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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMISSION FILE NUMBER 333-84486
LAND O'LAKES, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0365145
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4001 LEXINGTON AVENUE NORTH
ARDEN HILLS, MINNESOTA 55126
(Address of principal executive offices and zip code)
(651) 481-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No X
-------- -------
The number of shares of the registrant's common stock outstanding as of July
31, 2002: 1,153 shares of Class A common stock, 5,874 shares of Class B common
stock, 199 shares of Class C common stock, and 1,406 shares of Class D common
stock.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION.......................................................................... 3
ITEM I. FINANCIAL STATEMENTS............................................................................ 3
LAND O'LAKES, INC.
Financial Statements (unaudited) for the three and six months ended June 30, 2002 and 2001
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001................................... 3
Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001......... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001................. 5
Notes to Consolidated Financial Statements.............................................................. 6
LAND O'LAKES FARMLAND FEED LLC
Financial Statements (unaudited) for the three and six months ended June 30, 2002 and 2001
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001.................................. 20
Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001........ 21
Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001................... 22
Notes to Consolidated Financial Statements.............................................................. 23
PURINA MILLS LLC
Financial Statements (unaudited) for the three months ended June 30, 2002 and 2001, the
three months ended March 31, 2002 and 2001, and the six months ended June 30, 2002 and 2001
Consolidated Balance Sheets as of June 30, 2002, March 31, 2002 and December 31, 2001................... 35
Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001,
the three months ended March 31, 2002 and 2001, and the six months ended June 30, 2002 and 2001....... 36
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001,
and the six months ended June 30, 2002 and 2001....................................................... 37
Notes to Consolidated Financial Statements.............................................................. 38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................... 69
PART II. OTHER INFORMATION............................................................................. 71
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 71
SIGNATURES.............................................................................................. 73
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
----------- -------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments........................ $ 79,446 $ 130,169
Receivables, net....................................... 446,427 574,011
Inventories............................................ 502,699 450,774
Prepaid expenses....................................... 96,488 185,490
Other current assets................................... 26,014 27,038
---------- -------------
Total current assets................................ 1,151,074 1,367,482
Investments................................................ 588,318 568,130
Property, plant and equipment, net......................... 648,813 675,277
Goodwill, net.............................................. 279,584 255,027
Other intangibles, net..................................... 107,582 108,987
Other assets............................................... 113,701 116,475
---------- -------------
Total assets........................................ $2,889,072 $ 3,091,378
========== =============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations....................... $ 31,518 $ 33,971
Current portion of long-term debt...................... 26,059 19,546
Accounts payable....................................... 448,105 652,309
Accrued expenses....................................... 204,120 187,569
Patronage refunds payable.............................. 16,139 28,900
---------- -------------
Total current liabilites............................ 725,941 922,295
Long-term debt............................................. 1,090,761 1,147,465
Employee benefits and other liabilities.................... 109,055 82,801
Deferred tax liabilities................................... 42,920 42,495
Minority interests......................................... 60,064 59,806
Equities:
Capital stock.......................................... 2,252 2,305
Member equities........................................ 836,911 805,860
Retained earnings...................................... 21,168 28,351
---------- -------------
Total equities...................................... 860,331 836,516
---------- -------------
Commitments and contingencies
Total liabilities and equities............................. $2,889,072 $ 3,091,378
========== =============
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2002 2001 2002 2001
---------------------------------------------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales.......................................... $1,412,057 1,372,473 2,936,253 2,748,200
Cost of sales...................................... 1,288,283 1,255,150 2,664,600 2,515,765
----------- ------------ ----------- ------------
Gross profit....................................... 123,774 117,323 271,653 232,435
Selling, general and administration................ 124,064 87,883 251,489 180,509
Restructuring and impairment charges (reversals)... 3,841 (843) 7,276 (1,809)
----------- ------------ ----------- ------------
(Loss) earnings from operations.................... (4,131) 30,283 12,888 53,735
Interest expense, net.............................. 17,401 12,557 34,948 24,309
Gain on legal settlement........................... (32,699) - (32,699) -
Gain on sale of intangibles........................ - - (4,184) -
Gain on divestiture of businesses.................. (1,205) (154) (1,205) (154)
Equity in earnings of affiliated companies......... (44,227) (37,370) (34,366) (37,291)
Minority interest in (loss) earnings of (1,024) 2,163 (90) 3,753
subsidiaries.....................................
----------- ------------ ----------- ------------
Earnings before income taxes....................... 57,623 53,087 50,484 63,118
Income tax expense................................. 9,327 8,897 3,164 5,885
----------- ------------ ----------- ------------
Net earnings....................................... $ 48,296 $ 44,190 $ 47,320 $ 57,233
=========== ============ =========== ============
Applied to:
Members equities
Allocated patronage refunds.................. $ 42,222 $ 29,963 $ 53,796 $ 43,067
Deferred equities............................ 1,493 4,160 (10,593) 2,846
----------- ------------ ----------- ------------
43,715 34,123 43,203 45,913
Retained earnings.............................. 4,581 10,067 4,117 11,320
----------- ------------ ----------- ------------
$ 48,296 $ 44,190 $ 47,320 $ 57,233
=========== ============ =========== ============
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------
2002 2001
---------------------------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................... $ 47,320 $ 57,233
Adjustment to reconcile net earnings to cash provided
by operating activities:
Depreciation and amortization....................... 54,034 43,147
Bad debt expense.................................... 2,636 1,054
Proceeds from patronage revolvement received........ 261 367
Non-cash patronage income........................... (203) (1,478)
Increase in other assets............................ (23,336) (7,095)
Increase in other liabilities....................... 25,863 241
Restructuring and impairment charges (reversals).... 7,276 (1,809)
Gain from divestiture of businesses................. (1,205) (154)
Equity in earnings of affiliated companies.......... (34,366) (37,291)
Minority interests.................................. (90) 3,753
Other............................................... (2,141) (3,592)
Changes in current assets and liabilites, net of
acquisitions and divestitures:
Receivables......................................... 107,416 21,561
Inventories......................................... (57,268) (62,506)
Other current assets................................ 90,719 121,237
Accounts payable.................................... (196,464) (85,582)
Accrued expenses.................................... 9,700 (22,896)
----------- --------------
Net cash provided by operating activities 30,152 26,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............. (34,841) (37,601)
Acquisitions, net of cash acquired..................... (13,300) -
Payments for investments............................... (4,669) (44,834)
Proceeds from divestiture of business.................. 1,710 -
Proceeds from sale of investments...................... 21,059 1,623
Proceeds from sale of property, plant and
equipment............................................ 9,828 6,638
Other.................................................. 7,707 2,836
----------- --------------
Net cash provided (used) by investing activities....... 794 (84,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt............................ 10,320 103,665
Proceeds from issuance of long-term debt............... 2,622 48,249
Payments on principal of long-term debt................ (60,147) (51,543)
Payments for redemption for member equities............ (36,472) (45,847)
Other.................................................. 2,008 (70)
----------- --------------
Net cash (used) provided by financing activities....... (81,669) 54,454
----------- --------------
Net decrease in cash................................... (50,723) (3,994)
Cash and short-term investments at beginning of period.... 130,169 3,994
----------- --------------
Cash and short-term investments at end of period.......... $ 79,446 $ -
=========== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid during periods for:
Interest, net of interest capitalized............... $ 35,784 $ 29,180
Income taxes (recovered) paid....................... $ (27,616) $ 14,241
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes, Inc. (the "Company"), all normal recurring
adjustments necessary for a fair statement of the financial position and
results of operations and cash flows for the interim periods. The statements
are condensed and, therefore do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to the audited consolidated financial statements and footnotes for the
year ended December 31, 2001 included in our Registration Statement on Form
S-4, as amended. The results of operations and cash flows for interim periods
are not necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Major provisions of
these statements are as follows: all business combinations must now use the
purchase method of accounting, the pooling of interests method of accounting
is now prohibited; intangible assets acquired in a business combination must
be recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as a part
of a related contract, asset or liability; goodwill and intangible assets with
indefinite lives are not amortized, but tested for impairment annually, except
in certain circumstances, and whenever there is an impairment indicator; all
acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting. The Company adopted the provisions
of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001, and the
remaining provisions of SFAS 142 as of January 1, 2002. As required by SFAS
142, the Company has performed step one of the impairment testing of goodwill
by June 30, 2002. For all segments, the fair market value exceeded the
carrying amount. Therefore, the second step of impairment testing was not
required and no impairment has been recognized in the current year of
adoption. The Company will perform impairment tests annually and whenever
events or circumstances occur indicating that goodwill or other intangible
assets might be impaired. As of January 1, 2002, the Company is no longer
amortizing goodwill, except for goodwill related to the acquisition of
cooperatives and the formation of joint ventures.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
2002 2001 2002 2001
------- -------- ------- -------
Net earnings....................................... $48,296 $ 44,190 $47,320 $ 57,233
Add back: Goodwill amortization, net of tax........ - 1,702 - 2,912
------- -------- ------- --------
Adjusted net earnings.............................. $48,296 $ 45,892 $47,320 $ 60,145
======= ======== ======= ========
2001 2000 1999
---- ---- ----
Net earnings................................ $ 71,488 $ 102,932 $ 21,399
Add back: Goodwill amortization, net of tax. 5,884 7,741 6,721
-------- --------- --------
Adjusted net earnings....................... $ 77,372 $110,673 $ 28,120
======== ========= ========
The Company adopted Emerging Issues Task Force (EITF) No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services," on January 1, 2002. EITF No. 00-25 deals with
the accounting for consideration paid from a vendor (typically a manufacturer
or distributor) to a retailer, including slotting fees, cooperative
advertising arrangements and buy-downs. The guidance in EITF 00-25 generally
requires that these incentives be classified as a reduction of sales. The
impact of the adoption decreased sales and selling and administration expense
for the six months ended June 30, 2002 and 2001 by $50.9 million and $46.7
million, respectively.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
6
A summary of intangible assets follows:
AS OF JUNE 30, 2002
----------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- -------------
Amortized intangible assets
Trademarks......................... $ 4,418 $ (1,592)
Patents............................ 16,373 (818)
Agreements not to compete.......... 8,871 (3,759)
Other.............................. 12,706 (5,580)
------- ---------
Total.............................. $42,368 $(11,749)
======= =========
Unamortized intangible assets
Trademarks......................... $76,963
=======
Aggregate amortization expense:
For six months ended June 30, 2002. $ 2,803
Estimated amortization expense:
For six months ended December 31, $ 3,933
2002.............................
For year ended December 31, 2003... 4,420
For year ended December 31, 2004... 3,822
For year ended December 31, 2005... 3,415
For year ended December 31, 2006... 3,393
For year ended December 31, 2007... 3,393
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002, are as follows:
DAIRY FOODS FEED SEED SWINE AGRONOMY OTHER TOTAL
------------ ------ ------ ----- -------- ------ -----
Balance as of January 1, 2002.................... $40,285 $109,463 $15,704 $ 701 $74,904 $13,970 $255,027
Madison Dairy additional
purchase price.............................. 26,461 - - - - - 26,461
Agriliance additional purchase price........... - - - - 1,709 - 1,709
Reallocation of purchase price................. - 1,730 1,240 - - 14 2,984
Amortization expense........................... - (375) (18) (27) (3,064) (462) (3,946)
Goodwill written off related to
sale of business unit....................... -- (2,600) -- -- -- (51) (2,651)
------- -------- ------- ----- ------- ------- --------
Balance as of June 30, 2002...................... $66,746 $108,218 $16,926 $ 674 $73,549 $13,471 $279,584
======= ======== ======= ===== ======= ======= ========
3. RECEIVABLES
A summary of receivables is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ---------
Trade accounts.............................. $246,908 $ 287,229
Notes and contracts......................... 49,215 50,626
Notes from sale of trade receivables (see 103,653 192,403
Note 4)...................................
Other....................................... 68,177 66,707
-------- ---------
467,953 596,965
Less allowance for doubtful accounts........ 21,526 22,954
-------- ---------
Total receivables, net...................... $446,427 $ 574,011
======== =========
A substantial portion of Land O'Lakes receivables is concentrated in the
agricultural industry. Collections of these receivables may be dependent upon
economic returns from farm crop and livestock production. The Company's credit
risks are continually reviewed, and management believes that adequate
provisions have been made for doubtful accounts.
4. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100.0 million receivables
purchase facility with CoBank, ACB (CoBank). A wholly owned unconsolidated
special purpose entity (SPE) was established to purchase certain receivables
from the Company. CoBank has been granted an interest in the pool of
receivables owned by the SPE. The transfers of the receivables from the
Company
7
to the SPE are structured as sales and, accordingly, the receivables
transferred to the SPE are not reflected in the consolidated balance sheet.
However, the Company retains credit risk related to the repayment of the notes
receivable with the SPE, which in turn is dependent upon the credit risk of
the SPE's receivables pool. Accordingly, the Company has retained reserves for
estimated losses. The Company expects no significant gains or losses from the
facility. At June 30, 2002, $30.0 million was outstanding under this facility
and $70.0 million remained available. The total accounts receivable sold
during the three months and six months ended June 30, 2002 were $610.7 million
and $1,264.8 million, respectively.
5. INVENTORIES
A summary of inventories is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ---------
Raw materials... $ 93,827 $ 81,923
Work in process. 35,819 37,423
Finished goods.. 373,053 331,428
-------- ---------
Total inventories $502,699 $ 450,774
======== =========
6. INVESTMENTS
A summary of investments is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ---------
CF Industries, Inc............................ $249,502 $ 248,502
Agriliance, LLC............................... 123,176 84,030
Ag Processing Inc............................. 38,263 38,977
MoArk LLC..................................... 42,419 47,593
Advanced Food Products LLC.................... 26,264 27,487
CoBank, ACB................................... 21,886 21,549
Melrose Dairy Proteins, LLC................... 9,265 8,253
PEC Mark II (Malta Cleyton)................... - 7,681
Universal Cooperatives........................ 6,196 6,196
Prairie Farms Dairy, Inc...................... 4,791 4,754
Other -- principally cooperatives and joint 66,556 73,108
ventures.................................... -------- ---------
Total investments............................. $588,318 $ 568,130
======== =========
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
JUNE 30, DECEMBER 31,
2002 2001
---------- ----------
Land and land improvements.......... $ 51,109 $ 51,818
Buildings and building equipment.... 308,107 311,499
Machinery and equipment............. 585,643 560,244
Software............................ 38,487 38,438
Construction in progress............ 38,225 56,769
---------- ----------
Total property, plant and equipment. 1,021,571 1,018,768
Less accumulated depreciation....... 372,758 343,491
---------- ----------
Total property, plant and equipment,
net............................... $ 648,813 $ 675,277
========== ==========
8. RESTRUCTURING AND IMPAIRMENT CHARGES
For the six months ended June 30, 2002, the Company recorded restructuring
and impairment charges of $7.3 million. Of this amount, $2.8 million
represented severance and outplacement costs for 136 employees at the Ft.
Dodge, IA office facility and other feed plant facilities, $1.5 million
represented severance and outplacement costs for 82 employees for the
Faribault, MN dairy plant facility closure, $1.3 million represented a
write-down of the Faribault, MN dairy plant to its estimated fair value, and
$1.7 million represented a write-down of certain feed plant assets to their
estimated fair value.
8
For the six months ended June 30, 2001, the Company recorded a
restructuring reversal of $1.8 million for the sale of certain feed assets
that had been written off in December 2000, and to reflect the decision to
continue to operate a plant previously scheduled for shutdown.
9. GAIN ON LEGAL SETTLEMENT
In the fourth quarter of 1999, a class action lawsuit, alleging illegal
price fixing, was filed against various vitamin product suppliers. Initially,
the Company was a party to this action as a member of the class. In February
2000, however, the Company decided to pursue its claims against the defendants
outside the class action. To date in 2002, the Company has received settlement
proceeds of $32.7 million from several of the defendants. These settlements
were reached with defendants who represent less than half of the Company's
total vitamin product purchases in dispute. The Company is currently pursuing
similar claims against the remaining defendants. With respect to the pending
claims, the factual discovery phase has ended and a January 2003 trial date
has been set.
10. GAIN ON SALE OF INTANGIBLES
For the six months ended June 30, 2002, the Company recorded a $4.2 million
gain on the sale to Potash Corporation of Saskatchewan of a customer list
pertaining to the feed phosphate distribution business.
11. DEBT OBLIGATIONS
The weighted average interest rate on short-term borrowings and notes
outstanding at June 30, 2002 and December 31, 2001 was 3.91% and 6.52%,
respectively.
As of June 30, 2002, interest rates on the Term A Loan, the Term B Loan,
and the revolving credit facility were 4.73%, 5.73% and 4.34%, respectively.
12. SEGMENT INFORMATION
The Company operates in five segments, dairy foods, animal feed, crop seed,
swine and agronomy.
The dairy foods segment produces, markets and sells products such as
butter, spreads, cheese, and other dairy related products. Products are sold
under well-recognized national brand names including LAND O LAKES, the Indian
Maiden logo and Alpine Lace, as well as under regional brand names such as New
Yorker and Lake to Lake.
The animal feed segment consists primarily of a 92% ownership position in
Land O'Lakes Farmland Feed LLC. Land O'Lakes Farmland Feed LLC develops,
produces, markets and distributes animal feeds such as ingredient feed,
formula feed, milk replacers, vitamins and additives.
The crop seed segment is a supplier and distributor of crop seed products
in the United States. A variety of crop seed is sold, including alfalfa,
soybeans, corn and forage and turf grasses.
The swine segment has three programs, farrow-to-finish, swine aligned and
cost-plus. The farrow-to-finish program produces and sells market hogs. The
swine aligned program raises feeder pigs which are sold to local member
cooperatives. The cost-plus program provides minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation.
The agronomy segment consists primarily of the Company's 50% ownership in
Agriliance, LLC, which is accounted for under the equity method. Agriliance,
LLC markets and sells two primary product lines: crop protection (including
herbicides and pesticides) and crop nutrients (including fertilizers and
micronutrients).
The Company allocates corporate administration expense to all of its
business segments, both directly and indirectly. Corporate staff functions
that are able to determine actual services provided to each segment allocate
expense on a direct and predetermined basis. All other corporate staff
functions allocate expense indirectly based on each segment's percent of total
invested capital. A majority of corporate administration expense is allocated
directly.
9
DAIRY FOODS FEED SEED SWINE AGRONOMY OTHER CONSOLIDATED
----------- ---- ---- ----- -------- ----- ------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Net sales............................. $ 710,302 $ 579,448 $ 97,189 $ 21,814 $ - $ 3,304 $ 1,412,057
Cost of sales......................... 671,966 509,206 83,087 22,111 3 1,910 1,288,283
Selling, general and administration... 40,135 63,733 10,180 1,568 5,938 2,510 124,064
Restructuring and impairment charges.. 2,800 1,041 - - - - 3,841
Interest expense, net................. 5,437 7,071 743 1,252 2,211 687 17,401
Gain on legal settlement.............. (828) (31,871) - - - - (32,699)
(Gain) loss on divestiture of
businesses.......................... (1,281) - - - - 76 (1,205)
Equity in (earnings) loss of affiliated
companies........................... (467) (110) (201) 365 (49,172) 5,358 (44,227)
Minority interest in (loss) earnings
of subsidiaries..................... (2,032) 971 - - - 37 (1,024)
----------- ---------- -------- --------- ---------- --------- ------------
(Loss) earnings before income taxes... $ (5,428) $ 29,407 $ 3,380 $(3,482) $ 41,020 $(7,274) $ 57,623
=========== ========== ======== ========= ========== ========= ============
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Net sales............................. $ 830,028 $ 401,474 $109,588 $ 28,134 $ - $ 3,249 $ 1,372,473
Cost of sales......................... 771,266 363,950 94,205 24,002 4 1,723 1,255,150
Selling, general and administration... 44,266 26,794 10,759 1,877 2,521 1,666 87,883
Restructuring and impairment reversal. - (843) - - - - (843)
Interest expense, net................. 4,826 1,690 1,692 1,541 2,593 215 12,557
Gain on divestiture of business....... - (154) - - - - (154)
Equity in (earnings) loss of affiliated
companies........................... (2,764) 337 116 (1,921) (34,606) 1,468 (37,370)
Minority interest in (loss) earnings
of subsidiaries..................... (223) 2,393 (3) - - (4) 2,163
----------- ---------- -------- --------- ---------- --------- -------------
Earnings (loss) before income taxes... $ 12,657 $ 7,307 $ 2,819 $ 2,635 $ 29,488 $(1,819) $ 53,087
=========== ========== ======== ========= ========== ========= =============
DAIRY FOODS FEED SEED SWINE AGRONOMY OTHER CONSOLIDATED
----------- ---- ---- ----- -------- ----- ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Net sales............................. $ 1,441,430 $1,189,974 $252,892 $ 45,694 $ - $ 6,263 $ 2,936,253
Cost of sales......................... 1,358,029 1,045,665 213,655 43,628 3 3,620 2,664,600
Selling, general and administration... 84,676 126,050 23,157 3,229 9,485 4,892 251,489
Restructuring and impairment charges.. 2,800 4,476 - - - - 7,276
Interest expense, net................. 9,795 15,100 1,716 2,637 4,298 1,402 34,948
Gain on legal settlement.............. (828) (31,871) - - - - (32,699)
Gain on sale of intangibles........... - (4,184) - - - - (4,184)
(Gain) loss on divestiture of
businesses.......................... (1,281) - - - - 76 (1,205)
Equity in loss (earnings) of affiliated
companies........................... 63 (568) (105) 204 (39,366) 5,406 (34,366)
Minority interest in (loss) earnings
of subsidiaries..................... (2,569) 2,370 - - - 109 (90)
----------- ---------- --------- --------- --------- --------- --------------
(Loss) earnings before income taxes... $ (9,255) $ 32,936 $ 14,469 $(4,004) $ 25,580 $(9,242) $ 50,484
=========== ========== ========= ========= ========= ========= ==============
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Net sales............................. $1,586,380 $ 809,919 $291,406 $ 53,719 $ - $ 6,776 $ 2,748,200
Cost of sales......................... 1,474,345 740,370 247,923 48,704 8 4,415 2,515,765
Selling, general and administration... 85,392 55,112 22,723 3,711 9,570 4,001 180,509
Restructuring and impairment
reversals .......................... - (1,809) - - - - (1,809)
Interest expense, net................. 9,750 2,827 4,049 3,197 4,145 341 24,309
Gain on divestiture of business....... - (154) - - - - (154)
Equity in earnings of affiliated
companies......................... (3,055) (142) (418) (2,064) (31,062) (550) (37,291)
Minority interest in (loss) earnings
10
of subsidiaries..................... (398) 4,165 (2) - - (12) 3,753
----------- ---------- --------- --------- --------- --------- --------------
Earnings (loss) before income taxes... $ 20,346 $ 9,550 $ 17,131 $ 171 $ 17,339 $(1,419) $ 63,118
=========== ========== ========= ========= ========= ========= ==============
13. CONSOLIDATING FINANCIAL INFORMATION
The Company issued $350 million in senior notes which are guaranteed by the
Company and certain of its wholly and majority owned subsidiaries (the
"Guarantor Subsidiaries"). Such guarantees are full, unconditional and joint
and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
The "Majority Owned Consolidated Guarantor" column in the following
supplemental financial information represents Land O'Lakes Farmland Feed LLC
(LOLFF), excluding certain majority owned non-guarantors of LOLFF.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES. INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ -------------- ----------- ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments........... $ 61,735 $ 11,210 $ (1,406) $ 7,907 $ - $ 79,446
Receivables, net........ 451,192 25,389 90,875 49,743 (170,772) 446,427
Inventories............. 325,557 64,840 106,349 5,953 - 502,699
Prepaid expenses........ 87,056 3,674 5,224 534 - 96,488
Other current assets.... 17,817 150 7,444 603 - 26,014
------------ ------------ ------------ -------------- ----------- ------------
Total current assets. 943,357 105,263 208,486 64,740 (170,772) 1,151,074
Investments................. 1,081,915 3,263 31,208 1,452 (529,520) 588,318
Property, plant and
equipment, net............ 268,309 28,217 299,647 52,640 - 648,813
Goodwill, net............... 158,900 13,355 107,019 310 - 279,584
Other intangibles, net...... 7,268 669 99,336 309 - 107,582
Other assets................ 56,224 2,075 25,301 41,859 (11,758) 113,701
------------ ------------ ------------ -------------- ----------- ------------
Total assets......... $ 2,515,973 $ 152,842 $ 770,997 $ 161,310 $(712,050) $2,889,072
============ ============ ============ ============== =========== ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations........... $ 2,105 $ 2,758 $ 1,613 $ 64,877 $ (39,835) $ 31,518
Current portion of
long-term debt........ 25,853 62,368 (12) 60 (62,210) 26,059
Accounts payable........ 286,025 67,854 88,754 16,470 (10,998) 448,105
Accrued expenses........ 168,163 2,067 30,225 3,665 - 204,120
Patronage refunds
payable............... 16,139 - - - - 16,139
------------ ------------ ------------ -------------- ----------- ------------
Total current
liabilities........ 498,285 135,047 120,580 85,072 (113,043) 725,941
Long-term debt.............. 1,074,177 10,373 56,129 19,569 (69,487) 1,090,761
Employee benefits and
other liabilities......... 74,843 1 33,930 281 - 109,055
Deferred tax liabilities.... 41,640 1,280 - - - 42,920
Minority interests.......... 8,048 - 54 12,366 39,596 60,064
Equities:
Capital stock........... 2,252 1,084 505,207 51,370 (557,661) 2,252
Member equities......... 836,911 - - - - 836,911
Retained earnings....... (20,183) 5,057 55,097 (7,348) (11,455) 21,168
------------ ------------ ------------ -------------- ----------- ------------
Total equities....... 818,980 6,141 560,304 44,022 (569,116) 860,331
------------ ------------ ------------ -------------- ----------- ------------
Total liabilities and
equities.................. $ 2,515,973 $ 152,842 $ 770,997 $ 161,310 $(712,050) $2,889,072
============ ============ ============ ============== =========== ============
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------ ------------ -------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales..................... $ 772,994 $ 53,935 $ 562,755 $ 22,373 $ 1,412,057
Cost of sales................. 730,784 36,210 494,064 27,225 1,288,283
------------- ------------ ------------ -------------- ------------
Gross profit.................. 42,210 17,725 68,691 (4,852) 123,774
Selling, general and
administration.............. 47,973 16,661 60,055 (625) 124,064
Restructuring and impairment
charges..................... 2,800 - 1,041 - 3,841
------------- ------------ ------------ -------------- ------------
(Loss) earnings from
operations.................. (8,563) 1,064 7,595 (4,227) (4,131)
Interest expense (income), net 17,162 1,039 (646) (154) 17,401
Gain on legal settlement...... (32,699) - - - (32,699)
Loss (gain) on divestiture
of business................. 364 - - (1,569) (1,205)
Equity in earnings of
affiliated companies........ (44,194) (33) (44,227)
- -
Minority interest in (loss)
earnings of subsidiaries.... (1,886) - 122 740 (1,024)
------------- ------------ ------------ -------------- ------------
Earnings (loss) before income
taxes....................... 52,690 25 8,152 (3,244) 57,623
Income tax expense (benefit).. 9,090 181 (94) 150 9,327
------------- ------------ ------------ -------------- ------------
Net earnings (loss)........... $ 43,600 $ (156) $ 8,246 $ (3,394) $ 48,296
============= ============ ============ ============== ============
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------ ------------ ------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales..................... $1,629,756 $ 103,901 $ 1,152,708 $ 49,888 $ 2,936,253
Cost of sales................. 1,519,920 80,053 1,012,202 52,425 2,664,600
------------- ------------ ------------ ------------- ------------
Gross profit.................. 109,836 23,848 140,506 (2,537) 271,653
Selling, general and
administration................ 106,209 22,783 118,887 3,610 251,489
Restructuring and impairment - - - - -
charges..................... 2,800 - 4,476 - 7,276
------------- ------------ ------------ ------------- ------------
Earnings (loss) from
operations.................. 827 1,065 17,143 (6,147) 12,888
Interest expense (income), net 34,573 2,032 (1,439) (218) 34,948
Gain on legal settlement...... (32,699) - - - (32,699)
Gain on sale of intangibles... - - - (4,184) (4,184)
Loss (gain) on divestiture
of business................. 364 - - (1,569) (1,205)
Equity in earnings of
affiliated companies........ (34,130) - (236) - (34,366)
Minority interest in (loss)
earnings of subsidiaries.... (716) - 308 318 (90)
------------- ------------ ------------ ------------- ------------
Earnings (loss) before
income taxes................ 33,435 (967) 22,694 (4,678) 50,484
Income tax expense (benefit).. 2,637 413 (496) 610 3,164
------------- ------------ ------------ ------------- ------------
Net earnings (loss)........... $ 30,798 $ (1,380) $ 23,190 $ (5,288) $ 47,320
============= ============ ============ ============= ============
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................... $ 30,798 $ (1,380) $ 23,190 $ (5,288) $ - $ 47,320
Adjustment to reconcile net earnings (loss)
to cash provided (used) by operating
activities:
Depreciation and amortization............... 26,818 1,920 23,728 1,568 - 54,034
Bad debt expense............................ 786 - 1,850 - - 2,636
Proceeds from patronage revolvement
received.................................. 261 - - - - 261
Non-cash patronage income.......... (203) - - - - (203)
(Increase) decrease in other assets......... (20,620) 1,251 (5,115) 6,952 (5,804) (23,336)
Increase (decrease) in other liabilities.... 28,465 (153) (2,448) (1) - 25,863
Restructuring and impairment charges ....... 2,800 - 4,476 - - 7,276
Loss (gain) on divestiture of businesses.... 364 - - (1,569) - (1,205)
Equity in earnings of affiliated companies.. (34,130) - (236) - - (34,366)
Minority interests.......................... (716) - 308 318 - (90)
Other....................................... (842) - 66 (1,365) - (2,141)
Changes in current assets and liabilities, net
of acquisitions and divestitures:
Receivables................................. 110,673 (1,733) 21,783 (7,422) (15,885) 107,416
Inventories................................. (52,411) (7,454) 1,198 1,399 - (57,268)
Other current assets........................ 84,003 5,799 969 (52) - 90,719
Accounts payable............................ (166,303) 2,621 (23,323) 1,463 (10,922) (196,464)
Accrued expenses............................ 20,794 (4,891) (6,199) (4) - 9,700
----------- ----------- ----------- ------------- ---------- ----------
Net cash provided (used) by operating
activities.................................. 30,537 (4,020) 40,247 (4,001) (32,611) 30,152
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.... (22,756) (995) (8,464) (2,626) - (34,841)
Payments for investments...................... (4,665) (4) - - - (4,669)
Proceeds from divestiture of business......... 1,710 - - - - 1,710
Proceeds from sale of investment.............. 20,003 - 1,056 - - 21,059
Proceeds from sale of property, plant and
equipment................................... 4,243 - 4,397 1,188 - 9,828
Other......................................... 7,707 - - - - 7,707
----------- ----------- ----------- ------------- ---------- ----------
Net cash provided (used) by investing
activities.................................. 6,242 (999) (3,011) (1,438) - 794
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt........ (19,572) 2,919 (2,923) 2,783 27,113 10,320
Proceeds from issuance of long-term debt...... 2,622 - - - - 2,622
Payments on principal of long-term debt....... (23,344) - (34,993) (1,810) - (60,147)
Payments for redemption for member
equities.................................... (36,472) - - - - (36,472)
Other......................................... (9,332) 4,220 301 1,321 5,498 2,008
----------- ----------- ----------- ------------- ---------- ----------
Net cash (used) provided by financing
activities.................................. (86,098) 7,139 (37,615) 2,294 32,611 (81,669)
----------- ----------- ----------- ------------- ---------- ----------
Net (decrease) increase in cash............... (49,319) 2,120 (379) (3,145) - (50,723)
Cash and short-term investments at
beginning of period............................ 111,054 9,090 (1,027) 11,052 - 130,169
----------- ----------- ----------- ------------- ---------- ----------
Cash and short-term investments at end of period. $ 61,735 $ 11,210 $ (1,406) $ 7,907 $ - $ 79,446
=========== =========== =========== ============= ========== ==========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ---------- ------------ ------------ ----------- ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term $ 111,054 $ 9,090 $ (1,027) $ 11,052 $ -- $ 130,169
investments.
Receivables, net 552,951 23,659 136,949 47,109 (186,657) 574,011
Inventories.... 276,115 57,388 107,548 9,723 -- 450,774
Prepaid expenses 168,486 9,625 6,265 1,114 -- 185,490
Other current
assets....... 27,038 -- -- -- -- 27,038
---------- --------- --------- -------- -------- -----------
Total current
assets.... 1,135,644 99,762 249,735 68,998 (186,657) 1,367,482
Investments...... 1,047,711 3,596 50,751 1,453 (535,381) 568,130
Property, plant and
equipment, net. 272,328 29,146 319,164 54,639 -- 675,277
Goodwill, net.... 138,054 12,224 103,790 959 -- 255,027
Other intangibles, 3,484 2,669 102,503 331 -- 108,987
net............
Other assets..... 73,403 2,111 4,521 48,141 (11,701) 116,475
---------- --------- --------- -------- -------- -----------
Total assets $2,670,624 $ 149,508 $ 830,464 $174,521 $(733,739) $ 3,091,378
========== ========= ========= ======== ========= ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and
short-term
obligations. $ 270 $ 2,701 $ 88,902 $ 68,261 $(126,163) $ 33,971
Current portion
of long-term debt 19,995 59,506 23 59 (60,037) 19,546
Accounts payable 436,177 61,786 133,872 20,550 (76) 652,309
Accrued expenses 142,820 6,959 33,769 4,021 -- 187,569
Patronage refunds
payable..... 28,900 -- -- -- -- 28,900
---------- --------- --------- -------- --------- ----------
Total current
liabilities 628,162 130,952 256,566 92,891 (186,276) 922,295
Long-term debt... 1,125,437 9,924 65 24,121 (12,082) 1,147,465
Employee benefits and
other liabilities 45,459 1,434 35,626 282 -- 82,801
Deferred tax
liability.......... 42,495 -- -- -- -- 42,495
Minority interests 5,494 -- 972 13,744 39,596 59,806
Equities:
Capital stock.. 2,305 1,084 504,916 58,410 (564,410) 2,305
Member equities 805,860 -- -- -- -- 805,860
Retained earnings 15,412 6,114 32,319 (14,927) (10,567) 28,351
---------- --------- --------- -------- ---------- ----------
Total equities 823,577 7,198 537,235 43,483 (574,977) 836,516
---------- --------- --------- -------- ---------- ----------
Total liabilities
and equities..... $2,670,624 $ 149,508 $ 830,464 $174,521 $(733,739) $3,091,378
========== ========= ========= ======== ========== ==========
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------ ------------ ------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales..................... $ 910,452 $ 58,067 $ 372,733 $ 31,221 $ 1,372,473
Cost of sales................. 843,017 41,716 341,957 28,460 1,255,150
------------- ------------ ------------ ------------- ------------
Gross profit.................. 67,435 16,351 30,776 2,761 117,323
Selling, general and
administration................ 49,104 14,136 21,623 3,020 87,883
Restructuring and impairment
reversals................... - - (843) - (843)
------------- ------------ ------------ ------------- ------------
Earnings (loss) from
operations.................. 18,331 2,215 9,996 (259) 30,283
Interest expense (income), net 10,337 1,159 1,369 (308) 12,557
Gain on divestiture of
business.................... (154) - - - (154)
Equity in earnings of
affiliated companies........ (36,931) - (439) - (37,370)
Minority interest in earnings
(loss) of subsidiaries...... 2,139 - 95 (71) 2,163
------------- ------------ ------------ ------------- ------------
Earnings before income taxes.. 42,940 1,056 8,971 120 53,087
Income tax expense............ 8,289 527 27 54 8,897
------------- ------------ ------------ ------------- ------------
Net earnings.................. $ 34,651 $ 529 $ 8,944 $ 66 $ 44,190
============= ============ ============ ============= ============
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------ ------------ -------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales......................... $ 1,813,424 $ 117,288 $ 762,849 $ 54,639 $ 2,748,200
Cost of sales..................... 1,677,206 89,981 698,011 50,567 2,515,765
------------- ------------ ------------ -------------- ------------
Gross profit...................... 136,218 27,307 64,838 4,072 232,435
Selling, general and
administration.................. 103,973 20,110 51,062 5,364 180,509
Restructuring and impairment
reversals....................... - - (1,809) - (1,809)
------------- ------------ ------------ -------------- ------------
Earnings (loss) from operations... 32,245 7,197 15,585 (1,292) 53,735
Interest expense (income), net.... 19,242 2,478 3,208 (619) 24,309
Gain on divestiture of business... (154) - - - (154)
Equity in earnings of
affiliated companies............ (36,460) - (831) - (37,291)
Minority interest in earnings
(loss) of subsidiaries.......... 4,032 - 150 (429) 3,753
------------- ------------ ------------ -------------- ------------
Earnings (loss) before income
taxes........................... 45,585 4,719 13,058 (244) 63,118
Income tax expense................ 3,530 2,187 - 168 5,885
------------- ------------ ------------ -------------- ------------
Net earnings (loss)............... $ 42,055 $ 2,532 $ 13,058 $ (412) $ 57,233
============= ============ ============ ============== ============
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
LAND
O'LAKES, CONSOLIDATED MAJORITY
INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss).................... $ 42,055 $ 2,532 $ 13,058 $ (412) $ - $ 57,233
Adjustment to reconcile net
earnings (loss) to cash provided
(used) by operating activities:
Depreciation and amortization........ 32,218 2,088 7,749 1,092 - 43,147
Bad debt expense..................... 1,002 - 52 - - 1,054
Proceeds from patronage
revolvement Received............... 367 - - - - 367
Non-cash patronage income............ (1,478) - - - - (1,478)
(Increase) decrease in other
assets............................. (4,188) 942 (2,288) (1,561) - (7,095)
Increase (decrease) in other
liabilities........................ 493 (244) (3,978) 5 3,965 241
Restructuring and impairment
reversals.......................... - - (1,809) - - (1,809)
Gain on divestiture of businesses.... (154) - - - (154)
Equity in earnings of affiliated
companies.......................... (36,460) - (831) - - (37,291)
Minority interests................... 4,032 - 150 (429) - 3,753
Other................................ (4,152) - 840 (280) - (3,592)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables.......................... 1,790 (5,795) 8,874 (6,966) 23,658 21,561
Inventories.......................... (75,145) 4,509 8,638 (508) - (62,506)
Other current assets................. 108,600 8,289 4,399 (51) - 121,237
Accounts payable..................... (56,206) (77,934) (13,133) 4,696 56,995 (85,582)
Accrued expenses..................... 5,298 (2,000) (25,560) (634) - (22,896)
--------- ---------- ---------- ------------ ---------- ----------
Net cash provided (used) by
operating activities................. 18,072 (67,613) (3,839) (5,048) 84,618 26,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment............................ (19,456) (171) (7,877) (10,097) - (37,601)
Acquisitions, net of cash acquired .... (13,300) - - - - (13,300)
Payments for investments............... (55,013) - (324) (3,192) 13,695 (44,834)
Proceeds from sale of investment....... 835 312 476 - - 1,623
Proceeds from sale of property,
plant and equipment.................. 4,798 - 1,840 - - 6,638
Other.................................. 2,836 - - - - 2,836
--------- ---------- ---------- ------------ ---------- ----------
Net cash (used) provided by
investing activities................. (79,300) 141 (5,885) (13,289) 13,695 84,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term
debt ................................ 115,375 64,366 5 4,495 (80,576) 103,665
Proceeds from issuance of long-term
debt................................. 19,834 - 10,617 15,640 2,158 48,249
Payments on principal of long-term
debt................................. (44,645) (200) (5,934) (764) - (51,543)
Payments for redemption for member
equities............................. (45,847) - - - - (45,847)
Other.................................. 6,142 4,299 6,894 2,490 (19,895) (70)
--------- ---------- ---------- ------------ ---------- ----------
Net cash provided (used) by
financing activities ................ 50,859 68,465 11,582 21,861 (98,313) 54,454
--------- ---------- ---------- ------------ ---------- ----------
Net (decrease) increase in cash........ (10,369) 993 1,858 3,524 - (3,994)
Cash and short-term investments at
beginning of period.................... 5,324 (546) (11,675) 10,891 - 3,994
--------- ---------- ---------- ------------ ---------- ----------
Cash and short-term investments at end
of period.............................. $ (5,045) $ 447 $ (9,817) $ 14,415 $ - $ -
========= ========== ========== ============ ========== ==========
19
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
----------- -------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments........................... $ - $ 3,019
Receivables, net.......................................... 97,769 119,063
Inventories............................................... 109,892 113,559
Prepaid expenses.......................................... 5,478 6,472
Notes receivable - Land O'Lakes, Inc. .................... 7,444 -
--------- ---------
Total current assets.................................. 220,583 242,113
Investments.................................................. 32,510 31,496
Property, plant and equipment, net........................... 305,960 326,956
Goodwill, net................................................ 107,329 104,749
Other intangibles, net....................................... 99,645 100,663
Other assets................................................. 27,836 27,640
--------- ---------
Total assets.......................................... $ 793,863 $ 833,617
========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations......................... $ 3,500 $ 5,000
Notes payable - Land O'Lakes, Inc. ...................... - 29,210
Accounts payable......................................... 90,850 117,074
Accrued expenses......................................... 31,493 35,132
--------- ---------
Total current liabilities............................. 125,843 186,416
Notes payable - Land O'Lakes, Inc............................ 59,664 59,664
Employee benefits and other liabilities...................... 34,211 36,656
Minority interests........................................... 3,020 2,919
Equities:
Contributed capital...................................... 515,044 515,044
Retained earnings........................................ 56,081 32,918
--------- ---------
Total equities........................................ 571,125 547,962
--------- ---------
Commitments and contingencies
Total liabilities and equities............................... $ 793,863 $ 833,617
========= =========
See accompanying notes to consolidated financial statements.
20
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2002 2001 2002 2001
--------------------------------------------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales.................................. $ 576,580 $ 392,958 $ 1,180,003 $ 796,493
Cost of sales.............................. 506,244 357,602 1,036,839 729,769
--------- ----------- ----------- ----------
Gross profit............................... 70,336 35,356 143,164 66,724
Selling, general and administration........ 61,155 25,564 120,830 52,489
Restructuring and impairment charges
(reversals).............................. 1,041 (843) 4,476 (1,809)
--------- ----------- ----------- ----------
Earnings from operations................... 8,140 10,635 17,858 16,044
Interest (income) expense, net............. (618) 1,682 (1,344) 3,454
Gain on sale of intangibles................ - - (4,184) -
Equity in earnings of affiliated companies. (60) (530) (263) (831)
Minority interest in earnings of
subsidiaries............................. 276 285 486 213
--------- ----------- ----------- ----------
Net earnings............................... $ 8,542 $ 9,198 $ 23,163 $ 13,208
========= =========== =========== ==========
See accompanying notes to consolidated financial statements.
21
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED
JUNE 30,
--------------------------
2002 2001
----------- ----------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................... $ 23,163 $ 13,208
Adjustment to reconcile net earnings to cash
provided by (used in) operating activities:
Depreciation and amortization................ 24,077 8,142
Bad debt expense............................. 1,850 52
Increase in other assets..................... (5,747) (2,243)
Decrease in other liabilities................ (2,445) (3,973)
Restructuring and impairment charges
(reversals)................................ 4,476 (1,809)
Equity in earnings in affiliated companies... (263) (831)
Minority interests........................... 486 213
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables.................................. 19,444 8,604
Inventories.................................. 3,667 8,890
Other current assets......................... 994 4,398
Accounts payable............................. (26,224) (13,168)
Accrued expenses............................. (6,462) (26,837)
---------- ----------
Net cash provided by (used in) operating
activities................................... 37,016 (5,354)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment...... (8,522) (7,916)
Payments for investments........................ - (563)
Proceeds from investments....................... 1,056 476
Proceeds from sale of property, plant and
equipment.................................... 5,585 1,840
---------- ----------
Net cash used by investing activities........... (1,881) (6,163)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in short-term debt.......... (1,500) 900
Proceeds from note payable to Land O'Lakes,
Inc. ........................................ 228,196 184,717
Payments on note payable to Land O'Lakes,
Inc. ........................................ (264,850) (174,100)
---------- ----------
Net cash (used in) provided by financing
activities................................... (38,154) 11,517
---------- ----------
Net decrease in cash and short-term
investments.................................. (3,019) -
Cash and short-term investments at beginning of
period........................................... 3,019 -
---------- ----------
Cash and short-term investments at end of period... $ - $ -
========== ==========
Supplementary Disclosure of Cash Flow
Information:
Cash paid during periods for:
Interest, net of interest capitalized........ $ - $ -
See accompanying notes to consolidated financial statements.
22
LAND O'LAKES FARMLAND FEED LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes Farmland Feed LLC (the "Company"), all normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations and cash flows for the interim periods. The statements
are condensed and, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2001 included in our Registration Statement on Form S-4, as
amended. The results of operations and cash flows for interim periods are not
necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. Land O'Lakes Farmland Feed
LLC has adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as
of July 1, 2001, and the remaining provisions of SFAS 142 as of January 1, 2002.
As required by SFAS 142, Land O'Lakes Farmland Feed LLC has performed step one
of the impairment testing of goodwill for the balances as of January 1, 2002 by
June 30, 2002. The fair value of goodwill did not exceed the carrying amount,
therefore the second step of impairment testing is not required and no
impairment has been recognized in the current year of adoption.
Land O'Lakes Farmland Feed LLC will perform impairment tests annually and
whenever events or circumstances occur indicating that goodwill or other
intangible assets might be impaired. As of January 1, 2002, we are no longer
amortizing goodwill, except for goodwill related to the acquisition of
cooperatives and the formation of joint ventures.
The following table presents a reconciliation of net earnings adjusted for
the exclusion of amortization of goodwill no longer required to be amortized,
net of income taxes:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2002 2001 2002 2001
-------- ------- -------- -------
Net earnings.................................. $ 8,542 $9,198 $23,163 $13,208
Add back: Goodwill amortization, net of
tax......................................... - 240 - 416
------- ------ ------- -------
Adjusted net earnings......................... $ 8,542 $9,438 $23,163 $13,624
======= ====== ======= =======
THREE
MONTHS
ENDED
DECEMBER 31,
2001 2000
------- ------------
Net earnings (loss)................................. $39,146 $ (6,228)
Add back: Goodwill amortization, net of
tax............................................... 1,041 85
------- --------
Adjusted net earnings............................... $40,187 $ (6,143)
======= ========
23
2. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of intangible assets follows:
AS OF JUNE 30, 2002
----------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets
Trademarks......................... $ 882 $ (217)
Patents............................ 16,373 (1,194)
Agreements not to compete.......... 1,402 (486)
Other.............................. 9,930 (4,008)
-------- ---------
Total.............................. $ 28,587 $ (5,905)
======== =========
Unamortized intangible assets
Trademarks......................... $ 76,963
========
Aggregate amortization expense:
For six months ended June 30, 2002. $ 1,797
Estimated amortization expense:
For six months ended December 31,
2002............................. $ 1,797
For year ended December 31, 2003... 3,594
For year ended December 31, 2004... 3,594
For year ended December 31, 2005... 3,594
For year ended December 31, 2006... 3,478
For year ended December 31, 2007... 3,478
The changes in the carrying amount of goodwill for the six months ended June
30, 2002, are as follows:
Balance as of January 1, 2002...... $ 104,749
Reallocation of purchase price..... 2,808
Amortization expense............... (244)
---------
Balance as of June 30, 2002........ $ 107,329
=========
3. RECEIVABLES
A summary of receivables is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Trade accounts.............................. $ 19,841 $ 25,320
Notes and contracts......................... 17,689 18,071
Notes from sale of trade receivables (see
Note 4)................................... 64,411 70,878
Other....................................... 7,231 13,879
-------- ---------
109,172 128,148
Less allowance for doubtful accounts........ 11,403 9,085
-------- ---------
Total receivables, net...................... $ 97,769 $ 119,063
======== =========
4. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and
Purina Mills, LLC established a $100.0 million receivables purchase facility
with CoBank, ACB (CoBank). A wholly owned unconsolidated special purpose entity,
Land O'Lakes Farmland Feed SPV, LLC, (SPE), was established to purchase certain
receivables from Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina
Mills, LLC. CoBank has been granted an interest in the receivables owned by the
SPE. The transfers of the receivables from the Company to the SPE are structured
as sales and, accordingly, the receivables transferred to the SPE are not
reflected in the Company's consolidated balance sheet. However, Land O'Lakes,
Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC retain the credit
risk related to the repayment of the notes receivable with the SPE, which in
turn is dependent upon the credit risk of the SPE's receivables. Accordingly,
the Company has retained reserves for estimated losses. The Company expects no
significant gains or losses from the sale of the receivables. At June 30, 2002
and December 31, 2001, there was $30.0 million and $75.8 million outstanding,
respectively. The total accounts receivable sold by the Company during the three
months and six months ended June 30, 2002 were $545.5 million and $1,125.2
million, respectively.
24
5. INVENTORIES
A summary of inventories is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Raw materials.................. $ 75,825 $ 63,435
Finished goods................. 34,067 50,124
-------- ---------
Total inventories.............. $109,892 $ 113,559
======== =========
6. INVESTMENTS
The Company's investments are as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Harmony Farms, LLC................... $ 3,596 $ 3,969
New Feeds, LLC....................... 3,034 3,214
Iowa River Feeds, LLC................ 2,581 2,648
Agland Farmland Feed, LLC............ 2,286 2,435
Pro-Pet, LLC......................... 2,730 2,362
Nutri-Tech Feeds, LLC................ 2,319 2,314
LOLFF SPV, LLC....................... 1,000 1,805
Northern Country Feeds, LLC.......... 1,687 1,652
CalvaAlto Liquid, LLC................ 1,302 1,302
T-PM Holding Company................. 1,280 1,290
Northern Colorado Feed, LLC.......... 1,098 1,210
Strauss Feeds, LLC................... 1,139 1,073
Nutrikowi, LLC....................... 876 783
Dakotaland Feeds, LLC................ 684 736
Other................................ 6,898 4,703
------- -------
Total investments.................... $32,510 $31,496
======= =======
All of the above investments are accounted for under the equity method with the
exception of a portion of the investments under the caption "Other."
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property plant and equipment is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Land and land improvements.......... $ 23,613 $ 23,826
Buildings and building equipment.... 121,511 124,205
Machinery and equipment............. 240,208 247,186
Construction in progress............ 18,237 13,019
-------- ---------
403,569 408,236
Less accumulated depreciation....... 97,609 81,280
-------- ---------
Total property, plant and
equipment, net.................... $305,960 $ 326,956
======== =========
8. RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended June 30, 2002, the Company recorded a $1.0 million
restructuring and impairment charge of which $0.8 million was related to the
write-down of certain impaired plant assets to their estimated fair value, and
$0.2 million was related to employee severance and outplacement costs for
employees at the Ft. Dodge, IA office and other plant facilities. The 2001
reversal of $0.8 million was for the sale of certain animal feed assets that had
been written off in December 2000 and to reflect the decision to continue
operating a plant previously scheduled for shutdown.
25
For the six months ended June 30, 2002 the Company recorded restructuring and
impairment charges of $4.5 million. Of this amount, $2.8 million represented
severance and outplacement costs for 136 employees at the Ft. Dodge office and
other plant facilities and $1.7 million represented a write-down of certain
impaired plant assets. $2.3 million of the charges remained accrued as of June
30, 2002. For the six months ended June 30, 2001, the Company recorded a
restructuring reversal of $1.8 million for the sale of certain assets that had
been written off in December 2000, and to reflect the decision to continue to
operate a plant previously scheduled for shutdown.
9. GAIN ON SALE OF INTANGIBLES
For the six months ended June 30, 2002, the Company recorded a gain of $4.2
million on the sale to Potash Corporation of Saskatchewan of a customer list
pertaining to the feed phosphate distribution business.
10. RELATED PARTY TRANSACTIONS
In accordance with the Management Services Agreement between Land O'Lakes,
Inc. and Farmland Industries (Farmland), Land O'Lakes, Inc. charges the Company
for corporate services such as legal, insurance administration, tax
administration, human resources, payroll and benefit administration, leasing,
public relations, credit and collections, accounting, and information technology
support. These costs totaled $1.8 million and $1.1 million for the three months
ended June 30, 2002 and 2001, respectively, and $3.5 million and $3.2 for the
six months ended June 30, 2002 and 2001, respectively.
Payroll and benefit-related costs are paid directly by Land O'Lakes, Inc. and
reimbursed by the Company. These costs totaled $25.8 million and $25.8 million
for the three months ended June 30, 2002 and 2001, respectively, and $ 52.4 and
$51.9 for the six months ended June 30, 2002 and 2001, respectively.
As part of the acquisition of Purina Mills on October 11, 2001, Land O'Lakes,
Inc. assumed certain liabilities, including a $59.7 million deferred tax
liability. The Company has established a noncurrent note payable for this
liability and, as future taxes relating to the deferred tax liability are paid
by Land O'Lakes, Inc., the Company will make a corresponding payment to Land
O'Lakes, Inc. This note is non-interest bearing and $59.7 million was
outstanding at June 30, 2002 and December 31, 2001.
The Company has a $100 million revolving credit facility with Land O'Lakes,
Inc. which bears interest at LIBOR plus 260 basis points. The facility
terminates on October 31, 2002, and is renewable annually. The Company had a
note receivable from Land O' Lakes, Inc. of $7.4 million at June 30, 2002 and a
note payable to Land O' Lakes, Inc. of $29.2 million at December 31, 2001.
The Company entered into a Feed Supply Agreement with Farmland whereby
Farmland agreed to purchase all of its feed and ingredients, excluding grain,
from the Company. Such sales are made at prices competitive with those available
from other suppliers. Sales to Farmland under the agreement totaled $.3 million
and $2.4 million for the three months ended June 30, 2002 and 2001,
respectively, and $1.5 and $4.1 for the six months ended June 30, 2002 and 2001,
respectively.
Sales to unconsolidated subsidiaries of the Company totaled $11.5 million and
$10.1 million for the three months ended June 30, 2002 and 2001, respectively,
and $22.4 and $19.3 for the six months ended June 30, 2002 and 2001,
respectively.
11. CONSOLIDATING FINANCIAL INFORMATION
Land O'Lakes, Inc. issued $350 million in senior notes which are guaranteed
by Land O'Lakes, Inc. and certain of its wholly and majority owned
subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full,
unconditional and joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
WHOLLY
OWNED
LAND SUBSIDIARIES WHOLLY WHOLLY OWNED
O'LAKES OF LAND OWNED SUBSIDIARIES OF
FARMLAND O'LAKES PURINA PURINA NON-
FEED FARMLAND MILLS, MILLS, LLC GUARANTOR
LLC PARENT FEED LLC LLC PARENT PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ---------- --------------- ------------ ------------ -------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
Investments............. $ (12,263) $ 4,965 $ 5,876 $ (3) $ 1,425 $ - $ -
Receivables, net.......... 109,966 20,176 2,063 12,130 6,920 (53,486) 97,769
Inventories............... 48,534 13,667 41,413 2,074 4,204 - 109,892
Prepaid expenses.......... 2,885 1,070 1,256 4 263 - 5,478
Note receivable -
Land O'Lakes, Inc....... 7,444 - - - - - 7,444
---------- --------- ---------- ---------- --------- ----------- ----------
Total current
assets............... 156,566 39,878 50,608 14,205 12,812 (53,486) 220,583
Investments................... 427,552 258 4,189 8,613 2,196 (410,298) 32,510
Property, plant and
equipment, net.............. 81,390 7,789 208,172 1,116 7,493 - 305,960
Goodwill, net................. 13,684 3,655 89,680 - 310 - 107,329
Other intangibles, net........ 1,300 1,591 96,445 - 309 - 99,645
Other assets.................. 36,429 2,044 20,301 - 1,151 (32,089) 27,836
---------- --------- ---------- ---------- --------- ----------- ----------
Total assets................. $ 716,921 $ 55,215 $ 469,395 $ 23,934 $ 24,271 $ (495,873) $ 793,863
========== ========= ========== ========== ========= =========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations............. $ 3,500 $ - $ - $ - $ - $ - $ 3,500
Accounts payable.......... 72,526 21,263 31,536 13,926 5,085 (53,486) 90,850
Accrued expenses.......... 11,222 1,617 17,207 124 1,323 - 31,493
---------- --------- ---------- ---------- --------- ---------- ----------
Total current
liabilities.......... 87,248 22,880 48,743 14,050 6,408 (53,486) 125,843
Notes payable -
Land O'Lakes, Inc. ......... 59,664 4,902 23,652 - 3,535 (32,089) 59,664
Employee benefits
and other liabilities....... (252) - 34,021 - 442 - 34,211
Minority interests............ (864) 866 26 - 2,992 - 3,020
Equities:
Contributed capital....... 515,044 15,950 338,483 13,025 10,117 (377,575) 515,044
Retained earnings
(accumulated
deficit)............ 56,081 10,617 24,470 (3,141) 777 (32,723) 56,081
---------- --------- ---------- ---------- --------- ---------- ----------
Total equities..... 571,125 26,567 362,953 9,884 10,894 (410,298) 571,125
---------- --------- ---------- ---------- --------- ---------- ----------
Total liabilities
and equities................ $ 716,921 $ 55,215 $ 469,395 $ 23,934 $ 24,271 $(495,873) $ 793,863
========== ========= ========== ========== ========= ========== ==========
27
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
WHOLLY
OWNED
LAND SUBSIDIARIES WHOLLY
O'LAKES OF OWNED WHOLLY OWNED
FARMLAND LAND O'LAKES PURINA SUBSIDIARIES OF NON-
FEED FARMLAND MILLS, PURINA GUARANTOR
LLC PARENT FEED LLC LLC PARENT MILLS, LLC PARENT SUBSIDIARIES CONSOLIDATED
---------- ------------ ---------- ----------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales.............. $ 313,253 $ 49,583 $ 193,106 $ 6,813 $ 13,825 $ 576,580
Cost of sales.......... 285,130 44,855 159,040 5,039 12,180 506,244
--------- --------- --------- ---------- ---------- ---------
Gross profit........... 28,123 4,728 34,066 1,774 1,645 70,336
Selling, general and
administration....... 27,238 3,084 26,573 3,168 1,092 61,155
Restructuring and
impairment charges... 1,041 - - - - 1,041
--------- --------- --------- ---------- ---------- ---------
Earnings (loss) from
operations........... (156) 1,644 7,493 (1,394) 553 8,140
Interest (income)
expense, net......... (499) 129 (271) (5) 28 (618)
Equity in (earnings)
loss of affiliated
companies............ (370) (106) 22 394 - (60)
Minority interest in
(loss) earnings of
subsidiaries.......... (86) 206 2 - 154 276
--------- --------- --------- ---------- ---------- ---------
Net earnings (loss)..... $ 799 $ 1,415 $ 7,740 $ (1,783) $ 371 $ 8,542
========= ========== ========= ========== ========== =========
28
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
WHOLLY
OWNED
LAND SUBSIDIARIES WHOLLY
O'LAKES OF OWNED WHOLLY OWNED
FARMLAND LAND O'LAKES PURINA SUBSIDIARIES OF NON-
FEED FARMLAND MILLS, PURINA GUARANTOR
LLC PARENT FEED LLC LLC PARENT MILLS, LLC PARENT SUBSIDIARIES CONSOLIDATED
---------- ------------ ---------- ----------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales.............. $ 649,598 $ 88,328 $ 400,840 $ 13,942 $ 27,295 $ 1,180,003
Cost of sales.......... 590,397 79,732 331,705 10,368 24,637 1,036,839
---------- --------- ---------- --------- --------- -----------
Gross profit........... 59,201 8,596 69,135 3,574 2,658 143,164
Selling, general and
administration....... 55,435 5,504 52,471 5,083 2,337 120,830
Restructuring and
impairment charges... 4,476 - - - - 4,476
---------- --------- ---------- --------- --------- -----------
(Loss) earnings from
operations........... (710) 3,092 16,664 (1,509) 321 17,858
Interest (income)
expense, net......... (1,116) 241 (559) (5) 95 (1,344)
Gain on sale of
intangibles.......... (4,184) - - - - (4,184)
Equity in (earnings)
loss of affiliated
companies............ (840) - (57) 634 - (263)
Minority interest in
earnings of
subsidiaries......... 33 206 69 - 178 486
---------- --------- ---------- --------- --------- -----------
Net earnings (loss).... $ 5,397 $ 2,645 $ 17,211 $ (2,138) $ 48 $ 23,163
========== ========= ========== ========= ========= ============
29
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
WHOLLY OWNED
LAND SUBSIDIARIES WHOLLY WHOLLY OWNED
O'LAKES OF OWNED SUBSIDIARIES
FARMLAND LAND O'LAKES PURINA OF NON-
FEED FARMLAND MILLS, PURINA MILLS, GUARANTOR
LLC PARENT FEED LLD LLC PARENT LLC PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ---------- ------------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss)....... $ 5,397 $ 2,645 $ 17,211 $ (2,138) $ 48 $ - $ 23,163
Adjustment to reconcile
net earnings(loss) to
cash provided (used)
by operating activities:
Depreciation and
amortization.......... 7,331 430 15,756 174 386 - 24,077
Bad debt expense........ 1,850 - - - - - 1,850
Decrease (increase) in
other assets.......... 25,218 2,787 (3,849) 583 437 (30,923) (5,747)
(Decrease) increase in
other liabilities..... (213) (3,344) 970 - 142 - (2,445)
Restructuring and
impairment charges.... 4,476 - - - - - 4,476
Equity in (earnings)
loss of affiliated
companies............. (840) - (57) 634 - - (263)
Minority interests...... 33 206 69 - 178 - 486
Changes in current assets
and liabilities, net of
acquisitions and
divestitures:
Receivables............. (8,706) (6,032) 7,758 202 (2,308) 28,530 19,444
Inventories............. (2,315) 1,867 1,980 328 1,807 - 3,667
Other current assets.... (2) (183) 1,167 (4) 16 - 994
Accounts payable........ 22,773 (2,077) (8,046) (83) (2,708) (36,083) (26,224)
Accrued expenses........ (4,772) 199 (1,911) 230 (208) - (6,462)
---------- ------------ ---------- ----------- --------- --------- ----------
Net cash provided (used)
by operating
activities.............. 50,230 (3,502) 31,048 (74) (2,210) (38,476) 37,016
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property,
plant and equipment..... (3,369) (331) (4,592) (143) (87) - (8,522)
Proceeds from sale of
investment.............. 681 375 1,056
Proceeds from sale of
property, plant and
equipment............... 5,585 - - - - - 5,585
---------- ------------ ---------- ----------- --------- --------- ----------
Net cash provided (used)
by investing
activities.............. 2,897 (331) (4,217) (143) (87) - (1,881)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in
short-term debt......... (8,962) 6,031 - - 1,431 - (1,500)
Proceeds from note
payable to
Land O'Lakes, Inc. ..... 189,720 - - - - 38,476 228,196
Payments on note
payable to
Land O'Lakes, Inc....... (226,374) (1,610) (35,111) - (1,755) - (264,850)
---------- ------------ ---------- ----------- --------- --------- ----------
Net cash (used) provided
by financing
activities.............. (45,616) 4,421 (35,111) - (324) 38,476 (38,154)
---------- ------------ ---------- ----------- --------- --------- ----------
Net increase (decrease)
in cash................. 7,511 588 (8,280) (217) (2,621) - (3,019)
Cash and short-term
investments at
beginning of period....... (19,774) 4,377 14,156 214 4,046 - 3,019
---------- ------------ ---------- ----------- --------- --------- ----------
Cash and short-term
investments at
end of period............. $ (12,263) $ 4,965 $ 5,876 $ (3) $ 1,425 $ - $ -
========== ============ ========== ============== ========= ========== ==========
30
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
WHOLLY OWNED
LAND SUBSIDIARIES WHOLLY WHOLLY OWNED
O'LAKES OF OWNED SUBSIDIARIES
FARMLAND LAND O'LAKES PURINA OF NON-
FEED FARMLAND MILLS, PURINA MILLS, GUARANTOR
LLC PARENT FEED LLD LLC PARENT LLC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ---------- ------------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments ........... $ (19,774) $ 4,377 $ 14,156 $ 214 $ 4,046 $ - $ 3,019
Receivables, net.......... 103,219 14,147 9,860 12,417 (4,556) (24,956) 119,063
Inventories .............. 46,219 15,534 43,393 2,402 6,011 - 113,559
Prepaid expenses.......... 2,883 887 2,423 - 279 - 6,472
----------- --------- ---------- -------- ---------- ---------- ---------
Total current
assets............... 132,547 34,945 69,652 15,033 14,892 (24,956) 242,113
Investments................. 391,970 258 19,712 11,077 1,303 (392,824) 31,496
Property, plant and
equipment, net............ 90,709 7,887 219,421 1,147 7,792 - 326,956
Goodwill, net............... 13,262 3,656 86,872 - 959 - 104,749
Other intangibles, net...... 1,163 - 99,169 - 331 - 100,663
Other assets................ 88,531 3,246 - - 1,232 (65,369) 27,640
----------- --------- ---------- -------- ---------- ---------- ---------
Total assets........... $ 718,182 $ 49,992 $ 494,826 $ 27,257 $ 26,509 $(483,149) $ 833,617
=========== ========= ========== ======== ========== ========== =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations............ $ 4,509 $ 23 $ - $ - $ 468 $ - $ 5,000
Notes payable-Land
O'Lakes, Inc. ......... 29,210 - - - - - 29,210
Accounts payable.......... 78,451 12,211 24,136 14,009 5,670 (17,403) 117,074
Accrued expenses.......... 13,170 1,418 19,120 (108) 1,532 - 35,132
----------- --------- ---------- -------- ---------- ---------- ----------
Total current
liabilities ......... 125,340 13,652 43,256 13,901 7,670 (17,403) 186,416
Notes payable-Land
O'Lakes, Inc. .............. 59,664 6,512 58,763 - 5,290 (70,565) 59,664
Employee benefits and
other liabilities......... 755 2,644 32,980 - 277 - 36,656
Minority interests.......... (840) 910 28 - 2,821 - 2,919
Equities:
Contributed capital....... 515,044 18,300 350,600 16,299 9,982 (395,181) 515,044
Retained earnings.........
(accumulated deficit)... 18,219 7,947 9,199 (2,934) 469 - 32,918
----------- --------- ---------- -------- ---------- ---------- ----------
Total equities......... 533,263 26,274 359,799 13,356 10,451 (395,181) 547,962
----------- --------- ---------- -------- ---------- ---------- ----------
Total liabilities and
equities.................. $ 718,182 $ 49,992 $ 494,826 $ 27,257 $ 26,509 $(483,149) $ 833,617
=========== ========= ========== ======== ========== ========== ==========
31
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
WHOLLY OWNED
LAND O'LAKES SUBSIDIARIES OF NON-
FARMLAND FEED LAND O'LAKES GUARANTOR
LLC PARENT FARMLAND FEED LLC SUBSIDIARIES CONSOLIDATED
-------------- ----------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ........................ $ 333,364 $ 39,369 $ 20,225 $ 392,958
Cost of sales..................... 303,273 35,646 18,683 357,602
----------- ----------- ---------- ----------
Gross profit ..................... 30,091 3,723 1,542 35,356
Selling, general and
administration.................. 22,508 2,030 1,026 25,564
Restructuring and impairment
(reversals)..................... (843) - - (843)
----------- ----------- ---------- ----------
Earnings from operations.......... 8,426 1,693 516 10,635
Interest expense, net............. 1,366 178 138 1,682
Equity in earnings of
affiliated companies............ (530) - - (530)
Minority interest in earnings
of subsidiaries................. 1 94 190 285
----------- ----------- ---------- ----------
Net earnings...................... $ 7,589 $ 1,421 $ 188 $ 9,198
=========== =========== ========== ==========
32
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
WHOLLY OWNED
LAND O'LAKES SUBSIDIARIES OF NON-
FARMLAND FEED LAND O'LAKES GUARANTOR
LLC PARENT FARMLAND FEED LLC SUBSIDIARIES CONSOLIDATED
------------- ----------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales .......................... $ 688,896 $ 73,953 $ 33,644 $ 796,493
Cost of sales ...................... 631,040 66,971 31,758 729,769
------------- ----------- ------------ ----------
Gross profit ....................... 57,856 6,982 1,886 66,724
Selling, general and
administration ................... 46,790 4,233 1,466 52,489
Restructuring and impairment
(reversals)....................... (1,809) - - (1,809)
------------- ----------- ------------ ----------
Earnings from operations............ 12,875 2,749 420 16,044
Interest expense, net .............. 2,846 362 246 3,454
Equity in earnings of
affiliated companies ............. (831) - - (831)
Minority interest in earnings
of subsidiaries .................. 3 147 63 213
------------- ----------- ------------ ----------
Net earnings........................ $ 10,857 $ 2,240 $ 111 $ 13,208
============= =========== ============ ==========
33
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
WHOLLY OWNED
LAND O'LAKES SUBSIDIARIES OF NON-
FARMLAND FEED LAND O'LAKES GUARANTOR
LLC PARENT FARMLAND FEED SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ --------------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................ $ 10,857 $ 2,240 $ 111 $ - $ 13,208
Adjustment to reconcile net earnings
to cash provided (used) by operating
activities:
Depreciation and amortization.......... 7,292 384 466 - 8,142
Bad debt expense....................... 52 - - - 52
(Increase) decrease in other assets.... (9,048) 1,663 (889) 6,031 (2,243)
(Decrease) increase in other
liabilities......................... (3,131) (847) 5 - (3,973)
Restructuring and impairment reversals. (1,809) - - - (1,809)
Equity in earnings of affiliated
companies........................... (831) - - - (831)
Minority interests..................... 3 147 63 - 213
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables............................ 25,646 (3,036) (270) (13,736) 8,604
Inventories............................ 7,772 866 252 - 8,890
Other current assets................... 4,543 (144) (1) - 4,398
Accounts payable....................... (14,499) (639) (35) 2,005 (13,168)
Accrued expenses....................... (23,924) (1,636) (1,277) - (26,837)
------------ ---------- ----------- ---------- ------------
Net cash provided (used) by operating
activities............................. 2,923 (1,002) (1,575) (5,700) (5,354)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment.............................. (7,005) (801) (110) - (7,916)
Payments for investments................. (259) - (304) - (563)
Proceeds from sale of investment......... 476 - - - 476
Proceeds from sale of property, plant
and equipment.......................... 1,840 - - - 1,840
------------ ---------- ----------- ---------- ------------
Net cash used by investing
activities ............................ (4,948) (801) (414) - (6,163)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt... 867 (1,466) (1) 1,500 900
Proceeds from note payable to Land O'
Lakes, Inc. ........................... 179,621 - 896 4,200 184,717
Payments on note payable to Land O'
Lakes, Inc. ........................... (170,858) (2,478) (764) - (174,100)
------------ ---------- ----------- ---------- ------------
Net cash provided (used) by financing
activities............................. 9,630 (3,944) 131 5,700 11,517
------------ ---------- ----------- ---------- ------------
Net increase (decrease) in cash ......... 7,605 (5,747) (1,858) - -
Cash and short-term investments at
beginning of period........................ (9,792) 7,397 2,395 - -
------------ ---------- ----------- ---------- ------------
Cash and short-term investments at
end of period.............................. $ (2,187) $ 1,650 $ 537 $ - $ -
============ ========== =========== ========== ============
34
PURINA MILLS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31, DECEMBER 31,
2002 2002 2001
---------------- ------------------ ------------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments.......... $ 5,873 $ 2,829 $ 14,370
Receivables, net......................... 14,193 10,818 22,097
Inventories.............................. 43,487 44,313 45,795
Prepaid expenses......................... 1,260 2,011 2,423
----------- ---------- ----------
Total current assets............... 64,813 59,971 84,685
Investments ................................. 12,802 11,921 11,105
Property, plant and equipment, net........... 209,288 214,236 220,567
Goodwill, net................................ 89,680 90,372 86,872
Other intangibles, net....................... 96,445 97,097 99,169
Receivable from Land O'Lakes Farmland
Feed LLC................................... 15,445 15,445 15,445
Other assets ................................ 20,301 19,678 19,684
----------- ---------- ----------
Total assets ...................... $ 508,774 $ 508,720 $ 537,527
=========== ========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Accounts payable......................... $ 45,462 $ 47,842 $ 53,591
Accrued expenses......................... 17,331 17,874 19,012
----------- ---------- ----------
Total current liabilites........... 62,793 65,716 72,603
Notes payable - Land O'Lakes Farmland
Feed LLC ................................ 23,652 26,666 58,763
Employee benefits and other liabilities...... 34,021 34,005 32,980
Minority interests .......................... 26 41 28
Equities:
Contributed capital...................... 366,953 366,920 366,897
Retained earnings........................ 21,329 15,372 6,256
----------- ---------- ----------
Totalequities...................... 388,282 382,292 373,153
----------- ---------- ----------
Commitments and contingencies
Total liabilities and equities .............. $ 508,774 $ 508,720 $ 537,527
=========== ========== ==========
See accompanying notes to consolidated financial statements.
35
PURINA MILLS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED MARCH 31, ENDED JUNE 30,
------------------------ ----------------------- -----------------------
2002 2001 2002 2001 2002 2001
---------- ----------- ----------- ----------- ----------- ----------
($ IN THOUSANDS)
(UNAUDITED)
Net sales........................................... $199,919 $ 192,987 $ 214,863 $ 220,368 $ 414,782 $ 413,355
Cost of sales....................................... 164,079 157,202 177,993 180,858 342,073 338,060
---------- ----------- ----------- ----------- ----------- ----------
Gross profit........................................ 35,840 35,785 36,870 39,510 72,709 75,295
Selling, general and administration................. 29,741 39,541 27,814 34,888 57,554 74,428
---------- ----------- ----------- ----------- ----------- ----------
Earnings (loss) from operations..................... 6,099 (3,756) 9,056 4,622 15,155 867
Interest (income) expense, net...................... (276) 2,836 (288) 2,796 (564) 5,632
Equity in loss of affiliated companies.............. 416 318 161 187 577 505
Minority interest in earnings of subsidiaries....... 2 69 67 34 69 102
---------- ----------- ----------- ----------- ----------- ----------
Earnings (loss) before income taxes................. 5,957 (6,979) 9,116 1,605 15,073 (5,372)
Income tax (benefit) expense........................ - (1,702) - 1,524 - (177)
---------- ----------- ----------- ----------- ----------- ----------
Net earnings (loss)................................. $ 5,957 $ (5,277) $ 9,116 $ 81 $ 15,073 $ (5,195)
========== =========== =========== =========== =========== ==========
See accompanying notes to consolidated financial statements.
36
PURINA MILLS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED JUNE 30,
------------------------ ---------------------
2002 2001 2002 2001
----------- ----------- --------- ----------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $ 9,116 $ 81 $ 15,073 $(5,195)
Adjustment to reconcile net earnings (loss) to
cash provided (used) by operating activities:
Depreciation and amortization...................... 7,798 10,850 15,930 22,996
Increase in other assets........................... (964) (1,137) (3,266) (1,162)
Increase in other liabilities...................... 972 1,484 970 2,207
Equity in loss of affiliated companies............. 161 187 577 505
Minority interests................................. 67 34 69 102
Other.............................................. - (2,936) - 2,311
Changes in current assets and liabilites, net of
acquisitions and divestitures:
Receivables........................................ 11,279 10,119 7,904 10,591
Inventories........................................ 1,482 1,537 2,308 4,605
Other current assets............................... 412 (1,078) 1,163 (448)
Accounts payable................................... (7,152) (22,727) (8,129) (26,205)
Accrued expenses................................... (1,138) (1,417) (1,681) (1,630)
----------- ----------- --------- ----------
Net cash provided (used) by operating activities 22,033 (5,003) 30,918 8,677
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment........... (2,895) (2,441) (4,735) (7,748)
Payments for investments............................. (8) (428) (22) (574)
Proceeds from investments............................ - 347 397 977
Proceeds from sale of property, plant and equipment.. - 82 - 84
----------- ----------- --------- ----------
Net cash used by investing activities................ (2,903) (2,440) (4,360) (7,261)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable to Land O'Lakes
Farmland Feed LLC.................................. (30,694) - (35,111) -
Payments on term loan................................ - (21,003) - (31,015)
Other................................................ 23 - 56 -
----------- ----------- --------- ----------
Net cash used by financing activities................ (30,671) (21,003) (35,055) (31,015)
----------- ----------- --------- ----------
Net decrease in cash and short-term investments...... (11,541) (28,446) (8,497) (29,599)
Cash and short-term investments at beginning of period... 14,370 37,664 14,370 37,664
----------- ----------- --------- ----------
Cash and short-term investments at end of period......... $ 2,829 $ 9,218 $ 5,873 $ 8,065
=========== =========== ========= ==========
Supplementary Disclosure of Cash Flow Information:
Cash paid during periods for:
Interest, net of interest capitalized.............. $ - $ 3,985 $ - $ 13,598
Income taxes paid.................................. $ - $ 299 $ - $ 173
See accompanying notes to consolidated financial statements.
37
PURINA MILLS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. BASIS OF PRESENTATION
On October 11, 2001, pursuant to an Agreement and Plan of Merger, LOL
Holdings III, Inc., an indirect wholly-owned subsidiary of Land O'Lakes, Inc.
was merged into Purina Mills, Inc. ("PMI"), with PMI being the surviving
corporation. As a result of the merger, LOL Holdings II, Inc., a wholly-owned
subsidiary of Land O'Lakes, Inc. owned 100% of PMI. Subsequently, PMI was
reorganized as a limited liability company, renamed Purina Mills, LLC ("Purina
Mills") and LOL Holdings II, Inc. contributed the business to Land O'Lakes
Farmland Feed LLC. Upon the formation of Purina Mills, provisions for income
taxes were no longer recorded since the taxable operations pass directly to the
owner.
The merger has been accounted for as a purchase transaction in accordance
with Statement of Financial Accounting Standards No. 141 ("SFAS 141") and,
accordingly, the consolidated financial statements for periods subsequent to
October 11, 2001 reflect the purchase price, including transaction costs,
allocated to tangible and intangible assets acquired and liabilities assumed,
based on their estimated fair value as of October 11, 2001. The consolidated
financial statements for periods prior to October 11, 2001 have been prepared on
the predecessor cost basis of Purina Mills, LLC.
2. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Purina Mills, LLC (the "Company"), all normal recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods. The statements are
condensed and, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. Additionally, certain
reclassifications have been made to prior period consolidated statements to
conform to the consolidated financial statement presentation as of and for the
six months ended June 30, 2002. The results of operations and cash flows for
interim periods are not necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. The Company adopted the
provisions of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001,
and the remaining provisions of SFAS 142 as of January 1, 2002. As required by
SFAS 142, the Company has performed step one of the impairment testing of
goodwill by June 30, 2002. The fair value of goodwill exceeded the carrying
amount, therefore the second step of impairment testing was not required and no
impairment has been recognized in the current year of adoption. The Company will
perform impairment tests annually and whenever events or circumstances occur
indicating that goodwill or other intangible assets might be impaired. As of
January 1, 2002, the Company is no longer amortizing goodwill, except for
goodwill related to the acquisition of cooperatives and the formation of joint
ventures.
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, MARCH 31, JUNE 30,
-------- --------- --------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Net earnings (loss) $ 5,957 $ (5,277) $ 9,116 $ 81 $ 15,073 $ (5,195)
Add back: Goodwill amortization, net of tax - - - - - -
---------- ---------- ---------- --------- ---------- ----------
Adjusted net earnings (loss) $ 5,957 $ (5,277) $ 9,116 $ 81 $ 15,073 $ (5,195)
========== ========== ========== ========= ========== ==========
38
3. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of intangible assets follows:
AS OF JUNE 30, 2002
----------------------------
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------------ ---------------
Amortized intangible assets
Patents..................................... $ 16,373 $ 818
Other....................................... 5,121 1,194
--------- ---------
Total....................................... $ 21,494 $ 2,012
========= =========
Unamortized intangible assets
Trademarks.................................. $ 76,963
=========
Aggregate amortization expense:
For six months ended June 30, 2002.......... $ 1,016
Estimated amortization expense:
For the six months ended December 31, 2002 $ 1,304
For year ended December 31, 2003............ 1,954
For year ended December 31, 2004............ 1,954
For year ended December 31, 2005............ 1,954
For year ended December 31, 2006............ 1,838
For year ended December 31, 2007............ 1,838
AS OF MARCH 31, 2002
-------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
---------------- ---------------
Amortized intangible assets
Patents..................................... $ 16,373 $ 626
Other....................................... 5,121 734
--------- ---------
Total....................................... $ 21,494 $ 1,360
========= =========
Unamortized intangible assets
Trademarks and other........................ $ 76,963
=========
Aggregate amortization expense:
For three months ended March 31, 2002....... $ 364
Estimated amortization expense:
For nine months ended December 31, 2002..... $ 1,956
For year ended December 31, 2003............ 1,954
For year ended December 31, 2004............ 1,954
For year ended December 31, 2005............ 1,954
For year ended December 31, 2006............ 1,838
For year ended December 31, 2007 1,838
The changes in the carrying amount of goodwill for the six months ended June
30, 2002, are as follows:
Balance as of January 1, 2002......................... $ 86,872
Reallocation of purchase price........................ 2,808
-----------
Balance as of June 30, 2002........................... $ 89,680
===========
39
4. RECEIVABLES
A summary of receivables is as follows:
JUNE 30, MARCH 31, DECEMBER 31,
2002 2002 2001
---------- ------------- ------------
Notes from sale of trade receivables (see Note 5).... 19,101 13,519 16,937
Other................................................ 1,016 3,130 10,809
--------- ----------- -----------
20,117 16,649 27,746
Less allowance for doubtful accounts................. 5,924 5,831 5,649
--------- ----------- -----------
Total receivables, net............................... $ 14,193 $ 10,818 $ 22,097
========= =========== ===========
5. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and
Purina Mills, LLC established a $100.0 million receivables purchase facility
with CoBank, ACB (CoBank). A wholly owned unconsolidated special purpose entity,
Land O'Lakes Farmland Feed SPV, LLC, (SPE), was established to purchase certain
receivables from Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina
Mills, LLC. CoBank has been granted an interest in the receivables owned by the
SPE. The transfers of the receivables from Purina Mills, LLC to the SPE are
structured as sales and, accordingly, the receivables transferred to the SPE are
not reflected in Purina Mills, LLC's consolidated balance sheet. However, Land
O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC retain the
credit risk related to the repayment of the notes receivable with the SPE, which
in turn is dependent upon the credit risk of the SPE's receivables. Accordingly,
Purina Mills, LLC has retained reserves for estimated losses. Purina Mills, LLC
expects no significant gains or losses from the sale of the receivables. The
total accounts receivable sold by Purina Mills, LLC during the first three
months and six months of 2002 were $235.6 million and $458.4 million,
respectively.
6. INVENTORIES
A summary of inventories is as follows:
JUNE 30, MARCH 31, DECEMBER 31,
2002 2002 2001
----------- ------------ ------------
Raw materials......................... $ 30,653 $ 31,874 $ 34,079
Finished goods........................ 12,834 12,439 11,716
----------- ----------- -----------
Total inventories..................... $ 43,487 $ 44,313 $ 45,795
=========== =========== ===========
7. INVESTMENTS
Purina Mills, LLC's investments are as follows:
JUNE 30, MARCH 31, DECEMBER 31,
2002 2002 2001
---------- ------------- ---------
Harmony Farms, LLC........................... $3,596 $3,969 $3,969
T-PM Holdings Company........................ 1,280 1,290 1,290
Northern Colorado Feed, LLC.................. 1,098 1,160 1,210
ESSV, LLC.................................... 893 893 -
Alliance Milk Products, LLC.................. 837 975 874
Eastern Block, Inc. ......................... 578 606 545
Y-Not, LLC................................... 512 552 560
Eastgate Feed and Grain, LLC................. 214 214 214
Eslabon Companies............................ 195 202 225
Other........................................ 3,599 2,060 2,218
--------- --------- ---------
Total investments............................ $ 12,802 $ 11,921 $ 11,105
========= ========= =========
40
8. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
JUNE 30, MARCH 31, DECEMBER 31,
2002 2002 2001
----------- ----------- --------------
Land and land improvements.................. $ 11,041 $ 11,041 $ 11,041
Buildings and building equipment............ 65,745 65,745 65,745
Machinery and equipment..................... 140,212 140,207 140,207
Construction in progress.................... 13,768 11,240 10,138
----------- ----------- -----------
230,766 228,233 227,131
Less accumulated depreciation............... 21,478 13,997 6,564
----------- ----------- -----------
Total property, plant and equipment, net.... $ 209,288 $ 214,236 $ 220,567
=========== =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussions of financial condition and results
of operations together with the financial statements and the notes to such
statements included elsewhere in this Form 10-Q. This discussion contains
forward-looking statements based on current expectations, assumptions, estimates
and projections of our management. These forward-looking statements involve
risks and uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
as more fully described in the "Risk Factors" section and elsewhere in this Form
10-Q. We undertake no obligation to update publicly any forward-looking
statements.
OVERVIEW
GENERAL
Segments
We operate our business predominantly in the United States in five segments:
dairy foods, animal feed, crop seed, swine and agronomy. We have limited
international operations, certain of which have recently been sold or are in the
process of being sold. Our dairy foods segment produces, markets and sells
butter, spreads, cheese and other dairy products. We operate our animal feed
segment principally through Land O'Lakes Farmland Feed LLC, our 92% owned joint
venture with Farmland Industries, Inc. ("Farmland Industries"). Our animal feed
segment develops, produces, markets and distributes animal feed to both
commercial and lifestyle customers. The results of the animal feed business are
consolidated in our financial statements and the minority interest is
eliminated. As a result of the Purina Mills acquisition in October 2001, animal
feed results for the six months ended June 30, 2002 include Purina Mills swine
marketing activities since Purina Mills historically reported results of its
swine business together with its feed business. Our crop seed segment sells seed
for a variety of crops, including alfalfa, corn, soybeans and forage and turf
grasses. Our swine segment produces and markets both young feeder pigs and
mature market hogs. Our agronomy segment distributes crop nutrient and crop
protection products. Historically, our agronomy segment consisted primarily of
the assets we contributed to Agriliance LLC ("Agriliance"), our unconsolidated
joint venture. Since the contribution of those assets to Agriliance at the end
of July 2000, our investment has been accounted for on the equity method through
our agronomy segment, along with the agronomy assets we retained. Our membership
interest in CF Industries, Inc. ("CF Industries") an interregional plant food
manufacturing cooperative, is accounted for through this segment on a cost
basis. We also derive a portion of revenues and income from other related
businesses, which are insignificant to our overall results. We allocate
corporate administration expense to all five of our business segments using two
methodologies, direct usage for services for which we are able to track this
usage, such as payroll and legal, and invested capital for all other expenses. A
majority of these costs is allocated based on direct usage. We allocate these
costs to segments whether or not they are solely composed of investments and
joint ventures.
Unconsolidated Businesses
We have investments in certain entities that are not consolidated in our
financial statements. For the six months ended June 30, 2002, income from our
unconsolidated businesses amounted to $34.4 million, compared to income of $37.3
million for the six months ended June 30, 2001. Our investment in unconsolidated
businesses amounted to $588.3 million on June 30, 2002, and $568.1 million on
December 31, 2001. Cash flow from our investment in unconsolidated businesses
for the six months ended June 30, 2002 was $4.0 million, compared to $1.7
million for the six months ended June 30, 2001.
Agriliance and CF Industries constitute the most significant of our
investments in unconsolidated businesses, both of which are
41
reflected in our agronomy results. Our investment in and earnings or losses from
Agriliance and CF Industries were as follows as of and for the six months ended:
JUNE 30,
-----------------
2002 2001
-------- --------
(IN MILLIONS)
AGRILIANCE:
Investment........... $ 123.2 $ 75.6
Equity in earnings .. 39.1 31.3
CF INDUSTRIES:
Investment........... $ 249.5 $ 248.5
Patronage income..... -- --
We did not receive cash distributions from Agriliance or CF Industries during
these periods.
Land O'Lakes, Cenex Harvest States Cooperatives ("CHS") and Farmland
Industries contributed substantially all of their agronomy marketing assets to
Agriliance in July 2000. The agronomy marketing operations of Land O'Lakes, CHS
and Farmland Industries were previously managed through various operating
entities. Land O'Lakes has a 50 percent equity ownership in Agriliance. The
other 50 percent ownership interest in Agriliance is owned by United Country
Brands (jointly owned by CHS and Farmland Industries). Land O'Lakes provides
certain support services to Agriliance at competitive market prices. Agriliance
was billed $4.4 million and $3.6 million, respectively, for the six months ended
June 30, 2002 and 2001 for the support services. In addition, Land O'Lakes
purchases insignificant amounts of product from Agriliance. The fiscal year of
Agriliance ends on August 31. Unless otherwise indicated, references in this
Form 10-Q to the annual or quarterly results of Agriliance are presented on a
calendar year basis to conform to Land O'Lakes presentation. Agriliance funds
its operations from operating cash flows, an initial working capital
contribution on formation and borrowings from unaffiliated third parties.
Agriliance has entered into syndicated secured term and revolving credit
arrangements in an aggregate amount of $407 million as of August 31, 2001. Since
then, credit arrangements were renegotiated and as of June 30, 2002 amounted to
$325 million. In addition, Agriliance has entered into a $200 million
receivables securitization with CoBank. Neither Land O'Lakes nor any of the
restricted subsidiaries guarantee these obligations. Land O'Lakes does not have
an obligation to contribute additional capital to finance Agriliance's
operations.
CF Industries is an inter-regional cooperative involved in the manufacture
of crop nutrients, in which we have a 38% ownership interest based on our
product purchases. As a member, we are allowed to elect one board member out of
a total of nine. Agriliance is one of CF Industries' most significant customers.
CF Industries operates in a highly cyclical industry. The oversupply of nitrogen
in the industry since 1998 has resulted in depressed prices and, consequently,
depressed earnings. Studies are currently under way to determine strategic steps
to address the negative earnings situation. Since CF Industries is a
cooperative, we only receive earnings from our investment when the cooperative
allocates and distributes patronage to us. No patronage was allocated and
distributed to us in the last three years because CF Industries realized losses
in those years. We anticipate that no patronage allocations will occur until
these losses have been recouped. Our $249.5 million investment in CF Industries
consists of approximately $150 million in noncash patronage income from prior
periods (not distributed to us) and approximately $100 million that was acquired
as part of our Countrymark acquisition in 1998 based on Countrymark's prior
business with CF Industries. Prior to the contribution of our agronomy assets to
Agriliance, our agronomy business earned patronage income on the business it
conducted with CF Industries. Since July 29, 2000, Land O'Lakes has been
entitled to receive patronage income for business that Agriliance transacts with
CF Industries on behalf of our members, primarily fertilizer purchases. We
believe these sales are on terms comparable to those available to unaffiliated
third parties.
We have an investment in CoBank, an agricultural cooperative bank, which
amounted to $21.9 million on June 30, 2002, and $21.5 million on December 31,
2001. This investment constitutes less than one percent of CoBank's total
shareholder equity. We account for our investment in CoBank under the cost basis
method of accounting. The investment consists of an initial nominal cash amount
of $1,000 and equity additions based on a percentage (currently 11.5%) of our
five-year average loan volume. Since CoBank operates as a cooperative, we
receive patronage income from CoBank based on our annual loan volume with
CoBank. This patronage income reduces our interest expense. We believe that
these loan transactions are on terms comparable to those available to
unaffiliated third parties.
Critical Accounting Policies
We utilize certain accounting measurements under applicable generally
accepted accounting principles, which involve the exercise of management's
judgment about subjective factors and estimates about the effect of matters
which are inherently uncertain. The following is a summary of those accounting
measurements which we believe are most critical to our reported results of
operations and
42
financial condition.
Inventory Valuation. Inventories are valued at the lower of cost or market.
Cost is determined on a first-in, first-out or average cost basis. Many of our
products, particularly in our dairy foods, animal feed and swine segments, use
dairy or agricultural commodities as inputs or constitute dairy or agricultural
commodity outputs. Consequently, our results are affected by the cost of
commodity inputs and the market price of outputs. Government regulation of the
dairy industry and industry practices in animal feed tend to stabilize margins
in those segments but do not protect against large movements in either input
costs or output prices. Such large movements in commodity prices could result in
significant write-downs to our inventories, which could have a significant
negative impact on our operating results.
We use derivative commodity instruments, primarily futures contracts, in our
operations to lock in our ingredient input prices, primarily for our product
inputs such as milk, butter and soybean oil for dairy foods, soybean meal and
corn for animal feed, and soybeans for crop seed. The degree of our hedging
position varies from less than one percent for butter to nearly 100% for soybean
oil. In addition, purchase agreements with various vendors are used to varying
degrees to lock in input prices. This decreases our exposure to changes in
commodity prices. We do not use derivative commodity instruments for speculative
purposes. The futures contracts are not designated as hedges under Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Accordingly, since the adoption of SFAS No.
133, effective January 1, 2001, the futures contracts are marked to market
(either Chicago Mercantile Exchange or Chicago Board of Trade) on the last day
of each month and unrealized gains and losses are recognized as an adjustment to
cost of sales. Prior to 2001, we did not mark our derivative commodity
instruments to market; instead, we recorded losses or gains only when realized.
Allowance for Doubtful Accounts. We estimate our allowance for doubtful
accounts based on an analysis of specific accounts, an analysis of historical
trends, payment and write-off histories, current sales levels and the state of
the economy. Our credit risks are continually reviewed and management believes
that adequate provisions have been made for doubtful accounts. However,
unexpected changes in the financial strength of customers or changes in the
state of the economy could result in write-offs which exceed estimates and
negatively impact our financial results.
Recoverability of Long-Lived Assets. We assess the recoverability of
goodwill and other long-lived assets annually or whenever events or changes in
circumstances indicate that expected future undiscounted cash flows might not be
sufficient to support the carrying amount of an asset. We deem an asset to be
impaired if a forecast of undiscounted future operating cash flows is less than
an asset's carrying amount. If an asset is determined to be impaired, the loss
is measured as the amount by which the carrying value of the asset exceeds its
fair value. Changes in our business strategies and/or changes in the economic
environment in which we operate may result in future impairment charges.
Cooperative Structure
Land O'Lakes is incorporated in Minnesota as a cooperative corporation.
Cooperatives resemble traditional corporations in most respects, but with two
primary distinctions. First, a cooperative's common shareholders, its "members,"
either supply the cooperative with raw materials or purchase its goods and
services. Second, to the extent a cooperative allocates its earnings from member
business to its members and meets certain other requirements, it is allowed to
deduct this "qualified patronage income" or "patronage income" from its taxable
income. Patronage income is allocated in accordance with the amount of business
each member conducts with the cooperative.
Cooperatives typically derive a majority of their business from members,
although they are allowed by the Internal Revenue Code to conduct non-member
business. Earnings from non-member business are retained as permanent equity by
the cooperative and taxed as corporate income in the same manner as a typical
corporation. Earnings from member business are either allocated to patronage
income or retained as permanent equity (in which case it is taxed as corporate
income) or some combination thereof.
In order to obtain favorable tax treatment on allocated patronage income,
the Internal Revenue Code requires that at least 20% of each member's annual
allocated patronage income be distributed in cash. The portion of patronage
income that is not distributed in cash is retained by the cooperative and
allocated to member equities. Member equities may be distributed to members at a
later time as a "revolvement" as determined by our board of directors. The
cooperative's members must recognize the amount of allocated patronage income
(whether distributed to members or retained by the cooperative) in the
computation of their individual taxable income.
Cooperatives are also allowed to designate patronage income as
"nonqualified" patronage income and allocate it to member
43
equities. Unlike qualified patronage income, the cooperative pays taxes on this
nonqualified patronage income as if it was derived from non-member business. The
cooperative may revolve the nonqualified patronage equity to members at some
later date and is allowed to deduct those amounts from its taxable income at
that time. When nonqualified patronage income is revolved to the cooperative's
members, the revolvement must be included in the members' taxable income.
Wholesaling and Brokerage Activities
Our dairy foods segment operates a wholesale milk marketing program. We
purchase excess raw milk over our production needs from our members and sell it
directly to other dairy processors. We generate losses or insignificant earnings
on these transactions; however, there are three principal reasons for doing
this: first, we need to sell a certain percentage of our raw milk to fluid dairy
processors in order to participate in the Federal market order system, which
lowers our input cost of milk for the manufacture of dairy products; second, it
reduces our need to purchase raw milk from sources other than members during
periods of low milk production in the United States (typically August, September
and October) and third, it ensures that our members have a market for the milk
that they produce during periods of high milk production. In the six months
ended June 30, 2002, we sold 2,915.7 million pounds of milk, which resulted in
$433.3 million of net sales or 30.1% of our dairy foods segment's net sales for
that period, with cost of sales exceeding net sales by $5.5 million.
Our animal feed segment, in addition to selling its own products, buys and
sells or brokers for a fee soybean meal and other feed ingredients. We market
these ingredients to our local member cooperatives and to other feed
manufacturers, which use them to produce their own feed. Although this activity
generates substantial revenues, it is a very low-margin business. We are
generally able to obtain feed inputs at a lower cost as a result of our
ingredient merchandising business because of lower per unit shipping costs
associated with larger purchases and volume discounts. For the six months ended
June 30, 2002, ingredient merchandising generated net sales of $238.0 million,
or 20.0% of total animal feed segment net sales, and a gross profit of $6.7
million, or 4.7% of total animal feed segment gross profit.
Seasonality
Certain segments of our business are subject to seasonal fluctuations in
demand. In our dairy foods segment, butter sales typically increase in the fall
and winter months due to increased demand during holiday periods. Animal feed
sales tend to increase in the fourth and first quarter of each year because
cattle are less able to graze during cooler months. Most crop seed sales used to
occur in the first and second quarter of each year. However, we have seen a
trend toward selling more crop seed in the fourth and first quarter of each year
as a result of lower sales of proprietary brands and increased sales of
partnered seed brands. Agronomy product sales tend to be much higher in the
first and second quarter of each year, as farmers buy crop nutrients and crop
protection products to meet their seasonal needs.
FACTORS AFFECTING COMPARABILITY
Dairy and Agricultural Commodity Inputs and Outputs
Many of our products, particularly in our dairy foods, animal feed and swine
segments, use dairy or agricultural commodities as inputs or constitute dairy or
agricultural commodity outputs. Consequently, our results are affected by the
cost of commodity inputs and the market price of commodity outputs. Government
regulation of the dairy industry and industry practices in animal feed tend to
stabilize margins in those segments but do not protect against large movements
in either input costs or output prices.
Dairy Foods. Raw milk is the major commodity input for our dairy foods
segment. For the six months ended June 30, 2002, our raw milk input cost was
$888.2 million, or 65.2% of the cost of sales for our dairy foods segment.
Cream, butter and bulk cheese are also significant dairy foods commodity inputs.
Cost of sales for these inputs was $122.4 million for cream, $41.6 million for
butter and $160.1 million for bulk cheese for the six months ended June 30,
2002. Our dairy foods outputs, namely butter, cheese and nonfat dry milk, are
also commodities.
The minimum price of raw milk and cream is set monthly by Federal regulators
based on regional prices of dairy foods products produced. These prices provide
the basis for our raw milk and cream input costs. As a result, those dairy foods
products for which the sales price is fixed shortly after production, such as
most bulk cheese, are not subject to significant commodity price risk as the
price received for the output varies with the cost of the significant inputs.
For the six months ended June 30, 2002, bulk cheese, which is generally sold the
day made, represented $131.5 million, or 9.1% of our dairy foods segment's net
sales. Other products, such as private label butter, which have significant net
sales, are also generally sold shortly after they are made.
44
We also maintain significant inventories of butter and cheese for sale to
our retail and food service customers, which are subject to commodity price
risk. Because production of raw milk and demand for butter varies seasonally, we
inventory significant amounts of butter. Demand for butter is highest during the
fall and winter, when milk supply is lowest. As a result, we produce and store
excess quantities of butter during the spring when milk supply is highest. In
addition, we maintain some inventories of cheese for aging. For the six months
ended June 30, 2002, branded and private label retail, deli and foodservice net
sales of cheese and butter represented $460.3 million, or 31.9% of our dairy
foods segment's net sales.
For the six months ended June 30, 2001, commodity butter and cheese prices
were increasing due to a short supply of milk. For the six months ended June 30,
2002, we saw declines in pricing due to larger supplies and a slowing economy;
butter pricing stayed slightly ahead of government support prices, while cheese
pricing dropped below government support prices. However, the net impact on
operating results was somewhat mitigated due to the use of pricing practices,
inventory policies and risk management.
We maintain a sizable dairy manufacturing presence in the Upper Midwest.
This region has seen significant declines in cow numbers. Since 1990, cow
numbers declined 16% in Minnesota and 14% in Wisconsin. Over the same period,
the Minnesota/Wisconsin share of nationwide dairy manufacturing volume has
declined from 40% to 28%. Competition for the lower milk production volumes
resulted in increased milk input costs. We aniticipate that increased milk input
costs will continue in the Upper Midwest through the end of 2002. The milk
volume decline, and resulting plant over capacity and increased milk input
costs, has put upward pressure on our Upper Midwest production costs and,
together with reductions in mozzarella cheese and whey sales decribed below, has
resulted in significant operating losses in this region for the six months ended
June 30, 2002.
In response to these pressures, we have adjusted production at our Perham
and Melrose, Minnesota, plants and we continue to explore alternative
infrastructure deployment models in an effort to increase efficiencies and
reduce costs. Based on the initiatives we have completed to date and those we
expect to complete by year-end, we expect to incur approximately $9 million of
restructuring related costs in 2002.
Reduced margins on our mozzarella and whey products also have had a negative
impact not only on our Upper Midwest operations but also on our Cheese & Protein
International LLC operations. Lower than expected demand and increasing
production capacity have placed downward pressure on the sales and margins these
products generate. We expect that the reduced margins will continue at least
through the end of 2002.
Animal Feed. The animal feed segment follows industry standards for feed
pricing. The feed industry generally prices products based on income over
ingredient cost ("IOIC") per ton of feed. This practice tends to mitigate the
impact of volatility in commodity ingredient markets on our animal feed profits.
As ingredient costs fluctuate, the changes are generally passed on to customers
through weekly or monthly changes in prices. Thus, the key indicator of business
performance in the animal feed segment is IOIC rather than net sales. Net sales
are considered to be a poor indicator of performance since large fluctuations
can occur from period-to-period due to volatility in the underlying commodity
ingredient prices.
We also enter into forward contracts to supply feed, which currently
represent approximately 20% of our feed output. When we enter into these
contracts, we also generally enter into forward input supply contracts to "lock
in" our IOIC.
Changes in commodity grain prices also have an impact on the mix of products
we sell. When grain prices are relatively high, the demand for complete feed
rises since many livestock producers are also grain growers and will sell their
grain in the market and purchase complete feed as needed. When grain prices are
relatively low, these producers will feed their grain to their livestock and
purchase premixes and supplements to provide complete nutrition to their
animals. These fluctuations in product mix generally have minimal effects on our
operating results. Complete feed has a far lower margin per ton than supplements
and premixes. Thus, during periods of relatively high grain prices, although our
margins per ton are lower, we sell substantially more tonnage because the grain
portion of complete feed makes up the majority of its weight.
As dairy production shifted from the Upper Midwest to the western United
States, we have seen a change in our feed product mix, with lower sales of
complete feed and increased sales of simple blends. This change is driven by the
difference in nutritional requirements in dairy cows as a result of less severe
winters in the western United States. In addition, the increase in vertical
integration of swine and poultry producers has resulted in increased sales of
lower-margin feed products.
Swine. We produce and market both young feeder pigs (approximately 45
pounds) and mature market hogs (approximately 260 pounds) under three primary
programs: swine aligned, farrow-to-finish and cost-plus.
45
Under the swine aligned program, we own sows and raise feeder pigs that we
sell to our local member cooperatives under ten-year contracts. For the first
five years, we receive a fixed base price for our feeder pigs and are reimbursed
for feed costs. In years six through ten, the price is based on the cost of
production, plus a margin designed to achieve a target return on invested
capital. Since the price for the duration of the contract is not tied to the
live hog market, we do not have market risk on feeder pig prices. In addition,
there is no risk on corn or soybean meal prices since we are reimbursed for
actual feed costs. We do incur production risk if we do not produce enough
feeder pigs or if we do not produce them at a competitive cost.
Under the farrow-to-finish program, we produce and sell market hogs.
Historically, market hog price fluctuations have resulted in volatility in our
net sales and earnings. In order to mitigate this risk, we have committed to
sell substantially all of the market hogs we produce annually through 2005 to
IBP, inc. under a packer agreement. Under this packer agreement, we are paid
market prices for our hogs with a settlement based on the sales price of the
pork products produced from those hogs. This approach mitigates some of the
volatility under this program because market hog and pork product margins do not
tend to move together. We sell the balance of our market hogs on the open
market.
Under the cost-plus program, we provide minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation. We are in
the process of phasing out our existing cost-plus contracts and will not be
entering into new ones under the current structure. The program incurred pretax
losses of $1.1 million for the six months ended June 30, 2002 and no earnings or
losses for the six months ended June 30, 2001.
Historically, Purina Mills reported results of its swine business together
with its feed business. Accordingly, the portion of our swine business which we
acquired from Purina Mills in October 2001 is reported within our feed segment
in the six months ended June 30, 2002. For the six months ended June 30, 2002,
the Purina Mills swine business generated a loss of $1.4 million compared to
earnings of $0.1 million for the six months ended June 30, 2001, primarily due
to a decline in hog market prices.
Acquisitions/Joint Ventures/Divestitures
We have engaged in various significant acquisitions, joint ventures and
divestitures since January 1, 1999. Each of the acquisitions was accounted for
as a purchase transaction. The Land O'Lakes Farmland Feed and Agriliance joint
ventures, our most significant joint ventures, involved the combination of
existing Land O'Lakes business units with those of our joint venture partners to
create new entities. Since its formation on October 1, 2000, we have
consolidated Land O'Lakes Farmland Feed. However, because we do not control
Agriliance, it is accounted for under the equity method.
The following table lists each acquisition, joint venture and divestiture in
excess of $50 million in asset value since 1999.
YEAR NAME TRANSACTION TOTAL ASSETS
---- ---- ----------- ------------
2001 Purina Mills........................ Acquisition for cash of $540.5 million
stock of commercial and
lifestyle feed company
(October 2001)
2000 Madison Dairy Produce Co............ Acquisition for cash of $59.3 million
private label butter
company (January 2000)
Fluid dairy assets.................. Divestiture for cash of $112.2 million
fluid dairy assets
(July 2000)
Land O'Lakes Farmland Feed.......... Joint venture with $91.7 million
Farmland Industries (our contribution)
involving transfer of
existing Land O'Lakes
animal feed business
(October 2000)
Agriliance.......................... Joint venture with $79.5 million
United Country Brands (our contribution)
involving transfer of
certain Land O'Lakes
agronomy assets (July
2000)
1999 Terra Industries.................... Acquisition for cash of $70.7 million
46
selected agronomy retail
distribution assets in
the eastern United
States (June 1999)
Agro Distribution................... Investment in joint $50.0 million
venture with CHS
Cooperatives (June
1999) formed to acquire
selected northern and
southern ag retail
distribution assets from
Terra Industries
In June 1999, certain of the northern and southern retail agronomy assets of
Terra Industries were acquired by Agro Distribution, our unconsolidated joint
venture with CHS Cooperatives, which was subsequently contributed to Agriliance.
The objective of this acquisition was to sell each retail agronomy location to
one or more of our local cooperative members. Nearly all of the northern
locations have been sold. We were unable to sell most of the southern locations
and decided in the fall of 2001 to continue to operate these southern retail
agronomy assets. Operation of these locations resulted in significant losses for
the six months ended June 30, 2001. These losses were recorded through our
investment in Agriliance as equity in earnings or loss from affiliated
companies. Agro Distribution's losses on operation of these locations aggregated
$22.4 million for the six months ended June 30, 2001, with Land O'Lakes
recording 50% of these losses in equity in loss of affiliated companies.
In October 2001, we acquired Purina Mills, Inc. The total purchase price of
the Purina Mills acquisition was $358.6 million. The acquisition added $86.9
million of goodwill and $98.9 million of other intangible assets to our balance
sheet. This acquisition resulted in a substantial increase in our leverage
(long-term debt, including Capital Securities, to capital) from 43.5% at
December 31, 2000 to 54.2% at June 30, 2002 and increased interest costs by
approximately $40 million annually. Given the nature of products sold by Purina
Mills and its distribution network, the Purina Mills business has a higher gross
margin rate and a higher rate of selling, general and administration expense as
a percent of sales than the Land O'Lakes Farmland Feed business. By the end of
2002, we expect to have implemented programs that would enable us to generate
recurring annual cost savings of approximately $50 million as a result of the
acquisition, relative to costs that would have been incurred separately. In
2002, we expect to generate approximately $25 million in savings, which are
expected to be partially offset by plant closing, severance, employee relocation
and information technology integration costs of approximately $20 million.
RESULTS OF OPERATIONS
Three Months Ended
June 30,
---------------------------------------
2002 2001
------------------ -----------------
% of % of
$ Amount Total $ Amount Total
---------- ------- --------- ------
(Dollars in millions)
Net sales
Dairy foods..... $ 710.3 50.3 $ 830.0 60.5
Animal feed..... 579.4 41.1 401.5 29.3
Crop seed....... 97.2 6.9 109.6 8.0
Swine........... 21.8 1.5 28.1 2.0
Other........... 3.4 0.3 3.3 0.2
-------- ---- -------- ----
Total net sales $1,412.1 $1,372.5
======== ========
% of % of
Net Net
$ Amount Sales $ Amount Sales
---------- ------- --------- ------
Cost of sales
Dairy foods............... $ 672.0 94.6 $ 771.3 92.9
Animal feed............... 509.2 87.9 364.0 90.7
Crop seed................. 83.1 85.5 94.2 86.0
Swine..................... 22.1 101.4 24.0 85.4
Other..................... 1.9 55.9 1.7 51.5
-------- --------- -------- --------
Total cost of sales... 1,288.3 91.3 1,255.2 91.5
Selling, general and
administration expense
Dairy foods............... 40.1 5.6 44.3 5.3
Animal feed............... 63.7 11.0 26.8 6.7
Crop seed................. 10.2 10.5 10.8 9.9
Swine..................... 1.6 7.3 1.9 6.8
Agronomy.................. 5.9 -- 2.5 --
Other..................... 2.6 76.5 1.6 45.5
-------- --------- -------- --------
47
Total selling, general and
administration
expense............. 124.1 8.8 87.9 6.4
Restructuring and impairment
charges (reversals)..... 3.8 0.3 (0.8) 0.0
-------- --------- --------- ---------
Earnings (loss) from operations (4.1) 0.3 30.3 2.2
Interest expense, net..... 17.4 1.3 12.6 0.9
Gain on legal settlement.. (32.7) 2.4 -- --
Gain on divestiture of
businesses.............. (1.2) 0.1 (0.2) 0.0
Equity in earnings of
affiliated companies.... (44.2) 3.2 (37.4) 2.7
Minority interest in (loss)
earnings of
subsidiaries............ (1.0) 0.1 2.2 0.2
---------- ---------- --------- ---------
Earnings before
income taxes............ 57.6 4.1 53.1 3.9
Income tax expense........ 9.3 0.7 8.9 0.6
-------- --------- -------- --------
Net earnings.............. $ 48.3 3.5 $ 44.2 3.2
======== ========= ======== ========
Six Months Ended
June 30,
---------------------------------------
2002 2001
------------------ -----------------
% of % of
$ Amount Total $ Amount Total
---------- ------- --------- ------
(Dollars in millions)
Net sales
Dairy foods..... $1,441.4 49.1 $1,586.4 57.7
Animal feed..... 1,190.0 40.5 809.9 29.5
Crop seed....... 252.9 8.6 291.4 10.6
Swine........... 45.7 1.6 53.7 2.0
Other........... 6.3 0.2 6.8 0.2
-------- ---- -------- ----
Total net sales $2,936.3 $2,748.2
======== ========
% of % of
Net Net
$ Amount Sales $ Amount Sales
---------- ------- --------- ------
Cost of sales
Dairy foods............... $1,358.0 94.2 $1,474.3 92.9
Animal feed............... 1,045.7 87.9 740.4 91.4
Crop seed................. 213.7 84.5 247.9 85.1
Swine..................... 43.6 95.4 48.7 90.7
Other..................... 3.6 57.1 4.5 66.2
-------- --------- --------- ---------
Total cost of sales... 2,664.6 90.8 2,515.8 91.6
Selling, general and
administration expense
Dairy foods............... 84.7 5.9 85.4 5.4
Animal feed............... 126.1 10.6 55.1 6.8
Crop seed................. 23.2 9.2 22.7 7.8
Swine..................... 3.2 7.0 3.7 6.9
Agronomy.................. 9.5 -- 9.6 --
Other..................... 4.8 76.2 4.0 58.8
-------- --------- --------- ---------
Total selling, general and
administration
expense............. 251.5 8.6 180.5 6.6
Restructuring and impairment
charges (reversals)..... 7.3 0.2 (1.8) 0.1
-------- --------- --------- ---------
Earnings from operations.. 12.9 0.5 53.7 2.0
Interest expense, net..... 34.9 1.2 24.3 0.9
Gain on legal settlement.. (32.7) 1.2 -- --
Gain on sale of intangibles (4.2) 0.1 -- --
Gain on divestiture of
Businesses.............. (1.2) -- (0.2) --
Equity in earnings of
affiliated companies.... (34.4) 0.1 (37.3) 1.4
Minority interest in (loss)
earnings of
subsidiaries............ (0.1) - 3.8 0.1
-------- --------- --------- ---------
Earnings before
income taxes ........... 50.5 1.7 63.1 2.2
Income tax expense ....... 3.2 0.1 5.9 0.2
-------- --------- --------- ---------
Net earnings ............. $ 47.3 1.6 $ 57.2 2.1
======== ========= ========= =========
48
THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
NET SALES
Net sales for the three months ended June 30, 2002 increased $39.6 million,
or 2.9%, to $1,412.1 million, compared to net sales of $1,372.5 million for the
three months ended June 30, 2001. The increase was primarily attributed to the
acquisition of Purina Mills in October 2001 which contributed $199.9 million in
sales, partially offset by declines in dairy foods sales and the impact of the
discontinuance of a partnered soybean brand.
Dairy Foods. Net sales for the three months ended June 30, 2002 decreased
$119.7 million, or 14.4%, to $710.3 million, compared to net sales of $830.0
million for the three months ended June 30, 2001. During the three months ended
June 30, 2002, average commodity prices for butter decreased $0.77 per pound,
while average commodity prices for cheese decreased $0.34 per pound compared to
the same period in 2001. The impact of these commodity price changes decreased
net sales of butter by $53.0 million and cheese by $26.4 million. However, the
prices retailers set for branded butter did not follow trends in the commodity
butter markets. Retail prices for branded butter remained high, which resulted
in declines in sales volumes as consumers shifted to substitute products or
reduced consumption. Butter and spreads volumes decreased 4.9 million pounds and
3.2 million pounds, respectively, representing a decrease in net sales of $11.8
million and $2.3 million, respectively, from the same period last year. Nonfat
dry milk powder and private label butter sales in the Western Region decreased
$15.0 million and $1.2 million, respectively. The decline in powder sales was
due to changes in production schedules at our dairy plants, which resulted in
reduced powder byproduct availability, while the decline in butter sales was due
to a combination of decreased market prices and volume declines. Cheese &
Protein International LLC., a cheese and whey joint venture, began production
during the three months ended June 30, 2002 and added sales of $3.7 million.
Sales for the three months ended June 30, 2002 under our wholesale milk
marketing program decreased $10.6 million, or 4.8%, to $211.9 million, compared
to $222.5 million for the three months ended June 30, 2001. This decrease was
primarily due to a decrease in the market price of milk. Changes in other
product categories accounted for a sales decrease of $3.1 million.
Animal Feed. Net sales for the three months ended June 30, 2002 increased
$177.9 million, or 44.3%, to $579.4 million, compared to net sales of $401.5
million for the three months ended June 30, 2001. The acquisition of Purina
Mills contributed $199.9 million in incremental sales. This increase was
partially offset by declines in Land O'Lakes Farmland Feed branded sales. Sales
in our Land O'Lakes Farmland Feed Animal Health and Packaged Goods area
decreased $5.3 million as a result of a realigned marketing arrangement with a
large vendor whereby we no longer record sales dollars, but rather a
margin-based fee. Swine sales in our Land O'Lakes Farmland Feed branded products
decreased $3.2 million as a result of decreased volumes and depressed market
prices for hog producers. Sales also decreased $1.8 million in our Land O'Lakes
Farmland Feed branded lifestyle product lines, reflecting a later than expected
beginning of the aquaculture feeding season. Sales of Land O'Lakes Farmland Feed
branded beef feeds decreased $1.4 million, primarily due to the effect of warmer
than average weather and excess food proteins (such as beef cattle, swine and
chickens) in the U.S. market. Sales of bulk phosphates decreased $5.2 million
due to the sale of this business to a third party. Sales in our dairy feeds area
increased $3.5 million, driven by strong sales of simple blends in our Western
feed division. Sales in our International division decreased $5.8 million from
$8.5 million for the three months ended June 30, 2001 to $2.7 million for the
three months ended June 30, 2002 as a result of the exit from Mexico operations.
Finally, sales from ingredient merchandising increased $1.6 million, or 1.4%,
from $114.3 million for the three months ended June 30, 2001 to $115.9 million
for the three months ended June 30, 2002.
Crop Seed. Net sales for the three months ended June 30, 2002 decreased
$12.4 million, or 11.3%, to $97.2 million, compared to net sales of $109.6
million for the three months ended June 30, 2001. The discontinuance of a
partnered soybean brand contributed to decreased volumes, resulting in a sales
decrease of soybeans of $13.4 million or 39.3%. Sales of alfalfa decreased by
$5.2 million, or 35.8%, due mainly to increased volumes of low-priced generic
alfalfa. Turf volume declines resulted in lower sales of $2.6 million, or 14.6%.
Continued volume growth resulted in increased sales of corn of $7.7 million, or
7.3%. A change in billing for technology fees collected on behalf of one of our
third-party suppliers added $2.8 million to sales and cost of sales. Volume
declines in other seed categories resulted in a sales decrease of $1.7 million.
Swine. Net sales for the three months ended June 30, 2002 decreased $6.3
million, or 22.4%, to $21.8 million, compared to $28.1 million for the three
months ended June 30, 2001. The number of market hogs sold decreased by 17,474
and the average weight per market hog sold decreased 4.4 pounds, with a
corresponding sales decrease of $3.3 million. Reduced consumer demand, caused,
in part, by an excess of food proteins in the U.S. markets, decreased the
average market price for the three months ended June 30, 2002 to $36.35 per
hundredweight versus an average market price of $52.95 for the three months
ended June 30, 2001. The decrease in
49
average market hog prices of $16.60 per hundredweight decreased sales by $5.2
million. We signed a packer agreement with IBP, inc. effective September 25,
2000, which ties the price we receive for market hogs to the price that the
packer receives for pork products. For the three months ended June 30, 2002,
this agreement increased our sales by $2.7 million. The average price per feeder
pig sold under contract increased $0.37 from $45.44 for the three months ended
June 30, 2001 to $45.81 for the three months ended June 30, 2002, which
increased sales by $0.1 million. This increase was due primarily to the fact
that we added more swine aligned contracts with a higher base price. The average
price per feeder pig sold on the open market decreased $12.23, from $49.62 for
the three months ended June 30, 2001 to $37.39 for the three months ended June
30, 2002, which decreased sales by $1.0 million.
COST OF SALES
Cost of sales for the three months ended June 30, 2002 increased $33.1
million, or 2.6%, to $1,288.3 million, compared to cost of sales of $1,255.2
million for the three months ended June 30, 2001. Cost of sales as a percent of
net sales decreased 0.2 percentage points to 91.3% for 2002, compared to 91.5%
for the prior year. The acquisition of Purina Mills added significantly to our
cost of sales, resulting in an increase of $164.9 million. This increase was
partially offset by lower cost of sales in dairy foods, seed and swine. For the
three months ended June 30, 2002, patronage income from other cooperatives that
was directly attributable to product purchases amounted to $2.2 million,
compared to $1.4 million for the three months ended June 30, 2001. Our cost of
sales was reduced by these amounts.
Dairy Foods. Cost of sales for the three months ended June 30, 2002
decreased $99.3 million, or 12.9%, to $672.0 million, compared to cost of sales
of $771.3 million for the three months ended June 30, 2001. During the three
months ended June 30, 2002, average commodity butter prices decreased $0.77 per
pound, while average commodity cheese prices decreased $0.34 per pound compared
to the same period in 2001. The impact of these commodity price changes
decreased cost of sales of butter by $53.0 million and cheese by $26.4 million.
Cost of sales for nonfat dry milk powder and private label butter in the Western
region decreased $15.0 million and $1.8 million, respectively. Higher milk input
costs and plant restructuring in the Upper Midwest resulted in increased cost of
sales of $4.1 million. Cost of sales for the three months ended June 30, 2002
under our wholesale milk marketing program decreased $9.2 million, or 4.1%, to
$212.9 million, compared to $222.1 million for the three months ended June 30,
2001. This decrease was due primarily to the lower market price of milk. Cost of
sales include a $10.3 million loss from the start-up of our cheese and whey
plant in Tulare, California, that we operate as a joint venture with Mitsui of
Japan and lower demand in both mozzerella and whey. Finally, cost of sales for
exports, foodservice cheese and other products increased $8.3 million over the
prior-year period. Cost of sales as a percent of net sales increased 1.7
percentage points from 92.9% for the three months ended June 30, 2001 to 94.6%
for the three months ended June 30, 2002, primarily due to lower sales volumes.
Animal Feed. Cost of sales for the three months ended June 30, 2002
increased $145.2 million, or 39.9%, to $509.2 million compared to $364.0 million
for the three months ended June 30, 2001. The acquisition of Purina Mills added
$164.9 million in cost of sales for the three months ended June 30, 2002. This
increase was slightly offset by a decrease in Land O'Lakes Farmland Feed branded
product lines. Land O'Lakes Farmland Feed Animal Health and Packaged Goods
decreased $5.2 million driven by a realigned marketing arrangement whereby we no
longer record cost of sales dollars, but rather a margin-based fee. Land O'Lakes
Farmland Feed branded lifestyle cost of sales declined $2.9 million resulting
from a later than expected beginning of the aquaculture feeding season. Land
O'Lakes Farmland Feed branded swine cost of sales decreased by $1.0 million.
Land O'Lakes Farmland Feed branded beef feeds cost of sales decreased $0.4
million, due to slower sales as a result of warm winter weather. Cost of sales
in our International division decreased $5.2 million from $8.5 million in the
second quarter of 2001 to $2.9 million on the second quarter of 2002 primarily
due to the exit of our Mexico operations in the first quarter of 2002. Cost of
sales of bulk phosphates decreased $4.5 million as we sold this business during
the first quarter of 2002. Cost reductions from the integration efforts related
to Purina Mills reduced our cost of sales by $2.0 million. Cost of sales in our
dairy feed area increased $4.7 million, primarily as a result of strong sales in
our Western region. Patronage income which is recorded as a reduction of cost of
sales decreased $1.9 million from earnings of $0.9 million in the second quarter
of 2001 to a loss of $1.0 million in the second quarter of 2002. An unrealized
hedging gain in the second quarter of 2002 related to corn and soybean meal
futures contracts decreased cost of sales by $1.8 million, compared to a gain of
$1.2 million in the second quarter of 2001. Cost of sales increased $1.7 million
as a result of the increase in ingredient merchandising sales. Cost of sales as
a percent of net sales decreased 2.8 percentage points, from 90.7% in the second
quarter of 2001 to 87.9% in the same period of 2002. The decrease was due
primarily to certain Purina Mills products, which carry a comparatively higher
margin than our traditional product lines. IOIC as a percent of cost of sales
increased to 26.1% in the second quarter of 2002 from 18.5% in the same period
of 2001 due to the change in product mix and the change in unrealized hedging
gains and losses as noted above.
Crop Seed. Cost of sales for the three months ended June 30, 2002 decreased
$11.1 million, or 11.8%, to $83.1 million, compared to cost of sales of $94.2
million for the three months ended June 30, 2001. Cost of sales decreased for
soybeans ($12.0 million), alfalfa ($5.3 million) and turf seeds ($2.4 million)
due to volume decreases. Increased sales of corn resulted in increased cost of
sales of $8.0
50
million. In addition, a change in billing for technology fees collected on
behalf of one of our third-party suppliers increased sales and cost of sales by
$2.8 million. Volume changes for other seed products contributed $0.9 million to
the cost of sales decrease. An unrealized hedging gain of $0.9 million for the
three months ended June 30, 2002 was related to soybean futures contracts,
compared to an unrealized hedging loss of $0.4 million for the three months
ended June 30, 2001, which reduced cost of sales by $1.3 million. Cost of sales
as a percent of net sales decreased 0.5 percentage points, from 86.0% for the
three months ended June 30, 2001 to 85.5% for the three months ended June 30,
2002, due to the change in product mix.
Swine. Cost of sales for the three months ended June 30, 2002 decreased $1.9
million, or 7.9%, to $22.1 million, compared to $24.0 million for the three
months ended June 30, 2001. Reduced unit sales decreased cost of sales by $2.1
million. In cost-plus, the decrease in markets fell below the program's floor
price to independent producers, which increased cost of sales by $1.2 million.
An unrealized hedging gain decreased cost of sales by $0.2 million for the three
months ended June 30, 2002, compared to an unrealized hedging loss of $0.8
million for the three months ended June 30, 2001, resulting in a net decrease in
cost of sales of $1.0 million.
million. Cost of sales as a percent of net sales increased 16.0 percentage
points from 85.4% to 101.4% of sales, primarily due to the decrease in hog
market prices which lowered swine net sales.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the three months ended June
30, 2002 increased $36.3 million, or 41.3%, to $124.1 million, compared to
selling, general and administration expense of $87.9 million for the three
months ended June 30, 2001. Selling, general and administration expense as a
percent of net sales increased 2.4 percentage points from 6.4% for the three
months ended June 30, 2001 to 8.8% for the three months ended June 30, 2002. The
acquisition of Purina Mills in October 2001 contributed to the increase.
Dairy Foods. Selling, general and administration expense for the three
months ended June 30, 2002 decreased $4.2 million, or 9.5%, to $40.1 million,
compared to $44.3 million for the three months ended June 30, 2001. This
decrease was primarily due to a reduction in advertising and promotion spending
of $2.5 million and goodwill amortization of $0.7 million. Selling, general and
administration expense as a percent of net sales increased 0.3 percentage points
from 5.3% for the three months ended June 30, 2001 to 5.6% for the three months
ended June 30, 2002 due to lower sales volumes.
Animal Feed. Selling, general and administration expense for the three
months ended June 30, 2002 increased $36.9 million, or 137.7%, to $63.7 million,
compared to $26.8 million for the three months ended June 30, 2001. The majority
of this increase was related to the acquisition of Purina Mills, which
contributed $30.9 million in increased selling, general and administration
expense. In addition, we incurred one-time integration costs of $3.2 million
related to the Purina Mills acquisition, including $1.7 million in information
systems integration costs and $0.6 million in relocation expense. During the
second quarter of 2002, bad debt expense increased by $1.7 million over the same
period in 2001. Selling, general and administration expense as a percent of net
sales increased 4.3 percentage points from 6.7% for the three months ended June
30, 2001 to 11.0% for the three months ended June 30, 2002. Selling, general and
administration expense as a percent of IOIC increased from 41.4% for the three
months ended June 30, 2001 to 48.0% for the three months ended June 30, 2002.
Crop Seed. Selling, general and administration expense for the three months
ended June 30, 2002 decreased $0.6 million, or 5.6%, to $10.2 million, compared
to $10.8 million for the three months ended June 30, 2001. Cost reduction
efforts and decreased information systems spending are the primary reasons.
Selling, general and administration expense as a percent of net sales increased
0.6 percentage points, from 9.9% for the three months ended June 30, 2001 to
10.5% for the three months ended June 30, 2002.
Swine. Selling, general and administration expense for the three months
ended June 30, 2002 decreased $0.3 million, or 15.8%, to $1.6 million, compared
to $1.9 million for the three months ended June 30, 2001 due to reduced
staffing. Selling, general and administration expense as a percent of net sales
increased 0.5 percentage points, from 6.8% for the three months ended June 30,
2001 to 7.3% for the three months ended June 30, 2002.
Agronomy. Selling, general and administration expense for the three months
ended June 30, 2002 increased $3.4 million, or 136.0%, to $5.9 million, compared
to $2.5 million for the three months ended June 30, 2001. The increase was
primarily due to the recording of a $2.1 million charge for environmental
liabilities related to pre-Agriliance operations. Selling, general and
administration expense for the three months ended June 30, 2002 included minimal
losses recorded for eastern agronomy assets held for sale, compared to income of
$0.7 million recorded for the three months ended June 30, 2001. Since most of
the eastern agronomy assets have been sold, we did not record any income in the
second quarter from these assets.
51
RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended June 30, 2002, Land O'Lakes recorded
restructuring and impairment charges of $3.8 million, compared to a reversal of
a prior-year charge of $0.8 million for the three months ended June 30, 2001.
Dairy foods recorded a $2.8 million charge, which consisted of $1.5 million for
employee severance and outplacement for 82 employees and $1.3 million for
impairment related to the Faribault, MN dairy plant closure. Animal feed
recorded a $1.0 million restructuring and impairment charge, of which $0.9
million was related to the write-down of certain impaired plant assets to their
estimated fair value, and $0.1 million was related to employee severance and
outplacement costs for employees at various locations. The 2001 reversal of $0.8
million was for the sale of certain animal feed assets that had been written off
in December 2000 and to reflect the decision to continue operating a plant
previously scheduled for shutdown.
We anticipate restructuring and impairment charges of approximately $7
million in 2002 related to the integration of Purina Mills into Land O'Lakes
Farmland Feed. In addition, we anticipate restructuring charges of approximately
$9 million in 2002 related to the consolidation of dairy operations in the Upper
Midwest and California.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2002 was $17.4 million,
compared to $12.6 million for the three months ended June 30, 2001. The $4.8
million, or 38.1%, increase primarily resulted from increased borrowing to
finance the Purina Mills acquisition. Average debt balances increased by $247.1
million over the three months ended June 30, 2001. CoBank patronage reduced
interest expense by $0.1 million for the three months ended June 30, 2002,
compared to $0.2 million for the three months ended June 30, 2001. Combined
interest rates for borrowings, excluding CoBank patronage, averaged 6.99% for
the three months ended June 30, 2002, compared to 6.39% for the three months
ended June 30, 2001.
GAIN ON LEGAL SETTLEMENT
In the fourth quarter of 1999, a class action lawsuit, alleging illegal
price fixing, was filed against various vitamin product suppliers. Initially,
the Company was a party to this action as a member of the class. In February
2000, however, the Company decided to pursue its claims against the defendants
outside the class action. To date in 2002, the Company has received settlement
proceeds of $32.7 million from several of the defendants. These settlements were
reached with defendants who represent less than half of the Company's total
vitamin product purchases in dispute. The Company is currently pursuing similar
claims against the remaining defendants. With respect to the pending claims, the
factual discovery phase has ended and a January 2003 trial date has been set.
GAIN ON DIVESTITURE OF BUSINESSES
We recorded a gain of $1.2 million on divestiture of a dairy foods business
in Poland for the three months ended June 30, 2002, compared to a gain of $0.2
million on divestiture of a feed business for the three months ended June 30,
2001.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the three months ended June 30, 2002, equity in earnings of affiliated
companies was $44.2 million, compared to earnings of $37.4 million for the three
months ended June 30, 2001. Results for the three months ended June 30, 2002
included earnings from Agriliance of $48.3 million, primarily driven by lower
selling, general and administration expense, improved fertilizer margins and
lower interest expense, partially offset by declines in nitrogen prices and
fertilizer volumes as well as the sale of selected retail facilities. We
recorded a loss of $5.3 million from MoArk, primarily as a result of low market
prices for eggs due to an oversupply of eggs in the market. Improvements in
market prices are expected for the second half of 2002 as a result of a
declining chick hatch and anticipated changes in response to new animal welfare
guidelines. Results for the three months ended June 30, 2001 included earnings
from Agriliance of $34.0 million, earnings from Gold Kist of $1.0 million and a
loss from MoArk of $1.4 million.
MINORITY INTEREST IN LOSS OR EARNINGS OF SUBSIDIARIES
For the three months ended June 30, 2002, we recorded minority interest in
loss of subsidiaries of $1.0 million, compared to earnings of $2.2 million for
the three months ended June 30, 2001. Minority interest in earnings of animal
feed related subsidiaries was more than offset by minority interest in the loss
of dairy foods and other consolidated subsidiaries.
52
INCOME TAXES
We recorded income tax expense of $9.3 million for the three months ended
June 30, 2002, compared to income tax expense of $8.9 million for the three
months ended June 30, 2001.
NET EARNINGS
Net earnings increased $4.1 million to net earnings of $48.3 million for the
three months ended June 30, 2002, compared to net earnings of $44.2 million for
the three months ended June 30, 2001. A $32.7 million gain on legal settlement
and an increase in equity in earnings of affiliated companies contributed to the
net earnings increase, but were mostly offset by lower dairy foods sales
volumes, higher milk input costs, higher selling, general and administration
expense and higher interest expense.
SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
NET SALES
Net sales for the six months ended June 30, 2002 increased $188.1 million,
or 6.8%, to $2,936.3 million, compared to net sales of $2,748.2 million for the
six months ended June 30, 2001. Excluding the effects of the formation of the
Advanced Food Products joint venture in March 2001, net sales increased $201.8
million, or 7.4%, from $2,734.5 million for the six months ended June 30, 2001
to $2,936.3 million for the six months ended June 30, 2002. The increase was
primarily attributed to the acquisition of Purina Mills in October 2001 which
contributed $414.8 million in incremental sales, partially offset by declines in
dairy foods sales, the impact of early shipments of crop seed products in the
fourth quarter of 2001 that historically occurred in the first quarter of each
year and lower swine sales.
Dairy Foods. Net sales for the six months ended June 30, 2002 decreased
$145.0 million, or 9.1%, to $1,441.4 million, compared to net sales of $1,586.4
million for the six months ended June 30, 2001. Excluding the effects of the
Advanced Food Products joint venture, net sales for the six months ended June
30, 2002 decreased $131.3 million, or 8.3%, from the six months ended June 30,
2001. For the six months ended June 30, 2002, average commodity prices for
butter decreased $0.43 per pound, while average commodity prices for cheese
decreased $0.14 per pound compared to the same period in 2001. The impact of
these market price changes decreased net sales of butter by $61.0 million and
decreased net sales of cheese by $21.6 million. However, the prices retailers
set for branded butter did not follow trends in the commodity butter markets.
Retail prices for branded butter remained high, which resulted in declines in
sales volumes as consumers shifted to substitute products or reduced
consumption. Butter and spreads volumes decreased 6.5 million pounds and 6.4
million pounds, respectively, representing a decrease in net sales of $14.5
million and $4.7 million, respectively, from the same period last year. Deli
cheese volumes decreased 3.9 million pounds from the prior year and resulted in
a reduction of sales of $7.4 million. Nonfat dry milk powder and private label
butter sales in the Western Region decreased $27.5 million and $14.6 million,
respectively. The decline in powder sales was due to changes in production
schedules at our dairy plants, which resulted in reduced powder byproduct
availability, while the decline in butter sales was due to a combination of
decreased market prices and volume declines. Cheese & Protein International
LLC., a cheese and whey joint venture, began production in 2002 and added sales
of $3.7 million. Sales for the six months ended June 30, 2002 under our
wholesale milk marketing program increased $9.4 million, or 2.2%, to $433.3
million, compared to $423.9 million for the six months ended June 30, 2001. This
increase was due to the acquisition of the Melrose, MN dairy plant in March
2001, which contributed $24.1 million in incremental wholesale milk sales for
the six months ended June 30, 2002. Volume changes in exports, foodservice
cheese and other product categories accounted for the remaining sales decrease
of $16.9 million.
Animal Feed. Net sales for the six months ended June 30, 2002 increased
$380.1 million, or 46.9%, to $1,190 million, compared to net sales of $809.9
million for the six months ended June 30, 2001. The acquisition of Purina Mills
contributed $414.8 million in incremental sales. This increase was partially
offset by declines in Land O'Lakes Farmland Feed branded sales. Sales in our
Land O'Lakes Farmland Feed Animal Health and Packaged Goods area decreased $10.2
million as a result of a realigned marketing arrangement with a large vendor
whereby we no longer record sales dollars, but rather a margin-based fee. Swine
sales in our Land O'Lakes Farmland Feed branded products decreased $7.0 million
as a result of decreased volumes and depressed market prices for hog producers
caused, in part, by a protein oversupply in the U.S. market. Sales of Land
O'Lakes Farmland Feed branded beef feeds decreased $6.7 million, primarily due
to the effect of warmer than average winter weather and excess food proteins
(such as beef cattle, swine and chickens) in the U.S. market. Sales also
decreased $5.3 million in our Land O'Lakes Farmland Feed branded lifestyle
product lines, reflecting a delayed start to the aquaculture feeding season.
Sales of bulk phosphates decreased $8.3 million due to the sale of this business
to a third party. International sales decreased by $3.5 million from $13.4
million for the first half of 2001 compared to $9.9 million for the same period
in 2002 as a result of our exit of Mexican operations during the first quarter
of 2002.
53
Sales in our dairy feeds area increased $4.8 million, driven by strong sales of
simple blends in our Western region. We also experienced an increase of $4.0
million in our Animal Milk Products area as a result of strong volumes. Changes
in other feed categories amounted to a decrease of $7.6 million. Finally, sales
from ingredient merchandising decreased $1.0 million from $238.9 million for the
six months ended June 30, 2001 to $238.0 million for the six months ended June
30, 2002.
Crop Seed. Net sales for the six months ended June 30, 2002 decreased $38.5
million, or 13.2%, to $252.9 million, compared to net sales of $291.4 million
for the six months ended June 30, 2001. We shipped $42.0 million in sales in the
fourth quarter of 2001 that historically would have occurred during the first
six months of 2002. These $42.0 million shipments included $28.5 million for
soybeans and $11.0 million for corn. An early fall harvest and mild winter
allowed us to ship product early in the season, and third-party suppliers also
provided incentives to customers to take seed product early. The discontinuance
of a partnered soybean brand contributed to decreased volumes and a sales
decrease of $13.7 million or 13.5%. Strong volume growth resulted in increased
sales of corn of $17.4 million, or 22.9%, due to early placement of product in
the retail channels because of the mild winter season, while sales of alfalfa
decreased by $7.5 million, or 20.2%, due to the continued glut in the alfalfa
market. A change in billing for technology fees collected on behalf of one of
our third-party suppliers added $10.8 million to sales and cost of sales.
Declines in other seed categories accounted for the remaining decrease of $3.5
million.
Swine. Net sales for the six months ended June 30, 2002 decreased $8.0
million, or 14.9%, to $45.7 million, compared to $53.7 million for the six
months ended June 30, 2001. Reduced consumer demand caused, in part, by an
excess of food proteins in the U.S. market, decreased the average market price
for the six months ended June 30, 2002 to about $38.20 per hundredweight versus
an average market price of approximately $48.33 for the six months ended June
30, 2001. The decrease in average market hog prices of $10.13 per hundredweight
decreased sales by $6.1 million. The number of market hogs sold decreased by
32,791, with a corresponding sales decrease of $4.3 million, and the total
number of feeder pigs sold increased by 693 with minimal impact on sales,
resulting in a net decrease in sales of $4.3 million. The average price per
feeder pig sold on the open market decreased $12.49, from $51.73 for the six
months ended June 30, 2001 to $39.24 for the six months ended June 30, 2002,
which decreased sales by $0.9 million. The decrease in feeder pig sales price
was due mainly to lower hog markets, since producers utilize hog market futures
prices to determine how much they can profitably pay for feeder pigs which they
raise into market hogs. We signed a packer agreement with IBP, inc., effective
September 25, 2000, which ties the price we receive for market hogs to the price
that the packer receives for pork products. For the six months ended June 30,
2002, this agreement increased our sales by $3.2 million, compared to the six
months ended June 30, 2001. The average price per feeder pig sold under contract
increased $0.50 from $46.87 for the six months ended June 30, 2001 to $47.37 for
the six months ended June 30, 2002, which increased sales by $0.1 million. This
increase was due primarily to the fact that we added more swine aligned
contracts with a higher base price.
COST OF SALES
Cost of sales for the six months ended June 30, 2002 increased $148.8
million, or 5.9%, to $2,664.6 million, compared to cost of sales of $2,515.8
million for the six months ended June 30, 2001. Cost of sales as a percent of
net sales decreased 0.8 percentage points to 90.8% for 2002, compared to 91.6%
for the prior year. The formation of the Advanced Food Products joint venture
impacted our reported results because we no longer consolidate its results in
our financial statements. Adjusting for the effects of this transaction, cost of
sales increased $161.5 million, or 6.5%, to $2,664.6 million for the six months
ended June 30, 2002, compared to cost of sales of $2,503.2 million for the six
months ended June 30, 2001. Cost of sales as a percentage of net sales adjusted
for the effects of this transaction decreased 0.7 percentage points from 91.5%
for the six months ended June 30, 2001 to 90.8% for the six months ended June
30, 2002. The acquisition of Purina Mills added significantly to our cost of
sales, resulting in an increase of $342.1 million. This increase was partially
offset by lower cost of sales in dairy foods, crop seed and swine. For the six
months ended June 30, 2002, patronage income from other cooperatives that was
directly attributable to product purchases amounted to $3.3 million, compared to
$2.0 million for the six months ended June 30, 2001. Our cost of sales was
reduced by these amounts.
Dairy Foods. Cost of sales for the six months ended June 30, 2002 decreased
$116.3 million, or 7.9%, to $1,358.0 million, compared to cost of sales of
$1,474.3 million for the six months ended June 30, 2001. Excluding the effects
of the formation of the Advanced Food Products joint venture, cost of sales
decreased $103.8 million to $1,358.0 million for the six months ended June 30,
2002, compared to $1,461.9 million for the six months ended June 30, 2001. For
the six months ended June 30, 2002, average butter market prices decreased $0.43
per pound, while average cheese market prices decreased $0.14 per pound compared
to the same period in 2001. The impact of these market price changes decreased
cost of sales of butter by $61.0 million and decreased cost of sales of cheese
by $21.6 million. Reduced sales of butter and deli cheese resulted in decreased
cost of sales of $17.0 million and $6.1 million, respectively. Cost of sales for
nonfat dry milk powder and private label butter in the Western region decreased
$28.5 million and $14.1 million, respectively. Higher milk input costs and plant
restructuring in the Upper Midwest resulted in increased cost of sales of $8.1
million. Cost of sales for the six months ended June 30, 2002 under our
wholesale milk marketing program increased $14.1
54
million, or 3.3%, to $438.8 million, compared to $424.7 million for the six
months ended June 30, 2001. The Melrose, MN plant acquisition in March 2001
resulted in incremental cost of sales of $25.3 million. Cost of sales include an
$11.7 million loss from the start-up of our cheese and whey plant in Tulare,
California, that we operate as a joint venture with Mitsui of Japan and lower
demand for mozzerella and whey. Finally, cost of sales for other products
decreased $10.6 million over the prior-year period. Cost of sales as a percent
of net sales increased 1.3 percentage points from 92.9% for the six months ended
June 30, 2001 to 94.2% for the six months ended June 30, 2002, primarily due to
lower sales volumes and decreased commodity prices for butter and cheese.
Animal Feed. Cost of sales for the six months ended June 30, 2002 increased
$305.3 million, or 41.2%, to $1,045.7 million compared to $740.4 million for the
six months ended June 30, 2001. The acquisition of Purina Mills added $342.1
million in cost of sales for the six months ended June 30, 2002. This increase
was slightly offset by a decrease in Land O'Lakes Farmland Feed branded product
lines. Land O'Lakes Farmland Feed branded beef feeds cost of sales decreased
$4.6 million, due to slower sales as a result of warm winter weather. Land
O'Lakes Farmland Feed Animal Health and Packaged Goods decreased $10.1 million
driven by a realigned marketing arrangement whereby we no longer record cost of
sales dollars, but rather a margin-based fee. Land O'Lakes Farmland Feed branded
lifestyle cost of sales declined $6.0 million as result of a delayed start to
the aquaculture feeding season. Cost of sales of bulk phosphates decreased $7.4
million as we sold this business during the first quarter of 2002. Land O'Lakes
Farmland Feed branded swine cost of sales decreased by $2.8 million. Cost of
sales in our dairy feed area increased $6.7 million, primarily as a result of
strong sales in our Western feed division. Cost of sales in our Animal Milk
Products area increased $2.5 million primarily due to increased volumes. Cost of
sales in our International division decreased $3.2 million from $11.5 million in
the first six months of 2001 to $8.3 million in the first six months of 2002
primarily due to the exit of our Mexico operations in the first quarter of 2002.
Cost reductions from the integration efforts related to Purina Mills reduced our
cost of sales by $3.3 million. Patronage income which is recorded as a reduction
of cost of sales decreased $1.5 million. Cost of sales decreased $.9 million as
a result of the decline in ingredient merchandising sales. An unrealized hedging
gain in the first half of 2002 related to corn and soybean meal futures
contracts decreased cost of sales by $3.9 million, compared to an increase from
an unrealized hedging loss of $1.3 million in the first half of 2001. Cost of
sales as a percent of net sales decreased 3.5 percentage points, from 91.4% in
the first quarter of 2001 to 87.9% in the same period of 2002. The decrease was
due primarily to higher margins on certain Purina Mills products, which carry a
comparatively higher margin than our traditional product lines. IOIC as a
percent of cost of sales increased to 25.7% in the first half of 2002 from 17.8%
in the same period of 2001 due to the above changes in product mix and in
unrealized hedging gains and losses.
Crop Seed. Cost of sales for the six months ended June 30, 2002 decreased
$34.2 million, or 13.8%, to $213.7 million, compared to cost of sales of $247.9
million for the six months ended June 30, 2001. Cost of sales decreased for
alfalfa ($6.3 million) and soybeans ($2.7 million), primarily as a result of
volume declines due to early shipment of $42.0 million of product in the fourth
quarter of 2001 that historically would have occurred in the first quarter of
2002. This early shipment accounted for $36.1 million of cost of sales and
included $24.5 million for soybeans, $9.5 million for corn and $2.1 million for
alfalfa. Incremental sales growth of corn of $17.4 million and, consequently, an
increase in cost of sales of $16.0 million partially offset the impact of this
loss of volume. In addition, a change in billing for technology fees collected
on behalf of one of our third-party suppliers increased sales and cost of sales
by $10.8 million. The discontinuance of a partnered soybean brand resulted in
decreased cost of sales of $13.5 million. An unrealized hedging gain of $2.0
million for the six months ended June 30, 2002 related to soybean futures
contracts, compared to an unrealized hedging loss of $0.1 million for the six
months ended June 30, 2001, reduced cost of sales by $2.1 million. Cost of sales
as a percent of net sales decreased 0.6 percentage points, from 85.1% for the
six months ended June 30, 2001 to 84.5% for the six months ended June 30, 2002,
due to the change in product mix.
Swine. Cost of sales for the six months ended June 30, 2002 decreased $5.1
million, or 10.5%, to $43.6 million, compared to $48.7 million for the six
months ended June 30, 2001. Reduced unit sales decreased cost of sales by $3.5
million and slightly lower cost of production decreased cost of sales by $0.6
million. Cost of sales in our cost plus program increased by $1.5 million. An
unrealized hedging gain decreased cost of sales by $0.7 million for the six
months ended June 30, 2002, compared to an unrealized hedging loss of $1.8
million for the six months ended June 30, 2001, resulting in a net decrease in
cost of sales of $2.5 million. Cost of sales as a percent of net sales increased
4.7 percentage points from 90.7% to 95.4% of sales, primarily as a result of
lower hog market prices which decreased swine sales for the six months ended
June 30, 2002.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the six months ended June
30, 2002 increased $71.0 million, or 39.3%, to $251.5 million, compared to
selling, general and administration expense of $180.5 million for the six months
ended June 30, 2001. Selling, general and administration expense as a percent of
net sales increased 2.0 percentage points from 6.6% for the six months ended
June 30, 2001 to 8.6% for the six months ended June 30, 2002. Excluding the
effects of the formation of our Advanced Food Products joint venture, selling,
general and administration expense increased $71.7 million, or 39.9%, to $251.5
million for the six months ended
55
June 30, 2002, compared to $179.8 million for the six months ended June 30,
2001. The acquisition of Purina Mills in October 2001 contributed to the
increase.
Dairy Foods. Selling, general and administration expense for the six months
ended June 30, 2002 decreased $0.7 million, or 0.8%, to $84.7 million, compared
to $85.4 million for the six months ended June 30, 2001. Excluding the effects
of the formation of the Advanced Food Products joint venture, selling, general
and administration expense remained flat at $84.7 million. Increased R&D
spending and selling expenses were offset by a reduction in advertising and
promotion expense. Selling, general and administration expense as a percent of
net sales increased 0.5 percentage points from 5.4% for the six months ended
June 30, 2001 to 5.9% for the six months ended June 30, 2002.
Animal Feed. Selling, general and administration expense for the six months
ended June 30, 2002 increased $71.0 million, or 128.9%, to $126.1 million,
compared to $55.1 million for the six months ended June 30, 2001. The majority
of this increase was related to the acquisition of Purina Mills, which added
$69.4 million in increased selling, general and administration expense. We also
incurred one-time integration costs of $5.5 million, including $3.0 million in
information systems integration costs and $1.0 million in relocation expense,
and an additional $1.7 million of bad debt expense. Selling, general and
administration expense as a percent of net sales increased 3.8 percentage points
from 6.8% for the six months ended June 30, 2001 to 10.6% for the six months
ended June 30, 2002. Selling, general and administration expense as a percent of
IOIC increased from 42.9% for the six months ended June 30, 2001 to 46.8% for
the six months ended June 30, 2002.
Crop Seed. Selling, general and administration expense for the six months
ended June 30, 2002 increased $0.5 million, or 2.2%, to $23.2 million, compared
to $22.7 million for the six months ended June 30, 2001. The increase was
primarily due to increased advertising and promotion spending for customer
recognition and brand awareness, partially offset by reduced selling and
administration spending and a decline in information technology expenditures.
Selling, general and administration expense as a percent of net sales increased
1.4 percentage points, from 7.8% for the six months ended June 30, 2001 to 9.2%
for the six months ended June 30, 2002.
Swine. Selling, general and administration expense for the six months ended
June 30, 2002 decreased $0.5 million, or 13.5%, to $3.2 million, compared to
$3.7 million for the six months ended June 30, 2001 due to reduced staffing and
support. Selling, general and administration expense as a percent of net sales
increased from 6.9% for the six months ended June 30, 2001 to 7.0% for the six
months ended June 30, 2002.
Agronomy. Selling, general and administration expense for the six months
ended June 30, 2002 decreased $0.1 million, or 1.0%, to $9.5 million, compared
to $9.6 million for the six months ended June 30, 2001. Selling, general and
administration expense for the six months ended June 30, 2002 included $0.2
million in losses recorded for eastern agronomy assets held for sale, compared
to losses of $2.5 million recorded for the six months ended June 30, 2001. The
decrease in losses was due to the fact that most of the eastern agronomy assets
have been sold. In June 2002, we also recorded a $2.1 million charge for
environmental liabilities related to pre-Agriliance operations.
RESTRUCTURING AND IMPAIRMENT CHARGES
For the six months ended June 30, 2002, Land O'Lakes recorded restructuring
and impairment charges of $7.3 million, compared to a reversal of a prior-year
charge of $1.8 million for the six months ended June 30, 2001. Animal feed
recorded a $4.5 million restructuring and impairment charge, of which $1.7
million was related to the write-down of certain impaired plant assets to their
estimated fair value, and $2.8 million was related to employee severance and
outplacement costs for 136 employees at the Ft. Dodge, IA office facility and
other feed plant facilities. Dairy foods recorded a $2.8 million charge, which
consisted of $1.5 million for employee severance and outplacement for 82
employees and $1.3 million for impairment related to the Faribault, MN dairy
plant closure. The 2001 reversal of $1.8 million was for the sale of certain
animal feed assets that had been written off in December 2000 and to reflect the
decision to continue operating a plant previously scheduled for shutdown.
We anticipate restructuring and impairment charges of approximately $7
million in 2002 related to the integration of Purina Mills into Land O'Lakes
Farmland Feed. In addition, we anticipate restructuring charges of approximately
$9 million in 2002 related to the consolidation of dairy operations in the Upper
Midwest and California.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2002 was $34.9 million,
compared to $24.3 million for the six months ended
56
June 30, 2001. The $10.6 million, or 43.6%, increase primarily resulted from
increased borrowing to finance the Purina Mills acquisition. Average debt
balances increased by $247.1 million over the six months ended June 30, 2001.
CoBank patronage reduced interest expense by $0.7 million for the six months
ended June 30, 2002, compared to $0.8 million for the six months ended June 30,
2001. Combined interest rates for borrowings, excluding CoBank patronage,
averaged 6.97% for the six months ended June 30, 2002, compared to 6.67% for the
six months ended June 30, 2001.
GAIN ON LEGAL SETTLEMENT
In the fourth quarter of 1999, a class action lawsuit, alleging illegal
price fixing, was filed against various vitamin product suppliers. Initially,
the Company was a party to this action as a member of the class. In February
2000, however, the Company decided to pursue its claims against the defendants
outside the class action. To date in 2002, the Company has received settlement
proceeds of $32.7 million from several of the defendants. These settlements were
reached with defendants who represent less than half of the Company's total
vitamin product purchases in dispute. The Company is currently pursuing similar
claims against the remaining defendants. With respect to the pending claims, the
factual discovery phase has ended and a January 2003 trial date has been set.
GAIN ON SALE OF INTANGIBLE
For the six months ended June 30, 2002, we recorded a gain of $4.2 million
on the sale to Potash Corporation of Saskatchewan of a customer list pertaining
to the feed phosphate distribution business.
GAIN ON DIVESTITURE OF BUSINESSES
For the six months ended June 30, 2002, we recorded a gain of $1.2 million
on the divestiture of our dairy foods Poland business. For the six months ended
June 30, 2001, we recorded a gain of $0.2 million on the divestiture of a feed
business.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the six months ended June 30, 2002, equity in earnings of affiliated
companies was $34.4 million, compared to earnings of $37.3 million for the six
months ended June 30, 2001. Results for the six months ended June 30, 2002
included earnings from Agriliance of $39.1, primarily driven by lower selling,
general and administration expense, improved fertilizer margins and lower
interest expense, partially offset by declines in nitrogen prices and fertilizer
volumes as well as the sale of selected retail facilities. We recorded a loss
from MoArk of $5.2 million, driven by low market prices for eggs due to an
oversupply of eggs in the market. Improvements in market prices are expected for
the second half of 2002 as a result of a declining chick hatch and anticipated
changes in response to new animal welfare guidelines. Results for the six months
ended June 30, 2001 primarily reflected earnings from Agriliance of $31.3
million, earnings from Gold Kist of $1.1 million, earnings from MoArk of $0.6
and earnings from other affiliated companies.
MINORITY INTEREST IN LOSS OR EARNINGS OF SUBSIDIARIES
For the six months ended June 30, 2002, we recorded minority interest in
loss of subsidiaries of $0.1 million, compared to earnings of $3.8 million for
the six months ended June 30, 2001. Minority interest in earnings of animal feed
related subsidiaries was $2.4 million, offset by minority interest in the loss
of dairy foods related subsidiaries. Results for the six months ended June 30,
2001 included minority interest in earnings of animal feed related subsidiaries
of $4.2 million, slightly offset by minority interest in loss of other
consolidated subsidiaries.
INCOME TAXES
We recorded an income tax expense of $3.2 million for the six months ended
June 30, 2002, compared to an income tax expense of $5.9 million for the six
months ended June 30, 2001. The tax expense resulted from member and non-member
earnings and from the gain on legal settlement.
NET EARNINGS
Net earnings decreased $9.9 million to net earnings of $47.3 million for the
six months ended June 30, 2002, compared to net earnings of $57.2 million for
the six months ended June 30, 2001. Improved margins in animal feed and crop
seed, in addition to a
57
gain on legal settlement, were more than offset by higher selling, general and
administration expense, and higher interest expense.
LIQUIDITY AND CAPITAL RESOURCES
We rely on cash from operations, borrowings under our bank facilities and
bank term debt and other institutionally placed funded debt as the main sources
for financing working capital requirements, additions to property, plant and
equipment and to complete acquisitions and joint ventures. Other sources of
funding consist of leasing arrangements, a receivables securitization and the
sale of non-strategic assets. Total long-term debt was $1,090.8 million,
including $190.7 million in Capital Securities, as of June 30, 2002, and
$1,147.5 million, including $190.7 million in Capital Securities, as of December
31, 2001.
Net cash provided by operating activities was $30.2 million for the six
months ended June 30, 2002 and $26.2 million for the six months ended June 30,
2001. For the six months ended June 30, 2002, net cash provided by operating
activities was $4.0 million more than for the six months ended June 30, 2001.
Excluding the cash proceeds from the legal settlement, net cash provided by
operating activities for the six months ended June 30, 2002, would have been
$32.7 million lower, resulting in cash used by operating activities of $2.5
million.
Net cash flows provided (used) by investing activities was $0.8 million for
the six months ended June 30, 2002 and $(84.6) million for the six months ended
June 30, 2001. The change was primarily due to sales of selected assets and a
decrease in acquisition and investment spending subsequent to the Purina Mills
acquisition in October 2001.
Net cash flows (used) provided by financing activities was $(81.7) million
for the six months ended June 30, 2002 and $54.5 million for the six months
ended June 30, 2001. For the six months ended June 30, 2002, we made payments of
$60.1 million on existing long-term debt and payments of $36.5 million for
redemption of member equities. At the same time, we increased short-term debt by
$10.3 million to cover seasonal working capital needs. For the six months ended
June 30, 2001, we borrowed $103.7 million in short-term debt and made payments
of $45.8 million for redemption of member equities.
Our principal liquidity requirements are to service our debt and meet our
working capital and capital expenditure needs. Following the Purina Mills
acquisition, we have significantly increased our leverage. As of June 30, 2002
we had $1,090.8 million outstanding in long-term debt, including $190.7 million
of Capital Securities, and $57.6 million outstanding in short-term debt. In
addition, as of June 30, 2002, $224.2 million was available under a $250 million
revolving credit facility for working capital and general corporate purposes,
after giving effect to no borrowings on the credit line and $25.8 million of
outstanding letters of credit, which reduce availability. Total equity as of
June 30, 2002 was $860.3 million.
The principal term loans consist of a $325.0 million syndicated Term Loan A
Facility with a remaining balance of $291.2 million and a final maturity of five
years, and a syndicated Term Loan B Facility with a remaining balance of $233.8
million and a final maturity of seven years. Our $250.0 million revolving credit
facility terminates on June 28, 2004.
Borrowings under the term loans and the revolving credit facility bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins are dependent upon Land O'Lakes credit ratings.
The Term Loan A Facility is prepayable at any time without penalty. The Term
Loan B Facility is prepayable with a penalty of 3% through October 10, 2002, 2%
from October 11, 2002 through October 10, 2003, 1% from October 11, 2003 through
October 10, 2004 and no penalty thereafter. The term loans are subject to
mandatory prepayments, subject to certain limited exceptions, in an amount equal
to (1) 50% of excess cash flow of Land O'Lakes and the restricted subsidiaries,
(2) 100% of the net cash proceeds of asset sales and dispositions of property of
Land O'Lakes and the restricted subsidiaries, if not reinvested, (3) 100% of any
casualty or condemnation receipts by Land O'Lakes and the restricted
subsidiaries, if not used to repair or replace assets, (4) 100% of joint venture
dividends or distributions received by Land O'Lakes or the restricted
subsidiaries, to the extent that they relate to the sale of property, casualty
or condemnation receipts, or the issuance of any equity interest in the joint
venture, (5) 100% of net cash proceeds from the sale of inventory or accounts
receivable in a securitization transaction to the extent cumulative proceeds
from such transactions exceed $100.0 million and (6) 100% of net cash proceeds
from the issuance of unsecured senior or subordinated indebtedness issued by
Land O'Lakes. In February 2002, we made a $33.8 million prepayment on Term Loan
A Facility and a $16.2 million prepayment on Term Loan B Facility, of which 75%
was mandatory and 25% was optional.
58
The amortization schedules for the Term Loan A and Term Loan B Facilities
are provided below.
TERM LOAN A TERM LOAN B
----------- -----------
2002 (paid 2/22/02)........... $33,782,609 $ 16,217,391
2003.......................... 54,337,200 2,116,744
2004.......................... 71,064,057 2,822,325
2005.......................... 94,752,077 2,822,325
2006.......................... 71,064,057 2,822,325
2007.......................... -- 2,822,325
2008.......................... -- 220,376,564
----------- ------------
Total.................... $325,000,000 $250,000,000
============ ============
In November 2001, we issued $350 million of senior notes. These notes bear
interest at a fixed rate of 8 3/4% and mature on November 15, 2011. The notes
are callable beginning in year six at a redemption price of 104.375%. In years
seven and eight, the redemption price is 102.917% and 101.458%, respectively.
The notes are callable at par beginning in year nine.
In 1998, Capital Securities in an amount of $200 million were issued by our
trust subsidiary, and the net proceeds were used to acquire a junior
subordinated note of Land O'Lakes. The holders of these securities are entitled
to receive dividends at an annual rate of 7.45% until the securities mature in
2028 and correspond to the payment terms of the junior subordinated debentures
which are the sole asset of the trust subsidiary. Interest payments on the
debentures can be deferred for up to five years, and the obligations under the
debentures are junior to all of our debt. As of June 30, 2002, the outstanding
balance of Capital Securities was $190.7 million.
The credit agreements relating to the term loans and revolving credit
facility and the indenture relating to the 8 3/4% senior notes impose certain
restrictions on us, including restrictions on our ability to incur indebtedness,
make payments to members, make investments, grant liens, sell our assets and
engage in certain other activities. In addition, the credit agreements relating
to the term loans and revolving credit facility require us to maintain an
interest coverage ratio of at least 2.50 to 1. Our ratio was 3.83 to 1 as of
December 31, 2001 and 3.52 to 1 as of June 30, 2002. We are also required to
maintain a leverage ratio of no greater than 4.75 to 1. The actual leverage
ratio as of December 31, 2001 was 3.77 to 1 and 3.87 to 1 as of June 30, 2002.
The required leverage ratio steps down to 4.25 to 1 as of October 11, 2002 and
3.75 to 1 as of October 11, 2003 and remains constant thereafter.
Indebtedness under the term loans and revolving credit facility is secured
by substantially all of the material assets of Land O'Lakes and its wholly-owned
domestic subsidiaries (other than LOL Finance Co. and LOLFC, LLC) and Land
O'Lakes Farmland Feed and its wholly-owned domestic subsidiaries (other than LOL
Farmland Feed SPV, LLC), including real and personal property, inventory,
accounts receivable, intellectual property and other intangibles, other than
those receivables which have been sold in connection with our receivables
securitization. Indebtedness under the term loans and revolving credit facility
is also guaranteed by our wholly-owned domestic subsidiaries (other than LOL
Finance Co. and LOLFC, LLC) and Land O'Lakes Farmland Feed and its wholly-owned
domestic subsidiaries (other than LOL Farmland Feed SPV, LLC). The 8 3/4% senior
notes are unsecured but are guaranteed by the same entities that guaranty the
obligations under the term loans and revolving credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
In order to reduce overall financing costs, Land O'Lakes entered into a
revolving receivables securitization program with CoBank in December 2001 for up
to $100 million in advances against eligible receivables. Under this program,
Land O'Lakes, Land O'Lakes Farmland Feed LLC and Purina Mills, LLC sell feed,
seed and certain swine receivables to LOL Farmland Feed SPV, LLC, a limited
purpose wholly-owned subsidiary of Land O'Lakes Farmland Feed. This subsidiary
is a qualifying special purpose entity (QSPE) under applicable accounting rules.
The QSPE was established for the limited purpose of purchasing and obtaining
financing for these receivables. The transfers of the receivables to the QSPE
are structured as sales and, in accordance with applicable accounting rules,
these receivables are not reflected in the consolidated balance sheets of Land
O'Lakes Farmland Feed LLC or Land O'Lakes, Inc. The QSPE purchases the
receivables with a combination of cash initially received from CoBank, equal to
the present value of eligible receivables times the agreed advance rate; and
notes, equal to the unadvanced present value of the receivables. Land O'Lakes
and the other receivables sellers are subject to credit risk related to the
repayment of the QSPE notes, which in turn is dependent upon the ultimate
collection on the QSPE's receivables pool. Accordingly, we have retained
reserves for estimated losses. As of June 30, 2002, $30.0 million was drawn
under this securitization.
In addition, we lease various equipment and real properties under long-term
operating leases. Total consolidated rental expense was $14.3 million for the
six months ended June 30, 2002, and $13.5 million for the six months ended June
30, 2001. Most of the leases require payment of operating expenses applicable to
the leased assets. We expect that in the normal course of business most leases
that expire will be renewed or replaced by other leases. We are also
contingently liable for a $114 million synthetic lease entered into by Cheese
and Protein International, LLC, ("CPI"), a consolidated joint venture 70% owned
by Land O'Lakes, for the construction of a cheese and whey plant. The
construction of the plant has been financed by a special purpose entity. The
special purpose entity is not consolidated in Land O'Lakes financial statements
and we have accounted for this arrangement as an operating
59
lease in accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," as amended. The base term of the lease commenced on
April 30, 2002 and expires on the fifth anniversary, unless we request and the
lessor approves one or more one-year base term extensions, which could extend
the base term by no more than five additional years. The interest rate on the
lease is LIBOR-based and actual lease payments will vary with short-term
interest rate fluctuations. Future minimum lease payments under this lease are
included in the table below. At the conclusion of the lease term, CPI is
obligated to pay the remaining lease balance. In the event CPI defaults on its
obligations under the lease, Land O'Lakes could elect one of the following
options: (i) assume the lease obligations of CPI, (ii) purchase the leased
assets, (iii) fully cash collateralize the lease or (iv) nominate a replacement
lessee to be approved by the lessor.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At June 30, 2002, we had certain contractual obligations, which required us
to make payments as follows:
PAYMENTS DUE BY PERIOD (AS OF JUNE 30, 2002)
CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
---------------------------- ----------- -------- ----------- ----------- ---------------
(IN THOUSANDS)
Revolving Credit
Facility(1)............... $ -- $ -- $ -- $ -- $ --
Long-Term Debt(2)........... 1,116,820 26,059 169,757 127,214 793,790
Operating Leases(3)......... 219,547 26,157 50,258 42,864 100,268
---------- -------- --------- --------- ---------
Total Contractual
Obligations.......... $1,336,367 $ 52,216 $ 220,015 $ 170,078 $ 894,058
========== ======== ========= ========= =========
- ----------
(1) Maximum $250 million facility, of which $224.2 million was available as of
June 30, 2002. $25.8 million of this commitment was unavailable due to
outstanding letters of credit.
(2) Term Loan A and Term Loan B Facilities are subject to certain mandatory
prepayment obligations in certain events as explained above. See
"Off-balance Sheet Arrangements" for information concerning our receivables
securitization program.
(3) Includes lease payments under the synthetic lease identified above, which is
an off-balance sheet contingent liability. See "Off-balance Sheet
Arrangements."
We expect that our total capital expenditures will be approximately $90
million in 2002 and approximately $96 million in 2003. Of such amounts, we
currently estimate that a minimum range of $35 million to $45 million of ongoing
maintenance capital expenditures is required each year. We had $34.8 million in
capital expenditures for the six months ended June 30, 2002, compared to $37.6
million in capital expenditures for the six months ended June 30, 2001.
We expect that funds from operations and available borrowings under our
revolving credit facility and receivables securitization facility will provide
sufficient working capital to operate our business, to make expected capital
expenditures and to meet foreseeable liquidity requirements, including debt
service on the term debt, the revolving credit facilities and the 8 3/4% senior
notes.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. We adopted the provisions
of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001, and the
remaining provisions of SFAS 142 as of January 1, 2002. As required by SFAS 142,
we performed step one of the impairment testing of goodwill by June 30, 2002.
For all segments the fair market value exceeded the carrying amount. Therefore,
the second step of impairment testing is not required and no impairment has been
recognized in the current year of adoption. We will perform impairment tests
annually and whenever events or circumstances occur indicating that goodwill or
other intangible assets might be impaired. As of January 1, 2002, we are no
longer amortizing goodwill, except for
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goodwill related to the acquisition of cooperatives and the formation of joint
ventures.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- --------- -------- ---------
Net earnings.................................... $48,296 $ 44,190 $47,320 $ 57,233
Add back: Goodwill amortization, net of tax..... - 1,702 - 2,912
------ --------- -------- ---------
Adjusted net earnings........................... $48,296 $ 45,892 $47,320 $ 60,145
======= ========= ======= =========
2001 2000 1999
---- ---- ----
Net earnings......................................... $ 71,488 $ 102,932 $ 21,399
Add back: Goodwill amortization, net of tax.......... 5,884 7,741 6,721
---------- ------------ ------------
Adjusted net earnings................................ $ 77,372 $ 110,673 $ 28,120
========== ============ ==========
We adopted Emerging Issues Task Force (EITF) No. 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services," on January 1, 2002. EITF No. 00-25 deals with the
accounting for consideration paid from a vendor (typically a manufacturer or
distributor) to a retailer, including slotting fees, cooperative advertising
arrangements and buy-downs. The guidance in EITF 00-25 generally requires that
these incentives be classified as a reduction of sales. The impact of the
adoption decreased sales and selling and administration expense for the six
months ended June 30, 2002 and 2001 by $50.9 million and $46.7 million,
respectively.
FORWARD LOOKING STATEMENTS
This Form 10-Q for the six months ended June 30, 2002 includes
"forward-looking statements" within the meaning of the safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "could," "should,"
"seeks," "pro forma," "as adjusted," "anticipates," "intend," or other
variations thereof, including their use in the negative, or by discussions of
strategies, plans or intentions. Although we believe that our plans, intentions
and expectations reflected in or suggested by such forward-looking statements
are reasonable, you should be aware that actual results could differ materially
from those projected by the forward-looking statements. For a discussion of
factors that could cause actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements, see the discussion of risk factors set forth below. Because actual
results may differ, readers are cautioned not to place undue reliance on
forward-looking statements. We assume no obligation to update such
forward-looking statements or to update the reasons that actual results could
differ materially from those anticipated in such forward-looking statements.
RISK FACTORS
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL OUR OBLIGATIONS UNDER OUR DEBT OBLIGATIONS AND OPERATE OUR
BUSINESS.
We are highly leveraged and have significant debt service obligations. As of
June 30, 2002, after eliminating intercompany activity, our aggregate
outstanding indebtedness was $1,090.8 million, excluding unused commitments, and
our total equity was $830.2 million. For the year ended December 31, 2001,
giving pro forma effect to the acquisition of Purina Mills as of January 1,
2001, our interest expense would have been $73.3 million. We may incur
additional debt from time to time to finance strategic acquisitions, investments
and alliances, capital expenditures or for other purposes, subject to the
restrictions contained in our debt agreements.
Our substantial debt could have important consequences to persons holding
our outstanding indebtedness, including the following:
- - we will be required to use a substantial portion of our cash flow from
operations to pay principal and interest on our debt, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures,
strategic acquisitions, investments and alliances and other general
corporate requirements;
- - our interest expense could increase if interest rates in general increase
because a substantial portion of our debt will bear interest at floating
rates;
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- - our substantial leverage will increase our vulnerability to general economic
downturns and adverse competitive and industry conditions and could place us
at a competitive disadvantage compared to those of our competitors which are
less leveraged;
- - our debt service obligations could limit our flexibility to plan for, or
react to, changes in our business and the dairy and agricultural industries;
- - our level of debt may restrict us from raising additional financing on
satisfactory terms to fund working capital, capital expenditures, strategic
acquisitions, investments and joint ventures and other general corporate
requirements;
- - our level of debt may prevent us from raising the funds necessary to
repurchase all of our 8 3/4 senior notes due 2011 tendered to us upon the
occurrence of a change of control, which would constitute an event of
default under the senior notes; and
- - our failure to comply with the financial and other restrictive covenants in
our debt instruments could result in an event of default that, if not cured
or waived, could cause our debt to become due immediately and permit our
lenders to enforce their remedies.
See "Item 3. Quantitative and Qualitative Disclosures about Market Risk."
ABILITY TO SERVICE DEBT -- SERVICING OUR INDEBTEDNESS REQUIRES A SIGNIFICANT
AMOUNT OF CASH, AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND
OUR CONTROL.
We expect to obtain the cash to make payments on our debt, and to fund
working capital, capital expenditures, strategic acquisitions, investments and
joint ventures and other general corporate requirements from our operations. Our
ability to generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We cannot
assure investors that our business will generate sufficient cash flow from
operations, that we will realize currently anticipated cost savings, net sales
growth and operating improvements on schedule, or at all, or that future
borrowings will be available to us under our credit facilities, in each case, in
amounts sufficient to enable us to service our indebtedness or to fund our other
liquidity needs. If we cannot service our indebtedness, we will have to take
actions such as reducing or delaying capital expenditures, strategic
acquisitions, investments and joint ventures, selling assets, restructuring or
refinancing our indebtedness or seeking additional equity capital, which may
adversely affect our membership and affect their willingness to remain members.
These remedies may not be effected on commercially reasonable terms, or at all.
In addition, the terms of existing or future indebtedness agreements, including
the credit agreements relating to our bank facilities and bank term debt and the
indenture for our 8 3/4% senior notes, may restrict us from adopting any of
these alternatives. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ADDITIONAL BORROWING CAPACITY -- DESPITE OUR SUBSTANTIAL LEVERAGE, WE WILL BE
ABLE TO INCUR MORE DEBT, WHICH MAY INTENSIFY THE RISKS ASSOCIATED WITH OUR
SUBSTANTIAL LEVERAGE.
The agreements governing our debt will permit us, subject to certain
conditions, to incur a significant amount of additional indebtedness. In
addition, we may incur additional debt under our $250.0 million revolving credit
facility, of which approximately $224.2 million was available to us as of June
30, 2002. If we incur additional debt, the risks associated with our substantial
leverage, including our ability to service our debt, could intensify.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS -- RESTRICTIONS IMPOSED BY OUR
DEBT AGREEMENTS LIMIT OUR ABILITY TO FINANCE FUTURE OPERATIONS OR CAPITAL NEEDS
OR ENGAGE IN OTHER BUSINESS ACTIVITIES THAT MAY BE IN OUR INTEREST.
The terms of our current debt agreements impose, and the terms of any future
debt may impose, operating and other restrictions on us and certain of our
subsidiaries. In addition, the agreements governing our outstanding credit
facilities also require us to achieve specified financial and operating results
and maintain compliance with specified financial ratios.
The restrictions contained in our debt agreements could:
- - limit our ability to plan for or react to market conditions or meet capital
needs or otherwise restrict our activities or business plans; and
- - adversely affect our ability to finance our operations, strategic
acquisitions, investments or alliances or other capital needs or to
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engage in other business activities that would be in our interest.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could trigger cross default provisions in the
agreements governing our other debt. If a default occurs, certain of our debt
agreements allow the lenders to declare all borrowings outstanding, together
with accrued interest and other fees, to be immediately due and payable which
would result in an event of default under the indenture governing our senior
notes and a termination event under the agreements governing our receivables
securitization. Lenders will also have the right in these circumstances to
terminate any commitments they have to provide further borrowings. If we are
unable to repay outstanding borrowings when due, those lenders will also have
the right to proceed against the collateral, including our available cash,
granted to them to secure the indebtedness. If this debt was to be accelerated,
our assets may not be sufficient to repay in full that indebtedness and our
other indebtedness. If not cured or waived, such default could give our lenders
the right to enforce other remedies that would interrupt the operation of our
business.
CHANGES IN CONSUMER PREFERENCES AND DISTRIBUTION CHANNELS COULD DECREASE OUR
REVENUES AND CASH FLOW.
We are subject to the risks of:
- - evolving consumer preferences and nutritional and health-related concerns;
and
- - changes in food distribution channels, such as consolidation of the
supermarket industry and other retail outlets that result in a smaller
customer base and intensify the competition for fewer customers.
To the extent that consumer preference evolves away from products that we
produce for health or other reasons, and we are unable to create new products
that satisfy new consumer preferences, there will be a decreased demand for our
products. There has been a recent trend toward consolidation among food
retailers which we expect to continue. As a result, these food retailers are
selecting product suppliers who can meet their needs nationwide. If we are not
selected by these food retailers for one or more of our products, our sales
volumes could be significantly reduced. In addition, national distributors or
regional food brokers could choose not to carry our products. Because of the
high degree of consolidation of national food distributors, the decision of a
single such distributor not to carry our products could have a serious impact on
our revenues. Any shift in consumer preferences away from our products could
decrease our revenues and cash flow and impair our ability to fulfill our
obligations under our debt obligations and operate our business.
In the first quarter of 2002, we launched our brand repositioning campaign
in our dairy foods business to further strengthen the LAND O LAKES brand. The
success of our brand repositioning campaign in increased demand for, and sales
of, our producs depend on consumer preferences and consumer reaction to our
emphasis on "Simple Goodness Living."
Our animal feed business relies on the sale of animal feed products to
consumers who own animals for recreational purposes or hobbies. The impact of an
extended economic downturn in the U.S. economy could cause some of these owners
to sell their animals or to seek alternative, less expensive products.
COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS.
Our business segments operate in highly competitive industries. In addition,
some of our business segments compete with companies that have greater capital
resources, research and development staffs, facilities, diversity of product
lines and brand recognition than ours. Increased competition as to any of our
products could result in reduced prices which would reduce our sales and
margins.
Our competitors may succeed in developing new or enhanced products which are
better than ours. These companies may also prove to be more successful in
marketing and selling their products than we are with ours.
OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY EXTREME WEATHER
CONDITIONS.
Our operating results within many of our segments are affected by seasonal
fluctuations of our sales and operating profits. There is significantly
increased demand for butter in the months prior to Thanksgiving and Christmas.
Because our supply of milk is lowest at this time, we produce and store surplus
quantities of butter in the months preceding the increase in demand for butter.
As a result, we are subject both to the risk that butter prices may decrease and
that increased demand for butter may never materialize, resulting in decreased
net sales.
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Our animal feed sales are seasonal, with a higher percentage of sales
generated during the fourth and first quarters of the year. This seasonality is
driven largely by weather conditions affecting sales of our beef cattle
products. If the weather is particularly warm during the winter, then sales of
feed for beef cattle may decrease because the cattle may be better able to graze
under warmer conditions.
The sales of crop seed and crop nutrient and crop protection products are
dependent upon the planting and growing season, which varies from year to year,
resulting in both highly seasonal patterns and substantial fluctuations in our
quarterly sales and operating profits. Most sales of our seed products and of
Agriliance's agronomy products are in the first half of the year during the
spring planting season in the United States. If the spring is particularly wet,
farmers will not apply crop nutrient and crop protection products because they
will be washed away and may be ineffective if applied. We experienced volume
shift in crop seed volume from the first quarter of 2002 to the fourth quarter
of 2001, compared to historical results. This crop seed volume shift resulted
from third-party seed suppliers' incentives to customers to take seed product
early. We anticipate a similar volume shift will occur at the end of 2002.
Live hog and wholesale pork prices are also affected by seasonal factors.
Because of production times for hogs, there are generally fewer hogs available
in the second quarter, causing live hog and wholesale pork prices to be higher
at these times. Conversely, there are generally more hogs available in the
fourth quarter, which generally causes live hog and wholesale pork prices to be
lower on average during these months.
In addition, severe weather conditions and natural disasters, such as
floods, droughts, frosts or earthquakes, or adverse growing conditions, diseases
and insect-infestation problems may reduce the quantity and quality of
commodities available for processing by us. For example, dairy cows produce less
milk when subjected to extreme weather conditions, including hot and cold
temperatures. A significant reduction in the quantity or quality of commodities
harvested or produced due to adverse weather conditions, disease, insect
problems or other factors could result in increased processing costs and
decreased production, with adverse financial consequences to us.
INCREASED ENERGY AND GAS COSTS COULD INCREASE OUR EXPENSES AND REDUCE OUR
PROFITABILITY.
We require a substantial amount of electricity, natural gas and gasoline to
manufacture, store and transport our products. The prices of electricity,
natural gas and gasoline fluctuate significantly over time. Many of our products
compete based on price and we may not be able to pass on increased costs of
production, storage or transportation to our customers. As a result, increases
in the cost of electricity, natural gas or gasoline could substantially harm our
business and results of operations. For instance, prices for natural gas, a key
component in the manufacture of fertilizer, increased from approximately $2.50
per million Btu in January 2000 to approximately $10.00 per million Btu in
January 2001. Depending upon the type of fertilizer produced, a one dollar
increase in the price of gas can result in increased fertilizer costs ranging
from $11.70 to $33.50 per ton. Agriliance was not able to pass on the entire
increase in fertilizer costs to customers, therefore Agriliance's margins on
fertilizer products were lower than they would have been had natural gas and
fertilizer costs remained constant. The higher sales price of fertilizer
resulted in a reduction of expected sales volume. Increases in natural gas
prices may not occur to the same degree in countries where natural gas does not
have as many other uses, such as countries with temperate climates where natural
gas in not used as a heating fuel. As a result of these demand differences,
fertilizer producers in the United States may be at a competitivie disadvantage
to some international competitors during natural gas price increases.
Our dairy business requires a continuous supply of energy to refrigerate raw
materials and finished products. Our largest dairy processing facility is
located in California, which recently experienced an energy crisis that
disrupted our dairy processing operations and increased our expenses. As a
result of blackouts at our Tulare, California plant, we have added electrical
generating capacity. Future blackouts at this or other plants, however, may
result in the interruption of our processing operations and the loss of
perishable ingredients and products which could result in substantial financial
losses.
AN OVERSUPPLY OF FOOD PROTEIN IN THE U.S. MARKET COULD CONTINUE TO REDUCE OUR
NET SALES AND CASH FLOWS.
Our animal feed segment supplies feed to farmers and specialized livestock
producers for use in their commercial production of livestock. When the price
that these producers receive for their livestock declines as a result of an
oversupply of food proteins (such as beef cattle, swine and chicken) in the
market, such producers may decide to lower their production levels or to seek
alternative, lower margin products, resulting in lower net sales and cash flows
for us.
OUTBREAKS OF DISEASE CAN REDUCE OUR NET SALES AND OPERATING MARGINS.
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The productivity and profitability of our businesses depend on animal and
crop health and on disease control.
We face the risk of outbreaks of mad cow disease, which could lead to the
destruction of beef cattle and dairy cows and decreased demand for dairy and
beef products. If this occurs, we would also face reduced milk supply and
increased cost to produce our dairy products, which could reduce our sales and
operating margins. In addition, we could have decreased demand for our feed
products as dairy and beef producers decrease their herd sizes due to decreased
demand for dairy and beef products.
We face the risk of outbreaks of foot-and-mouth disease, which could lead to
a massive destruction of cloven-hoofed animals such as dairy cattle, beef
cattle, swine, sheep and goats and significantly reduce the demand for meat
products. Because foot-and-mouth disease is highly contagious and destructive to
susceptible livestock, any outbreak of foot-and-mouth disease could result in
the widespread destruction of all potentially infected livestock. Our feed
operations could suffer as a result of decreased demand for feed products. If
this happens, we could also have difficulty procuring the milk we need for our
dairy operations and incur increased cost to produce our dairy products, which
could reduce our sales and operating margins. In addition, we may be prevented
from selling or transporting hogs.
Outbreaks of plant diseases and pests could destroy entire crops of plants
for which we sell crop seed. If this occurs, the crops grown to produce seed
could also be destroyed, resulting in a shortage of crop seed available for us
to sell for the next planting season. In addition, there may be decreased demand
for our crop seed from farmers who choose not to plant those species of crops
affected by these diseases or pests. These shortages and decreased demand could
reduce our sales.
CHANGES IN THE MARKET PRICES OF THE DAIRY AND AGRICULTURAL COMMODITIES THAT WE
USE AS INPUTS AS WELL AS THE PRODUCTS WE MARKET MAY CAUSE OUR OPERATING PROFIT
TO DECREASE.
Many of our products, particularly in our dairy foods, animal feed and swine
segments, use dairy or agricultural commodities as inputs or constitute dairy or
agricultural commodity outputs. Consequently, increased cost of commodity inputs
and decreased market price of commodity outputs may reduce our operating profit.
We are major purchasers of commodities used as inputs in our dairy foods
segment, namely milk, cream, butter and bulk cheese. Our dairy food outputs,
namely butter, cheese and nonfat dry milk, are also commodities. We inventory a
significant amount of the cheese and butter products we produce for sale to our
customers at a later date and at the market price on that date. For example, we
build significant butter inventories in the spring when milk supply is highest
for sale to our retail customers in the fall when butter demand is highest. If
the market price we receive at the time we sell our products is less than the
market price on the day we made the products, we will have lower (or negative)
margins which may have a material adverse impact on our results of operations.
In addition, we maintain significant inventories of cheese for aging and face
the same risk with respect to these products.
In 1999, our earnings were significantly impacted by the dramatic declines
in the price of cheese and butter, which caused significant devaluations of our
inventory of cheese products and, to a lesser extent, butter. Based on data from
the Chicago Mercantile Exchange, commodity block cheese prices began the year at
$1.90 per pound and finished at $1.20 per pound, and commodity butter prices
began at $1.43 per pound and finished at $0.88 per pound. These declining
commodity prices occurred throughout the year as we were building our inventory
necessary during the peak sales periods of fall and winter. The resulting $62.1
million inventory write-down partially accounted for the decrease in earnings of
the dairy foods segment, as compared with 1998.
The animal feed segment follows industry standards for feed pricing. The
feed industry generally prices products on the basis of income over ingredient
cost ("IOIC") per ton of feed. This practice mitigates the impact of volatility
in commodity ingredient markets on our animal feed margins. However, if our
commodity input prices were to increase dramatically, we may be unable to pass
these prices on to our customers, who may find alternative feed sources at lower
prices or may exit the market entirely. This increased expense could reduce our
profitability.
We have ownership interests in swine. In recent years, the market for hogs
and wholesale pork has been the subject of extreme market fluctuations as a
result of a number of factors, including industry expansion, processor capacity
and consumer demand. In December 1998, the price of hogs hit its lowest point in
nearly forty years, resulting in the price we received for a finished hog being
substantially less than the cost to produce the hog. The prices for weanling and
feeder pigs also decreased dramatically. As a result, in the fiscal years ended
December 31, 2000 and 1999, on a pro forma basis, we experienced operating
losses in the swine production business of approximately $8.3 million and $42.0
million, respectively. The Purina Mills portion of these losses was largely
responsible for Purina Mills filing for bankruptcy.
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During the fiscal years ended December 31, 2000 and 1999, a large portion of
these losses were attributable to our cost-plus contracts (or comparable
contracts of Purina Mills), which guarantee swine producers certain minimum
prices for feeder pigs. Although we do not intend to renew or extend these
contracts, we may continue to incur losses under these contracts until the last
ones expire in 2004.
DECREASE IN MILK SUPPLY COULD DECREASE OUR SALES AND INCREASE OUR COST OF
PRODUCTION.
We operate 14 dairy facilities which are located in different regions of the
United States. Milk production in certain regions, including the Midwest and
Northeast is decreasing as smaller producers in these regions have ceased milk
production and larger producers in the West have increased milk production.
Since 1990, cow numbers have declined 16% in Minnesota and 14% in Wisconsin and
the Minnesota/Wisconsin share of nationwide dairy manufacturing volume has
declined from 40% to 28%. In addition, a producer, whether a member or a
non-member, may decide not to supply milk to us or may decide to stop supplying
milk to us when the term of its contractual obligation expires. Where milk
production is not sufficient to fully support our operations, or where producers
decide not to supply us with milk, we may not be able to operate our plants at a
capacity that is profitable, may be forced to transport milk from a distance or
may be forced to pay higher prices for our milk supply. This could decrease our
operating margins and could decrease our net sales as a result of our inability
to meet customer demand.
In response to decreased milk production in the Upper Midwest, we are
restructuring our dairy facility infrastructure to increase production
efficiencies and reduce costs. The success and cost of this restructuring will
be negatively affected if the demand for cheese and dairy products decreases,
our competitors increase for volume of dairy products they produce or the milk
supply in the Upper Midwest continues to decrease.
WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS AND TO CONTROL
THE JOINT VENTURE ARE LIMITED.
We produce, market and sell products through numerous joint ventures with
unaffiliated third parties. Our feed and agronomy businesses are primarily
operated through joint ventures.
The terms of each joint venture are different, but our joint venture
agreements generally contain:
- - restrictions on our ability to transfer our ownership interest in the joint
venture;
- - no right to receive distributions without the unanimous consent of the
members of the joint venture; and
- - noncompetition arrangements restricting our ability to engage independently
in the same line of business as the joint venture.
In addition to these restrictions, in connection with the formation of some of
our joint ventures, we have entered into purchase or supply agreements which
require us to purchase a minimum amount of the products produced by the joint
venture or supply a minimum amount of the raw materials used by the joint
venture. The day-to-day operations of some of our joint ventures are managed by
us through a management contract and others are managed by other joint venture
members. As a result, we do not have day-to-day control over certain of these
companies. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of our material joint
ventures.
AGRILIANCE'S BUSINESS MAY BE ADVERSELY AFFECTED BY AGRILIANCE'S DEPENDENCE UPON
ITS SUPPLIERS.
Agriliance relies on a limited number of suppliers for the agronomy products
it sells. In 2001, approximately 58% of Agriliance's crop protection products
were sourced from three suppliers. In the event Agriliance is unable to purchase
its agronomy products on favorable terms from these suppliers, Agriliance may be
unable to find suitable alternatives to meet its product needs. In addition,
Agriliance procures approximately 80% of its fertilizer needs from CF Industries
and Farmland Industries. Farmland Industries initiated Chapter 11 bankruptcy
proceeding on May 31, 2002. As of June 30, 2002, Farmland Industries was
continuing to run its fertilizer plants and was meeting its delivery obligation
to Agriliance. Although Agriliance believes that it can meet its fertilizer
supply needs for the 2002 planting season from CF Industries and other third
party sources if Farmland Industries ceases deliveries Agriliance may be unable
to meet its fertilizer supply needs on suitable terms for future planting
seasons if it is unable to purchase its fertilizer needs on favorable terms from
both CF Industries and Farmland.
A LOSS OF OUR COOPERATIVE TAX STATUS COULD INCREASE OUR TAX LIABILITY.
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Subchapter T of the Internal Revenue Code sets forth rules for the tax
treatment of cooperatives. As a cooperative, we are not taxed on earnings from
member business that we deem to be patronage income allocated to our members.
However, we are taxed as a typical corporation on the remainder of our earnings
from our member business (those earnings which we have not deemed to be
patronage income) and on earnings from nonmember business. If we were not
entitled to be taxed as a cooperative, our tax liability would be significantly
increased.
OUR LIMITED ACCESS TO EQUITY MARKETS COULD ADVERSELY AFFECT OUR ABILITY TO
OBTAIN ADDITIONAL EQUITY CAPITAL.
As a cooperative, we may not sell our common stock in the traditional equity
markets. In addition, our articles of incorporation and by-laws contain
limitations on dividends and liquidation preferences of any preferred stock we
issue. These limitations restrict our ability to raise equity capital and may
adversely affect our ability to compete with entities that do not face similar
restrictions.
WE MAY NOT SUCCESSFULLY IMPLEMENT THE STRATEGIES RELATING TO OUR RECENT
ACQUISITIONS OR ACHIEVE THE ANTICIPATED BENEFITS FROM THESE ACQUISITIONS.
In addition to the acquisition of Purina Mills, we have added more than 20
joint ventures and acquisitions over the past five years. However, Purina Mills
represents our largest acquisition to date. The integration and consolidation of
Purina Mills as well as the other acquisitions into our business require
substantial management, financial and other resources. Such integration involves
a number of significant risks, including:
- - unforeseen liabilities;
- - unanticipated problems with the quality of the assets of the acquired
businesses;
- - loss of customers;
- - personnel turnover;
- - loss of relationships with suppliers or service providers; and
- - diversion of management's attention from other aspects of our business.
The effects of these risks and our inability to integrate and manage Purina
Mills and the other acquired businesses successfully or to achieve a substantial
portion of the anticipated cost savings from these acquisitions in the timeframe
we anticipate, could have a material adverse effect on our business, financial
condition or results of operations. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO
POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We are subject to Federal, state and local laws and regulations relating to
the manufacturing, labeling, packaging, health and safety, sanitation, quality
control, fair trade practices, and other aspects of our business. In addition,
zoning, construction and operating permits are required from governmental
agencies which focus on issues such as land use, environmental protection, waste
management, and the movement of animals across state lines. These laws and
regulations may, in certain instances, affect our ability to develop and market
new products and to utilize technological innovations in our business. In
addition, changes in these rules might increase the cost of operating our
facilities or conducting our business which would adversely affect our finances.
Our dairy business is affected by Federal price support programs and federal
and state pooling and pricing programs to support the prices of certain products
we sell. Federal and certain state regulations help ensure that the supply of
raw milk flows in priority to fluid milk and soft cream producers before
producers of hard products such as cheese and butter. In addition, as a producer
of dairy products, we participate in the Federal market order system and pay
into regional "pools" for the milk we use based on the amount of each class of
dairy product we produce and the price of those products. If any of these
programs was no longer available to us, the prices we pay for milk could
increase and reduce our profitability.
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In addition, as a manufacturer of food and animal feed products, we are
subject to the Federal Food, Drug and Cosmetic Act and regulations issued
thereunder by the Food and Drug Administration ("FDA"). The pasteurization of
our milk and milk products is also subject to inspection by the United States
Department of Agriculture. Several states also have laws that protect feed
distributors or restrict the ability of corporations to engage in farming
activities. These regulations may require us to alter or restrict our operations
or cause us to incur additional costs in order to comply with the regulations.
INABILITY TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS COULD DAMAGE
OUR COMPETITIVE POSITION.
We rely on patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our intellectual
property. Any infringement or misappropriation of our intellectual property
could damage its value and could limit our ability to compete. We may have to
engage in litigation to protect our rights to our intellectual property, which
could result in significant litigation costs and require a significant amount of
management's time.
We license our LAND O LAKES and the Indian Maiden logo trademarks to certain
of our joint ventures and other third parties for use in marketing certain of
their products. We have invested substantially in the promotion and development
of our trademarked brands and establishing their reputation as high-quality
products. Actions taken by these parties may damage our reputation and our
trademarks' value.
We believe that the recipes and production methods for our dairy and spread
products and formulas for our feed products are trade secrets. In addition, we
have amassed a large body of knowledge regarding animal nutrition and feed
formulation which we believe to be proprietary. Because most of this proprietary
information is not patented, it may be more difficult to protect. We rely on
security procedures and confidentiality agreements to protect this proprietary
information, however such agreements and security procedures may be insufficient
to keep others from acquiring this information. Any such dissemination or
misappropriation of this information could deprive us of the value of our
proprietary information.
Purina Mills, LLC, a wholly-owned subsidiary of Land O'Lakes Farmland Feed
licenses the trademarks Purina, Chow and the "Checkerboard" Nine Square Logo
under a perpetual, royalty-free license from Nestle Purina PetCare Company.
Under the terms of the license agreement, Nestle Purina PetCare Company retains
primary responsibility for protecting the licensed trademarks from infringement.
If Nestle Purina PetCare Company fails to assert its rights to the licensed
trademarks, Purina Mills may be unable to stop such infringement or cause them
to do so. Any such infringement of the licensed trademarks, or of similar
trademarks of Nestle Purina PetCare Company, could result in a dilution in the
value of the licensed trademarks.
OUR BRAND NAMES COULD BE CONFUSED WITH NAMES OF OTHER COMPANIES WHO, BY THEIR
ACT OR OMISSION, COULD ADVERSELY AFFECT THE VALUE OF OUR BRAND NAMES.
Purina Mills' products are generally marketed under the trademarks Purina,
Chow and the "Checkerboard" Nine Square Logo under a perpetual, royalty-free
license from Nestle Purina PetCare Company. Nestle Purina PetCare Company
markets widely recognized products under the same trademarks and has given other
unaffiliated companies the right to market products under these trademarks. A
competitor of ours, Cargill, licenses from Nestle Purina PetCare Company the
right to market the same types of products which Purina Mills sells under these
trademarks in countries other than the United States. Acts or omissions by
Nestle Purina PetCare Company or other unaffiliated companies may adversely
affect the value of the Purina, Chow and the "Checkerboard" Nine Square Logo
trademarks and the demand for Purina Mills' products. Third-party announcements
or rumors about these unaffiliated companies could also have these negative
effects.
PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT OUR BUSINESS
REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY FEDERAL AND STATE REGULATORS.
The sale of food products for human consumption involves the risk of injury
to consumers and the sale of animal feed products involves the risk of injury to
those animals as well as human consumers of those animals. Such hazards could
result from:
- - tampering by unauthorized third parties;
- - product contamination (such as listeria, E. coli. and salmonella) or
spoilage;
- - the presence of foreign objects, substances, chemicals, and other agents;
68
- - residues introduced during the growing, storage, handling or transportation
phases; or
- - improperly formulated products which either do not contain the proper
mixture of ingredients or which otherwise do not have the proper attributes.
Some of the products we sell are produced for us by third parties, or
contain inputs manufactured by third parties, and such third parties may not
have adequate quality control standards to assure that such products are not
adulterated, misbranded, contaminated or otherwise defective. In addition, we
license our LAND O LAKES brand for use on products produced and marketed by
third parties, for which we receive royalties. We may be subject to claims made
by consumers as a result of products manufactured by these third parties which
are marketed under our brand names.
Consumption of our products may cause serious health-related illnesses and
we may be subject to claims or lawsuits relating to such matters. Even an
inadvertent shipment of adulterated products is a violation of law and may lead
to an increased risk of exposure to product liability claims, product recalls
and increased scrutiny by federal and state regulatory agencies. Such claims or
liabilities may not be covered by our insurance or by any rights of indemnity or
contribution which we may have against others in the case of products which are
produced by third parties. In addition, even if a product liability claim is not
successful or is not fully pursued, the negative publicity surrounding any
assertion that our products caused illness or injury could have a material
adverse effect on our reputation with existing and potential customers and on
our brand image. In the past, we have voluntarily recalled certain of our
products in response to reported or suspected contamination. If we determine to
recall any of our products, we may face material consumer claims.
OUR BUSINESS IS SUBJECT TO THE RISK OF ENVIRONMENTAL LIABILITY AND WE COULD BE
NAMED AS A RESPONSIBLE OR POTENTIALLY RESPONSIBLE PARTY.
Many of our current and former facilities have been in operation for many
years and, over that time, we and other operators of those facilities have
generated, used, stored, or disposed of substances or wastes that are or might
be considered hazardous under applicable environmental laws, including chemicals
and fuel stored in underground and above-ground tanks, animal wastes and large
volumes of wastewater discharges. As a result, the soil and groundwater at or
under certain of our current and former facilities may have been contaminated,
and we may be required to make material expenditures to investigate, control and
remediate such contamination.
We have been identified as a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
at several national priority list sites and currently have unresolved liability
with respect to the past disposal of hazardous substances at several of our
current and former facilities and waste disposal facilities operated by third
parties. CERCLA may impose joint and several liability on owners, operators and
users of a facility for the costs of investigation and remediation of
contaminated properties, regardless of fault or the legality of the original
disposal.
In addition, federal and state environmental authorities have proposed new
regulations and attempted to apply certain existing regulations for the first
time to agricultural operations. These regulations could result in significant
restraints on some of our operations, particularly our swine operations, and
could require us to spend significant amounts of money to bring these operations
into compliance.
STRIKES OR WORK STOPPAGES BY OUR UNIONIZED WORKERS COULD DISRUPT OUR BUSINESS.
As of June 30, 2002, approximately 26% of our employees were covered by
collective bargaining agreements, some of which are due to expire within the
year. Our inability to negotiate acceptable contracts with the unions upon
expiration of these contracts could result in strikes or work stoppages and
increased operating costs as a result of higher wages or benefits paid to union
members or replacement workers. If the unionized workers were to engage in a
strike or work stoppage, or other non-unionized operations were to become
unionized, we could experience a significant disruption of our operations or
higher ongoing labor costs.
THERE IS NO ASSURANCE THAT OUR SENIOR MANAGEMENT TEAM OR OTHER KEY EMPLOYEES
WILL REMAIN WITH US.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our senior
management team and other key employees. If members of the management team or
other key employees become unable or unwilling to continue in their present
positions, the operation of our business would be disrupted and we may not be
able to replace their skills and leadership in a timely manner to continue our
operations as currently anticipated. We operate generally
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without employment agreements with, or key person life insurance on the lives
of, our key personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK
In the ordinary course of business, we are subject to market risk resulting
from changes in commodity prices associated with dairy and other agricultural
markets. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation - -- Overview -- Factors Affecting
Comparability -- Dairy and Agricultural Commodity Inputs and Outputs." To manage
the potential negative impact of price fluctuations, we engage in various
hedging and other risk management activities.
As part of our trading activity, we utilize futures and option contracts
offered through regulated commodity exchanges to reduce risk on the market value
of our inventories and our fixed or partially fixed purchase and sale contracts.
We do not utilize hedging instruments for speculative purposes.
Certain commodities cannot be hedged with futures or option contracts
because such contracts are not offered for these commodities by regulated
commodity exchanges. Inventories and purchase contracts for those commodities
are hedged with forward sales contracts to the extent practical so as to arrive
at a net commodity position within the formal position limits set by us and
deemed prudent for each of those commodities. Commodities for which future
contracts and options are available are also typically hedged first in this
manner, with futures and options used to hedge within position limits that
portion not covered by forward contracts.
The notional or contractual amount of futures contracts provides an
indication of the extent of our involvement in such instruments for the dates
and the periods provided below, but does not represent exposure to market risk
or future cash requirements under certain of these instruments. A summary of our
futures contracts follows:
AT JUNE 30,
------------------------------------------
2002 2001
-------------------- --------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
Commodity futures contracts
Commitments to purchase. $ 66,009 $ 8,066 $ 60,132 $ 402
Commitments to sell..... (65,633) (3,069) (46,900) (2,661)
---------- -------- ---------- --------
Total outstanding
Derivatives......... $ 376 $ 4,997 $ 13,232 $(2,259)
========= ======= ========= ========
THREE MONTHS ENDED JUNE 30,
----------------------------------------------
2002 2001
---------------------- ----------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
---------- ---------- ---------- ----------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange
traded contracts:
Commitments to purchase. $ 66,604 $ (281) $ 40,954 $(317)
Commitments to sell..... $ (66,732) $ 2,488 $ (87,179) $(441)
SIX MONTHS ENDED JUNE 30,
----------------------------------------------
2002 2001
---------------------- ----------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
---------- ---------- ---------- ----------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange
traded contracts:
Commitments to purchase. $ 149,698 $ (326) $ 93,713 $(105)
Commitments to sell..... $(156,782) $ 882 $(141,360) $(1,118)
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INTEREST RATE RISK
We are exposed to changes in interest rates. As of December 31, 2001 and
June 30, 2002, we had $575 million and $525 million, respectively, in debt
outstanding under the credit agreements relating to the term loans and revolving
credit facility, all of which is variable rate debt. Interest rate changes
generally do not affect the market value of this debt but do impact the amount
of our interest payments and, therefore, our future earnings and cash flows,
assuming other factors are held constant. Holding other variables constant,
including levels of indebtedness as of June 30, 2002, a one-percentage point
increase in interest rates would have an estimated negative impact on pretax
earnings and cash flows for the next twelve months of approximately $5.3
million.
INFLATION RISK
Inflation is not expected to have a significant impact on our business,
financial condition or results of operations. We generally have been able to
offset the impact of inflation through a combination of productivity
improvements and price increases.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation of Land O'Lakes, Inc., as
amended, August 1998. (1)
3.2 By-Laws of Land O'Lakes Inc., as amended, December 2000. (1)
4.1 Credit Agreement among Land O'Lakes, Inc., the Lenders party
thereto and The Chase Manhattan Bank, dated as of October
11, 2001. (1)
4.2 First Amendment dated November 6, 2001 to the Credit
Agreement dated October 11, 2001. (1)
4.3 Second Amendment dated February 15, 2002 to the Credit
Agreement dated October 11, 2001. (1)
4.4 Guarantee and Collateral Agreement among Land O'Lakes, Inc.
and certain of its subsidiaries and The Chase Manhattan
Bank, dated as of October 11, 2001. (1)
4.5 Indenture dated as of November 14, 2001, among Land O'Lakes,
Inc. and certain of its subsidiaries, and U.S. Bank,
including Form of 8 3/4% Senior Notes due 2011 and Form of
8 3/4% Senior Notes due 2011. (1)
4.6 Registration Rights Agreement dated November 14, 2001 by and
among Land O'Lakes, Inc. and certain of its subsidiaries,
J.P. Morgan Securities Inc., SPP Capital Partners, LLC,
SunTrust Robinson Capital Markets, Inc., Tokyo-Mitsubishi
International plc and U.S. Bancorp Piper Jaffray, Inc. (1)
4.7 Purchase Agreement by and between Land O'Lakes, Inc., and
certain of its subsidiaries, J.P. Morgan Securities Inc.,
SPP Capital Partners, LLC, SunTrust Robinson Capital
Markets, Inc., Tokyo-Mitsubishi International plc and U.S.
Bancorp Piper Jaffray, Inc., dated as of November 8, 2001. (1)
4.8 Form of Old Note (included in Exhibit 4.5). (1)
4.9 Form of New Note (included in Exhibit 4.5). (1)
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EXHIBIT
NO. DESCRIPTION
- ------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the identical exhibit to the Company's
Registration Statement on Form S-4 filed March 18, 2002. (Registration
No. 333-84486)
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for Land O'Lakes, Inc. for the
three months ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Arden Hills,
State of Minnesota, on the 14th day of August, 2002.
LAND O'LAKES, INC.
By /s/ DANIEL KNUTSON
--------------------------------------------
Daniel Knutson
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
73