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UNITED STATES
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 March 31, 2004*
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ________.
Commission file number 333-84486
LAND O'LAKES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0365145
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55112
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12-b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
April 30, 2004: 1,081 shares of Class A common stock, 4,698 shares of Class B
common stock, 189 shares of Class C common stock, and 1,274 shares of Class D
common stock.
Land O'Lakes, Inc. is a cooperative. Our voting and non-voting common
equity can only be held by our members. No public market for voting and
non-voting common equity of Land O'Lakes, Inc. is established and it is
unlikely, in the foreseeable future, that a public market for our voting and
non-voting common equity will develop.
We maintain a website on the Internet through which additional information
about Land O' Lakes, Inc. is available. Our website address is
www.landolakesinc.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, press releases and earnings releases are
available, free of charge, on our website when they are released publicly or
filed with the SEC.
*Although Land O'Lakes, Inc. is not currently required to file this
Quarterly Report on Form 10-Q pursuant to Section 13 or 15(d), we are filing
voluntarily.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION........................................................................... 3
Item I. Financial Statements............................................................................. 3
LAND O'LAKES, INC.
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003....................... 3
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)..... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)..... 5
Notes to Consolidated Financial Statements (unaudited)................................................... 6
LAND O'LAKES FARMLAND FEED LLC
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003....................... 18
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)..... 19
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)..... 20
Notes to Consolidated Financial Statements (unaudited)................................................... 21
PURINA MILLS, LLC
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003....................... 31
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)..... 32
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)..... 33
Notes to Consolidated Financial Statements (unaudited)................................................... 34
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 37
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 52
Item 4. Controls and Procedures......................................................................... 53
PART II. OTHER INFORMATION.............................................................................. 53
Item 1. Legal Proceedings............................................................................... 53
Item 6. Exhibits and Reports on Form 8-K................................................................ 54
SIGNATURES............................................................................................... 55
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ......................................... $ 21,530 $ 110,274
Restricted cash ......................................................... 20,167 20,118
Receivables, net ........................................................ 603,729 640,146
Inventories ............................................................. 530,140 496,776
Prepaid expenses ........................................................ 46,005 246,373
Other current assets .................................................... 38,102 42,006
------------ ------------
Total current assets ............................................ 1,259,673 1,555,693
Investments ............................................................... 514,084 506,641
Property, plant and equipment, net ........................................ 619,986 624,631
Property under capital lease, net ......................................... 107,464 109,145
Goodwill .................................................................. 370,863 373,083
Other intangibles ......................................................... 102,030 102,938
Other assets .............................................................. 124,647 126,025
------------ ------------
Total assets .................................................... $ 3,098,747 $ 3,398,156
============ ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ........................................ $ 55,529 $ 80,703
Current portion of long-term debt ....................................... 9,378 7,841
Current portion of obligations under capital lease ...................... 10,066 10,399
Accounts payable ........................................................ 568,286 761,663
Accrued expenses ........................................................ 222,241 216,586
Patronage refunds and other member equities payable ..................... 15,480 19,449
------------ ------------
Total current liabilities ....................................... 880,980 1,096,641
Long-term debt ............................................................ 942,907 1,065,382
Obligations under capital lease ........................................... 98,266 99,650
Employee benefits and other liabilities ................................... 181,568 177,088
Minority interests ........................................................ 64,095 62,739
Equities:
Capital stock ........................................................... 2,114 2,125
Member equities ......................................................... 890,891 882,547
Accumulated other comprehensive loss .................................... (65,617) (65,617)
Retained earnings ....................................................... 103,543 77,601
------------ ------------
Total equities .................................................. 930,931 896,656
------------ ------------
Commitments and contingencies
Total liabilities and equities ............................................ $ 3,098,747 $ 3,398,156
============ ============
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ................................................................. $ 2,011,287 $ 1,454,452
Cost of sales ............................................................. 1,810,830 1,328,903
------------ ------------
Gross profit .............................................................. 200,457 125,549
Selling, general and administrative ....................................... 134,900 117,441
Restructuring and impairment charges ...................................... 900 1,092
------------ ------------
Earnings from operations .................................................. 64,657 7,016
Interest expense, net ..................................................... 23,701 19,913
Gain on legal settlements ................................................. (4,524) (8,889)
Other (income) expense, net ............................................... (1,587) (500)
Equity in (earnings) loss of affiliated companies ......................... (17,414) 983
Minority interest in earnings of subsidiaries ............................. 1,400 1,489
------------ ------------
Earnings (loss) before income taxes ....................................... 63,081 (5,980)
Income tax expense (benefit) .............................................. 16,552 (5,609)
------------ ------------
Net earnings (loss) ....................................................... $ 46,529 $ (371)
============ ============
Applied to:
Member equities
Allocated patronage refunds .......................................... $ 21,284 $ 9,794
Deferred equities .................................................... (623) (13,893)
------------ ------------
20,661 (4,099)
Retained earnings ....................................................... 25,868 3,728
------------ ------------
$ 46,529 $ (371)
============ ============
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ..................................................... $ 46,529 $ (371)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................................ 27,560 26,642
Amortization of deferred financing charges ........................... 2,561 913
Bad debt expense ..................................................... 379 691
Proceeds from patronage revolvement received ......................... 1,334 10
Non-cash patronage income ............................................ (412) (209)
Receivable from legal settlement ..................................... -- 96,707
Deferred income tax benefit .......................................... (865) --
Decrease in other assets ............................................. 2,269 1,709
(Decrease) increase in other liabilities ............................. (370) 2,096
Restructuring and impairment charges ................................. 900 1,092
Gain on divestiture of business ...................................... (1,664) --
Equity in (earnings) loss of affiliated companies .................... (17,414) 983
Minority interests ................................................... 1,400 1,489
Other ................................................................ (282) (1,229)
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables .......................................................... 33,854 62,553
Inventories .......................................................... (33,186) (47,777)
Other current assets ................................................. 198,963 92,304
Accounts payable ..................................................... (193,545) (192,201)
Accrued expenses ..................................................... 10,448 (6,537)
------------ ------------
Net cash provided by operating activities ............................... 78,459 38,865
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .............................. (20,574) (16,120)
Payments for investments ................................................ (148) (8,800)
Proceeds from divestiture of business ................................... 7,500 --
Proceeds from sale of investments ....................................... 1,983 3,000
Proceeds from sale of property, plant and equipment ..................... 2,703 1,562
Dividends from investments in affiliated companies ...................... 8,671 1,737
Increase in restricted cash ............................................. (49) --
Other ................................................................... 525 2,581
------------ ------------
Net cash provided (used) by investing activities ........................ 611 (16,040)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt .................................. (25,126) 24,768
Proceeds from issuance of long-term debt ................................ 17,605 425
Principal payments on long-term debt .................................... (137,646) (61,934)
Principal payments on obligations under capital lease ................... (2,524) (2,217)
Payments for redemption of member equities .............................. (16,308) (15,331)
Payments for debt issuance costs ........................................ (3,953) --
Other ................................................................... 138 1,349
------------ ------------
Net cash used by financing activities ................................... (167,814) (52,940)
------------ ------------
Net decrease in cash and short-term investments ......................... (88,744) (30,115)
Cash and short-term investments at beginning of period .................... 110,274 64,327
------------ ------------
Cash and short-term investments at end of period .......................... $ 21,530 $ 34,212
============ ============
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during periods for:
Interest ................................................................ $ 14,800 $ 14,610
Income taxes paid (recovered) ........................................... $ 160 $ (4,198)
See accompanying notes to consolidated financial statements.
5
LAND O'LAKES, INC.
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, 2003 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In May, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity." The
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
statement was effective for the Company as of January 1, 2004. The adoption of
this standard did not have a material impact on the Company.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for the Company as of December 31, 2003. The Company adopted this
Statement for the year ended December 31, 2003, and has provided the interim
disclosures in Note 10, Pension and Other Postretirement Plans.
On January 12, 2004, the FASB issued FASB Staff Position 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The position
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Act. Regardless of whether a sponsor elects that deferral,
the position requires certain disclosures pending further consideration of the
underlying accounting issues. The Company has chosen to defer accounting for the
benefit until the FASB issues final accounting guidance due to various
uncertainties related to this legislation and the appropriate accounting. The
Company's measures of its accumulated projected benefit obligation and net
periodic postretirement benefit costs as of and for the three months ended March
31, 2004 do not reflect the effect of the Act.
2. MOARK LLC CONSOLIDATION AND PLANNED ACQUISITION OF MINORITY INTEREST
At December 31, 2002, the Company carried its 50% ownership interest in
MoArk under the equity method with an investment balance of $44.7 million.
Osborne Investments, LLC ("Osborne") owned the remaining interest in MoArk. In
the three months ended March 31, 2003, the Company increased its ownership from
50% to 57.5% with an additional investment of $7.8 million. In addition, the
Company has the right to acquire (and Osborne has the right to require the
Company to acquire) the remaining 42.5% of MoArk owned by Osborne by making a
$42.2 million minimum payment in 2007.
In accordance with the provisions of FASB Interpretation No. 46, effective
July 1, 2003, the Company consolidated MoArk into its financial statements.
Although Osborne has a 42.5% ownership interest in MoArk, the Company continues
to be allocated 100% of the income or loss from the operations of MoArk (other
than on capital
6
transactions involving a realized gain or loss on intangible assets, which are
allocated 50/50). In addition to consolidating MoArk, the Company has presumed
for accounting purposes that it will acquire the remaining 42.5% in 2007.
Effective July 1, 2003, the Company recorded this presumed $42.2 million payment
as a long-term liability in the consolidated balance sheet as "employee benefits
and other liabilities" at a present value of $31.6 million using an effective
interest rate of 7%. The present value of this liability is $33.2 million at
March 31, 2004.
3. RESTRICTED CASH
On March 28, 2003, Cheese and Protein International LLC ("CPI"), a
96.5%-owned consolidated subsidiary, amended its lease for property and
equipment relating to its cheese manufacturing and whey processing plant in
Tulare, California. The amendment postponed the measurement of the fixed charge
coverage ratio requirement contained in the lease until March 2005. The
amendment requires Land O'Lakes to maintain a $20 million cash account (which
may be replaced by a letter of credit at the Company's option) to support the
lease. The cash account or letter of credit would only be drawn upon in the
event of a CPI default and would reduce amounts otherwise due under the lease.
The requirement can be lifted pending the achievement of certain financial
targets by CPI.
4. RECEIVABLES
A summary of receivables is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Trade accounts ............................................................ $ 393,567 $ 344,371
Notes and contracts ....................................................... 66,288 63,984
Notes from sale of trade receivables (see Note 5).......................... 86,340 155,191
Other ..................................................................... 75,746 96,152
------------ ------------
621,941 659,698
Less allowance for doubtful accounts ...................................... 18,212 19,552
------------ ------------
Total receivables, net .................................................... $ 603,729 $ 640,146
============ ============
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture, as well as wholesale and retail food industries. Collections of
these receivables may be dependent upon economic returns in these industries.
The Company's credit risks are continually reviewed, and management believes
that adequate provisions have been made for doubtful accounts.
5. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100 million receivables
purchase facility with CoBank, ACB ("CoBank"). In March 2004, the facility was
expanded to $200 million. A wholly-owned, unconsolidated special purpose entity
("SPE") has been 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 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 March 31, 2004, $120 million
was outstanding under this facility and $20 million was outstanding under this
facility at December 31, 2003. The total accounts receivable sold during the
three months ended March 31, 2004 and 2003 were $710 million and $673 million,
respectively.
6. INVENTORIES
A summary of inventories is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Raw materials ............................................................. $ 154,709 $ 159,511
Work in process ........................................................... 43,613 33,734
Finished goods ............................................................ 331,818 303,531
------------ ------------
Total inventories ......................................................... $ 530,140 $ 496,776
============ ============
7
7. INVESTMENTS
A summary of investments is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
CF Industries, Inc......................................................... $ 249,502 $ 249,502
Agriliance LLC............................................................. 98,790 92,134
Ag Processing Inc.......................................................... 38,162 37,941
Advanced Food Products LLC................................................. 28,642 27,494
CoBank, ACB................................................................ 17,313 18,583
Universal Cooperatives..................................................... 8,224 8,224
Melrose Dairy Proteins, LLC................................................ 7,905 6,623
Agronomy Company of Canada Ltd............................................. 7,515 7,954
Prairie Farms Dairy, Inc................................................... 5,305 5,125
MoArk/Fort Recovery Egg Marketing, LLC..................................... 2,646 2,210
Other -- principally cooperatives and joint ventures....................... 50,080 48,851
------------ ------------
Total investments.......................................................... $ 514,084 $ 506,641
============ ============
During the three months ended March 31, 2004, the Company sold its
investment in a swine joint venture for $2.0 million in cash.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Dairy Foods ............................................................... $ 66,259 $ 66,259
Feed ...................................................................... 150,734 150,922
Seed ...................................................................... 11,896 12,405
Agronomy .................................................................. 62,210 63,733
Layers .................................................................... 79,764 79,764
------------ ------------
Total goodwill ............................................................ $ 370,863 $ 373,083
============ ============
The decrease in goodwill of $2.2 million resulted from amortization
associated with investments in joint ventures and cooperatives of $1.7 million
and an impairment of $0.5 million in the seed segment.
OTHER INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Amortized other intangible assets:
Patents, less accumulated amortization
of $2,922 and $2,622, respectively ................................... $ 13,847 $ 14,147
Trademarks, less accumulated amortization of
$2,134 and $2,044, respectively ...................................... 2,207 2,296
Other intangible assets, less accumulated
amortization of $13,356 and $12,783, respectively..................... 9,351 9,870
------------ ------------
Total amortized other intangible assets ................................... 25,405 26,313
Total non-amortized other intangible assets - trademarks................... 76,625 76,625
------------ ------------
Total other intangible assets ............................................. $ 102,030 $ 102,938
============ ============
Amortization expense for the three months ended March 31, 2004 and 2003
was $1.0 million and $1.1 million, respectively. The estimated amortization
expense related to other intangible assets subject to amortization for the next
five years will approximate $2.5 million annually. The weighted-average life of
the intangible assets subject to amortization is approximately 10 years.
8
9. DEBT OBLIGATIONS
The Company had notes and short-term obligations of $55.5 million at March
31, 2004 and $80.7 million at December 31, 2003. The Company also has a $185
million revolving credit facility due January, 2007, with variable interest
based on LIBOR. There were no borrowings under this facility as of March 31,
2004.
A summary of long-term debt is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Term A Loan - quarterly installments through 2006 (variable rate based on
LIBOR) .................................................................. $ -- $ 92,473
Term B Loan - quarterly installments through 2008 (variable rate based on
LIBOR) .................................................................. 118,373 152,374
Senior unsecured notes - due 2011 (8.75%) ................................. 350,000 350,000
Senior secured notes - due 2010 (9.00%).................................... 175,000 175,000
MoArk LLC debt - due 2004 through 2023 (6.06% weighted average) ........... 80,455 75,785
Industrial development revenue bonds and other secured notes payable - due
2004 through 2016 (1.1% to 5.5%) ........................................ 14,934 14,940
Capital Securities of Trust Subsidiary - due due 2028 (7.45%) ............. 190,700 190,700
Other debt ................................................................ 22,823 21,951
------------ ------------
952,285 1,073,223
Less current portion ...................................................... 9,378 7,841
------------ ------------
Total long-term debt ...................................................... $ 942,907 $ 1,065,382
============ ============
In the three months ended March 31, 2004, the Company amended its
receivables securitization facility which expanded the facility from $100
million to $200 million. The incremental proceeds from the expansion were used
to make prepayments on the term loans. A mandatory $76.0 million payment in full
was made for Term A loan and a $24.0 million partial repayment was made for Term
B loan. Additional prepayments made in the three months ended March 31, 2004
were $16.5 million for Term A loan and $10.0 million for Term B loan. The
weighted average interest rates on short-term borrowings and notes outstanding
at March 31, 2004 and December 31, 2003 were 3.40% and 3.56%, respectively.
Borrowings under the revolving credit facility and the term loans bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins depend on Land O'Lakes leverage ratio in the
case of the revolving credit facility. The margin on the Term B loan is fixed at
350 basis points over LIBOR. Based upon Land O'Lakes leverage ratio as of March
31, 2004, the LIBOR margin for the revolving credit facility is 250 basis
points. Spreads for the Alternative Base Rate are 100 basis points lower than
the applicable LIBOR spreads. LIBOR may be set for one, two, three or six month
periods at the election of Land O'Lakes. As of March 31, 2004, the interest rate
on the Term B loan was 4.59%.
In April and May, 2004, the Company entered into three $50 million
fixed-to-floating interest rate swap agreements, designated as fair value
hedges, in an effort to return to historical exposure levels for floating
interest rate debt. These swaps mirror the terms of the 8.75% notes and
effectively convert $150 million of such notes from a fixed 8.75% rate to an
effective rate of LIBOR plus 385 basis points.
10. PENSION AND OTHER POSTRETIREMENT PLANS
The following tables present the components of net periodic benefit cost
for pension benefits and other postretirement benefits for the three months
ended March 31:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
2004 2003 2004 2003
------------ ------------ ------------ ------------
Service cost ................................ $ 5,250 $ 4,147 $ 250 $ 201
Interest cost ............................... 7,050 6,792 1,050 1,088
Expected return on assets ................... (8,175) (8,202) -- --
Amortization of actuarial loss .............. 1,875 443 650 542
Amortization of prior service cost .......... 200 211 75 67
Amortization of transition obligation ....... -- -- 150 161
------------ ------------ ------------ ------------
Net periodic benefit cost ................... $ 6,200 $ 3,391 $ 2,175 $ 2,059
============ ============ ============ ============
9
The Company expects to contribute approximately $12 million to its defined
benefit pension plans and $7 million to its other postretirement benefits plans
in 2004. During the three months ended March 31, 2004, the Company contributed
$0.6 million to its defined benefit pension plans and $1.6 million to its other
postretirement benefits plans.
11. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the three months ended March 31, 2004, the dairy foods segment
recorded a restructuring charge of $0.4 million for employees' severance related
to the impending closure of a facility in Volga, South Dakota. For the three
months ended March 31, 2003, the dairy foods segment recorded a restructuring
charge of $1.0 million which represented severance costs for 44 employees as a
result of closing an Upper Midwest whey production facility. The balance
remaining to be paid at March 31, 2004 for employee and severance outplacement
costs was $3.2 million.
IMPAIRMENT CHARGES
For the three months ended March 31, 2004, the seed segment recorded a
goodwill impairment charge of $0.5 million. For the three months ended March 31,
2003, the Company recorded impairment charges of $0.1 million in the feed
segment for write downs of certain plant assets to their estimated fair value.
12. GAIN ON LEGAL SETTLEMENTS
During the three months ended March 31, 2004 and 2003, the Company
recognized a gain on legal settlements of $4.5 million and $8.9 million,
respectively. The gains represent cash received from product suppliers against
whom the Company alleged certain price-fixing claims.
13. OTHER (INCOME) EXPENSE, NET
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ -------------
Loss (gain) on sale of investments ........................................ $ 77 $ (500)
Gain on divestiture of business ........................................... (1,664) --
------------ ------------
Total other (income) expense, net ......................................... $ (1,587) $ (500)
============ ============
During the three months ended March 31, 2004, the Company recorded a $0.1
million loss on the sale of an investment in the swine segment. During the three
months ended March 31, 2003, the Company recorded a $0.5 million gain on sale of
an investment in a swine joint venture within the Feed segment.
During the three months ended March 31, 2004, the divestiture of QC, Inc.,
an environmental, dairy and food testing company, resulted in a gain of $1.7
million.
14. SEGMENT INFORMATION
The Company operates in six segments: Dairy Foods, Feed, Seed, Swine,
Agronomy and Layers.
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.
The feed segment is largely made up of a 92% ownership position in Land
O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"). Land O'Lakes Farmland
Feed develops, produces, markets and distributes animal feeds such as ingredient
feed, formula feed, milk replacers, vitamins and additives.
The 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, 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.
10
The agronomy segment consists primarily of the Company's 50% ownership in
Agriliance LLC ("Agriliance"), which is accounted for under the equity method.
Agriliance markets and sells two primary product lines: crop protection
(including herbicides and pesticides) and crop nutrients (including fertilizers
and micronutrients).
The layers segment consists of the Company's MoArk joint venture, which
was consolidated as of July 1, 2003. MoArk produces and markets shell eggs and
egg products that are sold at retail and wholesale for consumer and industrial
use throughout the United States.
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.
DAIRY FOODS FEED SEED SWINE
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
Net sales ........................................... $ 899,088 $ 676,979 $ 243,367 $ 22,498
Cost of sales (1) ................................... 840,469 600,900 212,549 22,485
Selling, general and administrative ................. 43,223 62,375 14,343 1,569
Restructuring and impairment charges ................ 400 -- 500 --
Interest expense (income), net ...................... 7,094 7,367 2,060 1,691
Gain on legal settlements ........................... (91) (4,433) -- --
Other (income) expense, net ......................... (1,664) -- -- 77
Equity in (earnings) loss of affiliated companies ... (2,812) (552) -- (32)
Minority interest in earnings of subsidiaries ....... -- 1,400 -- --
----------- ----------- ----------- -----------
Earnings (loss) before income taxes ................. $ 12,469 $ 9,922 $ 13,915 $ (3,292)
=========== =========== =========== ===========
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
Net sales ........................................... $ 636,670 $ 602,466 $ 191,895 $ 21,165
Cost of sales (1) ................................... 608,832 529,929 166,834 22,236
Selling, general and administrative ................. 39,462 58,006 12,870 1,317
Restructuring and impairment charges ................ 1,000 92 -- --
Interest expense (income), net ...................... 6,322 7,752 1,569 1,318
Gain on legal settlements ........................... -- (8,889) -- --
Other (income) expense, net ......................... -- (500) -- --
Equity in loss (earnings) of affiliated companies ... 630 (556) -- 365
Minority interest in earnings of subsidiaries ....... -- 1,489 -- --
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ................. $ (19,576) $ 15,143 $ 10,622 $ (4,071)
=========== =========== =========== ===========
(1) Cost of sales includes unrealized hedging (gains) losses of:
For the three months ended March 31,
2004............................................... $ (8,465) $ (5,483) $ 2,853 $ (5)
For the three months ended March 31,
2003............................................... (428) (1,491) 207 (1,059)
OTHER/
AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
Net sales ........................................... $ -- $ 175,359 $ (6,004) $ 2,011,287
Cost of sales (1) ................................... -- 140,431 (6,004) 1,810,830
Selling, general and administrative ................. 3,791 9,497 102 134,900
Restructuring and impairment charges ................ -- -- -- 900
Interest expense (income), net ...................... 2,342 3,860 (713) 23,701
Gain on legal settlements ........................... -- -- -- (4,524)
Other (income) expense, net ......................... -- -- -- (1,587)
Equity in (earnings) loss of affiliated companies ... (6,217) (7,808) 7 (17,414)
Minority interest in earnings of subsidiaries ....... -- -- -- 1,400
----------- ----------- ----------- -----------
Earnings (loss) before income taxes ................. $ 84 $ 29,379 $ 604 $ 63,081
=========== =========== =========== ===========
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
Net sales ........................................... $ -- $ -- $ 2,256 $ 1,454,452
Cost of sales (1) ................................... -- -- 1,072 1,328,903
Selling, general and administrative ................. 3,326 488 1,972 117,441
Restructuring and impairment charges ................ -- -- -- 1,092
Interest expense (income), net ...................... 2,332 1,231 (611) 19,913
Gain on legal settlements ........................... -- -- -- (8,889)
Other (income) expense, net ......................... -- -- -- (500)
Equity in loss (earnings) of affiliated companies ... 3,147 (2,625) 22 983
Minority interest in earnings of subsidiaries ....... -- -- -- 1,489
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ................. $ (8,805) $ 906 $ (199) $ (5,980)
=========== =========== =========== ===========
(1) Cost of sales includes unrealized hedging (gains) losses of:
For the three months ended March 31,
2004......,,,,,.................................... $ -- $ (2,052) $ -- $ (13,152)
For the three months ended March 31,
2003............................................... -- -- -- (2,771)
15. CONSOLIDATING FINANCIAL INFORMATION
The Company has entered into financing arrangements which are guaranteed
by the Company and certain of its wholly-owned 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 Land O'Lakes, Guarantor Subsidiaries and Land O'Lakes 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.
11
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
MARCH 31, 2004
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ....... $ 9,071 $ 5,903 $ -- $ 6,556 $ -- $ 21,530
Restricted cash ....................... 20,167 -- -- -- -- 20,167
Receivables, net ...................... 494,069 67,890 189,782 121,508 (269,520) 603,729
Inventories ........................... 277,192 47,529 144,044 61,375 -- 530,140
Prepaid expenses ...................... 18,582 606 12,391 14,426 -- 46,005
Other current assets .................. 31,291 6,123 -- 688 -- 38,102
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ................ 850,372 128,051 346,217 204,553 (269,520) 1,259,673
Investments ............................. 1,343,938 354 18,943 12,596 (861,747) 514,084
Property, plant and equipment, net ...... 237,508 16,995 219,358 146,125 -- 619,986
Property under capital lease, net ....... -- -- 31 107,433 -- 107,464
Goodwill ................................ 184,786 -- 121,832 64,245 -- 370,863
Other intangibles ....................... 3,596 366 94,644 3,424 -- 102,030
Other assets ............................ 54,547 9,253 25,786 54,427 (19,366) 124,647
----------- ----------- ----------- ----------- ----------- -----------
Total assets ........................ $ 2,674,747 $ 155,019 $ 826,811 $ 592,803 $(1,150,633) $ 3,098,747
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ...... $ 116,783 $ 2,954 $ 183 $ 93,636 $ (158,027) $ 55,529
Current portion of long-term debt ..... 1,512 51,643 -- 7,697 (51,474) 9,378
Current portion of obligations under
capital lease ....................... -- -- -- 10,066 -- 10,066
Accounts payable ...................... 399,566 64,968 108,049 50,944 (55,241) 568,286
Accrued expenses ...................... 161,601 30,815 26,259 18,710 (15,144) 222,241
Patronage refunds and other member
equities payable .................... 15,480 -- -- -- -- 15,480
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities............. 694,942 150,380 134,491 181,053 (279,886) 880,980
Long-term debt .......................... 859,441 9,708 -- 82,758 (9,000) 942,907
Obligations under capital lease ......... -- -- 12 98,254 -- 98,266
Employee benefits and other liabilities . 133,875 -- 29,410 18,283 -- 181,568
Minority interests ...................... 55,558 -- 2,652 5,885 -- 64,095
Equities:
Capital stock ......................... 2,114 1,215 502,444 104,307 (607,966) 2,114
Member equities ....................... 890,891 -- -- -- -- 890,891
Accumulated other comprehensive loss .. (65,617) -- (1,692) -- 1,692 (65,617)
Retained earnings ..................... 103,543 (6,284) 159,494 102,263 (255,473) 103,543
----------- ----------- ----------- ----------- ----------- -----------
Total equities ...................... 930,931 (5,069) 660,246 206,570 (861,747) 930,931
----------- ----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Total liabilities and equities .......... $ 2,674,747 $ 155,019 $ 826,811 $ 592,803 $(1,150,633) $ 3,098,747
=========== =========== =========== =========== =========== ===========
12
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ............................... $ 1,041,596 $ 78,792 $ 646,734 $ 244,165 $ -- $ 2,011,287
Cost of sales ........................... 958,163 68,772 573,536 210,359 -- 1,810,830
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ............................ 83,433 10,020 73,198 33,806 -- 200,457
Selling, general and administrative ..... 59,926 3,784 60,073 11,117 -- 134,900
Restructuring and impairment charges .... 900 -- -- -- -- 900
----------- ----------- ----------- ----------- ----------- -----------
Earnings from operations ................ 22,607 6,236 13,125 22,689 -- 64,657
Interest expense (income), net .......... 21,474 776 (688) 2,139 -- 23,701
Gain on legal settlements ............... (4,235) -- (289) -- -- (4,524)
Other (income) expense, net ............. (1,587) -- -- -- -- (1,587)
Equity in (earnings) loss of
affiliated companies .................. (53,119) -- (542) (7,808) 44,055 (17,414)
Minority interest in earnings of
subsidiaries .......................... 1,222 -- -- 178 -- 1,400
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes ..... 58,852 5,460 14,644 28,180 (44,055) 63,081
Income tax expense ...................... 12,323 58 -- 4,171 -- 16,552
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ..................... $ 46,529 $ 5,402 $ 14,644 $ 24,009 $ (44,055) $ 46,529
=========== =========== =========== =========== =========== ===========
13
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................... $ 46,529 $ 5,402 $ 14,644 $ 24,009 $ (44,055) $ 46,529
Adjustments to reconcile net earnings
(loss) to net cash (used) provided by
operating activities:
Depreciation and amortization ........ 12,471 512 8,915 5,662 -- 27,560
Amortization of deferred financing
costs .............................. 2,425 -- -- 136 -- 2,561
Bad debt expense ..................... 343 -- 36 -- -- 379
Proceeds from patronage revolvement
received ........................... 1,334 -- -- -- -- 1,334
Non-cash patronage income ............ (347) -- (65) -- -- (412)
Deferred income tax expense .......... (865) -- -- -- -- (865)
(Increase) decrease in other assets .. (2,040) 1,110 1,455 1,657 87 2,269
(Decrease) increase in other
liabilities ........................ (581) (1,256) 607 228 632 (370)
Restructuring and impairment charges.. 900 -- -- -- -- 900
Gain on divestiture of business ...... (1,664) -- -- -- -- (1,664)
Equity in (earnings) loss of
affiliated companies ............... (53,119) -- (542) (7,808) 44,055 (17,414)
Minority interests ................... 1,222 -- -- 178 -- 1,400
Other ................................ (75) -- (207) -- -- (282)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables .......................... (73,538) (8,762) 5,917 (29) 110,266 33,854
Inventories .......................... (11,140) (1,548) (12,017) (8,481) -- (33,186)
Other current assets ................. 206,281 (1,358) (1,416) (4,544) -- 198,963
Accounts payable ..................... (171,728) 5,347 (2,189) 12,238 (37,213) (193,545)
Accrued expenses ..................... 30,579 7,075 (12,565) 503 (15,144) 10,448
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by operating
activities ........................... (13,013) 6,522 2,573 23,749 58,628 78,459
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment ............................ (4,479) (5) (2,508) (13,582) -- (20,574)
Payments for investments ............... (8,648) -- -- -- 8,500 (148)
Net proceeds from divestiture of
business ............................. 7,500 -- -- -- -- 7,500
Proceeds from sale of investments ...... 1,983 -- -- -- -- 1,983
Proceeds from sale of property, plant
and equipment ........................ 2,601 -- 102 -- -- 2,703
Dividends from investments in
affiliated companies ................. 8,571 -- 100 -- -- 8,671
Increase in restricted cash ............ (49) -- -- -- -- (49)
Other .................................. 810 -- (285) -- -- 525
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
investing activities ................. 8,289 (5) (2,591) (13,582) 8,500 611
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term
debt ................................. 54,029 27 18 (20,572) (58,628) (25,126)
Proceeds from issuance of long-term
debt ................................. 12,934 -- -- 4,671 -- 17,605
Principal payments on long-term debt ... (132,798) (4,848) -- -- -- (137,646)
Principal payments on obligations
under capital lease .................. -- -- -- (2,524) -- (2,524)
Payments for redemption of member
equities ............................. (16,308) -- -- -- -- (16,308)
Payments for debt issuance costs ....... (3,953) -- -- -- -- (3,953)
Other .................................. 138 -- -- 8,500 (8,500) 138
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities ........................... (85,958) (4,821) 18 (9,925) (67,128) (167,814)
----------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash ........ (90,682) 1,696 -- 242 -- (88,744)
Cash and short-term investments at
beginning of period .................... 99,753 4,207 -- 6,314 -- 110,274
----------- ----------- ----------- ----------- ----------- -----------
Cash and short-term investments at end
of period .............................. $ 9,071 $ 5,903 $ -- $ 6,556 $ -- $ 21,530
=========== =========== =========== =========== =========== ===========
14
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments ....... $ 99,753 $ 4,207 $ -- $ 6,314 $ -- $ 110,274
Restricted cash ....................... 20,118 -- -- -- -- 20,118
Receivables, net ...................... 403,237 82,097 194,002 120,064 (159,254) 640,146
Inventories ........................... 265,874 45,981 132,027 52,894 -- 496,776
Prepaid expenses ...................... 227,495 3,053 10,975 4,850 -- 246,373
Other current assets .................. 33,968 2,318 -- 5,720 -- 42,006
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ............. 1,050,445 137,656 337,004 189,842 (159,254) 1,555,693
Investments ............................. 1,311,131 223 18,587 11,227 (834,527) 506,641
Property, plant and equipment, net ...... 246,803 13,357 228,100 136,371 -- 624,631
Property under capital lease, net ....... -- -- 31 109,114 -- 109,145
Goodwill ................................ 183,665 3,224 121,993 64,201 -- 373,083
Other intangibles ....................... 1,140 3,041 95,241 3,516 -- 102,938
Other assets ............................ 58,321 4,464 26,483 56,036 (19,279) 126,025
----------- ----------- ----------- ----------- ----------- -----------
Total assets ..................... $ 2,851,505 $ 161,965 $ 827,439 $ 570,307 $(1,013,060) $ 3,398,156
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ...... $ 62,802 $ 2,927 $ 165 $ 114,208 $ (99,399) $ 80,703
Current portion of long-term debt ..... 1,786 56,430 -- 6,055 (56,430) 7,841
Current portion of obligations under
capital lease ....................... -- -- -- 10,399 -- 10,399
Accounts payable ...................... 566,170 59,621 110,238 38,706 (13,072) 761,663
Accrued expenses ...................... 135,815 23,740 38,824 18,207 -- 216,586
Patronage refunds and other member
equities payable .................... 19,449 -- -- -- -- 19,449
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities......... 786,022 142,718 149,227 187,575 (168,901) 1,096,641
Long-term debt .......................... 984,884 9,769 -- 79,729 (9,000) 1,065,382
Obligations under capital lease.......... -- -- 14 99,636 -- 99,650
Employee benefits and other liabilities . 129,606 1,256 28,803 18,055 (632) 177,088
Minority interests ...................... 54,337 -- 2,561 5,841 -- 62,739
Equities:
Capital stock ......................... 2,125 1,216 502,506 95,745 (599,467) 2,125
Member equities ....................... 882,547 -- -- -- -- 882,547
Accumulated other comprehensive loss .. (65,617) -- -- -- -- (65,617)
Retained earnings ..................... 77,601 7,006 144,328 83,726 (235,060) 77,601
----------- ----------- ----------- ----------- ----------- -----------
Total equities ................... 896,656 8,222 646,834 179,471 (834,527) 896,656
----------- ----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Total liabilities and equities .......... $ 2,851,505 $ 161,965 $ 827,439 $ 570,307 $(1,013,060) $ 3,398,156
=========== =========== =========== =========== =========== ===========
15
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ............................... $ 777,400 $ 54,938 $ 589,485 $ 32,629 $ -- $ 1,454,452
Cost of sales ........................... 725,571 50,842 518,674 33,816 -- 1,328,903
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ............................ 51,829 4,096 70,811 (1,187) -- 125,549
Selling, general and administrative ..... 51,919 3,161 57,745 4,616 -- 117,441
Restructuring and impairment charges .... 1,000 -- 92 -- -- 1,092
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations ......... (1,090) 935 12,974 (5,803) -- 7,016
Interest expense (income), net .......... 20,699 667 (1,127) (326) -- 19,913
Gain on legal settlements ............... (8,021) -- (868) -- -- (8,889)
Gain on sale of investment .............. -- -- (500) -- -- (500)
Equity in (earnings) loss of affiliated
companies ............................. (10,948) -- (547) -- 12,478 983
Minority interest in earnings (loss)
of subsidiaries ....................... 1,309 -- (4) 184 -- 1,489
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings before income taxes ..... (4,129) 268 16,020 (5,661) (12,478) (5,980)
Income tax (benefit) expense ............ (3,758) 282 162 (2,295) -- (5,609)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) earnings ..................... $ (371) $ (14) $ 15,858 $ (3,366) $ (12,478) $ (371)
=========== =========== =========== =========== =========== ===========
16
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) earnings ................... $ (371) $ (14) $ 15,858 $ (3,366) $ (12,478) $ (371)
Adjustments to reconcile net (loss)
earnings to net cash provided (used)
by operating activities:
Depreciation and amortization ....... 15,670 574 9,870 528 -- 26,642
Amortization of deferred financing
charges ........................... 913 -- -- -- -- 913
Bad debt expense .................... 191 -- 500 -- -- 691
Proceeds from patronage revolvement
received .......................... 10 -- -- -- -- 10
Non-cash patronage income ........... (209) -- -- -- -- (209)
Receivable from legal settlement .... 90,707 -- 6,000 -- -- 96,707
(Increase) decrease in other assets . (8,037) 7,356 (564) (2,024) 4,978 1,709
Increase (decrease) in other
liabilities ....................... 3,516 (165) (1,072) (183) -- 2,096
Restructuring and impairment
charges ........................... 1,000 -- 92 -- -- 1,092
Equity in loss (earnings) of
affiliated companies .............. (10,948) -- (547) -- 12,478 983
Minority interest ................... 1,309 -- (4) 184 -- 1,489
Other ............................... (741) -- (425) (63) -- (1,229)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables ......................... (38,951) 2,791 64,730 (2,685) 36,668 62,553
Inventories ......................... (57,164) 18,600 (8,896) (317) -- (47,777)
Other current assets ................ 91,165 3,102 (1,942) (21) -- 92,304
Accounts payable .................... (13,459) (34,279) (22,585) (5,954) (115,924) (192,201)
Accrued expenses .................... (1,199) (12) (9,663) (888) 5,225 (6,537)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating
activities .......................... 73,402 (2,047) 51,352 (14,789) (69,053) 38,865
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment ........................... (12,509) (122) (3,370) (119) -- (16,120)
Payments for investments .............. (13,797) -- -- (348) 5,345 (8,800)
Proceeds from sale of investments ..... -- -- 3,000 -- -- 3,000
Proceeds from sale of property, plant
and equipment ....................... 1,562 -- -- -- -- 1,562
Dividends from investments in
affiliated companies ................ 1,737 -- -- -- -- 1,737
Other ................................. 41 -- 2,540 -- -- 2,581
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by investing
activities .......................... (22,966) (122) 2,170 (467) 5,345 (16,040)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in short-term
debt ................................ (7,460) 3,494 (604) 13,452 15,886 24,768
Proceeds from issuance of long-term
debt ................................ 424 -- -- 1 -- 425
Payments on principal of long-term
debt ................................ (61,916) (18) (52,593) (632) 53,225 (61,934)
Payments on principal of capital lease
obligation .......................... -- -- -- (2,217) -- (2,217)
Payments for redemption of member
equities ............................ (15,331) -- -- -- -- (15,331)
Other ................................. 51 (28) 765 5,964 (5,403) 1,349
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities .......................... (84,232) 3,448 (52,432) 16,568 63,708 (52,940)
----------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash ....... (33,796) 1,279 1,090 1,312 -- (30,115)
Cash and short-term investments at
beginning of period ................... 58,334 2,584 (1,461) 4,870 -- 64,327
----------- ----------- ----------- ----------- ----------- -----------
Cash and short-term investments at end
of period ............................. $ 24,538 $ 3,863 $ (371) $ 6,182 $ -- $ 34,212
=========== =========== =========== =========== =========== ===========
17
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ......................................... $ -- $ --
Receivables, net ........................................................ 85,530 142,207
Inventories ............................................................. 151,451 138,982
Prepaid expenses and other current assets ............................... 16,886 11,234
Note receivable - Land O'Lakes, Inc. .................................... 116,209 61,961
------------ ------------
Total current assets ............................................ 370,076 354,384
Investments ............................................................... 20,246 19,889
Property, plant and equipment, net ........................................ 226,611 232,232
Goodwill .................................................................. 122,092 122,209
Other intangibles ......................................................... 94,795 95,446
Other assets .............................................................. 25,876 29,149
------------ ------------
Total assets .................................................... $ 859,696 $ 853,309
============ ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ........................................ $ 183 $ 165
Accounts payable ........................................................ 119,339 113,981
Accrued expenses ........................................................ 27,483 41,086
------------ ------------
Total current liabilities ....................................... 147,005 155,232
Employee benefits and other liabilities ................................... 29,980 30,775
Minority interests ........................................................ 6,194 6,059
Equities:
Contributed capital ..................................................... 515,376 515,376
Accumulated other comprehensive loss .................................... (1,692) (1,692)
Retained earnings ....................................................... 162,833 147,559
------------ ------------
Total equities .................................................. 676,517 661,243
------------ ------------
Commitments and contingencies
Total liabilities and equities ............................................ $ 859,696 $ 853,309
============ ============
See accompanying notes to consolidated financial statements.
18
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ................................................................. $ 675,910 $ 601,100
Cost of sales ............................................................. 600,388 528,846
------------ ------------
Gross profit .............................................................. 75,522 72,254
Selling, general and administrative ....................................... 61,573 56,683
Restructuring and impairment charges ...................................... -- 92
------------ ------------
Earnings from operations .................................................. 13,949 15,479
Interest (income) expense, net ............................................ (661) 854
Gain on legal settlements ................................................. (289) (868)
Gain on sale of investment ................................................ -- (500)
Equity in earnings of affiliated companies ................................ (542) (547)
Minority interest in earnings of subsidiaries ............................. 178 180
------------ ------------
Earnings before income taxes .............................................. 15,263 16,360
Income tax expense ........................................................ 134 162
------------ ------------
Net earnings .............................................................. $ 15,129 $ 16,198
============ ============
See accompanying notes to consolidated financial statements.
19
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................ $ 15,129 $ 16,198
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ........................................ 9,058 10,011
Bad debt expense ..................................................... 36 500
Non-cash patronage income ............................................ (65) --
Receivable from legal settlement ..................................... -- 6,000
Decrease (increase) in other assets .................................. 888 (83)
Decrease in other liabilities ........................................ (560) (1,255)
Restructuring and impairment charges ................................. -- 92
Equity in earnings of affiliated companies ........................... (542) (547)
Minority interest in earnings of subsidiaries ........................ 178 180
Gain on sale of investment ........................................... -- (500)
Other ................................................................ (207) --
Changes in current assets and liabilities, net of acquisitions and
divestitures:
Receivables .......................................................... 56,641 64,953
Inventories .......................................................... (12,469) (8,689)
Other current assets ................................................. (2,960) (1,962)
Accounts payable ..................................................... 5,358 (22,863)
Accrued expenses ..................................................... (13,646) (10,869)
------------ ------------
Net cash provided by operating activities ............................... 56,839 51,166
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .............................. (2,526) (3,426)
Proceeds from sale of investments ....................................... -- 3,000
Proceeds from sale of property, plant and equipment ..................... 102 --
Dividends from affiliated companies ..................................... 100 --
Other ................................................................... (285) 2,540
------------ ------------
Net cash (used) provided by investing activities ........................ (2,609) 2,114
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt .................................. 18 (411)
Proceeds on note receivable to Land O'Lakes, Inc......................... 144,352 118,075
Payments on borrowings from Land O'Lakes, Inc............................ (198,600) (171,300)
------------ ------------
Net cash used by financing activities ................................... (54,230) (53,636)
------------ ------------
Net decrease in cash and short-term investments ......................... -- (356)
Cash and short-term investments at beginning of period .................... -- 356
------------ ------------
Cash and short-term investments at end of period .......................... $ -- $ --
============ ============
See accompanying notes to consolidated financial statements.
20
LAND O'LAKES FARMLAND FEED LLC
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 Farmland Feed LLC ("Land O'Lakes Farmland Feed"),
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 Land O'Lakes Farmland Feed's audited consolidated financial statements
and footnotes for the year ended December 31, 2003 included in Land O'Lakes,
Inc. Annual Report on Form 10-K. The results of operations and cash flows for
interim periods are not necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for Land O'Lakes Farmland Feed as of December 31, 2003. Land O'Lakes
Farmland Feed adopted this Statement for the year ended December 31, 2003, and
has provided the interim disclosures in Note 7, Pension and Other Postretirement
Plans.
2. RECEIVABLES
A summary of receivables is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------- ------------
Trade accounts............................. $ 33,624 $ 35,983
Notes and contracts........................ 5,430 14,422
Notes from sale of trade receivables (see
Note 3).................................. 55,106 95,957
Other...................................... 1,010 6,052
------------- -----------
95,170 152,414
Less allowance for doubtful accounts....... 9,640 10,207
------------- -----------
Total receivables, net..................... $ 85,530 $ 142,207
============= ===========
3. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes Farmland along with Land O'Lakes, Inc.,
established a $100 million receivables purchase facility with CoBank, ACB
("CoBank"). In March 2004, the facility was expanded to $200 million. A
wholly-owned, unconsolidated special purpose entity ("SPE") was established to
purchase certain receivables from Land O'Lakes Farmland Feed and Land O'Lakes,
Inc. CoBank has been granted an interest in the pool of receivables owned by the
SPE. The transfers of the receivables from Land O'Lakes Farmland Feed to the SPE
are structured as sales and, accordingly, the receivables transferred to the SPE
are not reflected in the consolidated balance sheet. However, Land O'Lakes
Farmland Feed 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, Land O'Lakes Farmland Feed has retained
reserves for estimated losses. Land O'Lakes Farmland Feed expects no significant
gains or losses from the facility. At March 31, 2004, $120 million was
outstanding under this facility. The total amount of accounts receivable sold
during the three months ended March 31, 2004 and 2003 were $607 million and $552
million, respectively.
21
4. INVENTORIES
A summary of inventories is as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Raw materials..................... $ 93,761 $ 91,890
Finished goods.................... 57,690 47,092
----------- -----------
Total inventories................. $ 151,451 $ 138,982
=========== ===========
5. INVESTMENTS
Land O'Lakes Farmland Feed's investments are as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------- ------------
New Feeds, LLC........................ $ 3,204 $ 3,145
Agland-Land O'Lakes Feed, LLC......... 2,432 2,432
Pro-Pet, LLC.......................... 2,304 2,219
Northern Country Feeds, LLC........... 1,803 1,780
CalvaAlto Liquid, LLC................. 1,302 1,302
Strauss Feeds, LLC.................... 1,164 1,063
Dakotaland Feeds, LLC................. 982 896
Nutrikowi Farmland, S.A. de C.V....... 876 876
Other................................. 6,179 6,176
----------- -----------
Total investments..................... $ 20,246 $ 19,889
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The change in the carrying amount of goodwill for the three months ended March
31, 2004, is as follows.
Balance as of December 31, 2003....................... $ 122,209
Amortization expense................................ 117
-----------
Balance as of March 31, 2004.......................... $ 122,092
===========
OTHER INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
Amortized other intangible assets
Patents, less accumulated amortization of $2,600 and $2,311, respectively....................... $ 13,823 $ 14,111
Trademarks, less accumulated amortization of $358 and $350, respectively........................ 513 532
Other intangible assets, less accumulated amortization of $7,579 and $7,225, respectively....... 3,834 4,178
----------- ------------
Total amortized other intangible assets........................................................... 18,170 18,821
Total non-amortized other intangible assets-trademarks............................................ 76,625 76,625
----------- ------------
Total other intangible assets..................................................................... $ 94,795 $ 95,446
=========== ============
Amortization expense for the three months ended March 31, 2004 and 2003 was
$0.7 million and $0.6 million, respectively. The estimated amortization expense
related to other intangible assets subject to amortization for the next five
years will approximate $2.2 million annually. The weighted-average life of the
intangible assets subject to amortization is approximately 13 years.
7. PENSION AND OTHER POSTRETIREMENT PLANS
Land O'Lakes Farmland Feed participates in Land O'Lakes, Inc.'s defined
benefit pension plan, which covers substantially all employees, and participates
in Land O'Lakes, Inc.'s plans that provide certain health care benefits for
retired employees. Costs relating to the plans are allocated to Land O'Lakes
Farmland Feed by Land O'Lakes, Inc. Land O'Lakes Farmland Feed's allocated
expenses relating to these plans were $3.7 million and $1.8 million for the
three months ended March 31, 2004 and 2003, respectively.
22
Land O'Lakes Farmland Feed has a discretionary capital accumulation plan
("CAP") for certain of its employees, which is a non-qualified, unfunded,
defined benefit pension plan. The net periodic benefit cost for the three months
ended March 31 for the CAP plan are as follows:
2004 2003
-------- --------
Interest cost....................... $ 425 $ 446
Amortization of actuarial loss...... 25 --
-------- --------
Net periodic benefit cost........... $ 450 $ 446
======== ========
Land O'Lakes Farmland Feed expects to contribute approximately $1.5 million
for benefit payments made by the CAP plan in 2004. During the three months ended
March 31, 2004, Land O'Lakes Farmland Feed contributed $0.4 million for benefit
payments made by the CAP plan.
8. RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended March 31, 2004, Land O'Lakes Farmland Feed did
not record any restructuring and impairment charges. The balance remaining to be
paid at March 31, 2004 for employee severance and outplacement costs was $0.6
million.
For the three months ended March 31, 2003, Land O'Lakes Farmland Feed
recorded impairment charges of $0.1 million from write-downs of certain plant
assets to their estimated fair value.
9. GAIN ON LEGAL SETTLEMENTS
During the three months ended March 31, 2004 and 2003, Land O'Lakes Farmland
Feed recognized gains on legal settlements of $0.3 million and $0.9 million,
respectively. The amounts were received from vitamin product suppliers against
whom Land O'Lakes Farmland Feed alleged certain price-fixing claims.
10. GAIN ON SALE OF INVESTMENT
For the three months ended March 31, 2003, Land O'Lakes Farmland Feed
recorded a gain of $0.5 million on the sale of an investment in a swine joint
venture.
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES OF PARENT DEBT
In December 2003, Land O'Lakes, Inc., which owns 92% of Land O'Lakes
Farmland Feed, issued $175 million of senior secured notes, due 2010. In
November 2001, Land O'Lakes, Inc. issued $350 million of senior unsecured notes,
due 2011. Both of these notes are guaranteed by certain domestic wholly-owned
subsidiaries of Land O'Lakes, Inc., including Land O'Lakes Farmland Feed, and by
each domestic wholly-owned subsidiary of Land O'Lakes Farmland Feed.
The guarantee of the senior secured notes is secured by substantially the
same assets securing Land O'Lakes, Inc. senior credit facilities. The guarantee
of the senior unsecured notes is a general unsecured obligation, ranks equally
in right of payment with all existing and future senior indebtedness of Land
O'Lakes Farmland Feed, is senior in right of payment to all existing and future
subordinated obligations of Land O'Lakes Farmland Feed, and is effectively
subordinated to any secured indebtedness of Land O'Lakes Farmland Feed and its
subsidiaries to the extent of the value of the assets securing such
indebtedness. The maximum potential amount of future payments that Land O'Lakes
Farmland Feed would be required to make is $525 million as of March 31, 2004.
Currently, Land O'Lakes Farmland Feed does not record a liability regarding the
guarantees. Land O'Lakes Farmland Feed has no recourse provision that would
enable it to recover amounts paid under the guarantees from Land O'Lakes, Inc.
or any other parties.
The notes are not guaranteed by certain majority-owned subsidiaries of Land
O'Lakes Farmland Feed (the "Non-Guarantors"). Summarized financial information
of the Non-Guarantors, which is consolidated in the financial statements of Land
O'Lakes Farmland Feed, as of and for the periods indicated, are as follows:
23
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Total assets..... $ 32,886 $ 25,870
Net sales........ 29,176 112,769
Net earnings..... 485 2,110
In November 2001, Land O'Lakes, Inc. entered into term facilities consisting
of a five-year Term Loan A facility and a seven-year Term Loan B facility.
During the three months ended March 31, 2004 Land O'Lakes, Inc. made prepayments
on the facilities. The Term Loan A facility was completely paid off with these
prepayments. The remaining facility is unconditionally guaranteed by certain
domestic wholly-owned subsidiaries of Land O'Lakes, Inc., including Land O'Lakes
Farmland Feed, and by each domestic wholly-owned subsidiary of Land O'Lakes
Farmland Feed. The maximum potential payment related to this guarantee is $118.4
million as of March 31, 2004. Land O'Lakes Farmland Feed does not currently
record a liability related to the guarantee of the term loan, and Land O'Lakes
Farmland Feed has no recourse provisions that would enable it to recover from
Land O'Lakes, Inc. or any other parties.
GUARANTEES OF PRODUCER LOANS
Land O'Lakes Farmland Feed guarantees certain loans to large producers
financed by LOL Finance Co. The loans totaled $14.6 million and $15.1 million at
March 31, 2004 and December 31, 2003, respectively. Reserves for these
guarantees of $1.1 million and $1.2 million at March 31, 2004 and December 31,
2003, respectively, are included in the allowance for doubtful accounts. The
maximum amount guaranteed by Land O'Lakes Farmland Feed is $7.0 million with the
remaining balance guaranteed by Land O'Lakes, Inc. There were no write-offs
related to producer loans for the three months ended March 31, 2004 or the year
ended December 31, 2003. Land O'Lakes Farmland Feed does not currently record a
liability related to the guarantee of the producer loans. Land O'Lakes Farmland
Feed would have recourse against the producer to partially off-set the
liability.
Land O'Lakes Farmland Feed also guarantees certain loans to producers and
dealers financed by third party lenders. The loans totaled $2.2 million at March
31, 2004 and December 31, 2003. Reserves for these guarantees were $0.7 million
at March 31, 2004 and December 31, 2003 and are included in the consolidated
balance sheet. There were insignificant write-offs related to these loans in the
three months ended March 31, 2004 and the year end December 31, 2003. The
maximum potential payment related to these guarantees is $0.8 million. Land
O'Lakes Farmland Feed has no recourse against the producer or dealer to
partially offset the potential liability.
12. CONSOLIDATING FINANCIAL INFORMATION
Land O'Lakes, Inc. has issued $525 million in senior notes which are
guaranteed by certain domestic wholly-owned and majority-owned subsidiaries of
Land O'Lakes, including Land O'Lakes Farmland Feed and Land O'Lakes Farmland
Feed's domestic wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several. Land O'Lakes Farmland
Feed's majority-owned subsidiaries are excluded from the guarantee
("Non-Guarantor Subsidiaries").
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for Land O'Lakes Farmland Feed, Guarantor Subsidiaries and Land
O'Lakes Farmland Feed's Non-Guarantor Subsidiaries. The supplemental financial
information reflects the investments of Land O'Lakes Farmland Feed in the
Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.
24
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
MARCH 31, 2004
LAND
O'LAKES WHOLLY OWNED
FARMLAND WHOLLY OWNED WHOLLY OWNED SUBSIDIARIES OF
FEED LLC SUBSIDIARIES OF PURINA MILLS, PURINA MILLS,
PARENT LOLFF LLC LLC PARENT LLC
-------- --------------- ------------- ---------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments..... $ -- $ -- $ -- $ --
Receivables, net.................... 65,545 28,496 -- 137
Inventories......................... 112,648 30,629 -- 767
Prepaid expenses and other
current assets.................... 9,600 45 2,744 2
Note receivable - Land
O'Lakes, Inc...................... 116,209 -- -- --
-------- ---------- --------- ---------
Total current assets........ 304,002 59,170 2,744 906
Investments........................... 195,924 258 1,754 --
Property, plant and equipment,
net................................ 94,208 7,512 116,527 1,142
Goodwill.............................. 118,176 3,656 -- --
Other intangibles..................... 93,830 814 -- --
Other assets.......................... 24,579 1,207 -- --
-------- ---------- --------- ---------
Total assets................ $830,719 $ 72,617 $ 121,025 $ 2,048
======== ========== ========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations.... $ 183 $ -- $ -- $ --
Accounts payable.................... 97,119 31,550 -- 26
Accrued expenses.................... 25,041 939 -- 277
-------- ---------- --------- ---------
Total current liabilities... 122,343 32,489 -- 303
Employee benefits and other
liabilities......................... 29,207 286 -- --
Minority interests.................... 2,652 -- -- --
Equities:
Contributed capital................. 515,376 16,272 72,852 14,005
Accumulated other
comprehensive loss................ (1,692) -- -- --
Retained earnings................... 162,833 23,570 48,173 (12,260)
-------- ---------- --------- ---------
Total equities.............. 676,517 39,842 121,025 1,745
-------- ---------- --------- ---------
Commitments and contingencies
Total liabilities and equities........ $830,719 $ 72,617 $ 121,025 $ 2,048
======== ========== ========= =========
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------
Current assets:
Cash and short-term investments.. $ -- $ -- $ --
Receivables, net..................... 11,958 (20,606) 85,530
Inventories.......................... 7,407 -- 151,451
Prepaid expenses and other
current assets..................... 4,495 -- 16,886
Note receivable - Land
O'Lakes, Inc....................... -- -- 116,209
-------- --------- --------
Total current assets......... 23,860 (20,606) 370,076
Investments............................ 1,303 (178,993) 20,246
Property, plant and equipment,
net................................. 7,222 -- 226,611
Goodwill............................... 260 -- 122,092
Other intangibles...................... 151 -- 94,795
Other assets........................... 90 -- 25,876
-------- --------- --------
Total assets................. $ 32,886 $(199,599) $859,696
======== ========= ========
Current liabilities:
Notes and short-term obligations..... $ -- $ -- $ 183
Accounts payable..................... 11,250 (20,606) 119,339
Accrued expenses..................... 1,226 -- 27,483
-------- --------- --------
Total current liabilities.... 12,476 (20,606) 147,005
Employee benefits and other
liabilities.......................... 487 -- 29,980
Minority interests..................... 3,542 -- 6,194
Equities:
Contributed capital.................. 12,932 (116,061) 515,376
Accumulated other
comprehensive loss................. -- -- (1,692)
Retained earnings.................... 3,449 (62,932) 162,833
-------- --------- --------
Total equities............... 16,381 (178,993) 676,517
-------- --------- --------
Commitments and contingencies
Total liabilities and equities......... $ 32,886 $(199,599) $859,696
======== ========= ========
25
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
WHOLLY
OWNED
LAND O'LAKES SUBSIDIARIES
FARMLAND WHOLLY OWNED WHOLLY OWNED OF PURINA NON-
FEED LLC SUBSIDIARIES OF PURINA MILLS, MILLS, GUARANTOR
PARENT LOLFF LLC LLC PARENT LLC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ --------------- ------------ ------------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales...................... $584,216 $ 51,361 $ -- $ 11,157 $ 29,176 $ -- $ 675,910
Cost of sales.................. 513,622 45,851 4,782 9,281 26,852 -- 600,388
-------- ------------ ---------- ---------- --------- --------- ----------
Gross profit................... 70,594 5,510 (4,782) 1,876 2,324 -- 75,522
Selling, general and
administrative............... 56,956 3,246 (30) (99) 1,500 -- 61,573
-------- ------------ ---------- ---------- --------- --------- ----------
Earnings (loss) from
operations................... 13,638 2,264 (4,752) 1,975 824 -- 13,949
Interest (income) expense,
net......................... (632) (56) -- -- 27 -- (661)
Gain on legal settlements...... -- -- (289) -- -- -- (289)
Equity in (earnings) loss
of affiliated companies...... (859) -- (75) (86) -- 478 (542)
Minority interest in earnings
of subsidiaries.............. -- -- -- -- 178 -- 178
-------- ------------ ---------- ---------- --------- --------- ----------
Earnings (loss) before income
taxes........................ 15,129 2,320 (4,388) 2,061 619 (478) 15,263
Income tax expense............. -- -- -- -- 134 -- 134
-------- ------------ ---------- ---------- --------- --------- ----------
Net earnings (loss)............ $ 15,129 $ 2,320 $ (4,388) $ 2,061 $ 485 $ (478) $ 15,129
======== ============ ========== ========== ========= ========= ==========
26
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
LAND WHOLLY WHOLLY
O'LAKES WHOLLY OWNED OWNED OWNED
FARMLAND SUBSIDIARIES PURINA SUBSIDIARIES
FEED LLC OF MILLS, LLC OF PURINA
PARENT LOLFF LLC PARENT MILLS, LLC
------ --------- ------ ----------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)..................................... $ 15,129 $ 2,320 $(4,388) $ 2,061
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization......................... 3,852 241 4,781 61
Bad debt expense...................................... 36 -- -- --
Non-cash patronage income............................. (65) -- -- --
Decrease in other assets.............................. 740 148 -- --
(Decrease) increase in other liabilities.............. (781) 177 -- (177)
Equity in (earnings) loss of affiliated
companies........................................... (859) -- (75) (86)
Minority interest in earnings of subsidiaries..... -- -- -- --
Other................................................. (178) -- (29) --
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables........................................... 46,498 18,061 -- 436
Inventories........................................... (3,898) (8,007) -- (112)
Other current assets.................................. 982 293 -- 1
Accounts payable...................................... 8,054 (13,248) -- (104)
Accrued expenses...................................... (12,679) 152 -- (83)
--------- -------- ------- --------
Net cash provided (used) by operating
activities............................................ 56,831 137 289 1,997
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............ (2,371) (137) -- --
Proceeds from sale of property, plant and
equipment............................................ 55 -- 47 --
Dividends from affiliated companies................... -- -- 100 --
Other................................................. (285) -- -- --
--------- -------- ------- -------
Net cash (used) provided by investing
activities.......................................... (2,601) (137) 147 --
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt........................... 18 -- -- --
Proceeds on note receivable to Land
O'Lakes, Inc........................................ 144,352 -- -- --
Payments on borrowings from Land O'Lakes,
Inc................................................. (198,600) -- -- --
Other................................................. -- -- (436) (1,997)
-------- -------- ------- -------
Net cash (used) provided by financing
activities........................................... (54,230) -- (436) (1,997)
--------- -------- ------- -------
Net increase in cash and short-term
investments......................................... -- -- -- --
Cash and short-term investments at beginning of year..... -- -- -- --
-------- -------- ------- -------
Cash and short-term investments at end of year............ $ -- $ -- $ -- $ --
======== ======== ======= =======
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)..................................... $ 485 $ (478) $ 15,129
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization......................... 123 -- 9,058
Bad debt expense...................................... -- -- 36
Non-cash patronage income............................. -- -- (65)
Decrease in other assets.............................. -- -- 888
(Decrease) increase in other liabilities.............. 221 -- (560)
Equity in (earnings) loss of affiliated
companies........................................... -- 478 (542)
Minority interest in earnings of subsidiaries......... 178 -- 178
Other................................................. -- -- (207)
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables........................................... (1,792) (6,562) 56,641
Inventories........................................... (452) -- (12,469)
Other current assets.................................. (4,236) -- (2,960)
Accounts payable...................................... 6,527 4,129 5,358
Accrued expenses...................................... (1,036) -- (13,646)
-------- ------- ----------
Net cash provided (used) by operating
activities............................................ 18 (2,433) 56,839
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............ (18) -- (2,526)
Proceeds from sale of property, plant and
equipment............................................ -- -- 102
Dividends from affiliated companies................... -- -- 100
Other................................................. -- -- (285)
------- ------- ----------
Net cash (used) provided by investing
activities.......................................... (18) -- (2,609)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt........................... -- -- 18
Proceeds on note receivable to Land
O'Lakes, Inc........................................ -- -- 144,352
Payments on borrowings from Land O'Lakes,
Inc................................................. -- -- (198,600)
Other................................................. -- 2,433 --
------- ------- ---------
Net cash (used) provided by financing
activities.......................................... -- 2,433 (54,230)
------- ------- ----------
Net increase in cash and short-term
investments......................................... -- -- --
Cash and short-term investments at beginning of year..... -- -- --
------- ------- ---------
Cash and short-term investments at end of year............ $ -- $ -- $ --
======= ======= =========
27
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
LAND WHOLLY WHOLLY
O'LAKES WHOLLY OWNED OWNED OWNED
FARMLAND SUBSIDIARIES PURINA SUBSIDIARIES
FEED LLC OF MILLS, LLC OF PURINA
PARENT LOLFF LLC PARENT MILLS, LLC
-------- ------------ ----------- ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments..... $ -- $ -- $ -- $ --
Receivables, net.................... 104,185 52,018 -- 573
Inventories......................... 108,750 22,622 -- 655
Prepaid expenses and other
current assets..................... 10,634 338 -- 3
Note receivable - Land
O'Lakes, Inc....................... 61,961 -- -- --
--------- --------- --------- -----------
Total current assets............. 285,530 74,978 -- 1,231
Investments.......................... 200,403 710 -- 1,694
Property, plant and equipment, net... 98,089 7,518 121,320 1,204
Goodwill............................. 118,337 3,656 -- --
Other intangibles.................... 94,351 890 -- --
Other assets......................... 25,204 1,279 -- --
--------- --------- --------- -----------
Total assets..................... $ 821,914 $ 89,031 $ 121,320 $ 4,129
========= ========= ========= ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations.... $ 165 $ -- $ -- $ --
Accounts payable.................... 90,045 44,798 -- 130
Accrued expenses.................... 37,677 787 -- 360
--------- --------- --------- -----------
Total current liabilities........ 127,887 45,585 -- 490
Employee benefits and other
liabilities......................... 30,223 109 -- 177
Minority interests................... 2,561 -- -- --
Equities:
Contributed capital................. 515,376 21,757 83,806 7,484
Accumulated other
comprehensive loss................. (1,692) -- -- --
Retained earnings................... 147,559 21,580 37,514 (4,022)
--------- --------- --------- -----------
Total equities................... 661,243 43,337 121,320 3,462
--------- --------- --------- -----------
Commitments and contingencies
Total liabilities and equities....... $ 821,914 $ 89,031 $ 121,320 $ 4,129
========= ========= ========= ===========
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------
Current assets:
Cash and short-term investments..... $ -- $ -- $ --
Receivables, net.................... 10,166 (24,735) 142,207
Inventories......................... 6,955 -- 138,982
Prepaid expenses and other
current assets..................... 259 -- 11,234
Note receivable - Land
O'Lakes, Inc....................... -- -- 61,961
--------- --------- --------
Total current assets............. 17,380 (24,735) 354,384
Investments.......................... 1,302 (184,220) 19,889
Property, plant and equipment, net... 4,101 -- 232,232
Goodwill............................. 216 -- 122,209
Other intangibles.................... 205 -- 95,446
Other assets......................... 2,666 -- 29,149
--------- --------- --------
Total assets..................... $ 25,870 $(208,955) $853,309
========= ========= ========
Current liabilities:
Notes and short-term obligations.... $ -- $ -- $ 165
Accounts payable.................... 3,743 (24,735) 113,981
Accrued expenses.................... 2,262 -- 41,086
--------- --------- --------
Total current liabilities........ 6,005 (24,735) 155,232
Employee benefits and other
liabilities......................... 266 -- 30,775
Minority interests................... 3,498 -- 6,059
Equities:
Contributed capital................. 12,870 (125,917) 515,376
Accumulated other
comprehensive loss................. -- -- (1,692)
Retained earnings................... 3,231 (58,303) 147,559
--------- --------- --------
Total equities................... 16,101 (184,220) 661,243
--------- --------- --------
Commitments and contingencies
Total liabilities and equities....... $ 25,870 $(208,955) $853,309
========= ========= ========
28
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
WHOLLY
OWNED
LAND O'LAKES SUBSIDIARIES
FARMLAND WHOLLY OWNED WHOLLY OWNED OF PURINA
FEED LLC SUBSIDIARIES OF PURINA MILLS, MILLS,
PARENT LOLFF LLC LLC PARENT LLC
------------ --------------- ------------- -------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales............................. $ 543,183 $ 34,187 $ -- $ 12,115
Cost of sales......................... 471,159 31,327 6,065 10,123
---------- --------- --------- ---------
Gross profit.......................... 72,024 2,860 (6,065) 1,992
Selling, general and
administrative....................... 53,953 1,640 151 40
Restructuring and impairment
charges.............................. 92 -- -- --
---------- --------- --------- ---------
Earnings (loss) from
operations .......................... 17,979 1,220 (6,216) 1,952
Interest (income) expense, net........ 698 136 -- --
Gain on legal settlements............. -- -- (868) --
Gain on sale of investment............ -- -- -- (500)
Equity in loss (earnings)
of affiliated companies.............. 1,086 -- -- 70
Minority interest in (loss) earnings
of subsidiaries...................... (3) -- -- --
---------- --------- --------- ---------
Earnings (loss) before income
taxes................................ 16,198 1,084 (5,348) 2,382
Income tax expense.................... -- -- -- --
---------- --------- --------- ---------
Net earnings (loss)................... $ 16,198 $ 1,084 $ (5,348) $ 2,382
========== ========= ========= =========
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales............................. $ 11,615 $ -- $ 601,100
Cost of sales......................... 10,172 -- 528,846
--------- -------- ---------
Gross profit.......................... 1,443 -- 72,254
Selling, general and
administrative ...................... 899 -- 56,683
Restructuring and impairment
charges.............................. -- -- 92
--------- -------- ---------
Earnings (loss) from
operations........................... 544 -- 15,479
Interest (income) expense, net........ 20 -- 854
Gain on legal settlements............. -- -- (868)
Gain on sale of investment............ -- -- (500)
Equity in loss (earnings)
of affiliated companies.............. -- (1,703) (547)
Minority interest in (loss) earnings
of subsidiaries...................... 183 -- 180
--------- -------- ---------
Earnings (loss) before income
taxes................................ 341 1,703 16,360
Income tax expense.................... 162 -- 162
--------- -------- ---------
Net earnings (loss)................... $ 179 $ 1,703 $ 16,198
========= ======== =========
29
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
LAND WHOLLY WHOLLY
O'LAKES WHOLLY OWNED OWNED OWNED
FARMLAND SUBSIDIARIES PURINA SUBSIDIARIES NON-
FEED LLC OF MILLS, LLC OF PURINA GUARANTOR
PARENT LOLFF LLC PARENT MILLS, LLC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ------------ ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)...................... $ 16,198 $ 1,084 $ (5,348) $ 2,382 $ 179 $ 1,703 $ 16,198
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization.......... 3,492 274 6,065 18 162 -- 10,011
Bad debt expense....................... 500 -- -- -- -- -- 500
Receivable from legal settlement....... 6,000 -- -- -- -- -- 6,000
Decrease (increase) in other assets. 73,126 139 -- -- 481 (73,829) (83)
(Decrease) increase in other
liabilities........................... (128,722) (461) -- -- (209) 128,137 (1,255)
Restructuring and impairment charges... 92 -- -- -- -- -- 92
Equity in loss (earnings) of
affiliated companies.................. 1,086 -- -- 70 -- (1,703) (547)
Minority interests..................... (3) -- -- -- 183 -- 180
Gain on sale of investment............. -- -- -- (500) -- -- (500)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables............................ 28,620 (1,060) -- 324 (2,655) 39,724 64,953
Inventories............................ (8,827) (718) -- 650 206 -- (8,689)
Other current assets................... (1,945) 9 -- (6) (20) -- (1,962)
Accounts payable....................... 85,442 (6,624) -- (473) 350 (101,558) (22,863)
Accrued expenses....................... (7,571) (1,859) -- (153) (1,286) -- (10,869)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities............................. 67,488 (9,216) 717 2,312 (2,609) (7,526) 51,166
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment............................... (3,092) (105) -- -- (229) -- (3,426)
Proceeds from sale of investments........ 3,000 -- -- -- -- -- 3,000
Other................................... 2,356 -- 184 -- -- -- 2,540
--------- --------- --------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities............................. 2,264 (105) 184 -- (229) -- 2,114
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt... (2,252) 2,015 -- -- 2,167 (2,341) (411)
Proceeds from note receivable from
Land O'Lakes, Inc....................... 118,075 -- -- -- -- -- 118,075
Payments on note payable to Land
O'Lakes, Inc............................ (170,812) -- -- -- (488) -- (171,300)
Other.................................... 630 28 (7,485) (2,382) (658) 9,867 --
--------- --------- --------- --------- --------- --------- ---------
Net cash (used) provided by financing
activities............................. (54,359) 2,043 (7,485) (2,382) 1,021 7,526 (53,636)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash.......... 15,393 (7,278) (6,584) (70) (1,817) -- (356)
Cash and short-term investments at
beginning of period...................... (15,393) 7,278 6,584 70 1,817 -- 356
--------- --------- --------- --------- --------- --------- ---------
Cash and short-term investments at end
of period................................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= ========= =========
30
PURINA MILLS, LLC
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
---- ----
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments..................... $ 275 $ 344
Receivables, net.................................... 212 573
Inventories......................................... 815 703
Prepaid expenses and other current assets........... 2,772 2,777
--------------- -------------
Total current assets........................ 4,074 4,397
Investments........................................... 1,755 1,694
Property, plant and equipment, net.................... 117,782 122,637
--------------- -------------
Total assets................................ $ 123,611 $ 128,728
=============== =============
LIABILITIES AND EQUITIES
Current liabilities:
Accounts payable.................................... 102 130
Accrued expenses.................................... 554 360
--------------- -------------
Total current liabilities................... 656 490
Employee benefits and other liabilities............... 68 177
Equities:
Contributed capital................................. 86,918 89,765
Retained earnings................................... 35,969 38,296
--------------- -------------
Total equities.............................. 122,887 128,061
--------------- -------------
Commitments and contingencies
Total liabilities and equities........................ $ 123,611 $ 128,728
=============== =============
See accompanying notes to consolidated financial statements.
31
PURINA MILLS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
($ IN THOUSANDS)
(UNAUDITED)
Net sales........................................... $ 11,157 $ 12,628
Cost of sales....................................... 14,063 16,650
------------- --------------
Gross profit (loss)................................. (2,906) (4,022)
Selling, general and administrative................. (129) 216
------------- --------------
Loss from operations................................ (2,777) (4,238)
Interest expense, net............................... -- 2
Gain on legal settlements........................... (289) (867)
Gain on sale of investment.......................... -- (500)
Equity in (earnings) loss of affiliated companies... (161) 3
Minority interest in loss of subsidiaries........... -- (8)
------------- --------------
Net loss............................................ $ (2,327) $ (2,868)
============= ==============
See accompanying notes to consolidated financial statements.
32
PURINA MILLS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (2,327) $ (2,868)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.......................... 4,842 6,083
Decrease in other liabilities.......................... (109) (569)
Equity in (earnings) loss of affiliated companies...... (161) 3
Minority interest...................................... -- (8)
Gain on sale of investment............................. -- (500)
(Gain) loss on sale of property, plant and equipment... (28) 106
Other.................................................. (1) (96)
Changes in current assets and liabilities, net of
divestitures:
Receivables............................................ 361 230
Inventories............................................ (112) 785
Other current assets................................... -- 935
Accounts payable....................................... (28) (328)
Accrued expenses....................................... 194 (852)
-------------- -------------
Net cash provided by operating activities................. 2,631 2,921
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from affiliated companies....................... 100 375
Proceeds from sale of investments......................... -- 3,000
Proceeds from sale of property, plant and equipment....... 47 34
-------------- -------------
Net cash provided by investing activities................. 147 3,409
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distribution to parent .............................. (2,847) (12,908)
-------------- -------------
Net cash used by financing activities..................... (2,847) (12,908)
-------------- -------------
Net decrease in cash and short-term investments........... (69) (6,578)
Cash and short-term investments at beginning of period...... 344 6,654
-------------- -------------
Cash and short-term investments at end of period............ $ 275 $ 76
============== =============
See accompanying notes to consolidated financial statements.
33
PURINA MILLS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. ORGANIZATION
Purina Mills, LLC ("Purina Mills") was established in October, 2001
through the merger of Purina Mills, Inc. with a wholly-owned subsidiary of Land
O'Lakes, Inc. As a result of the merger, Purina Mills, Inc. was reorganized as a
limited liability company, renamed Purina Mills, LLC, and was contributed to
Land O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed") on October 11,
2001.
Since October 2001, Land O'Lakes Farmland Feed has been integrating Purina
Mills's operations into its own to decrease operating costs and to generate
other integration-related synergies. In January 2003, Nestle Purina PetCare
Company ("NPPC") consented to the transfer of the Purina license from Purina
Mills to Land O'Lakes Farmland Feed. This transfer granted Land O'Lakes Farmland
Feed the exclusive right to use the Purina, Chow and the "Checkerboard" Nine
Square logo on a perpetual, royalty-free basis. In January of 2003, Purina Mills
distributed most of its net assets to its parent, Land O'Lakes Farmland Feed. At
March 31, 2004, although Purina Mills still owned a significant amount of
property, plant, and equipment, these assets generated no revenue for Purina
Mills since they are operated and controlled by Land O'Lakes Farmland Feed.
2. STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Purina Mills
and wholly-owned and majority-owned subsidiaries and limited liability
companies. Intercompany balances and transactions have been eliminated. Purina
Mills's parent company, Land O'Lakes Farmland Feed, conducts a portion of its
operations using Purina Mills's property, plant, and equipment. Accordingly, the
consolidated financial statements reflect depreciation expense associated with
these assets for which no reimbursement is received from the parent company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Purina Mills, LLC, 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 Purina Mills's audited
consolidated financial statements and footnotes for the year ended December 31,
2003 included in Land O'Lakes, Inc. Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
4. RECEIVABLES
A summary of receivables is as follows:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Trade receivables (see Note 5)............. $ -- $ 273
Other...................................... 212 300
--------- ---------
Total receivables, net..................... $ 212 $ 573
========= =========
5. RECEIVABLES PURCHASE FACILITY
In December 2001, Purina Mills along with Land O'Lakes, Inc. and Land
O'Lakes Farmland Feed LLC, established a $100 million receivables purchase
facility with CoBank, ACB ("CoBank"). In March 2004, the facility was expanded
to $200 million. A wholly-owned, unconsolidated special purpose entity ("SPE")
was established to purchase certain receivables from Purina Mills, Land O'Lakes,
Inc and Land O'Lakes Farmland Feed. CoBank has been granted an interest in the
pool of receivables owned by the SPE. The transfers of the receivables from
Purina Mills to the SPE are structured as sales and, accordingly, the
receivables transferred to the SPE are not reflected in
34
the consolidated balance sheet. On January 1, 2004, a subsidiary of Purina Mills
started to sell certain receivables to the SPE. Purina Mills's parent, Land
O'Lakes Farmland Feed, holds a note receivable from the SPE and retains credit
risk related to the repayment of the notes receivable from the SPE. Repayment of
the note receivable and the cash reimbursement to Purina Mills is dependent upon
the credit risk of the SPE's receivables pool. At March 31, 2004, $120 million
was outstanding under this facility. The total amount of accounts receivable
sold during the three months ended March 31, 2004 and 2003 were $1.9 million and
$0.0 million, respectively.
6. INVENTORIES
A summary of inventories is as follows:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Raw materials.......... $ 151 $ 152
Finished goods......... 664 551
-------- ---------
Total inventories...... $ 815 $ 703
======== =========
7. INVESTMENTS
Purina Mills's investments are as follows:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Y-Not, LLC...................... $ 725 $ 693
Eastern Block, Inc.............. 600 558
Eastgate Feed and Grain, LLC.... 393 367
Other........................... 37 76
-------- --------
Total investments............... $ 1,755 $ 1,694
======== ========
8. GAIN ON LEGAL SETTLEMENTS
Purina Mills recognized gains on legal settlements of $0.3 million and
$0.9 million for the three months ended March 31, 2004 and 2003, respectively,
related to litigation with vitamin product suppliers against whom Purina Mills
alleged certain price-fixing claims.
9. GAIN ON SALE OF INVESTMENT
For the three months ended March 31, 2003, Purina Mills recorded a gain of
$0.5 million on the sale of an investment in a swine joint venture.
10. COMMITMENTS AND CONTINGENCIES
GUARANTEE OF PARENT DEBT
In December 2003, Land O'Lakes, Inc. issued $175 million of senior secured
notes, due 2010. In November 2001, Land O'Lakes, Inc. issued $350 million of
senior unsecured notes, due 2011. Both of these notes are guaranteed by Purina
Mills and by each domestic wholly-owned subsidiary of Purina Mills.
The guarantee of the senior secured notes is secured by substantially the
same assets securing Land O'Lakes, Inc. senior credit facilities. The guarantee
of the senior unsecured notes is a general unsecured obligation, ranks equally
in right of payment with all existing and future senior indebtedness of Purina
Mills, is senior in right of payment to all existing and future subordinated
obligations of Purina Mills, and is effectively subordinated to any secured
indebtedness of Purina Mills and its subsidiaries to the extent of the value of
the assets securing such indebtedness. The maximum potential amount of future
payments that Purina Mills would be required to make is $525 million as of March
31, 2004. Currently, Purina Mills does not record a liability regarding the
guarantees. Purina Mills has no recourse provision that would enable it to
recover amounts paid under the guarantees from Land O'Lakes, Inc. or any other
parties.
35
The notes are not guaranteed by certain majority-owned subsidiaries of
Purina Mills (the "Non-Guarantors"). Summarized financial information of the
Non-Guarantors, which is consolidated in the financial statements of Purina
Mills, as of and for the periods indicated, are as follows:
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Total assets..... $ 260 $ 260
Net sales........ -- 3,051
Net earnings..... -- (72)
In November 2001, Land O'Lakes, Inc. entered into term facilities
consisting of a five-year Term Loan A facility and a seven-year Term Loan B
facility. During the three months ended March 31, 2004 Land O'Lakes, Inc. made
prepayments on the facilities. The Term Loan A facility was completely paid off
with these prepayments. The remaining facility is unconditionally guaranteed by
certain domestic wholly-owned subsidiaries of Land O'Lakes, Inc., including
Purina Mills and by each domestic wholly-owned subsidiary of Purina Mills. The
maximum potential payment related to this guarantee is $118.4 million as of
March 31, 2004. Purina Mills does not currently record a liability related to
the guarantee of the term loan, and Purina Mills has no recourse provisions that
would enable it to recover from Land O'Lakes, Inc. or any other parties.
11. RELATED PARTY TRANSACTIONS
Purina Mills records depreciation expense for property, plant, and
equipment used by the parent company, Land O'Lakes Farmland Feed, to conduct its
business. Purina Mills receives no reimbursement for this expense, which was
$4.8 million for the three months ended March 31, 2004.
For the three months ended March 31, 2004, Purina Mills did not pay for
certain selling, general and administrative expenses. These costs include sales
and marketing support, corporate and other administrative and management costs
which were paid for and expensed by Land O'Lakes Farmland Feed.
36
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.
OVERVIEW
GENERAL
We operate our business predominantly in the United States in six
segments: Dairy Foods, Feed, Seed, Swine, Agronomy and Layers. For the three
months ended March 31, 2004, we reported net sales of $2.0 billion and net
earnings of $46.5 million compared to net sales of $1.5 billion and a net loss
of $0.4 million for the three months ended March 31, 2003. The combination of
increased market prices primarily in our dairy foods and layers segments,
increased volumes in our dairy foods and seed segments, increased equity
earnings in our agronomy and layers segments, and an increase in unrealized
hedging gains resulted in the net earnings growth.
In April 2004, we announced our intention to reposition our MoArk layers
business for strategic growth. While no method for growth has yet been
identified, several alternatives are being considered, including financing at
the joint venture level, partnerships, or divestiture.
In March 2004, we completed an amendment to our receivables securitization
facility. The amendment increased the facility from $100 million to $200 million
and extended the facility's term from one year to three years. Concurrently with
the amendment, we sold $100 million of additional receivables and applied the
proceeds to our outstanding senior bank facilities, which included the mandatory
payment in full of our term A loan facility.
In January 2004, we completed amendments to our senior credit facilities.
The amendments included an extension of our revolving credit facility for an
additional three years.
UNCONSOLIDATED BUSINESSES
We have investments in certain entities that are not consolidated in our
financial statements. For the three months ended March 31, 2004, equity in
earnings from our unconsolidated businesses amounted to $17.4 million compared
to equity in losses of $1.0 million for the three months ended March 31, 2003.
Our investment in unconsolidated businesses amounted to $514.1 million at March
31, 2004 and $506.6 million at December 31, 2003. Cash flow from our equity
investments for the three months ended March 31, 2004 was $8.7 million compared
to $1.7 million for the three months ended March 31, 2003.
Agriliance and CF Industries, Inc. constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy segment results. We hold a 50% ownership interest in Agriliance along
with United Country Brands (wholly-owned by CHS Inc.). CF Industries is an
inter-regional cooperative in which we have a 38% ownership interest based on
our member product purchases. Our ownership in Agriliance is accounted for under
the equity method and our interest in CF Industries is accounted for on a cost
basis. Our investments in, and earnings from, Agriliance and CF Industries were
as follows as of and for the three months ended:
MARCH 31,
-----------------
2004 2003
------- -------
(IN MILLIONS)
AGRILIANCE:
Investment.................... $ 98.8 $ 88.9
Equity in earnings (loss)..... 6.7 (2.8)
CF INDUSTRIES:
Investment.................... $ 249.5 $ 249.5
Patronage income.............. -- --
For the three months ended March 31, 2004, net earnings for Agriliance
were $13.3 million, up $18.8 million versus the three months ended March 31,
2003. This increase is primarily the result of increased earnings from the crop
protection products business due to timing of vendor rebates and a 4% increase
in sales. In addition, expenses in the three months ended March 31, 2004
decreased by $3.7 million compared to the three months ended March 31, 2003 due
to reduced severance and insurance expenses in 2004. Partially offsetting these
increases was a $0.3
37
million decrease in the crop nutrient products business. This decrease was due
to a 0.3 million-ton volume decline partially offset by an increase in margins
due to lower input costs and a change in product mix. We did not receive cash
distributions from Agriliance during the three months ended March 31, 2004 and
March 31, 2003.
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 three months ended March
31, 2004, nor has any patronage been allocated during for the last four years
because CF Industries realized losses in those years. We anticipate that no
patronage allocations will occur until these losses have been recouped.
Our layers segment consists of our joint venture in MoArk, LLC. Through
June 30, 2003, MoArk was unconsolidated and our interest was recorded only as
equity in earnings or loss from affiliated companies using the equity method of
accounting. Effective July 1, 2003, MoArk was consolidated in our financial
statements as required by Financial Accounting Standards Board Interpretation
No. 46 ("FIN 46") and we did not restate prior periods. Accordingly, the
financial statements for the three months ended March 31, 2004 and the three
months ended March 31, 2003 are not comparable for several categories, including
sales and gross profit in this segment. Sales of $174.5 million and gross profit
of $34.9 million were recorded for the three months ended March 31, 2004 in this
segment. There were no sales and gross profit for the three months ended March
31, 2003 as MoArk was accounted for under the equity method during these
periods.
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. Feed sales
tend to increase in the first and fourth quarter of each year because cattle are
less able to graze during cooler months. Most seed sales occur in the first and
fourth quarters of each year. Agronomy product sales tend to be much higher in
the first and second quarter of each year, as farmers buy crop nutrient and crop
protection products to meet their seasonal needs.
DAIRY AND AGRICULTURAL COMMODITY INPUTS AND OUTPUTS
Many of our products, particularly in our dairy foods, feed, swine and
layers 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. 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 usually subject to
significant commodity price risk as the price received for the output usually
varies with the cost of the significant inputs. For the three months ended March
31, 2004, bulk cheese sales represented approximately 8% of the dairy foods
segment's net sales.
We 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 three months
ended March 31, 2004, we experienced a rising dairy price environment. The
financial impact to building inventories in a market with price volatility will
depend on what market trends occur up to and through the fall and winter of
2004. For the three months ended March 31, 2004 net sales of butter and cheese
products to retail and food service customers represent approximately 38% of the
dairy foods segment sales.
Market prices for commodities such as butter and cheese can have a
significant impact on both the cost of products produced and the price for which
products are sold. The per pound market price of butter averaged $1.75 for the
three months ended March 31, 2004 compared to $1.07 for the three months ended
March 31, 2003. The per-
38
pound market price for butter on December 31, 2003 was $1.25. In the past three
years, the lowest average monthly market price for butter was $0.96 in September
2002 and the highest average monthly market price was $2.20 in March 2004. The
per-pound market price for block cheese averaged $1.49 for the three months
ended March 31, 2004, compared to $1.11 for the three months ended March 31,
2003. In the past three years, the lowest monthly market price for block cheese
was $1.07 in March, 2003 and the highest monthly market price was $1.80 in March
2004. The per-pound market price for block cheese on December 31, 2003 was
$1.31.
We maintain a sizable dairy manufacturing presence in the Upper Midwest.
This region has seen significant declines in cow numbers and its share of
nationwide dairy manufacturing volume. This decline has put pressure on our
Upper Midwest milk input costs and is one of the factors resulting in losses for
the three months ended March 31, 2004 and 2003; however, operating losses for
2004 declined from the three months ended March 31, 2003 by $2.2 million due to
the effect of higher cheese and whey market prices. We continue to explore
additional initiatives to improve our Upper Midwest dairy infrastructure in an
effort to increase efficiencies and reduce costs. Based on initiatives we
started in 2002, including the impending closure of the Volga, South Dakota
plant in 2004, we incurred $0.4 million and $1.0 million for the three months
ended March 31, 2004 and 2003, respectively, for restructuring and impairment
charges related to the Upper Midwest.
Margins on our mozzarella and whey products, primarily in our western
cheese operations, remained weak for the three months ended March 31, 2004. Soft
demand for mozzarella and whey and over-capacity in the mozzarella industry
continued to place pressure on the margins these products generate. However,
market prices have moved higher for both cheese and whey products for the three
months ended March 31, 2004 compared to the same period for 2003 due to a rising
dairy price environment. Market softness and other factors have contributed to
start-up losses for the three months ended March 31, 2004 at our new Tulare,
California mozzarella and whey manufacturing facility, Cheese & Protein
International LLC ("CPI"). We expect pretax losses at CPI to continue at least
through 2004 as we complete our planned Phase II installation, which will
approximately double the plant capacity and improve profitability. Once our
planned Phase II installation is completed later in 2004, we expect our total
investment in the CPI facility to be approximately $186 million in property,
plant and equipment.
Feed. The Feed segment follows industry standards for feed pricing. The
feed industry generally prices products based on income over ingredient cost 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. Accordingly, net sales are less of an indicator of
performance since large fluctuations can occur from period-to-period due to
volatility in the underlying commodity ingredient prices.
We enter into forward contracts to supply feed, which currently represent
approximately 25% of our feed output. When we enter into these contracts, we
also generally enter into forward input supply contracts to lock in our
operating margins.
Changes in commodity grain prices 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 has 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. Complete feed is
manufactured feed which meets the complete nutritional requirements of animals,
whereas a simple blend is a blending of unprocessed commodities to which the
producer then adds vitamins to supply the animal's nutritional needs. Simple
blends tend to have lower margins than complete feeds. This change in product
mix is a result of differences in industry practices. Dairy producers in the
western United States tend to purchase feed components and mix them at the farm
location rather than purchasing a complete feed product delivered to the farm.
Producers purchase grain blends and concentrated premixes from separate
suppliers. This shift is reflected in increased sales in our subsidiaries that
manufacture premixes in the western area. In addition, the increase in vertical
integration of swine and poultry producers has impacted our feed product mix by
increasing sales of lower-margin feed products.
39
We have seen continued erosion of commodity feed volumes, mainly related
to historically low prices in swine and dairy markets, which has resulted in a
liquidation of herds and a decrease in feed demand. Although producer prices in
dairy and swine increased during the three months ended March 31, 2004, we
expect continued pressure on margins in dairy, poultry and swine feed to
continue in 2004 as producers closely manage their financial returns by
monitoring feed volumes and product mix . In addition, further integration and
consolidation in the swine and dairy industries is expected to continue to put
pressure on volumes in 2004. There continues to be uncertainty in the beef
livestock markets with the impact of reduced exports after the discovery of
bovine spongiform encephalopathy ("BSE;" also referred to as Mad Cow's disease)
in the U.S. marketplace. We do not believe that this uncertainty has had a
material impact on our operations.
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.
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 September,
2005 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. We sell feeder pigs on the open market, as well, depending on sow farm
performance and finishing space limitations. For the three months ended March
31, 2004, the average market hog price was $45.56 per hundredweight versus an
average market price of $36.43 for the three months ended March 31, 2003.
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 of our existing cost-plus contracts. In 2003, we
reduced our hog exposure by offering our cost-plus producers an early exit
option. Producers representing about 100,000 hogs elected this option. During
the three months ended March 31, 2004, additional contracts have expired and we
now have approximately 20,000 hogs remaining in this program compared to over
280,000 hogs at March 31, 2003. The last cost-plus contracts will expire in
August, 2005, and we will not be entering into new ones under the current
structure.
Layers. MoArk produces and markets shell eggs and egg products. MoArk's sales
and earnings fluctuate depending on egg prices. For the three months ended March
31, 2004, egg prices averaged $1.21 per dozen as measured by Urner Barry South
Central Large compared to egg prices of $0.85 for the three months ended March
31, 2003.
DERIVATIVE COMMODITY INSTRUMENTS
We use derivative commodity instruments, primarily futures contracts, to
reduce our exposure to changes in commodity prices. These contracts are not
designated as hedges under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The futures
contracts are marked to market each month and gains or losses ("unrealized
hedging gains and losses") are recognized in our earnings. We recorded
unrealized hedging gains of $13.2 million and $2.8 million for the three months
ended March 31, 2004 and March 31, 2003, respectively.
40
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2003
Overview of Results
Our net earnings were $46.5 million for the three months ended March 31,
2004 compared to a loss of $0.4 million for the three months ended March 31,
2003. Net earnings included income tax expense of $16.6 million compared to an
income tax benefit of $5.6 million for the three months ended March 31, 2004 and
2003, respectively. Earnings increased due to the effects of higher market
prices for dairy and egg products, volume growth in the dairy foods and seed
segments, and higher prices for market hogs. Earnings also improved through cost
control initiatives, increased earnings from equity in affiliated companies, and
a $1.7 million gain on a divestiture of a business in the dairy foods segment.
An increase in unrealized, hedging gains of $10.4 million also contributed to
the increased earnings. Offsetting these increases was a decrease in gain on
legal settlements to $4.2 million for the three months ended March 31, 2004
compared to $8.9 million for the three months ended March 31, 2003.
Net Sales
Net sales for the three months ended March 31, 2004 increased $556.8
million, or 38.3%, to $2,011.3 million compared to the same period in 2003. The
increase was partly attributed to the consolidation of MoArk effective July 1,
2003, which increased sales by $175 million, or 12%. Increases in dairy foods,
feed, and seed sales contributed $381 million of increased sales, or 26%,
compared to the three months ended March 31, 2003. A discussion of net sales by
business segment is found below under the caption "Net Sales and Gross Profit by
Business Segment."
Gross Profit
Gross profit for the three months ended March 31, 2004 increased $75.0
million, or 60%, to $200.5 million compared to $125.5 million for the three
months ended March 31, 2003. The consolidation of MoArk increased gross profit
by $35 million. The effect of higher average market prices for certain
commodities and volume increases in the dairy foods and seed segments also
contributed to the increase. Gross profit as a percent of net sales increased
1.4 percentage points to 10.0% for the three months ended March 31, 2004
compared to 8.6% for the same period in 2003. The consolidation of MoArk, which
has a higher-margin product mix, partly contributed to this increase. A
discussion of gross profit by business segment is found below under the caption
"Net Sales and Gross Profit by Business Segment."
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended
March 31, 2004 increased $17.5 million, or 15%, to $134.9 million compared to
$117.4 million for the three months ended March 31, 2003. The increase was
primarily due to the consolidation of MoArk, effective July 1, 2003, which added
$9.0 million of selling, general and administrative expense in the three months
ended March 31, 2004. Increased spending of $3.8 million in the feed segment
related to advertising and promotion costs and $4.0 million higher personnel
costs in both feed and seed contributed to the higher expenses for the three
months ended March 31, 2004 versus the three months ended March 31, 2003.
Selling, general and administrative expense as a percent of net sales decreased
1.4 percentage points to 6.7% for the three months ended March 31, 2004 from
8.1% for the three months ended March 31, 2003. The decline as a percent of net
sales is partially due to the consolidation of MoArk, which has a lower
percentage of selling, general and administrative expense to net sales than our
other segments, and also due to increased sales prices in dairy foods due to a
rising dairy product commodity market.
41
Restructuring and Impairment Charges
For the three months ended March 31, 2004, we had restructuring and
impairment charges of $0.9 million compared to $1.1 million for the same period
in 2003. In 2004, we incurred $0.4 million of restructuring charges for employee
severance in our dairy foods segment related to the impending closure of our
Volga, South Dakota cheese facility. We also incurred $0.5 million for goodwill
impairment in our seed segment related to assets held for sale. For the three
months ended March 31, 2003, dairy foods recorded a restructuring charge of $1.0
million for employee severance and outplacement costs related to discontinuing
whey production at an Upper Midwest dairy facility and feed recorded a $0.1
million asset impairment charge.
Interest Expense, Net
Interest expense, net of interest income, was $23.7 million for the three
months ended March 31, 2004 compared to $19.9 million for the three months ended
March 31, 2003. Changes in our debt structure resulted in additional interest
expense of $1.1 million for the three months ended March 31, 2004 compared to
the same period for the prior year. The consolidation of MoArk effective July 1,
2003, resulted in additional interest expense of $1.5 million. Also, for the
three months ended March 31, 2004, we accelerated $1.5 million of deferred
financing cost amortization as a result of prepayments made on our term loans
with proceeds from an expansion of our receivables securitization facility.
Combined interest rates for borrowings, excluding CoBank patronage, averaged
7.55% for the three months ended March 31, 2004 compared to 6.89% for the three
months ended March 31, 2003.
Gain on Legal Settlements
As a result of settled litigation, we recorded a gain on legal settlements
of $4.5 million for the three months ended March 31, 2004 compared to a gain on
legal settlements of $8.9 million for the three months ended March 31, 2003.
These gains represent cash received from product suppliers against whom we
alleged certain price-fixing claims. Although we continue to pursue related
claims, we do not expect to receive significant amounts relating to these
matters in the future.
Equity in Earnings of Affiliated Companies
For the three months ended March 31, 2004, equity in earnings of
affiliated companies was $17.4 million compared to an equity loss of $1.0
million for the three months ended March 31, 2003. Equity in earnings from
Agriliance was $6.7 million for the three months ended March 31, 2004, which was
a $9.5 million increase from an equity loss of $2.8 million for the three months
ended March 31, 2003. This increase was primarily driven by improved crop
protection product margins and was partially offset by a decline in crop
nutrient volumes. A discussion of net earnings for Agriliance can be found under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview - Unconsolidated Businesses." MoArk equity in
earnings from joint venture investments was $7.8 million for the three months
ended March 31, 2004 compared to $0.6 million for the three months ended March
31, 2003. The increase in MoArk equity in earnings was driven primarily by
improved market prices for eggs, in part as a result of a declining chick hatch,
changes in response to new animal welfare guidelines and changing consumer
dietary trends.
Income Taxes
We recorded income tax expense of $16.6 million for the three months ended
March 31, 2004 compared to a tax benefit of $5.6 million for the three months
ended March 31, 2003. The increase in income tax expense resulted from improved
earnings from MoArk and other non-member business, including unrealized hedging
gains.
42
Net Sales and Gross Profit by Business Segment
Our reportable segments consist of business units that offer similar
products and services and/or similar customers. We have six segments: Dairy
Foods, Feed, Seed, Swine, Agronomy and Layers. Our agronomy segment consists
primarily of our 50% ownership in Agriliance, which is accounted for under the
equity method, and our 38% interest in CF Industries, which is accounted for on
a cost basis. Accordingly, no sales or gross profit are recorded for the
agronomy segment. A discussion of net earnings for Agriliance can be found under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview - Unconsolidated Businesses."
DAIRY FOODS
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(in millions) 2004 2003 % CHANGE
---- ---- --------
Net sales........................ $ 899.1 $ 636.7 41.2%
Gross profit..................... 58.6 27.8 110.8%
Gross profit % of net sales 6.5% 4.4%
Net Sales
Net sales for the three months ended March 31, 2004 increased $262.4
million, or 41.2%, compared to the three months ended March 31, 2003. Butter and
value-added cheese (retail, deli, and foodservice cheese) sales prices increased
for the three months ended March 31, 2004 compared to the same period in 2003
due primarily to higher commodity prices, resulting in increased sales of $52.6
million and $14.2 million, respectively. Industrial cheese sales increased $57.5
million due to the increase in the average commodity market price of cheese, up
$.38 per pound compared to the same period in 2003. Volume increases in sales of
butter, particularly our branded butter, and value-added cheese for the three
months ended March 31, 2004 also contributed to the increase in sales by $18.8
million and $32.7 million, respectively. Butter volume increases were partly due
to the impact of our spreadable butter with canola oil product, which was
introduced in the second quarter of 2003, and also timing due to the earlier
Easter holiday and a buildup of customer inventories related to concerns about
market volatility.. Value-added cheese volume increases were due to strong
consumer demand, especially for foodservice and deli cheese. Sales through our
wholesale milk marketing program, which supplies milk to fluid dairy processors,
increased by $64.5 million compared to the same period for 2003 due primarily to
increases in milk market prices. Other product categories increased sales by
$22.1 million.
Gross Profit
Gross profit for the three months ended March 31, 2004 increased $30.8
million compared to the three months ended March 31, 2003. Gross profit for
value-added cheese increased $5.4 million due to higher profit margins as a
result of higher commodity market prices. Volume increases for value-added
cheese also increased gross profit by $4.7 million. Gross profit for butter
increased $2.4 million due to increased volumes. Gross profit for industrial
cheese increased by $9.0 million for the three months ended March 31, 2004
versus the same period in the prior year due to an increase in prices,
manufacturing efficiencies, and the closure of the Gustine cheese facility in
2003. An unrealized hedging gain of $8.5 million for the three months ended
March 31, 2004 compared to $0.5 million for the three months ended March 31,
2003 resulted in an additional $8.0 million of gross profit. Offsetting these
increases was a $4.5 million reduction to gross profit from our wholesale milk
marketing program. The 2.1 percentage-point increase in gross profit as a
percent of net sales is partly due to the $8.0 million increase in the
unrealized hedging gain, which accounts for 0.8 percentage points of the
increase. The remaining 1.3 percentage point increase is largely due to
increases in commodity prices and manufacturing efficiencies.
FEED
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(in millions) 2004 2003 % CHANGE
---- ---- --------
Net sales........................ $ 677.0 $ 602.5 12.4%
Gross profit..................... 76.1 72.5 5.0%
Gross profit % of net sales 11.2% 12.0%
43
Net Sales
Net sales for the three months ended March 31, 2004 increased $74.5
million, or 12.4%, compared to the three months ended March 31, 2003.
Ingredients sales increased $35.7 million due to higher commodity prices in the
three months ended March 31, 2004 compared to the same period in 2003. Formula
feed sales, which includes both lifestyle and livestock feeds, increased $16.2
million primarily due to increased volumes, particularly in horse and companion
lifestyle animal feed, as well as higher commodity prices. Although livestock
feed sales increased due to higher commodity prices, some of this increase was
offset by slightly lower volumes for dairy and swine feed. Continued producer
integration as well as a geographic shift in livestock numbers are the primary
causes for this volume decline. Sales of animal health, farm and ranch products
were $9.8 million higher than in the three months ended March 31, 2003 due to
the creation of Heritage Trading Company, a consolidated joint venture formed in
March of 2003. Sales at a Land O'Lakes Farmland Feed LLC subsidiary increased
$13.9 million mainly due to increased sales of premix products.
Gross Profit
Gross profit for the three months ended March 31, 2004 increased $3.6
million, or 5.0%, compared to the three months ended March 31, 2003. Sales of
ingredients resulted in $3.7 million of additional gross profit due to focused
purchasing opportunities in rising commodity markets. Gross profit for animal
health, farm and ranch products was $0.6 million higher than for the three
months ended March 31, 2003 due to the creation of Heritage Trading Company.
Increased sales at a premix subsidiary resulted in increased gross profit of
$0.7 million. An unrealized hedging gain of $5.5 million for the three months
ended March 31, 2004 compared to $1.5 million for the three months ended March
31, 2003 resulted in an additional $4.0 million of gross profit. Partially
offsetting these increases was a decline in formula feed gross profit of $2.3
million due to volume declines in livestock feeds, product mix changes, and
increased costs of packaging and other supplies. Gross profit also decreased
$2.0 million due to increased freight subsidies resulting from higher fuel
costs. Gross profit as a percent of net sales declined from 12.0% to 11.2% for
the three months ended March 31, 2004 versus 2003, respectively. The decline is
primarily due to product mix changes to lower-margin formula feed products and
increased packaging, supplies, and fuel costs. Offsetting the decline was an
increase to gross profit as a percent of net sales of 0.8% for the three months
ended March 31, 2004 compared to 0.2% for the three months ended March 31, 2003
due to the effects of unrealized hedging gains.
SEED
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(in millions) 2004 2003 % CHANGE
---- ---- --------
Net sales........................ $ 243.4 $ 191.9 26.8%
Gross profit..................... 30.8 25.1 22.7%
Gross profit % of net sales 12.7% 13.1%
Net Sales
Net sales for the three months ended March 31, 2004 increased $51.5
million, or 26.8%, compared to the three months ended March 31, 2003. Corn seed
sales increased $29.2 million due to volume growth in partnered products and
product mix in our proprietary brands. Soybean sales increased $16.3 million for
this same period primarily as a result of increased volumes in both proprietary
and partnered brands. Alfalfa sales also increased $4.0 million mainly due to
increased demand in international markets.
44
Gross Profit
Gross profit for the three months ended March 31, 2004 increased $5.7
million, or 22.7%, compared to the three months ended March 31, 2003. Stronger
corn seed sales resulted in increased gross profit of $3.3 million. Soybean
gross profit was $2.3 million higher for the three months ended March 31, 2004
compared to the same period in 2003 mainly due to volume growth. Alfalfa gross
profit increased by $2.7 million due to increased volumes and a lower cost base
compared to the same period for 2003. Offsetting these increases was an
unrealized hedging loss on soybean futures contracts for $2.9 million for the
period ended March 31, 2004 compared to an unrealized hedging loss of $0.2
million for the three months ended March 31, 2003. Gross profit as a percent of
net sales declined to 12.7%, or 0.4 percentage points, compared to the three
months ended March 31, 2003, due to the increased unrealized hedging loss
recorded for the three months ended March 31, 2004.
SWINE
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(in millions) 2004 2003 % CHANGE
---- ---- --------
Net sales........................ $ 22.5 $ 21.2 6.1%
Gross profit..................... 0 (1.1) n/a
Gross profit % of net sales 0% -5.2%
Net Sales
Net sales for the three months ended March 31, 2004 increased $1.3
million, or 6.1%, compared to the same period last year. Average market hog
prices increased from $36.43 per hundredweight for the three months ended March
31, 2003 to $45.56 per hundredweight for the three months ended March 31, 2004
due to stronger consumer demand which resulted in a sales increase of $2.2
million. Offsetting this increase was a decrease in the number of market hogs
sold which reduced sales by $.3 million. In addition, sales under our packer
agreement, which ties the price we receive for market hogs to the price that the
packer receives for pork products, declined by $.6 million due to price.
Gross Profit
Gross profit for the three months ended March 31, 2004 increased $1.1
million compared to the three months ended March 31, 2003. The increase in
average market hog prices resulted in a gross profit improvement of $2.2
million. Gross profit also increased by $1.3 million due to reduced expenses for
our cost-plus program, which ties producer payments we make under the program to
market hog prices, as a result of higher market hog prices. Partially offsetting
these increases were $0.6 million of higher corn and soybean meal costs and a
$0.6 million decline in price related to the packer agreement versus the three
months ended March 31, 2003. A decline in unrealized hedging gains of $1.1
million for the three months ended March 31, 2004 compared to the three months
ended March 31, 2003 also reduced gross profit. Gross profit as a percent of net
sales increased to 0% from (5.2%) for the three months ended March 31, 2004
compared to the same period for 2003.
LAYERS
Effective July 1, 2003, we consolidated MoArk as required by FIN 46 and
presented the business as our layers segment in our financial statements. Prior
periods were not restated. Prior to July 1, 2003, MoArk was accounted for under
the equity method; accordingly, sales and gross profit for the three months
ended March 31, 2003 were not included in our layers segment which is comprised
solely of our ownership of MoArk.
Net Sales
Net sales for the three months ended March 31, 2004 were $175.4 million
compared to no net sales for the three months ended March 31, 2003 due to the
consolidation of MoArk under FIN 46 on July 1, 2003. On a stand-alone basis,
MoArk had net sales of $115.7 million for the three months ended March 31, 2003.
The increase in net sales was driven primarily by higher egg market prices. For
the three months ended March 31, 2004, the average market price of eggs per
dozen was $1.21 versus $.85 for the three months ended March 31, 2003. Total
volume of shell eggs (in dozens) increased by 3.3 percent for the period ended
March 31, 2004 compared to the same period in the prior year.
45
Gross Profit
Gross profit for the three months ended March 31, 2004 was $34.9 million
compared to no gross profit for the three months ended March 31, 2003 due to the
consolidation of MoArk under FIN 46 on July 1, 2003. On a stand-alone basis,
MoArk had gross profit of $9.7 million for the three months ended March 31,
2003. Increased egg prices, increased volume in shell eggs and savings from
cost-control initiatives resulted in MoArk's gross profit increase. An
unrealized hedging gain of $2.1 million for the three months ended March 31,
2004 compared to $0 for the three months ended March 31, 2003, also increased
gross profit.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
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 as well as acquisitions and investments in joint ventures. Other
sources of funding consist of leasing arrangements, a receivables securitization
and the sale of non-strategic assets.
Total long-term debt, including the current portion, was $952.3 million as
of March 31, 2004 compared to $1,073.2 million as of December 31, 2003. The
decrease was due to term debt repayments of $126.5 million ($100 million of
proceeds from the expansion of our receivables securitization facility was used
to pay the term debt), somewhat offset by a net $4.7 million increase for
MoArk-related debt.
Our primary sources of debt at March 31, 2004 included a $185 million
revolving credit facility (which was amended in January, 2004) and a $118.4
million institutional Term B loan, both of which are secured by the majority of
the Company's assets. In addition, we have $175 million in secured notes, $350
million in unsecured notes and $191 million of capital securities. For more
information, please see the caption below entitled "Principal Debt Facilities."
At March 31, 2004, we also had long and short-term debt related to MoArk
of $84 million. Land O'Lakes does not provide any guarantees or support for
MoArk's debt. In addition, we had $37.7 million of other miscellaneous long-term
debt at March 31, 2004.
During the fourth quarter of 2001, we entered into a $100 million
receivables securitization program to reduce overall financing costs. On March
31, 2004, we expanded the facility to $200 million. At March 31, 2004, $120
million was outstanding under this facility. In accordance with generally
accepted accounting principles, this facility was not reflected as debt on our
consolidated balance sheet. A more complete description of this accounts
receivable securitization program is found below under the caption, "Off-balance
Sheet Arrangements."
Our principal liquidity requirements are to service our debt and meet our
working capital and capital expenditure needs. As of March 31, 2004, $136.6
million was available under our $185 million revolving credit facility for
working capital and general corporate purposes after giving effect to $48.4
million of outstanding letters of credit, which reduce availability. There was
no outstanding balance on the facility as of March 31, 2004. In addition, at
March 31, 2004, we had available cash on hand of $21.5 million, excluding an
additional $20 million in cash held in escrow to support the capital lease
financing of Cheese and Protein International Total equities as of March 31,
2004 were $930.9 million.
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 liquidity requirements for at least the next twelve
months, including debt service on our term debt, the revolving credit
facilities, the 9% senior secured notes and our 8 3/4% senior unsecured notes.
46
We expect total capital expenditures to be approximately $100 million in
2004, of which approximately $30 million relates to the Phase II installation at
CPI's Tulare, California facility. Of such amounts, we currently estimate that a
minimum range of $35 million to $45 million of ongoing maintenance capital
expenditures will be required. We had $20.6 million in capital expenditures for
the three months ended March 31, 2004 compared to $16.1 million for the three
months ended March 31, 2003.
CASH FLOWS
The following table summarizes the key elements for our cash flows for the
following periods:
Three months ended Three months ended
March 31, 2004 March 31, 2003
-------------- --------------
($ in millions)
Net cash provided by operating activities............ $ 78.5 $ 38.9
Net cash provided (used) by investing activities..... 0.6 (16.0)
Net cash used by financing activities................ (167.8) (52.9)
Operating Activities. Net cash provided by operating activities increased
by $39.6 million for the three months ended March 31, 2004 compared to the same
period for 2003. The increase was largely due to improved net earnings of $46.9
million. Working capital requirements increased cash flow by $108.1 million
primarily in our seed and dairy foods segments. The increase in seed was due to
lower receivable balances at March 31, 2004 compared to March 31, 2003 as more
customers were prepaying for products. The increase in dairy foods was due to
rising commodity prices which increased payables more than inventory valuations.
Partially offsetting these increases were a non-cash change to equity in
earnings of $18.4 million and a decrease in legal settlement proceeds of $101.1
million for the three months ended March 31, 2004 compared to the three months
ended March 31, 2003. Legal settlement proceeds totaled $4.5 million for the
three months ended March 31, 2004 compared to $105.6 million for the same period
in 2003.
Investing Activities. Net cash provided by investing activities increased
$16.6 million for the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. The increase was due to proceeds from the
divestiture of a business of $7.5 million received in the three months ended
March 31, 2004 and a $7.0 million increase in dividends received from
investments in affiliated companies, primarily investments held by MoArk.
Financing Activities. During the three months ended March 31, 2004, our
financing activities resulted in a decrease in cash flow of $114.9 million.
Payments on Term A and Term B loans were $65.3 million higher for the three
months ended March 31, 2004 compared to the same period for 2003. MoArk debt
payments, net of debt acquired, for the three months ended March 31, 2004 were
$16.8 million. Moark was not consolidated in our financial statements for the
three months ended March 31, 2003. In 2004, we also paid $4.0 million for debt
issuance costs related to senior secured notes issued December of 2003 and for
an amendment of our senior bank facilities in January of 2004. For the three
months ended March 31, 2004, we had no borrowings from our revolving credit
facility, whereas for the same period in 2003 we borrowed $18.5 million against
this facility.
PRINCIPAL DEBT FACILITIES
The principal term loans consisted of a syndicated Term A loan facility
with a final maturity date of October 10, 2006, and a syndicated Term B loan
facility with a final maturity of October 10, 2008. During the three months
ended March 31, 2004, we made prepayments of $92.5 million on the Term A loan
and $34.0 million on the Term B loan. The Term A loan was prepayable at any time
without penalty and was completely paid off with these prepayments. At March 31,
2004, the Term B loan had a remaining balance of $118.4 million.
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The amortization schedule for the Term B loan facility is provided below.
Term Loan B
-----------
($ in millions)
2004 (remaining as of 3/31/04) $ --
2005.......................... 1.1
2006.......................... 1.5
2007.......................... 1.5
2008.......................... 114.3
---------------
Total.................... $ 118.4
===============
Our $250.0 million revolving credit facility was scheduled to terminate on
June 28, 2004. In January 2004, we completed an amendment to this facility.
Under the amendment, the lenders have committed to make advances and issue
letters of credit until January, 2007, in an aggregate amount not to exceed $185
million, subject to a borrowing base limitation. The amendment also increases
the amount available for the issuance of letters of credit under the revolving
facility from $50 million to $75 million.
Borrowings under the term loan 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 leverage ratio
in the case of the revolving credit facility. The margin on the Term B loan is
fixed. As of March 31, 2004, the Term B loan interest rate was 4.59%.
The Term B loan facility is prepayable with a penalty of 1% through
October 10, 2004 and no penalty thereafter. The facility is subject to mandatory
prepayments, subject to certain limited exceptions, in an amount equal to (1)
50% of excess cash flow, as defined in the facility agreement, of Land O'Lakes
and the restricted subsidiaries measured annually following year end, (2) 100%
of the net cash proceeds of asset sales and dispositions of property of Land
O'Lakes and the restricted subsidiaries, to the extent not reinvested, (3) 100%
of any casualty or condemnation receipts by Land O'Lakes and the restricted
subsidiaries, to the extent 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 2004, we made a mandatory prepayment of
$26.5 million on Term A and Term B loans based on the excess cash flow
calculation for December 31, 2003. In March 2004, we made a mandatory prepayment
of $100 million on Term A and Term B loans due to additional cash received from
the expansion of our accounts receivable securitization.
In December 2003, we issued $175 million of senior secured notes that
mature on December 15, 2010. Proceeds from the issuance were used to make
payments on the Term A loan of $122.5 million and on the Term B loan of $52.5
million. These notes bear interest at a fixed rate of 9% per annum, payable on
June 15 and December 15 each year. The notes are callable beginning in year four
at a redemption price of 104.5%. In year five, the redemption price is 102.25%.
The notes are callable at par beginning in year six.
In November 2001, we issued $350 million of senior unsecured notes that
mature on November 15, 2011. Proceeds from the issuance were used to refinance
the Company in connection with the acquisition of Purina Mills. These notes bear
interest at a fixed rate of 8 3/4% per annum, payable on May 15 and November 15
each year. 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 the securities are entitled to
receive dividends at an annual rate of 7.45% until the securities mature in
2028. The payment terms of the Capital Securities 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 March 31, 2004, the outstanding balance of Capital Securities was
$190.7 million.
48
In April and May 2004 we entered into three $50 million fixed-to-floating
interest rate swap agreements, designated as fair value hedges, in an effort to
return to historical exposure levels for floating interest rate debt. These
swaps mirror the terms of the 8 -3/4% notes and effectively convert $150 million
of such notes from a fixed 8.75% rate to an effective rate of LIBOR plus 385
basis points.
The credit agreements relating to the term loan and revolving credit
facility and the indentures relating to the 8.75% senior unsecured notes and the
9.0% senior secured 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 loan and
revolving credit facility require us to maintain an interest coverage ratio and
a leverage ratio. Theses actual and required ratios for the periods indicated
below are as follows:
As of and for the As of and for the
twelve months ended year ended
March 31, 2004 December 31, 2003
-------------- -----------------
Actual Interest Coverage Ratio 3.70 to 1 4.55 to 1
Required Interest Coverage Ratio:
Must be at least 2.50 to 1 2.50 to 1
Actual Leverage Ratio 2.85 to 1 2.62 to 1
Required Leverage Ratio:
Must be no greater than 4.75 to 1 3.75 to 1
An amendment to the credit agreements in January 2004 increased the
required maximum leverage ratio from 3.75 to 1 to 4.75 to 1. The ratio steps
down to 4.5 to 1 for the December 31, 2004 calculation, 4.0 to 1 for the
December 31, 2005 calculation and to 3.75 to 1 for the December 31, 2006
calculation and thereafter.
Indebtedness under the term loan 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 (other than those receivables which have been sold in
connection with our receivables securitization), intellectual property and other
intangibles. 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 9% senior
notes are secured by a second lien on essentially all of the assets which secure
the term loan and the revolving credit agreement, and are guaranteed by the same
entities. The 8 3/4% senior notes are unsecured but are guaranteed by the same
entities that guarantee the obligations under the term loan and revolving credit
facility.
OFF-BALANCE SHEET ARRANGEMENTS
In order to reduce overall financing costs, we 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 or Land O'Lakes. The QSPE purchases the receivables with a
combination of cash initially received from CoBank, equal to the present value
of eligible receivables multiplied by 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.
49
On March 31, 2004, we completed an amendment to our receivables
securitization facility. Under the amendment, the facility was increased from
$100 million to $200 million. The amendment incorporates receivables generated
in our dairy foods segment. In addition, the amendment increases the facility's
term from one year to three years. Concurrently with the amendment, we applied
the incremental proceeds from the expansion to our outstanding senior bank
facilities, which included the mandatory payment in full of our Term A loan
facility and a partial repayment on our Term B loan facility. The amendment also
reduced the effective cost of the facility from LIBOR plus 175 basis points to
LIBOR plus 137.5 basis points. As of March 31, 2004, $120.0 million was drawn
under this securitization.
CAPITAL LEASES
Cheese and Protein International (CPI), a consolidated joint venture of
Land O'Lakes, leases the real property, certain equipment and the buildings
relating to its cheese manufacturing and whey processing plant in Tulare,
California (the "Lease"). The Lease is accounted for as a capital lease in our
consolidated financial statements, and as of March 31, 2004 the lease balance
was $97.0 million. The Lease base term commenced on April 30, 2002 and expires
on the fifth anniversary, unless CPI requests, and the lessor approves, one or
more one-year base term extensions, which could extend the base term to no more
than ten years. We have entered into a Support Agreement in connection with the
Lease. Pursuant to this agreement, we can elect one of the following options in
the event CPI defaults on its obligations under the Lease: (i) assume the
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. The lease agreement requires, among other things, that CPI maintain
certain financial ratios including minimum tangible net worth and a minimum
fixed charge coverage ratio, and complete certain capital expansion activities
by June 1, 2004. In addition, CPI is restricted as to borrowings and changes in
ownership.
On March 28, 2003, the CPI lease agreement was amended. The amendment
postponed the measurement of the fixed charge coverage ratio until March 2005.
In addition, Land O'Lakes established a $20 million restricted cash account
(which may be replaced with a letter of credit, at our option) which supports
the lease. The restricted cash account or letter of credit would only be drawn
upon in the event of a CPI default, and would reduce amounts otherwise due under
the lease. This support requirement will be lifted when certain financial
targets are achieved by CPI.
Our joint venture partner, Mitsui, has a put option for its remaining
interest, which can be exercised beginning on December 31, 2004 and which takes
effect up to nine months following such notice. The put allows Mitsui to sell
its entire remaining interest to us for $3.2 million, which we have reflected as
a liability on our financial statements. Mitsui may exercise the option earlier,
but only if certain specified actions are deliberately taken by CPI or Land
O'Lakes to Mitsui's material disadvantage. We do not expect that such a scenario
will occur. If we acquire Mitsui's remaining equity interest, and if we do not
replace Mitsui with another partner, CPI would become a restricted subsidiary
under the senior bank facilities at that time. As a restricted subsidiary under
the senior bank facilities, CPI's on-balance sheet debt and income or loss would
be included in the covenant calculations for our senior bank facilities.
Further, as a restricted subsidiary under the senior bank facilities, CPI would
be required to guarantee our senior bank facilities, the 8 3/4% senior unsecured
notes and the 9% senior secured notes.
MoArk, a consolidated joint venture of Land O'Lakes, had capital leases at
March 31, 2004 of $11.3 million for land, buildings, machinery and equipment at
various locations. Land O'Lakes does not provide any guarantees or support for
any of MoArk's capital leases.
RECENT ACCOUNTING PRONOUNCEMENTS
In May, 2003, the FASB issued Statement of Financial Accounting Standards
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liability and Equity." The statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The statement was effective for us as of January 1, 2004. The
adoption of this standard did not have a material impact on us.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension
50
and other postretirement benefit plans. It requires additional disclosure
regarding changes in benefit obligations and fair value of plan assets. The
statement was effective for the Company as of December 31, 2003. We adopted this
Statement for the year ended December 31, 2003, and have provided the interim
disclosures in Item 1, Financial Statements, Note 10, Pension and Other
Postretirement Plans.
On January 12, 2004, the FASB issued FASB Staff Position 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The position
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Act. Regardless of whether a sponsor elects that deferral,
the position requires certain disclosures pending further consideration of the
underlying accounting issues. We have chosen to defer accounting for the benefit
until the FASB issues final accounting guidance due to various uncertainties
related to this legislation and the appropriate accounting. Our measures of the
accumulated projected benefit obligation and net periodic postretirement benefit
costs as of and for the three months ended March 31, 2004 do not reflect the
effect of the Act.
FORWARD-LOOKING STATEMENTS
This Form 10-Q for the three months ended March 31, 2004 includes
forward-looking statements. These forward-looking statements can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "could," "should," "seeks," "anticipates," "intends," 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. 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.
- OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO
FULFILL OUR OBLIGATIONS UNDER OUR DEBT OBLIGATIONS AND OPERATE OUR
BUSINESS.
- SERVICING OUR INDEBTEDNESS REQUIRES A SIGNIFICANT AMOUNT OF CASH,
AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR
CONTROL.
- DESPITE OUR SUBSTANTIAL LEVERAGE, WE ARE ABLE TO INCUR MORE DEBT,
WHICH MAY INTENSIFY THE RISKS ASSOCIATED WITH OUR SUBSTANTIAL
LEVERAGE, INCLUDING OUR ABILITY TO SERVICE OUR DEBT.
- 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.
- AN OVERSUPPLY OF FOOD PROTEIN IN THE UNITED STATES MARKET HAS
REDUCED, AND COULD CONTINUE TO REDUCE, OUR SALES AND MARGINS.
- A GEOGRAPHIC SHIFT IN DAIRY PRODUCTION HAS DECREASED AND COULD
CONTINUE TO DECREASE OUR SALES AND MARGINS.
- CHANGES IN CONSUMER PREFERENCES AND DISTRIBUTION CHANNELS COULD
DECREASE OUR REVENUES AND CASH FLOW.
- COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS.
- OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY
WEATHER CONDITIONS.
51
- INCREASED ENERGY AND GAS COSTS COULD INCREASE OUR EXPENSES AND
REDUCE OUR PROFITABILTIY.
- OUTBREAK OF DISEASE CAN REDUCE OUR NET SALES AND OPERATING MARGINS.
- 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 AND THE LIKELIHOOD OF RECEIVING
DIVIDENDS FROM OUR JOINT VENTURES TO DECREASE.
- WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS
AND TO CONTROL THE JOINT VENTURE ARE LIMITED.
- AGRILIANCE'S BUSINESS MAY BE ADVERSELY AFFECTED BY AGRILIANCE'S
DEPENDENCE UPON ITS SUPPLIERS.
- A LOSS OF OUR COOPERATIVE TAX STATUS COULD INCREASE OUR TAX
LIABILITY.
- OUR LIMITED ACCESS TO EQUITY MARKETS COULD ADVERSELY AFFECT OUR
ABILITY TO OBTAIN ADDITIONAL EQUITY CAPITAL.
- OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS,
EXPOSING US TO POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD
ADVERSELY AFFECT OUR BUSINESS.
- INABILITY TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS
COULD DAMAGE OUR COMPETITIVE POSITION.
- 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.
- PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT
OUR BUSINESS REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY
FEDERAL AND STATE REGULATORS.
- WE COULD INCUR SIGNIFICANT COSTS FOR VIOLATIONS OF OR LIABILITIES
UNDER ENVIRONMENTAL LAWS AND REGULATIONS APPLICABLE TO OUR
OPERATIONS.
- STRIKE OR WORK STOPPAGES BY OUR UNIONIZED WORKERS COULD DISRUPT OUR
BUSINESS.
- THERE IS NO ASSURANCE THAT OUR SENIOR MANAGEMENT TEAM OR OTHER KEY
EMPLOYEES WILL REMAIN WITH US.
For a discussion of additional 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
in our Annual Report on Form 10-K for the year ended December 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three months ended March 31, 2004 the Company did not experience
significant changes in market risk exposures that materially affect the
quantitative and qualitative disclosures presented in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
In April and May 2004, we entered into three $50 million fixed-to-floating
interest rate swap agreements, designated as fair value hedges, in an effort to
return to historical exposure levels for floating interest rate debt.
52
These swaps mirror the terms of the 8.75% notes and effectively convert $150
million of such notes from a fixed 8.75% rate to an effective rate of LIBOR plus
385 basis points.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or in other factors that could significantly
affect these controls subsequent to the date of their evaluation and there were
no corrective actions with regard to significant deficiencies or material
weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently and from time to time involved in litigation incidental
to the conduct of our business. The damages claimed against us in some of these
cases are substantial. On February 24, 2004, Cache La Poudre Feeds, LLC
("Cache") filed a lawsuit in the United States District Court for the District
of Colorado against the Company, Land O'Lakes Farmland Feed LLC and certain
named officers thereof claiming trademark infringement with respect to certain
animal feed sales under the Profile trade name. Cache seeks damages of at least
$132.8 million, which, it claims, is the amount the named entities generated in
gains, profits and advantages from using the Profile trade name. In response to
Cache's complaint, the Company denied any wrongdoing and pursued certain
counterclaims against Cache relating to, among other things, trademark
infringement, and other claims against Cache for, among other things, defamation
and libel. In addition, the Company believes that Cache's calculation of the
Company's gains, profits and advantages allegedly generated from the use of the
Profile trade name is grossly overstated. The Company believes that sales
revenue generated from the sale of products carrying the Profile trade name are
immaterial. Although the amount of any loss that may result from this matter
cannot be ascertained with certainty, we do not currently believe that it will
result in a loss material to our consolidated financial condition, future
results of operations or cash flow.
In 2003, several lawsuits were filed against the Company by Ohio alpaca
producers in which it is alleged that the Company manufactured and sold animal
feed that caused the death of, or damage to, certain of the producers' alpacas.
It is possible that additional lawsuits or claims relating to this matter could
be brought against the Company. Although the amount of any loss that may result
from these matters cannot be ascertained with certainty, we do not currently
believe that, in the aggregate, they will result in losses material to our
consolidated financial condition, future results of operations or cash flow.
In December 2002, we reached settlements with defendants whom we claimed
had illegally fixed the prices for various vitamin and methionine products we
purchased. As a result of the settlements, we received proceeds of approximately
$119.5 million in 2003. In February 2004, we received an additional $4.5 million
of proceeds. When combined with the settlement proceeds received from similar
claims settled since the commencement of these actions, we have received
cumulatively approximately $188 million from the settling defendants. These
claims that have been settled represent the vast majority of our vitamin and
methionine purchases.
In a letter dated January 18, 2001, we were identified by the United
States Environmental Protection Agency ("EPA") as a potentially responsible
party for clean-up costs in connection with hazardous substances and wastes at
53
the Hudson Refinery Superfund Site in Cushing, Oklahoma. The letter invited us
to enter into negotiations with the EPA for the performance of a remedial
investigation and feasibility study at the site and also demanded that we
reimburse the EPA approximately $8.9 million for remediation expenses already
incurred at the site. In March 2001, we responded to the EPA denying any
responsibility. No further communication has been received from the EPA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT DESCRIPTION
3.1 By-Laws of Land O'Lakes Inc., as amended, February 2003 (1)
4.1 Fourth Amendment dated January 13, 2004 to the Credit
Agreement dated October 11, 2001 among Land O'Lakes, Inc.,
the Lenders party thereto and the Chase Manhattan Bank. (2)
10.1 Amended and Restated Receivables Purchase Agreement
dated as of March 31, 2004, among Land O'Lakes
Farmland Feed LLC, LOL Farmland Feed SPV, LLC, and
CoBank, ACB (1)
10.2 Fourth Amendment dated January 13, 2004 to the
Amended and Restated Five-Year Credit Agreement
dated October 11, 2001 among Land O'Lakes, Inc., the
Lenders party thereto and the Chase Manhattan Bank.
(1)
10.3 First Amendment dated March 31, 2004 to Purchase and
Sales Agreement dated December 18, 2001, among Land
O'Lakes, Inc., Land O'Lakes Farmland Feed LLC,
Purina Mills, LLC and LOL Farmland Feed SPV, LLC (1)
31.1 Certification Pursuant to 15 U.S,C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification Pursuant to 15 U.S,C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002*
32.2 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 an exhibit to the registrant's Registration
Statement on Form S-4 filed April 28, 2004.
(2) Incorporated by reference to an exhibit to the Company's Form 10-K for the
year ended December 31, 2003, filed on March 30, 2004.
* Filed electronically herewith
(B) REPORTS ON FORM 8-K
On February 2, 2004 the Company furnished a Report on Form 8-K to report
the filing of a press release containing the Company's 2003 annual
earnings information.
On February 26, 2004 the Company furnished a Report on Form 8-K to make
available its Annual Report to Stakeholders.
On March 3, 2004 the Company furnished a Report on Form 8-K to report the
filing of a press release announcing the election of a new chairman to the
Company's Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 13th day of May, 2004.
LAND O'LAKES, INC.
By /s/ Daniel Knutson
----------------------------------------------
Daniel Knutson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
55