- Balances at December 31, 2002 $ 84 $ 66,662 $(12,558) $ (815) $ (73) $ 51,540 $ 104,840 ======== ========= ======== ======= ====== ======== =========
The Notes to Consolidated Financial Statements on pages 21-32 are an integral part of these statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Operating results for The Andersons, Inc. business segments are discussed in the Business Review on pages 6-13 of this annual report. In addition, Note 13 to the consolidated financial statements displays selected financial information for each of the Company's business segments. The following discussion focuses on the operating results as shown in the consolidated statements of income. COMPARISON OF 2002 WITH 2001 Sales and merchandising revenues for 2002 totaled $1.08 billion, an increase of $91.2 million, or 9%, from 2001. Sales in the Agriculture Group were up $109.8 million, or 18%. Increased grain sales of $114.4 million included both a 9% volume increase and a 16% increase in the average price of bushels sold. All grains showed price per bushel increases and bushel volume was up for corn and wheat. Fertilizer sales were down $4.6 million, or 3%, due to a 9% decrease in the average price per ton sold, partially offset by a 7% increase in tons sold. Revenues in both grain and fertilizer businesses are significantly impacted by the market price of the commodities being sold. Merchandising revenues in the Agriculture Group were down $11.0 million, or 23%, due to decreases in space income (before interest charges) in the grain division. Space income is income earned on grain held for our account or for our customers and includes storage fees earned and appreciation or depreciation in the value of grain owned. Grain on hand at December 31, 2002 was 56.3 million bushels, of which 13.4 million bushels were stored for others. This compares to 65.4 million bushels on hand at December 31, 2001, of which 10.4 million bushels were stored for others. The results of the 2002 harvest were mixed with poor yields in some portions of the Company's market area. As a result, management expects that the 14% decline in grain held in the Company's facilities from year to year will negatively impact space income in the first half of 2003. The higher grain prices, however, may favorably impact the fertilizer business for the same period. Wheat acreage (planted in 2002 for harvest in July 2003) in the Company's market area has increased and management expects that corn acreage to be planted in Spring 2003 will increase as well, due to the higher corn prices. However, poor weather during the spring planting season may unfavorably impact the corn and soybean planted acreage during that time. The Processing Group had a $1.5 million, or 1%, increase in sales and merchandising revenues resulting primarily from an overall 3% increase in lawn division tons sold, partially offset by a 3% decrease in the average price per lawn division ton sold. The industrial lawn business (where the Group is responsible only for the contract manufacturing of product and does no marketing) continues to grow in relative size, due, in part, to the movement of a large consumer customer to an industrial relationship. The Company receives less margin for industrial tons, as compared to consumer tons, because it is acting primarily as a contract manufacturer and not incurring certain sales and marketing costs. Further, the Company is no longer required to accept returns from the customer. The reduction of returns and elimination of marketing costs contributed to the sales increase. The professional lawn business continues to be impacted by general softness in the golf course market and a reduction in the number of rounds played. 6 The Rail Group had a $12.3 million, or 40%, decrease in sales. While lease revenue was up $1.8 million, or 14%, in 2002, sales of railcars were down $15.2 million. Sales in the fabrication and rail repair shops were up $1.1 million. Railcars under management at December 31, 2002 were 5,699 compared to 5,432 under management at December 31, 2001. Locomotives under management were 51 for both 2001 and 2002. The railcar utilization (railcars in lease service) rate increased from 75% at December 31, 2001 to 85% at the end of December 2002. The Retail Group had a 1.8% increase in same-store sales and revenues in 2002 as compared to 2001. Individual store results were mixed, however both the Toledo and Columbus markets showed increases. In addition, three of the six stores have added a fresh meat counter since the third quarter of 2001. This business is managed by a third party and the Company earns commissions on sales of fresh meat; these commissions have been included in merchandising revenues. The Company expects that significant new competition in the Toledo market may impact sales in 2003. The Company is also in the process of testing a new store layout in one of its Toledo area stores which should improve customer flow. Gross profit for 2002 totaled $165.4 million, an increase of $6.0 million, or 4%, from 2001. The Agriculture Group had a $0.9 million, or 1%, decrease in gross profit, in spite of the significant increase in revenues mentioned previously. Gross profit in the grain division totaled $51.2 million, a decrease of $0.8 million, or 2%. The fertilizer businesses of the Agriculture Group recognized a decrease in gross profit of $0.1 million, primarily due to a decrease in gross profit per ton, nearly offset by increased volume of fertilizer sold. Gross profit for the Processing Group in 2002 increased $2.5 million, or 12%, when compared to 2001. Overall gross profit per ton for the Processing Group was up 11%. Although there was a 3% decrease in average price per lawn ton sold, there was also a 5% decrease in the average cost of a lawn ton. Coupled with the volume increase in the lawn division and the gross profit impact of the reduction in returns and marketing costs mentioned previously, lawn division gross profit was up $2.8 million, or 16%. The cob-based businesses experienced a decrease of $0.3 million, or 8%, in gross profit, resulting in the overall $2.5 million increase for the Group. Gross profit in the Rail Group increased $1.5 million, or 20%. Of this increase, $0.4 million was due to the improved performance of the lease fleet primarily related to the increase in railcars in service. In addition, the Group took a $0.3 million non-cash charge to recognize a permanent impairment in the value of certain railcars in 2002; the Group took a comparable charge of $1.5 million in 2001. Gross profit in the Retail Group increased $2.9 million, or 6%, from 2001. This was due to both the increase in sales discussed previously and a percentage point increase in margins. This margin increase results primarily from changes in product mix and better management of promotional programs and markdowns. The Company recorded gains of $0.3 million in each of 2002 and 2001 related to insurance recoveries. Operating, administrative and general expenses for 2002 totaled $139.5 million, a $0.2 million decrease from 2001. Full-time employees increased 2% from 2001, however, labor expense decreased $1.0 million, or 1%. The majority of the decrease relates to severance costs of $1.3 million in 2001 compared to $0.4 million in 2002. Benefit costs, however, rose 11% due to the increased cost of providing pension 7 and health care benefits to current and former employees. In addition, the Company's performance incentive expense increased $1.3 million, which reflects the improved 2002 results when compared to 2001. Significant expense reductions were realized in rent, advertising and professional services. In addition to the benefit and performance incentive expense increases mentioned previously, increases were also realized in insurance expense and maintenance expense. In spite of actions taken to slow the growth of benefit and insurance expenses, the Company expects the trend toward higher costs to continue through 2003. Interest expense for 2002 was $9.8 million, a $1.8 million, or 15%, decrease from 2001. Average daily short-term borrowings for 2002 were up 2% when compared to 2001 while the average short-term interest rate decreased from 5.1% for 2001 to 3.2% for 2002. Long-term interest expense decreased slightly for the same period. As a result of the above, pretax income of $19.8 million for 2002 was 66% higher than the pretax income of $11.9 million in 2001. Income tax expense of $6.5 million was recorded in 2002 at an effective rate of 32.8%. In 2001, income tax expense of $2.9 million was recorded at an effective rate of 24.2%. The significant change in the effective tax rates between 2001 and 2002 resulted primarily from a much higher benefit from our foreign sales corporation in 2001 relative to the pretax income. As a result of the above, the 2002 net income of $13.3 million was $4.4 million better than the 2001 net income of $8.9 million. Basic earnings per share increased $0.61 from 2001 and diluted earnings per share increased $0.58 from 2001. COMPARISON OF 2001 WITH 2000 Sales and merchandising revenues for 2001 totaled $984.6 million, an increase of $23.5 million, or 2%, from 2000. Sales in the Agriculture segment were up $11.6 million, or 2%. Grain sales were down $13.5 million, or 3%, due to flat volumes and a 3% decrease in the average price per bushel sold. Fertilizer sales were up $25.1 million, or 17%, due to a 2% increase in volume and a 14% increase in average price per ton sold. Merchandising revenues in the Agriculture segment were up $2.8 million, or 6%, due primarily to increases in drying and mixing income, space income (before interest charges) in the grain division and licensing revenue from the Crop Revenue Profiler(R) software. Space income includes storage fees earned on grain held for our customers and appreciation in the value of grain owned. Grain bushels on hand at December 31, 2001 were 65.4 million, slightly more inventory than at December 31, 2000. The Processing segment had a sales increase of $5.4 million, or 5%. The majority of this increase was attributable to increased price per ton sold in the lawn fertilizer division and a full twelve months of sales in 2001 of the U.S. ProTurf(R) product line, which was acquired from The Scotts Company on May 31, 2000. Volume decreased for the period in the consumer and industrial lawn fertilizer businesses (sold into the retail distribution channel) due to softness in the economy coupled with cold weather in much of the spring application season. The much smaller corncob-based businesses experienced a 16% increase in the average price per ton sold, partially offset by an 11% reduction in volume. The Rail segment had a sales increase of $12.1 million, or 64%. Railcar sales transactions completed during 2001 were up $11.5 million, and lease fleet revenue was up $1.0 million, or 8%. The lease fleet revenue growth was due to an increased number of railcars and locomotives managed and in service as 8 compared to 2000. Railcars managed at December 31, 2001 numbered 5,432, an increase of approximately 13% over railcars managed at December 31, 2000. The segment also added 21 locomotives to its fleet. The Retail segment experienced decreased sales of $5.9 million, or 3%, in 2001 when compared to 2000. More than half of this decrease relates to an extra (or 53rd) week in the 2000 fiscal year. In addition, weather during the months of January and December in 2001 was mild and demand for our cold weather items was very limited. This is in contrast to the same months in 2000 where weather drove significant sales of cold weather items. The absence of revenues in the Other segment for 2001 was due to the sale of the Company's interest in The Andersons-Tireman Auto Centers (Tireman), an automotive repair business, in 2000. Gross profit for 2001 totaled $159.3 million, an increase of $2.4 million, or 2%, from 2000. The Agriculture segment had a gross profit increase of $8.5 million, or 11%, resulting from a 28% increase in margin on grain bushels sold, a 14% increase in gross profit on fertilizer tons sold and the 6% increase in merchandising revenues discussed previously. As always, this segment's results are highly dependent on weather conditions during the spring planting season through fall harvest in the eastern corn belt. Gross profit for the Processing segment decreased $1.8 million, or 8%, from the prior year. This decrease resulted from a 6% decrease in gross profit per lawn fertilizer ton sold and a 6% decrease in lawn fertilizer volume. The decrease in gross profit per ton was primarily caused by high raw material costs coupled with a change in product mix in the 2001 spring season, as customers opted for lower margin products. Gross profit in the corncob-based businesses was up $0.3 million, or 12%. Gross profit in the Rail segment decreased $1.0 million, or 12%, from the prior year. While gross profit from car sales, railcar repairs, the fabrication shop and lease transactions was up, the segment took a $1.5 million charge to write down the book value of certain impaired railcars. The increased sales activity in the latter portion of the year and some indications of future long-term deals are positive indications that the industry is improving; however, the recovery has been slow. Customer preference and market rates are still more focused on short-term lease opportunities rather than long-term leases or outright sales. Gross profit in the Retail segment decreased by $2.0 million, or 4%, from 2000. Half of this decrease was related to the extra week in 2000 mentioned previously. The remainder was due to the decrease in sales discussed above. New competition is expected in the Toledo market in 2002. Gross profit in the Other segment declined by $1.5 million in 2001 over 2000 due to the Company's sale of its interest in Tireman in March 2000. The Company recorded a gain of $0.3 million in 2001 related to an insurance recovery for a damaged grain tank at the Albion, Michigan facility. A tank collapse at its Webberville, Michigan wholesale fertilizer facility resulted in a 2000 gain of $2.1 million from an insurance settlement for the replacement of the fixed assets. In addition, the Company recognized a gain of $1.0 million on the sale of its 52.5% interest in Tireman. Operating, administrative and general expenses for 2001 totaled $139.7 million, a $1.8 million, or 1%, increase from 2000. The increase primarily reflects increased labor and benefits expenses including $1.3 9 million in severance expense. Full-time employees decreased 4% from the prior year, with reductions in all segments and at the corporate level. Interest expense for 2001 was $11.6 million, a $0.3 million, or 2%, decrease from 2000. Average daily short-term borrowings increased 1% from 2000 while the average short-term interest rate decreased from 6.95% in 2000 to 5.10% in 2001. However, the Company has increased its long-term debt (including current maturities) 14% from December 31, 2000 to December 31, 2001 and has seen a similar increase in its long-term interest expense. Income before income taxes of $11.9 million decreased $2.5 million, or 17%, from the 2000 pretax income of $14.4 million. Income tax expense was $2.9 million, a $1.4 million, or 33%, decrease from 2000. The effective tax rate decreased significantly from the 2000 rate of 29.8% to 24.2% in 2001. This significant decrease resulted primarily from an increased benefit from the Company's foreign sales corporation. The Company recognized an after-tax charge of $0.2 million to record the cumulative effect of adopting the new financial accounting standard on derivatives. As a result of the above, net income for 2001 decreased $1.2 million, or 12%, from the $10.1 million in 2000 to $8.9 million in 2001. Basic earnings per share decreased $0.12 from 2000 and diluted earnings per share decreased $0.13 from 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's operations (before changes in operating assets and liabilities) provided cash of $29.9 million in 2002, an increase of $6.0 million from 2001. Net working capital at December 31, 2002 was $80.8 million, an increase of $5.6 million from December 31, 2001. The Company has significant short-term lines of credit available to finance working capital, primarily inventories and accounts receivable. Effective on November 1, 2002, the Company entered into a borrowing arrangement with a syndicate of banks which provides the Company with $150 million in short-term lines of credit and an additional $50 million in a three-year line of credit. Prior to the syndication agreement, the Company managed several separate short-term lines of credit. The Company had $70.0 million outstanding on its short-term line of credit at December 31, 2002. Peak short-term borrowing during 2002 was $139.2 million on February 25, 2002. In most years, 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 December 31, 2002, the fair value of these derivative financial instruments recorded in the balance sheet (primarily interest rate swaps and interest rate caps) was a net liability of $0.1 million. Quarterly cash dividends of $0.065 per common share were paid in 2002 and 2001. A cash dividend of $0.07 per common share was declared on January 2, 2003 and was paid on January 22, 2003. The Company made income tax payments of $2.5 million in 2002. During 2002, the Company issued approximately 132 thousand shares to employees and directors under its share compensation plans. 10 Total capital spending for 2002 on property, plant and equipment was $9.8 million and included $1.8 million for investments in facilities and expansion in the Agriculture Group, $1.6 million for information systems and $0.7 million for retail store improvements and additions. The remaining amount of $5.7 million was spent on numerous assets and projects with no single project costing more than $0.3 million. The Company also spent $8.2 million in 2002 for the purchase of railcars and capitalized modifications on railcars that may then be sold, financed off-balance sheet or owned by the Company for lease to customers. The Company sold or financed $16.0 million of railcars during 2002. Finally, the Company completed its minority investment in a new limited liability corporation specializing in grain trading with Lansing Grain Company in January, 2003. Certain of the Company's 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. In addition, certain of the Company's long-term borrowings are secured by first mortgages on various facilities or are collateralized by railcar assets. The Company was in compliance with all of these provisions at December 31, 2002. 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. CONTRACTUAL OBLIGATIONS Future payments due under contractual obligations at December 31, 2002 are as follows:
Payments Due by Period CONTRACTUAL OBLIGATIONS (in thousands) Less than 1 year 1-3 years 4-5 years After 5 years Total ------------- ------------- --------------- -------------- -------------- Long-term debt $ 9,454 $14,915 $16,600 $48,928 $ 89,897 Capital lease obligations 327 696 3,127 -- 4,150 Operating leases 10,367 14,606 6,869 9,992 41,834 Other 200 400 400 -- 1,000 ------------- ------------- --------------- -------------- -------------- Total contractual cash obligations $20,348 $30,617 $26,996 $58,920 $136,881 ============= ============= =============== ============== ==============
Included in long-term debt are acquisition liabilities that include minimum royalty payments. There are additional contingent sales-based royalty payments that have not triggered to date and which are not expected to be material to the Company if they trigger in the future. The royalty period ends May 2005. The Company had standby letters of credit outstanding of $19.2 million at December 31, 2002, of which $8.5 million are credit enhancements 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 and, to a lesser extent, forward sale contracts to sell 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. These contractual obligations are not included in the preceding table. 11 Approximately 72% of the operating lease commitments above relate to 1,934 railcars that the Company leases from financial intermediaries. See the following section on Off-Balance Sheet Transactions. The Company is subject to various loan covenants as highlighted previously. Although 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. OFF-BALANCE SHEET TRANSACTIONS The Company's Rail Group utilizes leasing arrangements that provide off-balance sheet financing for its activities. The Company leases railcars from financial intermediaries under operating leases through sale-leaseback transactions, the majority of which involve operating leasebacks. Railcars owned by the Company, or leased by the Company from a financial intermediary, are generally leased to a customer under an operating lease. The Company also arranges non-recourse lease transactions under which it sells railcars or locomotives to a financial intermediary, and assigns the related operating lease to the financial intermediary on a non-recourse basis. In such arrangements, the Company generally provides ongoing railcar maintenance and management services for the financial intermediary, and receives a fee for such services. On most of the railcars and locomotives, the Company holds an option to purchase these assets at the end of the lease. The following table describes the railcar and locomotive positions at December 31, 2002.
METHOD OF CONTROL FINANCIAL STATEMENT NUMBER --------------------------------------------------------- -------------------------------------- ------------ Owned-railcars available for sale On balance sheet - current 144 Owned-railcar assets leased to others On balance sheet - non-current 2,124 Railcars leased from financial institutions Off balance sheet 1,934 Railcars - non-recourse arrangements Off balance sheet 1,497 ------------ TOTAL RAILCARS 5,699 ============ Locomotives - non-recourse arrangements Off balance sheet 51 ============
The Company has future lease payment commitments aggregating $30.1 million for the railcars leased by the Company from financial intermediaries under various operating leases. Remaining lease terms vary with none exceeding 10 years. The majority of these railcars have been leased to customers at December 31, 2002 over similar terms. The segment manages risk by matching lease commitments with funding (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. 12 CRITICAL ACCOUNTING POLICIES The Company marks all grain inventory, forward purchase and sale contracts for grain, and exchange-traded futures and options contracts to the market. Changes in market value are recorded as merchandising revenues in the statement of operations. Because the Company marks inventories and sales commitments to the market, gross profit on a grain sale transaction is recognized when a contract for sale of the grain is executed. The related revenue is recognized upon shipment of the grain, at which time title transfers and customer acceptance occurs. The Company has a marketing agreement that covers certain of its grain facilities. This five-year agreement, which expires in May 2003, includes a base-level income guarantee and equal sharing of income over that base level. There is also a look-back provision that places at risk any income in excess of the base level for the term of the agreement upon the occurrence of certain circumstances. The Company has recognized in income the base level guarantee amount for each year of the agreement and spreads its share of the amount in excess of the base level on a pro rata basis over all future periods covered by the agreement. At December 31, 2002, the Company had completed 55 months under the agreement and had current deferred income of approximately $1.5 million. If the facilities' performance drops below the base-level income guarantee for the remaining 5 months of the contract, the Company is at risk for not realizing a portion of this deferred income. If performance is at or greater than the base-level guarantee, the Company will recognize over the next 5 months the remaining income it has deferred. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's market risk-sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices and interest rates as discussed below. Commodity Prices The 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 13 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:
DECEMBER 31 (in thousands) 2002 2001 -------------------- -------------------- Net (short) long position ($2,302) $3,659 Market risk 230 366
Interest Rates The fair value of the Company's long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. In addition, the Company has derivative interest rate contracts recorded in its balance sheet at their fair value. The fair value of these contracts is estimated based on quoted market termination values. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates, is summarized below:
DECEMBER 31 (in thousands) 2002 2001 -------------------- -------------------- Fair value of long-term debt and interest rate contracts $96,358 $104,102 Fair value in excess of carrying value 2,236 2,344 Market risk 1,893 2,253
FORWARD LOOKING STATEMENTS The preceding 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; interest rates; and income taxes. 14 The Andersons, Inc. Notes to Consolidated Financial Statements 1. BASIS OF FINANCIAL PRESENTATION / ACQUISITIONS These consolidated financial statements include the accounts of The Andersons, Inc. and its wholly-owned and majority-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions are eliminated in consolidation. On May 31, 2000, the Company acquired inventory and intangible assets of the U.S. ProTurf(R) division of The Scotts Company. The acquisition was accounted for as a purchase, and the results of operations have been included in the consolidated statements of income from June 1, 2000. This transaction was completed through a combination of cash paid and liabilities assumed with a total purchase price of approximately $19.8 million. Of this amount, $15.0 million was allocated to inventory and the remainder to goodwill and other intangible assets. The purchase agreement provides for additional payments to the seller through 2005 if the sales volume of the acquired business exceeds certain targets. These payments, if any, will be accounted for as additional purchase price; no such payments have been made since the acquisition to date. If the acquisition had taken place on January 1, 2000, pro forma revenues (unaudited) would have been $993.0 million for the year ended December 31, 2000. The business has been integrated into the Company's Processing segment and is expected to result in significantly different cost and expense structures. Therefore, pro forma operating income, net income and earnings per common share are not presented as they are not meaningful. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and all highly liquid debt instruments purchased with an initial maturity of three months or less. The carrying values of these assets approximate their fair values. INVENTORIES AND INVENTORY COMMITMENTS Grain inventories include owned bushels of grain, the value of forward contracts to buy and sell grain, and exchange traded futures and option contracts used to hedge the value of both owned grain and forward contracts. Each of these grain inventory components is marked to the market price. The forward contracts require performance in future periods. Contracts to purchase grain from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. 15 Contracts for the sale of grain to processors or other consumers generally do not extend beyond one year. The terms of contracts for the purchase and sale of grain are consistent with industry standards. All other inventories are stated at the lower of cost or market. Cost is determined by the average cost method. DERIVATIVES - COMMODITY AND INTEREST RATE CONTRACTS For the purpose of hedging its market price risk exposure on grain owned and related forward grain purchase and sale contracts, the Company holds regulated commodity futures and options contracts for corn, soybeans, wheat and oats. The Company accounts for all commodity contracts using a daily mark-to-market method, the same method it uses to value grain inventory and forward purchase and sale contracts. Company policy limits the Company's unhedged grain position. While the Company considers all of its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges. Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices or due to sale, maturity or extinguishment of the commodity contract), grain inventories and related forward grain contracts are included in sales and merchandising revenues in the statements of income. The Company also periodically enters into interest rate contracts to manage interest rate risk on borrowing or financing activities. The Company accounts for its long-term interest rate swap, Treasury rate lock and interest rate corridor contracts as cash flow hedges; accordingly, changes in the fair value of the instruments are recognized in other comprehensive income. While the Company considers all of its derivative positions to be effective economic hedges of specified risks, the Company does not designate or account for other open interest rate contracts as hedges. Changes in the market value of all other interest rate contracts are recognized currently in income. Upon termination of a derivative instrument or a change in the hedged item, any remaining fair value recorded on the balance sheet is immediately recorded as interest expense. The deferred derivative gains and losses on closed Treasury rate locks and the changes in fair value of the interest rate corridors are reclassified into income over the term of the underlying hedged items, which are either long-term debt or lease contracts. At January 1, 2001, the Company recorded in the statement of income a transition adjustment of $305 thousand ($185 thousand after tax) as a result of adopting Financial Accounting Standards Board (FASB) Statement No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities." This adjustment was made to write down open interest rate contracts to their fair values. The Company also reclassified deferred net losses of $1.2 million to other comprehensive income. This amount represented deferred net losses on the settlement of Treasury rate locks entered into for the purpose of hedging the interest rate component of firm commitment lease transactions. The deferred losses will be recognized as a component of gross profit over the term of the underlying leases. During 2002, the Company reclassified $0.2 million of other comprehensive income into rail lease cost of sales under the reclassification policy noted above for amortization of the closed Treasury rate locks. Less than $0.1 million was reclassified to interest expense as a result of amortization of other comprehensive income from the change in fair value of the interest rate corridors. Prior to the adoption of Statement No. 133, the Company recognized income or expense associated with interest rate swap contracts on the accrual basis over the term of the agreement as interest expense. The cost of short-term interest rate caps was expensed at the date of purchase, and the cost of long-term 16 interest rate caps was expensed over the term of the underlying obligation. Gains or losses on settlement of Treasury rate locks hedging the interest component of firm commitment lease transactions were recognized over the term of the ensuing lease transaction. The fair value of interest rate contracts was not recognized in the balance sheet prior to 2001. RAILCARS AVAILABLE FOR SALE The Company's Rail segment purchases, leases, markets and manages railcars for third parties and for internal use. Railcars to which the Company holds title are shown on the balance sheet in one of two categories - railcars available for sale or railcar assets leased to others. Railcars that have been acquired but have not been placed in service are classified as current assets and are stated at the lower of cost or market. Railcars leased to others, both on short- and long-term leases, are classified as long-term assets and are depreciated over their estimated useful lives. Details about the Rail segment's leasing activities are presented in the Leases and Related Commitments note. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Repairs and maintenance are charged to expense as incurred, while betterments that extend useful lives are capitalized. Depreciation is provided over the estimated economic useful lives of the individual assets, principally by the straight-line method. Estimated useful lives are generally as follows: land improvements and leasehold improvements - 10 to 16 years; buildings and storage facilities - 20 to 30 years; machinery and equipment - 3 to 20 years; and software - 3 to 10 years. The cost of assets retired or otherwise disposed of and the accumulated depreciation thereon are removed from the accounts, with any gain or loss realized upon sale or disposal credited or charged to operations. INTANGIBLE ASSETS AND GOODWILL Intangible assets, primarily purchased intangible assets resulting from business acquisitions, are amortized over the estimated period of benefit (generally 5 years) by the straight-line method. Intangible assets of $3.4 million and $4.2 million at December 31, 2002 and 2001, respectively, are included in Other assets and notes receivable in the balance sheet. Accumulated amortization at December 31, 2002 and 2001 was $2.6 million and $1.8 million, respectively. Prior to 2002, goodwill was amortized on a straight-line basis over the estimated period of benefit, ranging from 5 to 12 years. The Company adopted the provisions of FASB Statement No. 142, "Goodwill and Other Intangible Assets," (Statement No. 142) on January 1, 2002. In connection with the adoption of this statement, the Company ceased amortization of goodwill, and evaluated its remaining goodwill, with net book value of $1.3 million, for impairment. The adoption of Statement 142 eliminated annual goodwill amortization of $0.2 million. With the adoption of Statement No. 142, the Company annually evaluates recorded goodwill for impairment utilizing a fair value methodology. Recorded goodwill relates primarily to the Company's Processing Group. The Company's goodwill was not impaired upon adoption of Statement No. 142 or at December 31, 2002. 17 IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the assets to the future net cash flows the Company expects to generate with the asset. If such assets are considered to be impaired, the Company recognizes impairment expense for the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company recognized impairment losses on long-term railcars of $0.3 million in both 2002 and 2001 in cost of sales. The Company also recognized a $0.2 million impairment on an agricultural facility in 2002, which was included in operating, administrative and general expenses. In addition, in 2001, the Company recorded a $1.2 million lower of cost or market adjustment for railcars classified as available for sale. ACCOUNTS PAYABLE FOR GRAIN Accounts payable for grain includes the liability for grain purchases on which price has not been established (delayed price). This amount has been computed on the basis of market prices at the balance sheet date, adjusted for the applicable premium or discount. DEFERRED INCOME Certain of the Company's agriculture facilities are subject to a five-year marketing agreement with a third party that provides for a base-level income guarantee and equal sharing of income earned over the base level. The marketing agreement includes a look-back provision that places at risk any income in excess of the base level for the term of the agreement. The Company recognizes the base-level income guarantee as revenue on a pro rata basis over the remaining life of the agreement. The Company measures its share of the cumulative income over the base-level income guarantee at the end of each contract year and recognizes such income on a pro rata basis over the life of the agreement. The marketing agreement will terminate in May 2003. Deferred income at December 31, 2002 and 2001 was $1.5 million and $5.4 million, respectively. 18 STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has adopted the disclosure only provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company provides pro forma disclosures assuming that the Company had accounted for its stock-based compensation programs using the fair value method promulgated by Statement No. 123.
(in thousands, except for per share data) YEAR ENDED DECEMBER 31 2002 2001 2000 -------------- --------------- -------------- Net income, as reported $13,319 $ 8,857 $10,078 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (316) (318) (363) -------------- --------------- -------------- Pro forma net income $13,003 $ 8,539 $ 9,715 ============== =============== ============== Earnings per share: Basic - as reported $1.83 $1.22 $1.34 ============== =============== ============== Basic - pro forma $1.79 $1.17 $1.29 ============== =============== ============== Diluted - as reported $1.79 $1.21 $1.34 ============== =============== ============== Diluted - pro forma $1.75 $1.17 $1.29 ============== =============== ==============
REVENUE RECOGNITION Sales of products are recognized at the time of shipment. Under the Company's mark-to-market method for its grain operations, gross profit on grain sales is recognized when sales are contracted. Revenues from other merchandising activities are recognized as open grain contracts are marked-to-market or as services are provided. Sales returns and allowances are provided for at the time sales are recorded. Shipping and handling costs are included in cost of sales. Sales of railcars, including railcars sold in non-recourse lease transactions, are recorded as revenue on the date of sale. Sales for these transactions totaled $0.1 million, $15.3 million and $3.8 million in 2002, 2001 and 2000, respectively. LEASE ACCOUNTING The Company accounts for its leases under FASB Statement No. 13, as amended, and related pronouncements. The Company's Rail segment leases and manages railcars for third parties, and leases railcars for internal use. The Company is an operating lessor of railcars that are owned by the Company, or leased by the Company from financial intermediaries. The Company records lease income for its activities as an operating lessor as earned, which is generally spread evenly over the lease term. The Company expenses operating lease payments made to financial intermediaries on a straight-line basis over the lease term. The Company periodically enters into leases with Rail Group customers that are classified as direct financing capital leases. Although lease terms are not significantly different from other operating leases 19 that the Company maintains with its railcar customers, they qualify as capital leases. For these leases, the net minimum lease payments, net of unearned income is included in prepaid expenses and other current assets for the amount to be received within one year and the remainder in other assets. The Company also arranges non-recourse lease transactions under which it sells railcars or locomotives to financial intermediaries and assigns the related operating lease on a non-recourse basis. The Company generally provides ongoing railcar maintenance and management services for the financial intermediaries, and receives a fee for such services when earned. On the date of sale, the Company recognizes the proceeds from sales of railcars in non-recourse lease transactions as revenue. Management and service fees are recognized as revenue, which is generally spread evenly over the lease term. INCOME TAXES Income tax expense for each period includes taxes currently payable plus the change in deferred income tax assets and liabilities. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws governing periods in which the differences are expected to reverse. The Company evaluates the realizability of deferred tax assets and provides a valuation allowance for amounts that management does not believe are more likely than not to be recoverable, as applicable. ADVERTISING Advertising costs are expensed as incurred. Advertising expense of $2.2 million in 2002 and $2.8 million in each of 2001 and 2000 is included in operating, administrative and general expenses. 20 EARNINGS PER SHARE Basic earnings per share is equal to net income divided by weighted average shares outstanding. Diluted earnings per share is equal to basic earnings per share plus the incremental per share effect of dilutive options and restricted shares.
YEAR ENDED DECEMBER 31 (in thousands, except for per share data) 2002 2001 2000 --------------- -------------- ------------- Income before cumulative effect of accounting change $13,319 $9,042 $10,078 Cumulative effect of change in accounting principle, net of income tax benefit -- (185) -- --------------- -------------- ------------- Net income $13,319 $8,857 $10,078 =============== ============== ============= Basic earnings per share: Income before cumulative effect of accounting change $1.83 $1.24 $1.34 Cumulative effect of change in accounting principle, net of income tax benefit -- (0.02) -- --------------- -------------- ------------- Net income $1.83 $1.22 $1.34 =============== ============== ============= Diluted earnings per share: Income before cumulative effect of accounting change $1.79 $1.24 $1.34 Cumulative effect of change in accounting principle, net of income tax benefit -- (0.03) -- --------------- -------------- ------------- Net income $1.79 $1.21 $1.34 =============== ============== ============= Weighted average shares outstanding - basic 7,283 7,281 7,507 Restricted shares and shares contingently issuable upon exercise of options 146 35 18 --------------- -------------- ------------- Weighted average shares outstanding - diluted 7,429 7,316 7,525 =============== ============== =============
Diluted earnings per common share excludes the impact of 1 thousand, 260 thousand and 634 thousand employee stock options for 2002, 2001 and 2000, respectively, as such options were antidilutive. NEW ACCOUNTING STANDARDS The FASB has issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which is effective for the Company's 2002 fiscal year. This statement requires additional disclosures about the Company's stock-based compensation plans. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies disclosures that are required to be made for certain guarantees and establishes a requirement to record a liability at fair value for certain guarantees at the time of the guarantee's issuance. The disclosure requirements of FIN No. 45 have been applied in these financial statements. The requirement to record a liability applies to guarantees issued or modified after December 31, 2002. We 21 do not believe the adoption of this portion of the interpretation will have a material effect on our financial condition or results of operations. The FASB also issued the following statements in 2002. These statements each require prospective application. - Statement No. 145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" amends or corrects a variety of existing rules. The Company does not expect to be materially impacted by this statement. - Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," addresses the accounting and reporting of costs associated with exit or disposal activities. The Company does not expect to be materially impacted by this statement. - Statement No. 147, "Accounting Acquisitions of Certain Financial Institutions," amends previous guidance on this topic. The Company does not expect to be impacted by this statement. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 provides guidance on identification of a variable interest entity ("VIE") and on determination of whether the VIE should be consolidated in an enterprise's financial statements. In general, an enterprise deemed to be the primary beneficiary of a VIE is required to consolidate the VIE. FIN No. 46 is effective immediately for any new FIE established after January 31, 2003 and must be adopted for any pre-existing VIEs at the beginning of the Company's third quarter. The Company's railcar leasing activities, as described above, include transactions with financial intermediaries that may constitute variable interest entities under the guidance of FIN No. 46. Management has not completed its evaluation of these arrangements to determine whether any of these arrangements involve a VIE or, if a VIE exists, whether the Company is the primary beneficiary of the VIE. Therefore, management has not determined the impact of FIN No. 46 on the Company's financial statements. RECLASSIFICATIONS Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation. These reclassifications had no effect on net income or shareholders' equity as previously presented. 22 3. INVENTORIES Major classes of inventories are as follows:
DECEMBER 31 (in thousands) 2002 2001 -------------------------------------- Grain $ 156,742 $ 140,316 Agricultural fertilizer and supplies 25,699 24,240 Lawn and garden fertilizer and corncob products 42,947 43,440 Railcar repair parts 1,455 1,401 Retail merchandise 29,076 28,539 Other 356 355 -------------------------------------- $ 256,275 $ 238,291 ======================================
4. PROPERTY, PLANT AND EQUIPMENT AND RAILCAR ASSETS LEASED TO OTHERS The components of property, plant and equipment and railcar assets leased to others are as follows:
DECEMBER 31 (in thousands) 2002 2001 ---------------------------------------- Land $ 11,735 $ 11,758 Land improvements and leasehold improvements 29,122 27,937 Buildings and storage facilities 95,892 94,309 Machinery and equipment 121,911 119,460 Software 4,771 3,714 Construction in progress 2,369 4,144 ---------------------------------------- 265,800 261,322 Less accumulated depreciation and amortization 172,861 166,321 ---------------------------------------- $ 92,939 $ 95,001 ======================================== Railcar assets leased to others $ 32,144 $ 30,585 Less accumulated depreciation 5,745 4,483 ---------------------------------------- $ 26,399 $ 26,102 ========================================
On December 31, 2001, the Company entered into a sale-leaseback transaction with a financial institution; the Company accounts for its leaseback as a capital lease. These assets have a cost of $4.5 million and are included with other railcars above for both 2002 and 2001. Accumulated amortization for these assets was $0.3 million at December 31, 2002. 5. NONOPERATING GAINS During 2002, a conference facility owned by the Company was damaged by fire. This facility was insured for replacement value and the Company received insurance funds to repair the damaged assets. 23 The 2002 gain of $0.3 million represents the insurance proceeds received in 2002 in excess of the net book value of the destroyed assets. During 2000, a grain tank and related assets at the Company's Albion, Michigan facility were destroyed in a windstorm. This facility was insured for replacement value and the Company received insurance funds to replace the assets lost. The 2001 gain of $0.3 million represents the insurance proceeds received in 2001 in excess of the net book value of the destroyed assets. In March 2000, the Company sold its interest in The Andersons - Tireman Auto Centers, a joint venture in which it owned a 52.5% interest. The 2000 gain on sale of business of $1.0 million represents proceeds received in excess of the Company's investment. This business was previously included in the Company's financial statements and reported in the Other segment in the Company's segment data. During 2000, the Company completed the settlement of an insurance claim related to the 1999 collapse of a liquid fertilizer tank and adjoining assets at its Webberville, Michigan facility. The resultant gain of $2.1 million represents the insurance proceeds in excess of the net book value of the destroyed assets. 6. SHORT-TERM BORROWING ARRANGEMENTS During 2002, the Company entered into a borrowing arrangement with a syndicate of banks. The new arrangement provides the Company with $150 million in short-term lines of credit and an additional $50 million in a three-year line of credit. Short-term borrowings under this arrangement totaled $70.0 million at December 31, 2002. The borrowing arrangement terminates on October 29, 2003 but allows for indefinite renewals at the Company's option and as long as certain covenants are met. Management expects to renew the arrangement prior to its termination date. Borrowings under the lines of credit bear interest at variable interest rates, which are based on LIBOR, the prime rate or the federal funds rate, plus a spread. The terms of the borrowing agreement provide for annual commitment fees. Prior to this syndication, the Company managed several separate lines of credit for unsecured short-term debt with banks. The following information relates to short-term borrowings:
DECEMBER 31 (in thousands, except percentages) 2002 2001 2000 --------------------------------------------------- Maximum amount borrowed $139,200 $130,400 $113,800 Average daily amount borrowed 92,534 91,014 89,798 Weighted average interest rate 3.24% 5.10% 6.95%
24 7. LONG-TERM DEBT AND INTEREST RATE CONTRACTS Long-term debt consists of the following:
DECEMBER 31 (in thousands, except percentages) 2002 2001 --------------------------------- Note payable, 6.50%, payable $162 monthly, remainder due 2017 $ 17,758 $ -- Note payable, 6.95%, payable $317 quarterly, remainder due 2008 16,147 17,415 Note payable, 7.00%, payable $316 quarterly beginning in 2004, due 2016 10,681 10,681 Note payable, variable rate (2.76% at December 31, 2002), payable $150 first and second quarters and $99 third and fourth quarters of 2003, with decreasing quarterly payments thereafter, due 2005 6,787 7,750 Note payable under revolving line of credit -- 15,000 Notes payable, variable rate, due 2002 -- 1,657 Industrial development revenue bonds: Variable rate (1.68% at December 31, 2002), due 2019 4,650 4,650 Variable rate -- 1,944 Variable rate (1.70% at December 31, 2002), due 2025 3,100 3,100 Liabilities related to acquisition, discounted at 8.25%, due in variable quarterly installments through 2005 2,651 3,188 Debenture bonds, 5.50% to 8.50%, due 2003 through 2012 27,628 31,250 Obligations under capital lease 4,150 4,473 Other notes payable and bonds 495 582 --------------------------------- 94,047 101,690 Less current maturities 9,775 10,374 --------------------------------- $84,272 $91,316 =================================
In connection with its short-term borrowing agreement with a syndicate of banks, the Company obtained an unsecured $50.0 million long-term line of credit. Borrowings under this line of credit will bear interest based on LIBOR, plus a spread. The long-term line of credit expires on October 30, 2005, but may be renewed by the Company for an additional three years as long as covenants are met. After considering its standby letters of credit totaling $19.2 million, the Company had available borrowing capacity under this facility of $30.8 million. The notes payable due 2008, 2016 and 2017 and the industrial development revenue bonds are collateralized by first mortgages on certain facilities and related equipment with a book value of $29.2 million. The note payable due 2005 is collateralized by railcars with a book value of $6.8 million. The Company's short-term and long-term borrowing agreements include both financial and non-financial covenants that require the Company, among other things, to: - maintain minimum working capital of $45.0 million and net equity (as defined) of $65.0 million; - limit the addition of new long-term debt; - limit its unhedged grain position to 2.0 million bushels; and - restrict the amount of dividends paid. 25 The Company was in compliance with all covenants at December 31, 2002 and 2001. The aggregate annual maturities of long-term debt, including sinking fund requirements and capital lease obligations, are as follows: 2003--$9.8 million; 2004--$5.5 million; 2005--$10.1 million; 2006--$11.6 million; 2007--$8.0 million; and $49.0 million thereafter. Interest paid (including interest on short-term lines of credit) amounted to $9.7 million, $10.1 million and $11.5 million in 2002, 2001 and 2000, respectively. The Company has entered into derivative interest rate contracts to manage interest rate risk on short-term borrowings. The contracts convert variable interest rates to short-term fixed rates, consistent with projected borrowing needs. At December 31, 2002, the Company has two short-term interest rate cap agreements with a total notional amount of $20.0 million to hedge short-term borrowing costs. These agreements provide interest rate caps of between 2.75% and 3.00% and expire on April 1, 2003. Although these instruments are intended to hedge interest rate risk on short-term borrowings, the Company has elected not to account for them as hedges. Changes in their fair value are included in interest expense in the statements of income. The Company has also entered into various derivative financial instruments to hedge the interest rate component of long-term debt and lease obligations. The following table displays the contracts open at December 31, 2002.
INTEREST RATE INITIAL NOTIONAL HEDGING YEAR YEAR OF AMOUNT (IN INTEREST INSTRUMENT ENTERED MATURITY MILLIONS) HEDGED ITEM RATE -------------------- -------------- --------------- --------------------- --------------------------------------------- ----------- Cap 1999 2003 $19.4 Interest rate component of an operating 6.50% lease - not accounted for as a hedge Cap 2000 2005 $12.5 Interest rate component of a long-term note 7.66% payable - not accounted for as a hedge Swap 2001 2004 $14.6 Convert floating interest rate component of 3.27% an operating lease to a fixed rate Corridor 2002 2006 $4.8 Interest rate component of a railcar debt 4.25% - financing 7.00% Corridor 2002 2007 $4.3 Interest rate component of a railcar 4.25% - sale-leaseback transaction 7.00%
The initial notional amounts on the above instruments amortize monthly in the same manner as the underlying hedged item. Changes in the fair value of the caps are included in interest expense in the statements of income, as they are not accounted for as cash flow hedges. The swap and the interest rate corridors are designated as cash flow hedges with changes in their fair values included as a component of other comprehensive income or loss. Also included in accumulated other comprehensive income are closed treasury rate locks entered into to hedge the interest rate component of railcar lease transactions prior to their closing. The reclassification of these amounts from other comprehensive income into interest or cost of railcar sales occurs over the term of the hedged debt or lease, as applicable. The fair values of all derivative instruments are included in other assets and notes receivable or other long-term liabilities. The net fair value amount for 2002 and 2001 was less than $0.1 million. The mark- 26 to-market effect of long-term and short-term interest rate contracts on interest expense was $0.1 million interest credit and $0.2 million additional interest expense for 2002 and 2001, respectively. If there are no additional changes in fair value, the Company expects to reclassify $0.3 million from other comprehensive income into interest expense or cost of railcar sales in 2003. 8. INCOME TAXES Income tax provision (benefit) consists of the following:
YEAR ENDED DECEMBER 31 (in thousands) 2002 2001 2000 ------------ -------------- ------------- Current: Federal $3,606 $3,311 $2,219 State and local 200 117 (175) ------------ -------------- ------------- 3,806 3,428 2,044 ------------ -------------- ------------- Deferred: Federal 2,560 (496) 1,935 State and local 149 (43) 307 ------------ -------------- ------------- 2,709 (539) 2,242 ------------ -------------- ------------- Total: Federal 6,166 2,815 4,154 State and local 349 74 132 ------------ -------------- ------------- $6,515 $2,889 $4,286 ============ ============== =============
A reconciliation from the statutory U.S. federal tax rate to the effective tax rate follows:
YEAR ENDED DECEMBER 31 2002 2001 2000 ------------- ------------- ------------- Statutory U.S. federal tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: Effect of commissions paid to foreign sales corporation or excluded extraterritorial income (3.2) (11.3) (5.8) State and local income taxes, net of related federal taxes 1.1 0.4 0.6 Other, net (0.1) 0.1 -- ------------- ------------- ------------- Effective tax rate 32.8% 24.2% 29.8% ============= ============= =============
Income taxes paid in 2002, 2001 and 2000 were $2.5 million, $4.3 million, and $3.3 million, respectively. 27 Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31 (in thousands) 2002 2001 --------------- ------------- Deferred tax liabilities: Property, plant and equipment and railcar assets leased to others $(14,084) $(12,898) Prepaid employee benefits (3,857) (2,949) Other (344) (202) --------------- ------------- (18,285) (16,049) --------------- ------------- Deferred tax assets: Employee benefits 6,469 5,384 Deferred income 2,402 1,450 Accounts and notes receivable 1,246 1,289 Inventory 947 2,456 Investments 13 353 Other 348 433 --------------- ------------- 11,425 11,365 --------------- ------------- Net deferred tax liability $ (6,860) $ (4,684) =============== =============
In 2002 and 2001, the Company recorded deferred tax assets of $0.5 million and $0.1 million, respectively, related to the accounting for derivatives under Statement 133. The 2002 amount is included in other comprehensive income in the statement of shareholders' equity. The 2001 amount is included in the statement of income as a cumulative effect of change in accounting principle. 9. STOCK COMPENSATION PLANS The Company's Amended and Restated Long-Term Performance Compensation Plan dated December 14, 2001 (the LT Plan) authorizes the Board of Directors to grant options and share awards to employees and outside directors for up to 2.1 million of the Company's common shares. Options granted under the LT Plan have a maximum term of 10 years. Options granted to outside directors have a fixed term of five years and vest after one year. Options granted to management personnel under the LT Plan have a five-year term and vest 40% immediately, an additional 30% after one year and the remaining 30% after two years. Options granted under the LT Plan are structured as fixed grants with exercise price equal to the market value of the underlying stock on the date of the grant; accordingly, no compensation expense is recognized for these grants. The LT Plan also permits awards of restricted stock. The Company issued 15 thousand, 21 thousand and 20 thousand restricted shares during 2002, 2001 and 2000, respectively; 23 thousand restricted shares remain outstanding at December 31, 2002. These shares carry voting and dividend rights; however, sale of the shares is restricted prior to vesting. Restricted shares vest 50% after one year and the remaining 50% after two years. Restricted shares issued under the LT Plan are recorded at their fair value on the grant date with a corresponding charge to shareholders' equity representing the unearned portion of the award. The unearned portion is amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to restricted stock issued under the LT Plan amounted to $0.2 million in each of 2002, 2001 and 2000. 28 Certain Company executives and outside directors have elected to receive a portion of their cash compensation in stock options and/or restricted stock issued under the LT Plan. These options and restricted stock vest immediately. The options have a ten-year term. There were 3 thousand, 6 thousand and 4 thousand restricted shares issued in lieu of cash compensation in 2002, 2001 and 2000, respectively and 10 thousand options issued in 2002. The Company's Employee Share Purchase Plan (the ESP Plan) allows employees to purchase common shares through payroll withholdings. The Company has reserved 300 thousand common shares for issuance to and purchase by employees under this plan. The ESP Plan also contains an option component. The purchase price per share under the ESP Plan is the lower of the market price at the beginning or end of the year. Employees purchased 25 thousand, 33 thousand and 33 thousand shares under the ESP Plan in 2002, 2001 and 2000, respectively. The Company records a liability for withholdings not yet applied towards the purchase of common stock. No compensation expense is recognized for stock purchases or options under the ESP Plan. Pro forma information regarding net income and earnings per share required by Statement No. 123, "Accounting for Stock-Based Compensation," is included in note 2 and is determined as if the Company accounted for its employee stock options under the fair value method. The fair value of each option grant is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions by year.
2002 2001 2000 ---------------- ----------------- ---------------- LONG TERM PERFORMANCE COMPENSATION PLAN Risk free interest rate 4.42% 4.99% 6.36% Dividend yield 2.60% 3.01% 2.91% Volatility factor of the expected market price of the Company's common shares .300 .267 .276 Expected life for the options (in years) 5.30 5.00 5.00 EMPLOYEE SHARE PURCHASE PLAN Risk free interest rate 2.17% 5.32% 5.98% Dividend yield 2.60% 3.01% 2.91% Volatility factor of the expected market price of the Company's common shares .300 .267 .276 Expected life for the options (in years) 1.00 1.00 1.00
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. 29 A summary of the Company's stock option activity and related information for the years ended December 31 follows:
LONG-TERM PERFORMANCE COMPENSATION PLAN (common shares in thousands) 2002 2001 2000 ------------------------ ------------------------- ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ------------- ---------- -------------- ---------- ------------- Outstanding at beginning of year 915 $9.18 862 $9.24 671 $9.60 Granted 171 10.00 224 8.63 229 8.25 Exercised (239) 9.14 (93) 8.83 -- -- Expired/forfeited (39) 9.12 (78) 8.68 (38) 9.59 ---------- ---------- ---------- Outstanding at end of year 808 $9.37 915 $9.18 862 $9.24 ========== ========== ==========
2002 2001 2000 ---------------- ----------------- --------------- Weighted average fair value of options granted during year $2.62 $2.00 $2.18 ================ ================= =============== Options exercisable at end of year 662 732 687 ================ ================= =============== Weighted average exercise price of options exercisable at end of year $9.35 $9.35 $9.27 ================ ================= =============== Options available for grant at December 31, 2002 851 Price range of options at December 31, 2002 $8.25 TO $12.38 Weighted average remaining contractual life (in years) 3.61
10. OTHER COMMITMENTS AND CONTINGENCIES Railcar leasing activities: The Company is a lessor of railcars. The majority of railcars are leased to customers under operating leases that may be either net leases or full service leases under which the Company provides maintenance and fleet management services. The Company also provides such services to financial intermediaries to which it has sold railcars and locomotives in non-recourse lease transactions. Fleet management services generally include maintenance, escrow, tax filings and car tracking services. Many of the Company's leases provide for renewals. The Company also generally holds purchase options for railcars it has sold and leased-back from a financial intermediary, and railcars sold in non-recourse lease transactions. 30 Lease income from operating leases to customers and rental expense for railcar leases were as follows:
YEAR ENDED DECEMBER 31 (in thousands) 2002 2001 2000 ----------------------------------------------- Rental and service income - operating leases $ 11,521 $ 9,896 $ 9,497 =============================================== Rental expense $ 5,007 $ 4,387 $ 4,778 ===============================================
Future minimum rentals and service income for all noncancelable railcar operating leases greater than one year are as follows:
FUTURE RENTAL AND FUTURE MINIMUM (in thousands) SERVICE INCOME - RENTAL EXPENSE OPERATING LEASES ------------------------ -------------------- Year ended December 31 2003 $ 10,936 $ 6,795 2004 8,191 5,630 2005 6,307 3,803 2006 4,644 2,808 2007 3,651 2,362 Future years 12,162 8,707 ------------------------ --------------- $45,891 $30,105 ======================== ===============
Direct Financing Lease: During 2002, the Company entered into a direct financing lease with a railcar customer. Future minimum lease payments to be received under this lease, net of executory costs, aggregated $2.5 million at December 31, 2002. The Company's net investment in the lease of $0.9 million is included as $0.8 million in other assets on the balance sheet and $0.1 million in prepaid expenses and other current assets. Other Leasing Activities: The Company, as a lessee, leases real property, vehicles and other equipment under operating leases. Certain of these agreements contain lease renewal and purchase options. The Company also leases excess property to third parties. Net rental expense under these agreements was $5.1 million, $5.4 million and $5.2 million in 2002, 2001 and 2000, respectively. Future minimum lease payments (net of sublease income commitments) under agreements in effect at December 31, 2002 are as follows: 2003--$3.1 million; 2004 -- $2.5 million; 2005 -- $2.3 million; 2006 -- $1.0 million; 2007 -- $0.6 million; and $1.2 million thereafter. Other Commitments: The Company has agreed to fund a research and development effort at a rate of $0.2 million per year for five years, ending June 30, 2007. The commitment may be satisfied, in part, by qualifying internal costs or expenditures to third parties. 31 The Company has from time to time entered into agreements which resulted in indemnifying third parties against certain potential liabilities. Management believes that judgments, if any, related to such agreements would not have a material effect on the Company's financial condition, results of operations or cash flow. 11. EMPLOYEE BENEFIT PLAN OBLIGATIONS The Company provides retirement benefits for substantially all of its employees under several defined benefit and defined contribution plans. The Company's expense for its defined contribution plans amounted to $1.4 million in each of 2002, 2001 and 2000. The Company also provides certain health insurance benefits to employees, including retirees. Following are the details of the liability and funding status of the pension and postretirement benefit plans:
POSTRETIREMENT (in thousands) PENSION BENEFITS BENEFITS 2002 2001 2002 2001 --------------- -------------- ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $26,959 $25,151 $ 18,950 $ 11,372 Service cost 2,265 1,884 721 610 Interest cost 1,891 1,560 1,601 1,224 Actuarial (gains)/losses 4,040 (121) 7,011 6,493 Plan amendment -- -- (8,658) -- Participant contributions -- -- 120 73 Benefits paid (1,551) (1,515) (862) (822) --------------- -------------- ------------ ------------ Benefit obligation at end of year 33,604 26,959 18,883 18,950 --------------- -------------- ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 24,480 26,117 -- -- Actual losses on plan assets (3,310) (1,671) -- -- Company contributions 4,506 1,549 742 749 Participant contributions -- -- 120 73 Benefits paid (1,551) (1,515) (862) (822) --------------- -------------- ------------ ------------ Fair value of plan assets at end of year 24,125 24,480 -- -- --------------- -------------- ------------ ------------ Funded (underfunded) status of plans at end of year (9,479) (2,479) (18,883) (18,950) Unrecognized net actuarial loss 14,670 5,369 16,063 9,825 Unrecognized prior service cost 89 115 (7,216) -- Unrecognized net transition obligation -- -- -- 1,217 --------------- -------------- ------------ ------------ Prepaid (accrued) benefit cost $ 5,280 $ 3,005 $ (10,036) $ (7,908) =============== ============== ============ ============
32 Amounts recognized in the consolidated balance sheets at December 31 consist of:
POSTRETIREMENT BENEFITS (in thousands) PENSION BENEFITS 2002 2001 2002 2001 --------------- -------------- ------------- ----------- Accrued expenses $ (548) $ (1,243) $ -- $ -- Pension asset 5,828 4,248 -- -- Employee benefit plan obligations -- -- (10,036) (7,908) --------------- -------------- ------------- ------------ Net amount recognized $ 5,280 $ 3,005 $ (10,036) $ (7,908) =============== ============== ============= ============
Included in employee and benefit plan obligations are $1.7 million and $1.6 million at December 31, 2002 and 2001, respectively, of deferred compensation for certain employees who, due to Internal Revenue Service guidelines, may not take full advantage of the Company's primary defined contribution plan. Assets funding this plan are recorded at fair value in prepaid expenses and other current assets. Amounts applicable to a Company defined benefit plan with accumulated benefit obligations in excess of plan assets are as follows:
(in thousands) 2002 2001 ----------------- ----------------- Projected benefit obligation $ 1,252 $ 933 ================= ================= Accumulated benefit obligation $ 228 $ 137 ================= =================
Following are components of the net periodic benefit cost for each year:
PENSION BENEFITS POSTRETIREMENT BENEFITS (in thousands) 2002 2001 2000 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- Service cost $2,265 $1,884 $2,062 $ 721 $ 610 $ 434 Interest cost 1,891 1,560 1,625 1,601 1,224 766 Expected return on plan assets (2,197) (2,366) (2,353) -- -- -- Amortization of prior service cost 26 26 26 (122) -- -- Recognized net actuarial loss 246 25 73 587 420 157 Amortization of net transition obligation -- -- -- 83 111 111 ---------- ---------- ---------- ---------- ---------- ---------- Benefit cost $2,231 $1,129 $1,433 $2,870 $ 2,365 $1,468 ========== ========== ========== ========== ========== ==========
33
POSTRETIREMENT PENSION BENEFITS BENEFITS 2002 2001 2002 2001 --------------- -------------- ------------ ------------- WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 9.0% 9.0% -- -- Rate of compensation increases 4.0% 4.0% -- -- Health care cost trend rate -- -- 7.5% 8.0%
The health care cost trend rate of 7.5% is assumed to decline 0.5% per year to 5.0% and remain at that level thereafter. During 2002, the Company amended its postretirement benefits plan to eliminate health benefits for any full-time employees hired after January 1, 2003. The assumed health care cost trend rate has a significant effect on the amounts reported for postretirement benefits. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
ONE-PERCENTAGE-POINT (in thousands) INCREASE DECREASE ---------------------- ---------------------- Effect on total service and interest cost components in 2002 $ 505 $ (394) Effect on postretirement benefit obligation as of December 31, 2002 273 (249)
To partially fund self-insured health care and other employee benefits, the Company makes payments to a trust. Assets of the trust amounted to $4.0 million and $4.6 million at December 31, 2002 and 2001, respectively, and are included in prepaid expenses and other current assets. 12. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of the Company's cash equivalents, margin deposits, short-term borrowings and certain long-term borrowings approximate their carrying values since the instruments are close to maturity and/or carry variable interest rates based on market indices. The Company accounts for investments in affiliates on the equity method. The estimated fair value of these investments could not be obtained without incurring excessive costs as these investments have no quoted market price. 34 Certain long-term notes payable and the Company's debenture bonds bear fixed rates of interest and terms of up to fifteen years. Based upon current interest rates offered by the Company on similar bonds and rates currently available to the Company for long-term borrowings with similar terms and remaining maturities, the Company estimates the fair values of its long-term debt instruments outstanding at December 2002 and 2001 as follows:
-------------------- --------------------- (in thousands) CARRYING AMOUNT FAIR VALUE -------------------- --------------------- 2002: Long-term notes payable $ 47,237 $ 49,242 Debenture bonds 27,628 27,863 -------------------- ------------------ $ 74,865 $ 77,105 ==================== ================== 2001: Long-term notes payable $ 31,284 $ 32,695 Debenture bonds 31,250 32,189 -------------------- ------------------ $ 62,534 $ 64,884 ==================== ==================
13. BUSINESS SEGMENTS The Company's operations include four reportable business segments that are distinguished primarily on the basis of products and services offered. The Agriculture segment includes grain merchandising, the operation of terminal grain elevator facilities and the manufacture and distribution of agricultural inputs, primarily fertilizer, to dealers and farmers. The Processing segment includes the production and distribution of lawn care and corncob-based products. The Rail segment includes the leasing, marketing and fleet management of railcars and locomotives, railcar repair and metal fabrication. The Retail segment includes the operation of six large retail stores, a distribution center and a lawn and garden equipment sales and service shop. Included in the Other segment are the operations of several smaller businesses and corporate level amounts not attributable to an operating segment. These smaller businesses included the operations of ten auto service centers (a joint venture that was sold in March 2000) and the marketing of the Company's excess real estate. The segment information below (in thousands) includes the allocation of expenses shared by one or more segments. Although management believes such allocations are reasonable, the operating information does not necessarily reflect how such data might appear if the segments were operated as separate businesses. Inter-segment sales are made at prices comparable to normal, unaffiliated customer sales. Operating income (loss) for each segment is based on net sales and merchandising revenues plus identifiable other income less all identifiable operating expenses, including interest expense for carrying working capital and long-term assets. Capital expenditures include additions to property, plant and equipment, software and intangible assets. 35
2002 AGRICULTURE PROCESSING RAIL RETAIL OTHER TOTAL -------------------------------------- --------------- ---------------- ------------ -------------- ------------ ----------------- REVENUES FROM EXTERNAL CUSTOMERS $761,575 $114,315 $18,747 $181,197 -- $1,075,834 INTER-SEGMENT SALES 8,330 1,216 877 -- -- 10,423 OTHER INCOME (NET) 1,340 501 41 685 872 3,439 GAIN ON INSURANCE SETTLEMENT -- -- -- -- 302 302 INTEREST EXPENSE (INCOME) (a) 5,772 2,333 1,068 1,546 (907) 9,812 OPERATING INCOME (LOSS) 18,986 (1,322) 1,563 4,003 (3,396) 19,834 IDENTIFIABLE ASSETS 263,651 85,140 35,378 57,046 28,600 469,815 CAPITAL EXPENDITURES 5,760 832 199 1,694 1,349 9,834 RAILCAR EXPENDITURES -- -- 8,203 -- -- 8,203 DEPRECIATION AND AMORTIZATION 5,950 2,263 2,525 2,415 1,161 14,314 2001 AGRICULTURE PROCESSING RAIL RETAIL OTHER TOTAL -------------------------------------- --------------- ---------------- ------------ -------------- ------------ ----------------- Revenues from external customers $662,790 $112,827 $31,061 $177,949 -- $984,627 Inter-segment sales 5,645 1,212 930 -- -- 7,787 Other income (net) 1,196 300 248 618 1,141 3,503 Gain on insurance settlement 338 -- -- -- -- 338 Interest expense (income) (a) 6,179 3,428 1,846 1,900 (1,783) 11,570 Operating income (loss) 19,765 (7,654) (349) 1,868 (1,699) 11,931 Identifiable assets 244,289 84,709 45,037 57,289 27,000 458,324 Capital expenditures 5,845 1,549 166 907 688 9,155 Railcar expenditures -- -- 21,790 -- -- 21,790 Depreciation and amortization 6,399 2,341 2,432 2,426 666 14,264 2000 AGRICULTURE PROCESSING RAIL RETAIL OTHER TOTAL -------------------------------------- --------------- ---------------- ------------ -------------- ------------ ----------------- Revenues from external customers $648,410 $107,434 $18,972 $183,817 $2,489 $961,122 Inter-segment sales 5,896 1,280 1,029 -- -- 8,205 Other income (net) 1,204 358 233 611 1,583 3,989 Gain on sale of business -- -- -- -- 992 992 Gain on insurance settlement 2,088 -- -- -- -- 2,088 Interest expense (income) (a) 6,186 3,424 1,748 1,706 (1,235) 11,829 Operating income (loss) 14,301 (3,470) 1,003 3,246 (716) 14,364 Identifiable assets 218,084 87,092 43,213 60,178 34,398 442,965 Capital expenditures (b) 9,648 9,276 72 1,484 488 20,968 Railcar expenditures -- -- 16,245 -- -- 16,245 Depreciation and amortization 6,223 2,032 1,417 2,755 692 13,119
(a) The interest income reported in the Other segment includes net interest income at the corporate level. These amounts result from a rate differential between the interest rate on which interest is allocated to the operating segments and the actual rate at which borrowings are made. (b) Capital expenditures in 2000 include assets purchased in exchange for long-term liabilities. 36 Grain sales for export to foreign markets amounted to approximately $149 million, $191 million and $172 million in 2002, 2001 and 2000, respectively. Grain sales of $154 million, $122 million and $153 million in 2002, 2001, and 2000, respectively, were made to Cargill, Inc. 37 CORPORATE OFFICERS DENNIS J. ADDIS President, Plant Nutrient Division DANIEL T. ANDERSON President, Retail Group MICHAEL J. ANDERSON President & Chief Executive Officer RICHARD M. ANDERSON President, Processing Group RICHARD P. ANDERSON Chairman DALE W. FALLAT Vice President, Corporate Services PHILIP C. FOX Vice President, Corporate Planning CHARLES E. GALLAGHER Vice President Human Resources RICHARD R. GEORGE Vice President, Controller & CIO BEVERLY J. MCBRIDE Vice President, General Counsel & Corporate Secretary HAROLD M. REED President, Grain Division RASESH H. SHAH President, Rail Group GARY L. SMITH Vice President, Finance & Treasurer BOARD OF DIRECTORS DONALD E. ANDERSON Director of Science, Retired The Andersons, Inc. MICHAEL J. ANDERSON President & Chief Executive Officer The Andersons, Inc. RICHARD M. ANDERSON President, Processing Group The Andersons, Inc. RICHARD P. ANDERSON Chairman The Andersons, Inc. THOMAS H. ANDERSON Chairman Emeritus The Andersons, Inc. JOHN F. BARRETT (2) (3) Chairman, President & Chief Executive Officer The Western & Southern Life Insurance Co. PAUL M. KRAUS Attorney Marshall & Melhorn LLC DONALD L. MENNEL(1)(3) President & Treasurer The Mennel Milling Company DAVID L. NICHOLS(1)(3) President & Chief Operating Officer, Rich's-Macy's/Lazarus/ Goldsmith's Division of Federated Department Stores, Inc. DR. SIDNEY RIBEAU(2)(3) President Bowling Green State University CHARLES A. SULLIVAN(1)(3) Chairman Interstate Bakeries Corp JACQUELINE F. WOODS(2)(3) Retired President Ameritech Ohio (1) Audit Committee (2) Compensation Committee (3) Governance / Nominating Committee INVESTOR INFORMATION INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP, Toledo, OH NASDAQ SYMBOL The Andersons, Inc. common shares are traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol ANDE SHAREHOLDERS As of February 28, 2003, there were 7.2 million shares of common stock outstanding: 674 shareholders of record and approximately 2,500 shareholders for whom security firms acted as nominees. CORPORATE OFFICES The Andersons, Inc 480 West Dussel Drive Maumee, OH 43537 419-893-5050 www.andersonsinc.com TRANSFER AGENT & REGISTRAR Computershare Investor Services, LLC 2 North LaSalle Street Chicago, IL 60602 312-588-4991 FORM 10-K The Andersons' 2002 Form 10-K, filed in mid-March 2003 with the SEC, is available to stockholders and interested individuals without charge by writing or calling Investor Relations. INVESTOR RELATIONS Gary L. Smith Vice President, Finance & Treasurer 419-891-6417 gary_smith@andersonsinc.com ANNUAL MEETING The annual shareholders' meeting of The Andersons, Inc. will be held at The Andersons' Activities Building, 1833 South Holland-Sylvania Road, Maumee, OH at 1:30 p.m. on May 1, 2003. 38 OUR MISSION We firmly believe that our company is a powerful vehicle through which we channel our time, talent, and energy in pursuit of the fundamental goal of serving God by serving others. Through our collective action we greatly magnify the impact of our individual efforts to: - Provide extraordinary service to our customers - Help each other improve - Support our communities - Increase the value of our Company The Andersons, Inc. 480 West Dussel Drive Maumee, Ohio 43537 39