Attached files
file | filename |
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EX-32.1 - EX-32.1 - LAND O LAKES INC | c54629exv32w1.htm |
EX-32.2 - EX-32.2 - LAND O LAKES INC | c54629exv32w2.htm |
EX-31.1 - EX-31.1 - LAND O LAKES INC | c54629exv31w1.htm |
EX-31.2 - EX-31.2 - LAND O LAKES INC | c54629exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period ended September 30, 2009
or
o | 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 OLakes, Inc.
(Exact name of Registrant as Specified in Its Charter)
Minnesota (State or Other Jurisdiction of Incorporation or Organization) |
41-0365145 (I.R.S. Employer Identification No.) |
|
4001 Lexington Avenue North | ||
Arden Hills, Minnesota (Address of Principal Executive Offices) |
55112 (Zip Code) |
(651) 481-2222
(Registrants Telephone Number, Including Area Code)
(Registrants 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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
Land OLakes, 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 OLakes, 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.
The number of shares of the registrants common stock outstanding as of October 31, 2009: 856
shares of Class A common stock, 3,802 shares of Class B common stock, 158 shares of Class C common
stock, and 848 shares of Class D common stock.
Documents incorporated by reference: None.
We maintain a website on the Internet where additional information about Land OLakes,
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.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
LAND OLAKES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
($ in thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 29,734 | $ | 30,820 | ||||
Receivables, net |
1,206,587 | 1,104,261 | ||||||
Inventories |
1,088,832 | 1,083,978 | ||||||
Prepaid assets |
42,251 | 1,101,005 | ||||||
Other current assets |
60,787 | 123,504 | ||||||
Total current assets |
2,428,191 | 3,443,568 | ||||||
Investments |
258,674 | 314,487 | ||||||
Property, plant and equipment, net |
693,846 | 658,261 | ||||||
Goodwill, net |
276,657 | 277,176 | ||||||
Other intangibles, net |
116,406 | 120,982 | ||||||
Other assets |
158,317 | 166,838 | ||||||
Total assets |
$ | 3,932,091 | $ | 4,981,312 | ||||
LIABILITIES AND EQUITIES |
||||||||
Current liabilities: |
||||||||
Notes and short-term obligations |
$ | 610,612 | $ | 409,370 | ||||
Current portion of long-term debt |
2,581 | 2,864 | ||||||
Accounts payable |
928,840 | 1,175,995 | ||||||
Customer advances |
33,515 | 1,045,705 | ||||||
Accrued liabilities |
383,395 | 423,494 | ||||||
Patronage refunds and other member equities payable |
39,600 | 37,751 | ||||||
Total current liabilities |
1,998,543 | 3,095,179 | ||||||
Long-term debt |
535,231 | 531,955 | ||||||
Employee benefits and other liabilities |
361,841 | 358,404 | ||||||
Commitments and contingencies (Note 17) |
||||||||
Equities: |
||||||||
Capital stock |
1,439 | 1,611 | ||||||
Member equities |
964,665 | 947,141 | ||||||
Accumulated other comprehensive loss |
(166,876 | ) | (150,277 | ) | ||||
Retained earnings |
223,107 | 178,377 | ||||||
Total Land OLakes, Inc. equities |
1,022,335 | 976,852 | ||||||
Noncontrolling interests |
14,141 | 18,922 | ||||||
Total equities |
1,036,476 | 995,774 | ||||||
Total liabilities and equities |
$ | 3,932,091 | $ | 4,981,312 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
LAND OLAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
($ in thousands) | ||||||||||||||||
Net sales |
$ | 2,177,524 | $ | 2,783,930 | $ | 7,939,337 | $ | 9,368,794 | ||||||||
Cost of sales |
1,987,262 | 2,547,330 | 7,209,916 | 8,569,999 | ||||||||||||
Gross profit |
190,262 | 236,600 | 729,421 | 798,795 | ||||||||||||
Selling, general and administrative |
179,412 | 204,642 | 508,473 | 562,330 | ||||||||||||
Restructuring and impairment |
803 | | 10,036 | 41 | ||||||||||||
Gain on insurance settlement |
| (4,032 | ) | | (4,032 | ) | ||||||||||
Earnings from operations |
10,047 | 35,990 | 210,912 | 240,456 | ||||||||||||
Interest expense, net |
12,462 | 15,369 | 38,300 | 48,091 | ||||||||||||
Other (income) expense, net |
(300 | ) | | (7,028 | ) | 12 | ||||||||||
Equity in losses (earnings) of affiliated companies |
978 | (13,541 | ) | (2,523 | ) | (38,099 | ) | |||||||||
(Loss) earnings before income taxes |
(3,093 | ) | 34,162 | 182,163 | 230,452 | |||||||||||
Income tax expense |
1,213 | 1,804 | 25,461 | 22,442 | ||||||||||||
Net (loss) earnings |
(4,306 | ) | 32,358 | 156,702 | 208,010 | |||||||||||
Less: net earnings (loss) attributable to noncontrolling interests |
8 | 3,796 | (3,131 | ) | 15,380 | |||||||||||
Net (loss) earnings attributable to Land OLakes, Inc. |
$ | (4,314 | ) | $ | 28,562 | $ | 159,833 | $ | 192,630 | |||||||
Applied to: |
||||||||||||||||
Member equities |
||||||||||||||||
Allocated patronage |
$ | 1,638 | $ | 5,698 | $ | 113,144 | $ | 133,835 | ||||||||
Deferred equities |
11,764 | (1,893 | ) | (1,414 | ) | 679 | ||||||||||
13,402 | 3,805 | 111,730 | 134,514 | |||||||||||||
Retained earnings |
(17,716 | ) | 24,757 | 48,103 | 58,116 | |||||||||||
$ | (4,314 | ) | $ | 28,562 | $ | 159,833 | $ | 192,630 | ||||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
LAND OLAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
($ in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net earnings attributable to Land OLakes, Inc. |
$ | 159,833 | $ | 192,630 | ||||
Adjustments to reconcile net earnings attributable to Land OLakes, Inc. to net cash
used by operating activities: |
||||||||
Depreciation and amortization |
67,870 | 67,776 | ||||||
Amortization of deferred financing costs |
1,868 | 3,413 | ||||||
Bad debt expense |
6,479 | 5,731 | ||||||
Proceeds from patronage revolvement received |
236 | 1,777 | ||||||
Non-cash patronage income |
(798 | ) | (4,177 | ) | ||||
Deferred income tax expense (benefit) |
41,501 | (20,707 | ) | |||||
Decrease (increase) in other assets |
764 | (2,269 | ) | |||||
Increase in other liabilities |
20,224 | 21,399 | ||||||
Restructuring and impairment |
10,036 | 41 | ||||||
Loss on divestiture of a business |
407 | | ||||||
(Gain) loss on sale of investments |
(6,958 | ) | 12 | |||||
Gain on foreign currency exchange contracts on sale of investment |
(177 | ) | | |||||
Gain on insurance settlement |
| (4,032 | ) | |||||
Equity in earnings of affiliated companies |
(2,523 | ) | (38,099 | ) | ||||
Dividends from investments in affiliated companies |
36,140 | 32,652 | ||||||
Net (loss) earnings attributable to noncontrolling interests |
(3,131 | ) | 15,380 | |||||
Other |
(4,031 | ) | (2,525 | ) | ||||
Changes in current assets and liabilities, net of acquisitions and divestitures: |
||||||||
Receivables |
(119,141 | ) | (412,580 | ) | ||||
Inventories |
(5,964 | ) | (102,923 | ) | ||||
Prepaid assets and other current assets |
1,103,113 | 810,792 | ||||||
Accounts payable |
(246,306 | ) | 15,011 | |||||
Customer advances |
(1,012,190 | ) | (933,016 | ) | ||||
Accrued liabilities |
(53,999 | ) | 154,816 | |||||
Net cash used by operating activities |
(6,747 | ) | (198,898 | ) | ||||
Cash flows from investing activities: |
||||||||
Additions to property, plant and equipment |
(108,775 | ) | (120,533 | ) | ||||
Acquisitions, net of cash acquired |
(2,745 | ) | (9,040 | ) | ||||
Investments in affiliates |
(3,290 | ) | (50,860 | ) | ||||
Distributions from investments in affiliated companies |
| 8,824 | ||||||
Proceeds from divestiture of a business |
2,698 | | ||||||
Proceeds from sale of investments |
16,965 | 49 | ||||||
Proceeds from foreign currency exchange contracts on sale of investment |
518 | | ||||||
Proceeds from sale of property, plant and equipment |
1,493 | 5,581 | ||||||
Insurance proceeds for replacement assets |
6,538 | 5,321 | ||||||
Change in notes receivable |
(12,686 | ) | (11,606 | ) | ||||
Other |
250 | 3,049 | ||||||
Net cash used by investing activities |
(99,034 | ) | (169,215 | ) | ||||
Cash flows from financing activities: |
||||||||
Increase in short-term debt |
201,243 | 388,685 | ||||||
Proceeds from issuance of long-term debt |
4,459 | 496 | ||||||
Principal payments on long-term debt and capital lease obligations |
(1,950 | ) | (14,138 | ) | ||||
Payments for redemption of member equities |
(95,762 | ) | (94,896 | ) | ||||
Payments for debt issuance costs |
(1,486 | ) | | |||||
Other |
(1,809 | ) | (38 | ) | ||||
Net cash provided by financing activities |
104,695 | 280,109 | ||||||
Net decrease in cash and cash equivalents |
(1,086 | ) | (88,004 | ) | ||||
Cash and cash equivalents at beginning of the period |
30,820 | 116,839 | ||||||
Cash and cash equivalents at end of the period |
$ | 29,734 | $ | 28,835 | ||||
Supplementary Disclosure of Cash Flow Information |
||||||||
Cash paid (received) during periods for: |
||||||||
Interest |
$ | 39,046 | $ | 46,812 | ||||
Income taxes |
(14,269 | ) | 57,541 |
See accompanying notes to consolidated financial statements.
5
Table of Contents
LAND OLAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands in tables)
(Unaudited)
($ in thousands in tables)
(Unaudited)
1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Land OLakes, Inc. (the
Company) and wholly owned and majority-owned subsidiaries. The effects of intercompany
transactions have been eliminated. The unaudited consolidated financial statements reflect, in the
opinion of the Companys management, 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 results of operations and cash flows for interim periods are not necessarily
indicative of results for a full year because of, among other things, the seasonal nature of our
businesses. The statements are condensed and therefore do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete financial
statements. For further information, refer to the audited consolidated financial statements and
footnotes for the year ended December 31, 2008 included in our Form 10-K.
On January 1, 2009, the Company adopted Accounting Standards Codification (ASC) Topic
810-10-65, Noncontrolling Interests in Consolidated Financial Statements An Amendment to ARB
No. 51. The objective of this guidance was to improve the relevance, comparability and
transparency of the financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810-10-65 requires the
reclassification of noncontrolling interests, also referred to as minority interest, to the equity
section of the consolidated balance sheet presented upon adoption. Minority interest expense is no
longer separately reported as a reduction to net income on the consolidated income statement, but
is instead shown below net income under the heading net earnings (loss) attributable to
noncontrolling interests. Total provision for income taxes remains unchanged; however, the
Companys effective tax rate as calculated from the balances shown on the consolidated income
statement has changed as net earnings (loss) attributable to noncontrolling interests is no longer
included in the determination of income from continuing operations. The Company has changed the
presentation of its noncontrolling interests in compliance with this requirement.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 . This
statement modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing
only two levels of GAAP, authoritative and non-authoritative accounting literature. Effective July
2009, the FASB Accounting Standards Codification (ASC), also known collectively as the
Codification, is considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases issued by the SEC.
Non-authoritative guidance and literature would include, among other things, FASB Concepts
Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice
Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by
topic so that users can more easily access authoritative accounting guidance. It is organized by
topic, subtopic, section, and paragraph, each of which is identified by a numerical designation.
Following the Codification, the FASB will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASU) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the changes to the
Codification. This statement and the application of the Codification was effective for and adopted
by the Company as of July 1, 2009. All accounting references have been updated, and therefore SFAS
references have been replaced with ASC references.
In December 2008, the FASB issued ASC 715-20-65-2, Employers Disclosures about
Postretirement Benefit Plan Assets (ASC 715-20-65-2), which requires that an employer disclose
the following information about the fair value of plan assets: 1) how investment allocation
decisions are made, including the factors that are pertinent to understanding investment policies
and strategies; 2) the major categories of plan assets; 3) the inputs and valuation techniques used
to measure the fair value of plan assets; 4) the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for the period; and 5) significant
concentrations of risk within plan assets. At initial adoption, application of this guidance would
not be required for earlier periods that are presented for comparative purposes. The adoption of
this guidance in 2009 will increase the disclosures within the Companys consolidated financial
statements related to the assets of its defined benefit pension and other postretirement benefit
plans. This guidance will be effective for fiscal years ending after December 15, 2009, with early
application permitted. The Company will adopt this guidance as of December 31, 2009.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets
(SFAS 166), which has not been integrated into the Codification as of September 30, 2009. This
guidance removes the concept of a qualifying special-purpose entity (QSPE) and removes the
exception from applying consolidation guidance to these entities. SFAS 166 also clarifies the
requirements for isolation and limitations on portions of financial assets that are eligible for
sale accounting. This statement is effective for fiscal years beginning after November 15, 2009. Accordingly, the Company will adopt SFAS 166 as of January
1, 2010. The Company is currently evaluating the impact of adopting this standard on the
consolidated financial statements.
6
Table of Contents
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46R (SFAS
167), which has not been integrated into the Codification as of September 30, 2009. SFAS 167
requires an analysis to determine whether a variable interest gives the entity a controlling
financial interest in a variable interest entity. This statement requires an ongoing reassessment
and eliminates the quantitative approach previously required for determining whether an entity is
the primary beneficiary. This statement is effective for fiscal years beginning after November 15,
2009. Accordingly, the Company will adopt SFAS 167 as of January 1, 2010. The Company is currently
evaluating the impact of adopting this standard on the consolidated financial statements.
During 2009, the FASB has issued several ASUs ASU No. 2009-01 through ASU No. 2009-15. ASU
2009-01 amended the Codification, ASC 105, for the issuance of SFAS 168 discussed above. Except for
the ASU discussed below, the ASUs entail technical corrections to existing guidance or affect
guidance related to specialized industries or topics and therefore have minimal, if any, impact on
the Company.
In August 2009, FASB issued ASU No. 2009-05 which amends Fair Value Measurements and
Disclosures Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of
liabilities. This update requires clarification for circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques: 1) a valuation technique that
uses either the quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation
technique that is consistent with the principles in ASC Topic 820 such as the income and market
approach to valuation. The amendments in this update also clarify that when estimating the fair
value of a liability, a reporting entity is not required to include a separate input or adjustment
to other inputs relating to the existence of a restriction that prevents the transfer of the
liability. This update further clarifies that if the fair value of a liability is determined by
reference to a quoted price in an active market for an identical liability, that price would be
considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability
has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value
measurement if no adjustments to the quoted price of the asset are required. This update is
effective for the Company beginning October 1, 2009. The Company does not anticipate the adoption
of ASU No. 2009-05 to have a material impact to the consolidated financial statements.
Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates include, but are not
limited to, allowance for doubtful accounts, sales returns and allowances, vendor rebates
receivable, asset impairments, valuation of goodwill and unamortized other intangible assets, tax
contingency reserves, deferred tax valuation allowances, trade promotion and consumer incentives,
and assumptions related to pension and other post-retirement plans.
2. Business Combinations and Pending Business Combinations
2009 Acquisitions and Pending Acquisitions
In January 2009, Feed contributed $0.3 million in cash to Superior Feed Solutions, LLC, a
50/50 joint venture with Ceres Solutions LLP. The joint venture is accounted for under the equity
method of accounting as of and for the nine months ended September 30, 2009.
On April 9, 2009, the Company announced that Agriliance LLC (Agriliance) (a 50-50 joint
venture between the Company and United Country Brands, LLC (a wholly owned subsidiary of CHS Inc.
(CHS)) entered into an operating lease and an asset purchase agreement with Agri-AFC, LLC
(Agri-AFC), a wholesale and retail crop inputs supplier. Agri-AFC is a consolidated joint venture
between Winfield Solutions, LLC, a Land OLakes wholly owned subsidiary, and Alabama Farmers
Cooperative, Inc. Under the terms of the transaction documents, Agri-AFC immediately began
operating nine former Agriliance retail locations located in Georgia and Mississippi, and purchased
the working capital, primarily inventory, associated with such locations for $18.3 million. In July
2009, Agri-AFC completed the transaction and acquired the property, plant and equipment located at
these sites for $2.9 million in cash.
The Company also noted that as part of Agriliances ongoing restructuring, CHS purchased nine
retail sites in September 2009 and the Company purchased 34 retail sites in October 2009. The
Company anticipates that the restructuring will be substantially complete by the end of March 2010.
2008 Acquisitions
In January and February of 2008, Agriliance distributed its interest in four agronomy joint
ventures to the Company and CHS, and the Company acquired from CHS its partial interest in the
joint ventures for a total cash payment of $8.3 million representing the net book value of these
investments. In April 2008, a consolidated feed joint venture purchased the remaining interest in
a subsidiary for $0.4 million in cash. In May 2008, the Company acquired a forage grass seed company for $1.7
million in cash and acquired a seed treatment business for $1.1 million in cash.
7
Table of Contents
3. Receivables
A summary of receivables is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Trade accounts |
$ | 756,213 | $ | 846,794 | ||||
Notes and contracts |
97,218 | 89,736 | ||||||
Vendor rebates |
314,225 | 57,007 | ||||||
Other |
61,313 | 130,591 | ||||||
1,228,969 | 1,124,128 | |||||||
Less allowance for doubtful accounts |
(22,382 | ) | (19,867 | ) | ||||
Total receivables, net |
$ | 1,206,587 | $ | 1,104,261 | ||||
A substantial portion of the Companys receivables is concentrated in agriculture as well as
in the wholesale and retail food industries. Collection of receivables may be dependent upon
economic returns in these industries. The Companys credit risks are continually reviewed, and
management believes that adequate provisions have been made for doubtful accounts.
The Company operates a wholly owned subsidiary that provides operating loans and facility
financing to farmers and livestock producers, which are collateralized by the real estate,
equipment and livestock of their farming operations. These loans, which relate primarily to dairy,
swine, cattle and other livestock production, are presented as notes and contracts for the current
portion and as other assets for the non-current portion. Total notes and contracts were $157.5
million at September 30, 2009 and $139.7 million at December 31, 2008 of which $90.5 million and
$82.1 million, respectively, were included in the current portion in the table above.
Vendor rebate receivables are primarily generated as a result of seed and chemical purchases.
These receivables can vary significantly from period to period based on a number of factors,
including, but not limited to, specific terms and conditions set forth in the underlying
agreements, the timing of when such agreements become binding arrangements, and the timing of cash
receipts. The Company may, on occasion, enter into inventory purchase commitments with vendors in
order to achieve an optimal rebate return.
Other receivables include margin receivables from commodity brokers on open derivative
instruments, interest and expected insurance settlements.
4. Inventories
A summary of inventories is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials |
$ | 182,026 | $ | 217,087 | ||||
Work in process |
1,903 | 1,639 | ||||||
Finished goods |
904,903 | 865,252 | ||||||
Total inventories |
$ | 1,088,832 | $ | 1,083,978 | ||||
5. Investments
A summary of investments is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Agriliance LLC |
$ | 116,147 | $ | 176,191 | ||||
Advanced Food Products, LLC |
32,726 | 33,870 | ||||||
Ag Processing Inc. |
31,405 | 31,858 | ||||||
Delta Egg Farm, LLC |
11,832 | 11,464 | ||||||
Melrose Dairy Proteins, LLC |
9,638 | 6,397 | ||||||
Universal Cooperatives, Inc. |
7,849 | 7,877 | ||||||
CoBank, ACB |
5,345 | 4,892 | ||||||
Pro-Pet, LLC |
3,188 | 2,123 | ||||||
Wilco-Winfield, LLC |
3,261 | 3,131 | ||||||
Prairie Farms Dairy, Inc. |
2,913 | 2,954 | ||||||
Other principally cooperatives and joint ventures |
34,370 | 33,730 | ||||||
Total investments |
$ | 258,674 | $ | 314,487 | ||||
8
Table of Contents
During the nine months ended September 30, 2009, the Companys investment in Agriliance
decreased by $60.1 million, primarily due to a $25.0 million dividend received, $10.2 million in
equity losses for the period and a $24.9 million other comprehensive loss related to Agriliances
annual pension adjustments.
In February 2008, the Company and Golden Oval Eggs, LLC (Golden Oval) entered into an
Amendment to Asset Purchase Agreement that modified certain terms and conditions of the sale of
MoArk, LLCs (MoArk) liquid egg operations to Golden Oval, including the cancellation of the
principal amount owed under the note and the issuance of a warrant to the Company for the right to
purchase 880,492 convertible preferred units. As of the date the warrant was issued, the Company
determined that the underlying units had an insignificant fair value. In December 2008, Golden
Oval announced that it entered into an agreement to sell substantially all of its assets. As of
December 31, 2008, the Company held the warrant for the 880,492 convertible preferred units, which
carried a preference upon liquidation of $11.357 per unit, and 697,350 Class A units. In February
2009, the Company notified Golden Oval that it intended to exercise the warrant prior to Golden
Ovals scheduled asset sale, noted above. The Company had the right, in its sole discretion, to
convert to Class A units any preferred units it received upon exercise of its warrant. On March 2,
2009, in conjunction with Golden Ovals planned sale of substantially all of its assets to
Rembrandt Enterprises, Inc. (Rembrandt), the Company exercised its right to purchase 880,492
Class A Convertible Preferred Units (the Preferred Units) of Golden Oval. The Company also
elected to convert the Preferred Units to an equal number of Golden Ovals Class A Common Units on
the condition that it would retain the preferred payment rights established in the certificate of
designation of the Preferred Units. The sale of substantially all Golden Ovals assets to
Rembrandt closed as of March 30, 2009. In the first quarter of 2009, upon closing of the asset
sale, the Company recorded a $6.4 million receivable and gain, which represents the preferred
payment related to the 880,492 Preferred Units that were converted to Class A units in accordance
with the terms of the warrants execution. In the second quarter of 2009, the Company recorded an
additional $4.8 million gain, which represented the first distribution payment of the asset sale
related to the total 1,577,842 Class A units owned by the Company. For the nine months ended
September 30, 2009, the Company has received a total of $11.2 million in cash related to this
transaction. The Company expects to receive an additional $1.1 million, approximately, of cash
distributions from Golden Oval related to the asset sale in various amounts during 2009 and 2010
and additional gain will be recorded at that time. Once these distributions are complete, all
1,577,842 Class A units held by the Company are expected to have no remaining value.
6. Goodwill and Other Intangible Assets
Goodwill
The carrying amount of goodwill by segment is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Feed |
$ | 126,566 | $ | 126,960 | ||||
Dairy Foods |
68,525 | 68,525 | ||||||
Agronomy |
50,663 | 50,663 | ||||||
Layers |
20,221 | 20,346 | ||||||
Seed |
10,682 | 10,682 | ||||||
Total goodwill |
$ | 276,657 | $ | 277,176 | ||||
Goodwill amortization was $0 and $5.9 million for the nine months ended September 30, 2009 and
2008, respectively. Amortization of goodwill created as a result of business combinations between
mutual enterprises ceased with the adoption of revised guidance within ASC 850 Business
Combinations as of January 1, 2009. Amortization of goodwill was $7.9 million and $7.7 million for
the years ended December 31, 2008 and 2007, respectively.
Other Intangible Assets
A summary of other intangible assets is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Amortized other intangible assets: |
||||||||
Dealer networks and customer relationships, less accumulated amortization of $5,893
and $4,045, respectively |
$ | 48,629 | $ | 50,478 | ||||
Patents, less accumulated amortization of $9,285 and $8,414, respectively |
7,426 | 8,297 | ||||||
Trademarks, less accumulated amortization of $3,189 and $2,668, respectively |
4,426 | 4,946 | ||||||
Other intangible assets, less accumulated amortization of $4,235 and $4,412, respectively |
4,300 | 5,636 | ||||||
Total amortized other intangible assets |
64,781 | 69,357 | ||||||
Total non-amortized other intangible assets trademarks and license agreements |
51,625 | 51,625 | ||||||
Total other intangible assets |
$ | 116,406 | $ | 120,982 | ||||
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Amortization expense for the three months ended September 30, 2009 and 2008 was $1.3 million
and $1.6 million, respectively. Amortization expense for the nine months ended September 30, 2009
and 2008 was $3.9 million and $4.0 million, respectively. The estimated amortization expense related to other intangible assets subject to amortization for
the next five years will approximate $4.8 million annually. The weighted-average life of the
intangible assets subject to amortization is approximately 18 years. Non-amortized other
intangible assets relate to Feed and the majority of the amortized other intangible assets relate
to Feed, Agronomy and Layers.
7. Accrued Liabilities
A summary of accrued liabilities is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Marketing programs and consumer incentives |
$ | 156,444 | $ | 70,209 | ||||
Employee compensation and benefits |
116,617 | 141,376 | ||||||
Unrealized hedging losses and deferred option premiums received |
17,398 | 99,964 | ||||||
Other |
92,936 | 111,945 | ||||||
Total accrued liabilities |
$ | 383,395 | $ | 423,494 | ||||
Other accrued liabilities primarily include accrued taxes, interest, self-insurance reserves
and environmental liabilities.
8. Debt Obligations
Notes and Short-term Obligations
The Company had notes and short-term obligations at September 30, 2009 and December 31, 2008
of $610.6 million and $409.4 million, respectively. The Company maintains credit facilities to
finance its short-term borrowing needs, including a revolving credit facility and a receivables
securitization facility.
On October 29, 2009, the Company announced that it had refinanced its principal debt
facilities in order to, among other things, extend the term of its debt portfolio, a significant
portion of which was scheduled to mature in 2010 and 2011, to provide liquidity for general
corporate purposes and to take advantage of lower interest rates. The refinancing included the
following elements: the call of the Companys 8.75% Senior Unsecured Notes and 9.00% Senior Secured
Notes, which are expected to be redeemed on December 15, 2009; the issuance of new secured private
placement term debt; the replacement of the existing $400 million revolving credit facility with a
new $375 million revolving credit facility; and the amendment of the Companys existing $400
million receivables securitization facility.
Until its replacement on October 29, 2009, the Company maintained a $400 million five-year
revolving credit facility, which was scheduled to mature in August 2011. Borrowings bore interest
at a variable rate (either LIBOR or an Alternative Base Rate) plus an applicable margin. The margin
was dependent upon the Companys leverage ratio. Based on the Companys leverage ratio at the end
of September 2009, the LIBOR margin for the revolving credit facility was 275 basis points and the
spread for the Alternative Base Rate was 175 basis points. At September 30, 2009, $100.0 million
was outstanding on the revolving credit facility and $258.8 million was available after giving
effect to $41.2 million of outstanding letters of credit, which reduce availability. At December
31, 2008, there was no outstanding balance on the revolving credit facility and $188.6 million was
available after giving effect to $36.4 million of outstanding letters of credit, which reduce
availability.
As noted above, on October 29, 2009, the Company entered into a replacement $375 million
revolving credit facility led by CoBank, ACB, as administrative agent, bookrunner, collateral agent
and joint lead arranger, and Banc of America Securities LLC, as joint lead arranger (the CoBank
Revolving Credit Facility).
Under the terms of the CoBank Revolving Credit Facility, lenders have committed to make
advances and issue letters of credit until April 2013 in an aggregate amount not to exceed $375
million. Borrowings will bear interest at a variable rate (either LIBOR or an Alternative Base
Rate) plus an applicable margin. The margin is dependent upon the Companys leverage ratio. Based
on the leverage ratio at the end of September 2009, the LIBOR margin for the CoBank Revolving
Credit Facility would be 275 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 Companys election.
The borrowings under the CoBank Revolving Credit Facility will be secured, on a pari passu
basis with the new private placement notes, by substantially all the Companys material assets and
the assets and guarantees of certain of the Companys wholly owned domestic subsidiaries. The
credit agreement imposes certain restrictions on the Company and certain of its subsidiaries,
including, but not limited to, the Companys ability to incur additional indebtedness, make
payments to members, make investments, grant liens, sell assets and engage in certain other
activities.
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The Companys $400 million, five-year receivables securitization facility arranged by
CoBank ACB was amended and extended on October 29, 2009 and now matures in 2013. The Company and
certain wholly owned consolidated entities sell Dairy Foods, Feed, Seed, Agronomy and certain other
receivables to LOL SPV, LLC, a wholly owned, consolidated special purpose entity (the SPE). The
SPE enters into borrowings which are effectively secured solely by the SPEs receivables. The SPE
has its own separate creditors that are entitled to be satisfied out of the assets of the SPE prior
to any value becoming available to the Company. Borrowings under the receivables securitization
facility bear interest at LIBOR plus an applicable margin. The amendment increased the margin from
87.5 basis points to 225 basis points. Apart from the interest rate and the tenor of the facility,
all material terms of the facility were unchanged by the amendment. At September 30, 2009 and
December 31, 2008, the SPEs receivables were $636.3 million and $771.3 million, respectively. At
September 30, 2009 and December 31, 2008, outstanding balances under the facility, recorded as
notes and short-term obligations, were $400.0 million and $280.0 million, respectively and
availability was $0 and $120.0 million, respectively.
The Company also had $75.5 million as of September 30, 2009, and $74.5 million as of December
31, 2008, of notes and short-term obligations outstanding under a revolving line of credit and
other borrowing arrangements for a wholly owned subsidiary that provides operating loans and
facility financing to farmers and livestock producers.
Additionally, the Company had $20.0 million outstanding as of September 30, 2009 and December
31, 2008 of notes and short term obligations under a credit facility with Agriliance, a 50/50 joint
venture with CHS. The purpose of the credit facility is to provide additional working capital
liquidity and allows the Company to borrow from or lend to Agriliance at a variable rate of LIBOR
plus 100 basis points.
The Companys MoArk subsidiary maintains a $40 million revolving credit facility, which is
subject to a borrowing base limitation. Borrowings bear interest at a variable rate (either LIBOR
or an Alternative Base Rate) plus an applicable margin. At September 30, 2009 and December 31,
2008, the outstanding borrowings were $0. MoArks facility is not guaranteed by the Company nor is
it secured by Company assets. The facility is scheduled to mature on June 1, 2012.
The Companys Agri-AFC, LLC (Agri-AFC) subsidiary maintains a $45 million revolving credit
facility, which is subject to a borrowing base limitation. The revolving credit facility matures in
March 2010. Borrowings bear interest at a variable rate of LIBOR plus 250 basis points. At
September 30, 2009 and December 31, 2008, the outstanding borrowings were $15.1 million and $34.9
million, respectively. Agri-AFCs facility is not guaranteed by the Company nor is it secured by
Company assets, but it does contain a minimum net worth covenant which could require the Company to
make subordinated loans or equity infusions into Agri-AFC if Agri-AFCs net worth falls below
certain levels. The revolving credit facility is subject to certain debt covenants, which were all
satisfied as of September 30, 2009.
The weighted average interest rate on short-term borrowings and notes outstanding at September
30, 2009 and December 31, 2008 was 1.51% and 1.94%, respectively.
Long-term Debt
A summary of existing long-term debt is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Senior unsecured notes due 2011 (8.75%) |
$ | 174,002 | $ | 174,002 | ||||
Senior secured notes due 2010 (9.00%) |
149,700 | 149,700 | ||||||
Capital Securities of Trust Subsidiary due 2028 (7.45%) |
190,700 | 190,700 | ||||||
MoArk, LLC debt due 2011 through 2023 (7.75% weighted average) |
14,730 | 15,449 | ||||||
MoArk, LLC capital lease obligations (7.00% to 8.25%) |
3,746 | 4,668 | ||||||
Other debt |
4,934 | 300 | ||||||
537,812 | 534,819 | |||||||
Less current portion |
(2,581 | ) | (2,864 | ) | ||||
Total long-term debt |
$ | 535,231 | $ | 531,955 | ||||
As part of its overall refinancing, the Company provided an irrevocable redemption notice to
the holders of the notes issued under the Indenture governing $350 million in aggregate principal
amount of 8.75% Senior Unsecured Notes due 2011, dated as of November 14, 2001, (the Unsecured
Notes) and the holders of the notes issued under the Indenture governing $175 million in aggregate
principal amount of 9.00% Senior Secured Notes due 2010, dated as of December 23, 2003 (the
Secured Notes) (the Unsecured Notes and Secured Notes, together, the Called Notes). The
redemption notice provides that the Called Notes will be redeemed at par on December 15, 2009. The
remaining principal balance of the outstanding Unsecured Notes and Secured Notes as of October 29,
2009 was $174 million and $149.7 million, respectively. Once the Called Notes have been redeemed,
the Companys obligation to file periodic reports with the Securities and Exchange Commission (the
SEC) will terminate. Accordingly, the Company does not plan to make any filings with the SEC
after it submits its Form 10-Q Report for the period ended September 30, 2009.
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The Company also entered into a Note Purchase Agreement with certain institutional lenders
that governs the issuance of $325 million of privately placed notes (the New Notes). The New
Notes will be issued and sold in three series, as follows: $155 million aggregate principal amount
of 6.24% notes, due December 2016, (ii) $85 million aggregate principal amount of 6.67% notes, due
December 2019 and (iii) $85 million aggregate principal amount of 6.77% notes, due December 2021.
The sale of the New Notes will occur on or about December 15, 2009, and the Company will apply the
proceeds to the redemption of the Called Notes. The New Notes will be secured, on a pari passu
basis with the debt issued under the CoBank Revolving Credit Facility (described above), by
substantially all the Companys material assets and the assets and guarantees of certain of the
Companys wholly owned domestic subsidiaries. The Note Purchase Agreement imposes certain
restrictions on the Company and certain of its subsidiaries, including, but not limited to, the
Companys ability to incur additional indebtedness, make payments to members, make investments,
grant liens, sell assets and engage in certain other activities.
In December 2008, the Company entered into a transaction with the City of Russell, Kansas (the
City), whereby, the City purchased the Companys Russell, Kansas feed facility (the Facility)
by issuing $4.9 million in industrial development revenue bonds due December 2018 and leased the
Facility back to the Company for an identical term under a capital lease. The Citys bonds were
purchased by the Company. Because the City has assigned the lease to a trustee for the benefit of
the Company as the sole bondholder, the Company, in effect, controls enforcement of the lease
against itself. As a result of the capital lease treatment, the Facility will remain a component
of property, plant and equipment in the Companys consolidated balance sheet and no gain or loss
was recognized related to this transaction. The capital lease obligation and the corresponding
bond investment have been eliminated upon consolidation. Additional bonds may be issued to cover
the costs of certain improvements to the facility. The maximum amount of bonds authorized for
issuance is $6.0 million.
The Company and MoArk are each subject to certain restrictions and covenant ratio requirements
relating to their respective financing arrangements. As of September 30, 2009 and December 31,
2008, the Company and MoArks debt covenants were all satisfied.
9. Other Comprehensive Income
Comprehensive income for the three and nine months ended September 30 was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net (loss) earnings attributable to Land OLakes, Inc. |
$ | (4,314 | ) | $ | 28,562 | $ | 159,833 | $ | 192,630 | |||||||
Pension and other postretirement adjustments, net of income taxes
of $9,513, $(1,122), $10,326 and $(1,041), respectively |
(15,357 | ) | 1,811 | (16,670 | ) | 1,680 | ||||||||||
Foreign currency translation adjustment, net of income taxes of
$(55), $85, $(43) and $364, respectively |
87 | (137 | ) | 69 | (587 | ) | ||||||||||
Unrealized gains (loss) on available-for-sale-investment
securities, net of income taxes of $(2), $24, $(1) and $(38),
respectively |
8 | (82 | ) | 4 | (335 | ) | ||||||||||
Less: Other comprehensive (earnings) loss attributable to
noncontrolling interests |
(4 | ) | 43 | (2 | ) | 121 | ||||||||||
Total comprehensive (loss) income attributable to Land OLakes, Inc. |
$ | (19,580 | ) | $ | 30,197 | $ | 143,234 | $ | 193,509 | |||||||
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10. Derivative Instruments
We are exposed to the impact of price fluctuations in dairy and agriculture commodity inputs
consumed in operations and the impact of fluctuations in the relative value of currencies. We
periodically enter into derivative instruments in order to mitigate the effects of changing
commodity prices and mitigate our foreign currency risks.
In the normal course of operations, the Company purchases commodities such as: milk, butter,
soybean oil and various energy needs (energy) in Dairy Foods; soybean meal, corn and energy in
Feed and Layers; soybeans and energy in Seed; and energy in Agronomy. The Companys commodity
price risk management strategy is to use derivative instruments to reduce risk caused by volatility
in commodity prices due to fluctuations in the market value of inventories and fixed or partially
fixed purchase and sales contracts. The Company enters into futures, forward and options contract
derivative instruments for periods consistent with the related underlying inventory and purchase
and sales contracts. These contracts are not designated as hedges under ASC 815, Derivatives and
Hedging. The futures and option contracts are marked-to-market each month and gains and losses
(unrealized hedging gains and losses) are primarily recognized in cost of sales. The Company has
established formal position limits to monitor its price risk management activities and executes
derivative instruments only with respect to those commodities which the Company consumes or
produces in its normal business operations.
The notional or contractual amount of derivative instruments provides an indication of the
extent of the Companys involvement in such instruments at that time, but does not represent
exposure to market risk or future cash requirements under certain of these instruments. As of
September 30, 2009, the total absolute notional value associated with our outstanding commodity
derivative instruments and foreign currency derivative instruments was $341.2 million and $3.7
million, respectively.
The unrealized (gains) and losses on derivative instruments related to commodity contracts and
foreign currency exchange contracts for the three and nine months ended September 30, 2009 is as
follows:
Three Months Ended | Nine Months Ended | |||||||||
September 30, | September 30, | |||||||||
Derivative Instrument | Location | 2009 | 2009 | |||||||
Commodity derivatives |
Cost of sales | $ | 4,089 | $ | (37,228 | ) | ||||
Commodity derivatives |
Selling, general and administrative | 1 | (1,140 | ) | ||||||
Foreign currency
exchange contracts |
Cost of sales | (417 | ) | (1,374 | ) | |||||
Foreign currency
exchange contracts |
Other (income) expense, net | | 341 |
The gross fair market value of all derivative instruments and their location in the
consolidated balance sheet are shown by those in an asset or liability position and are further
categorized by commodity and foreign currency derivatives at September 30, 2009:
Asset | Liability | |||||||
Derivatives(a) | Derivatives(a) | |||||||
September 30, | September 30, | |||||||
Derivative Instrument | 2009 | 2009 | ||||||
Commodity derivatives |
$ | 16,647 | $ | 13,518 | ||||
Foreign currency exchange contracts |
449 | | ||||||
Total |
$ | 17,096 | $ | 13,518 | ||||
(a) | Asset derivative instruments are recorded in other current assets and liability derivative instruments are recorded in accrued liabilities in the consolidated balance sheet. |
The Company enters into derivative instruments with a variety of counterparties. These
instruments are primarily purchased and sold through brokers and regulated commodity exchanges. By
using derivative financial instruments to manage exposures to changes in commodity prices and
exchange rates, the Company exposes itself to the risk that the counterparty might fail to perform
its obligations under the terms of the derivative contracts. The Company mitigates this risk by
entering into transactions with high-quality counterparties and does not anticipate any losses due
to non-performance. The Company manages its concentration of counterparty credit risk on derivative
instruments prior to entering into derivative contracts by evaluating the counterpartys external
credit rating, where available, as well as an assessment of other relevant information such as
current financial statements, credit agency reports and/or credit references. As of September 30,
2009, the maximum amount of loss that the Company would incur if the counterparties to derivative
instruments fail to meet their obligations, not considering collateral received or netting
arrangements, was $17.1 million. The Company reviewed its counterparties and believes that a
concentration of risk does not exist and that a failure of any or all counterparties would have a
material effect on the consolidated financial statements as of September 30, 2009.
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11. Fair Value Measurements
The carrying amounts and estimated fair values of the Companys financial instruments are as
follows as of:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial Derivatives: |
||||||||||||||||
Commodity derivative assets |
$ | 16,647 | $ | 16,647 | $ | 50,053 | $ | 50,053 | ||||||||
Commodity derivative liabilities |
13,518 | 13,518 | 85,292 | 85,292 | ||||||||||||
Foreign currency exchange contract assets |
449 | 449 | 341 | 341 | ||||||||||||
Foreign currency exchange contract liabilities |
| | 925 | 925 | ||||||||||||
Loans receivable |
155,440 | 156,069 | 137,869 | 140,762 | ||||||||||||
Available-for-sale securities |
52 | 52 | 47 | 47 | ||||||||||||
Debt: |
||||||||||||||||
Senior unsecured notes, due 2011 |
174,002 | 185,750 | 174,002 | 161,410 | ||||||||||||
Senior secured notes, due 2010 |
149,700 | 162,386 | 149,700 | 150,999 | ||||||||||||
Capital Securities of Trust Subsidiary, due 2028 |
190,700 | 163,408 | 190,700 | 107,580 | ||||||||||||
MoArk fixed rate debt |
18,476 | 19,975 | 20,117 | 17,548 |
Unrealized gains and losses on financial derivative instruments are recorded at fair value in
the consolidated financial statements.
The fair value of derivative instruments is determined using quoted prices in active markets
or is derived from prices in underlying futures markets.
The fair value of loans receivable, which are loans made to farmers and livestock producers by
the Companys financing subsidiary, was estimated using a present value calculation based on
similar loans made or loans re-priced to borrowers with similar credit risks. This methodology is
used because no active market exists for these loans and the Company cannot determine whether the
fair values presented would equal the value negotiated in an actual sale. The Company manages its
credit risk related to these loans by using established credit limits, conducting ongoing credit
evaluation and account monitoring procedures, and securing collateral when deemed necessary.
Negative economic factors that may impact farmers and livestock producers could increase the level
of losses within this portfolio.
The fair value of fixed-rate long-term debt was estimated through a present value calculation
based on available information on prevailing market interest rates for similar securities.
The carrying value of financial instruments classified as current assets and current
liabilities, such as cash and cash equivalents, trade receivables, accounts payable and notes and
short-term obligations approximate fair value due to the short-term maturity of the instruments.
The Company invests its excess cash in deposits with major banks and limits the amounts invested in
any single institution to reduce risk. The Company regularly evaluates its credit risk to the
extent that financial instruments are concentrated in certain industries or with significant
customers and vendors, including the collectibility of receivables and prepaid deposits with
vendors.
The Company believes it is not feasible to readily determine the fair value of investments as
there is no established market for these investments. The fair value of certain current and
non-current notes receivable with a financial statement carrying value of $2.1 million and $14.7
million as of September 30, 2009 and $1.5 million and $18.6 million as of December 31, 2008,
respectively, was not estimated because it is not feasible to readily determine the fair value.
ASC 820 Fair Value Measurements and Disclosures establishes a valuation hierarchy for
disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the
inputs into three broad levels as follows:
Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | |||
Level 2: inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. | |||
Level 3: inputs are unobservable inputs based on the Companys own assumptions used to measure assets and liabilities at fair value. |
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A financial asset or liabilitys classification within the hierarchy is determined based
on the lowest level input that is significant to the fair value measurement. The following table
provides the assets and liabilities carried at fair value measured on a recurring basis as of
September 30, 2009 and December 31, 2008:
Fair Value Measurements at September 30, 2009 Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted prices | other | Significant | ||||||||||||||
Total carrying | in active | observable | unobservable | |||||||||||||
value at | markets | inputs | inputs | |||||||||||||
September 30, 2009(a) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Commodity derivative assets |
$ | 16,647 | $ | 16,220 | $ | 427 | $ | | ||||||||
Commodity derivative liabilities |
13,518 | 13,143 | 375 | | ||||||||||||
Foreign currency exchange contract assets |
449 | | 449 | | ||||||||||||
Foreign currency exchange contract
liabilities |
| | | | ||||||||||||
Available-for-sale securities |
52 | 52 | | |
Fair Value Measurements at December 31, 2008 Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted prices | other | Significant | ||||||||||||||
Total carrying | in active | observable | unobservable | |||||||||||||
value at | markets | inputs | inputs | |||||||||||||
December 31, 2008(a) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Commodity derivative assets |
$ | 50,053 | $ | 49,139 | $ | 914 | $ | | ||||||||
Commodity derivative liabilities |
85,292 | 85,128 | 164 | | ||||||||||||
Foreign currency exchange contract assets |
341 | | 341 | | ||||||||||||
Foreign currency exchange contract
liabilities |
925 | | 925 | | ||||||||||||
Available-for-sale securities |
47 | 47 | | |
(a) | ASC 815-10 permits, but does not require companies that enter into master netting arrangements to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or the obligation to return cash collateral. The Company has master netting arrangements with brokers for its exchange-traded futures and options contracts, however, it does not elect to offset fair value amounts recognized for derivative instruments under such master netting arrangements with amounts recognized for margin balances due from or due to brokers. |
Since commodity derivative forward contracts and the foreign currency exchange forward
contracts are not actively traded, they are priced at a fair value derived from an underlying
futures market for the commodity or currency. Therefore, they have been categorized as Level 2. The
available-for-sale equity securities and puts, calls and commodity futures are measured at fair
value based on quoted prices in active markets and as such are categorized as Level 1.
The fair value hierarchy for nonfinancial assets measured on a nonrecurring basis as of
September 30, 2009 is as follows:
Fair Value Measurements at September 30, 2009 Using: | ||||||||||||||||||||
Significant | Loss(b) (before | |||||||||||||||||||
Quoted prices | other | Significant | income tax) | |||||||||||||||||
Total carrying | in active | observable | unobservable | For the Nine | ||||||||||||||||
value at | markets | inputs | inputs | Months Ended | ||||||||||||||||
September 30, 2009 | (Level 1) | (Level 2) | (Level 3) | September 30, 2009 | ||||||||||||||||
Property, plant and equipment, net (held and used) |
$ | 2,810 | $ | | $ | 2,810 | $ | | $ | 5,304 | ||||||||||
Property, plant and equipment, net (held and used) |
2,857 | | | 2,857 | 1,323 | |||||||||||||||
Total |
$ | 5,667 | $ | | $ | 2,810 | $ | 2,857 | $ | 6,627 | ||||||||||
(b) | The losses were recorded in the restructuring and impairment line of the Consolidated Statements of Operations for the nine months ended September 30, 2009. |
In accordance with ASC 360-10-05, Impairment or Disposal of Long-Lived Assets,
long-lived assets related to the Companys announced closure of one of its Dairy Foods facilities
with a carrying value of $8.1 million were written down to a fair value of $2.8 million based on
significant other observable inputs (level 2) during the second quarter of 2009. This resulted in
the Company recording an impairment loss (before income tax) of $5.3 million for the nine months
ended September 30, 2009.
Additionally, during the nine months ended September 30, 2009, the Company incurred a $1.3
million impairment loss (before income tax) related to a Layers facility in which the carrying
value of $4.2 million was written down to its estimated fair value of $2.9 million due to the
announced closure of the facility in 2010. The fair value was determined by the application of an
internal discounted cash-flow model (level 3). Cash flows were determined based on managements
estimates of future production and using a discounted internal rate of return consistent with that
used by the Company to evaluate cash flows of other assets of a similar nature.
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12. Income Taxes
The Company derives a majority of its business from members, although it is allowed by the
Internal Revenue Code to conduct non-member business. Earnings from member business are deductible
from taxable income as a patronage deduction. Earnings from non-member business are taxed as
corporate income in the same manner as a typical corporation. The effective tax rate as a result
of non-member business activity was (39.2%) and 5.3% for the three month periods ended September
30, 2009 and 2008, respectively and 14.0% and 9.7% for the nine month periods ended September 30,
2009 and 2008, respectively. Income tax expense and the overall effective tax rate varies
significantly each period based upon profitability and the level of non-member business during each
of the comparable periods. The tax expense for the three and nine months ended September 30, 2009
was primarily the result of non-member earnings offset by the book-tax reporting differences for
domestic production activities deduction.
13. Pension and Other Postretirement Plans
The following table presents the components of net periodic benefit cost for pension benefits
and other postretirement benefits for the three months ended September 30:
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 3,333 | $ | 3,810 | $ | 128 | $ | 196 | ||||||||
Interest cost |
9,474 | 9,678 | 908 | 1,071 | ||||||||||||
Expected return on assets |
(10,432 | ) | (11,000 | ) | | | ||||||||||
Amortization of actuarial loss |
1,318 | 1,290 | 184 | 488 | ||||||||||||
Amortization of prior service cost |
(111 | ) | (132 | ) | | | ||||||||||
Amortization of transition obligation |
| | 107 | 116 | ||||||||||||
Net periodic benefit cost |
$ | 3,582 | $ | 3,646 | $ | 1,327 | $ | 1,871 | ||||||||
During the three months ended September 30, 2009, the Company contributed $21.1 million to its
defined benefit pension plans and $0.8 million to its other postretirement benefits plans.
The following table presents the components of net periodic benefit cost for pension benefits
and other postretirement benefits for the nine months ended September 30:
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 10,001 | $ | 11,431 | $ | 385 | $ | 589 | ||||||||
Interest cost |
28,422 | 29,033 | 2,722 | 3,212 | ||||||||||||
Expected return on assets |
(31,298 | ) | (32,999 | ) | | | ||||||||||
Amortization of actuarial loss |
3,952 | 3,871 | 552 | 1,466 | ||||||||||||
Amortization of prior service cost |
(331 | ) | (396 | ) | | | ||||||||||
Amortization of transition obligation |
| | 321 | 348 | ||||||||||||
Net periodic benefit cost |
$ | 10,746 | $ | 10,940 | $ | 3,980 | $ | 5,615 | ||||||||
During the nine months ended September 30, 2009, the Company contributed $23.3 million to its
defined benefit pension plans and $3.7 million to its other postretirement benefits plans.
The Company expects to contribute approximately $24.6 million to its defined benefit pension
plans and $5.4 million to its other postretirement benefits plans in 2009.
14. Restructuring and Impairment Charges
A summary of restructuring and impairment charges is as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Restructuring charges |
$ | 803 | $ | | $ | 3,409 | $ | 41 | ||||||||
Impairment charges |
| | 6,627 | | ||||||||||||
Total restructuring and impairment charges |
$ | 803 | $ | | $ | 10,036 | $ | 41 | ||||||||
Restructuring Charges
On April 15, 2009, the Company announced its intent to close one of its Dairy Foods facilities
and recorded charges of $2.1 million to restructuring, primarily related to employee severance, for
the nine months ended September 30, 2009. All 120 employees at the Madison, Wisconsin plant were affected by the closure. The remaining restructuring liability
of $1.4 million was presented in accrued liabilities in the consolidated balance sheet at September
30, 2009.
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During the three and nine months ended September 30, 2009, Feed incurred restructuring charges
of $0.7 million and $1.2 million, respectively, primarily related to employee severance due to
reorganization of Feed personnel. The remaining liability at September 30, 2009, for severance and
other exit costs, including restructuring charges incurred in 2008, was $2.0 million and was
presented in accrued liabilities in the consolidated balance sheet.
During the three and nine months ended September 30, 2009, Layers incurred restructuring
charges of $0.1 million, primarily related to employee severance due to the planned closure of its
Berino, NM facility in 2010. The remaining liability at September 30, 2009 for severance and other
exit costs was $0.1 million and was presented in accrued liabilities in the consolidated balance
sheet.
Impairment Charges
In connection with the announced closure of the Madison, WI facility within Dairy Foods, the
Company incurred $5.3 million of impairment charges for the nine months ended September 30, 2009 as
the carrying values of certain fixed assets were written down to fair value based on an estimated
highest and best use of the fixed assets within this asset group.
During the nine months ended September 30, 2009, Layers incurred $1.3 million of impairment
charges related to the Berino, NM facilitys asset group within Layers in which the carrying value
of $4.2 million was written down to its estimated fair value of $2.9 million due to the announced
closure of the facility in 2010.
15. Other (Income) Expense, Net
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Gain) loss on sale of investments |
$ | | $ | | $ | (6,958 | ) | $ | 12 | |||||||
Loss on divestiture of a business |
| | 407 | | ||||||||||||
Gain on sale of intangibles |
(300 | ) | | (300 | ) | | ||||||||||
Gain on foreign currency exchange contracts on sale of investment |
| | (177 | ) | | |||||||||||
Total other (income) expense, net |
$ | (300 | ) | $ | | $ | (7,028 | ) | $ | 12 | ||||||
The Companys consolidated balance sheet at December 31, 2008 reflected a $10.8 million
receivable for cash proceeds expected to be received in 2009 for the sale of an investment in
Agronomy Company of Canada Ltd. (ACC) within Agronomy. During the nine months ended September 30,
2009, the Company received $6.4 million in cash. The remaining $4.4 million receivable represented
the portion recorded by the Company at December 31, 2008 in accordance with the sales agreement.
The sales agreement required a final purchase price true-up based on the audited financial
statements for ACC as of December 31, 2008. The Company received the audited financial statements
for ACC in 2009, which reflected significantly different financial results than expected or
previously reported to the Company. The Company has disputed the results of the audit. However,
based on the available information, the Company elected to establish a reserve for the amount in
dispute and has recorded a $4.2 million loss on sale of investment for the nine months ended
September 30, 2009, which reduced the remaining receivable to the amount of the newly reported
purchase price true-up.
Additionally, during the nine months ended September 30, 2009, the Company recognized $11.2
million of gains on sale of investment in Golden Oval within Layers. The Company expects to receive
an additional $1.1 million, approximately, of cash distributions from Golden Oval related to the
asset sale in various amounts during 2009 and 2010 and will record a further gain on sale of
investment as cash is received. Once these distributions are complete, all 1,577,842 Class A units
held by the Company are expected to have no remaining value. See Note 5 for additional information
regarding this transaction.
During the nine months ended September 30, 2009, Feed divested a business for $2.7 million in
cash, which resulted in a $0.4 million loss.
During the three and nine months ended September 30, 2009, Feed recognized a $0.3 million
gain on the sale of intangibles.
During the nine months ended September 30, 2009, the Company received $0.5 million in cash and
recognized a $0.2 million gain on foreign currency exchange contracts on the sale of its investment
related to ACC.
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16. Insurance Proceeds
In October 2008, the Company received notification from its insurance carrier that it would
receive $6.7 million of insurance proceeds for the replacement of capital assets at a Feed facility
in Statesville, North Carolina that was destroyed by fire in 2005. At December 31, 2008, $6.4
million remained as a receivable in the consolidated balance sheet. The Company received $6.5
million of insurance proceeds and recorded the additional $0.1 million of cash received in excess
of the receivable within the selling, general and administrative line of the consolidated
statements of operations for the nine months ended September 30, 2009. The Company does not
anticipate any further insurance recoveries related to the Statesville fire.
17. Commitments and Contingencies
On March 6, 2007, the Company announced that one of its indirect wholly owned subsidiaries,
Forage Genetics Inc. filed a motion to intervene in a lawsuit brought against the U.S. Department
of Agriculture (USDA) by the Center for Food Safety, the Sierra Club, two individual farmers/seed
producers (together, the Plaintiffs) and others regarding Roundup Ready® Alfalfa. The plaintiffs
claim that the USDA did not sufficiently assess the potential environmental impact of its decision
to approve Roundup Ready® Alfalfa in 2005. The Monsanto Company and several independent alfalfa
growers also filed motions to intervene in the lawsuit. On March 12, 2007, the United States
District Court for the Northern District of California (the Court) issued a preliminary
injunction enjoining all future plantings of Roundup Ready® Alfalfa beginning March 30, 2007. The
Court specifically permitted plantings until that date only to the extent the seed to be planted
was purchased on or before March 12, 2007. On May 3, 2007, the Court issued a permanent injunction
enjoining all future plantings of Roundup Ready® Alfalfa until after an environmental impact study
can be completed and a deregulation petition is approved. Roundup Ready® Alfalfa planted before
March 30, 2007 may be grown, harvested and sold to the extent certain court-ordered cleaning and
handling conditions are satisfied. In January 2008, the USDA filed a notice of intent to file an
Environmental Impact Study (the EIS). Despite delays in the completion of the draft EIS, the
Company anticipates that the USDA will issue its EIS in early 2010. Although the Company believes
the outcome of the EIS will be favorable, which would allow for the reintroduction of the product
into the market in 2010, there are approximately $3.1 million of purchase commitments with seed
producers over the next year and $33.4 million of inventory as of September 30, 2009, which could
negatively impact future earnings if the results of the study are unfavorable or delayed.
In a letter dated January 18, 2001, the Company was identified by the United States
Environmental Protection Agency (EPA) as a potentially responsible party in connection with
hazardous substances and wastes at the Hudson Refinery Superfund Site in Cushing, Oklahoma. The
letter invited the Company to enter into negotiations with the EPA for the performance of a
remedial investigation and feasibility study at the Site and also demanded that the Company
reimburse the EPA approximately $8.9 million for removal costs already incurred at the Site. In
March 2001, the Company responded to the EPA denying any responsibility with respect to the costs
incurred for the remediation expenses incurred through that date. On February 25, 2008, the
Company received a Special Notice Letter (Letter) from the EPA inviting the Company to enter into
negotiations with the EPA to perform selected remedial action for remaining contamination and to
resolve the Companys potential liability for the Site. In the Letter, the EPA claimed that it has
incurred approximately $21.0 million in response costs at the Site through October 31, 2007 and is
seeking reimbursement of these costs. The EPA has also stated that the estimated cost of the
selected remedial action for remaining contamination is $9.6 million. The Company maintains that
the costs incurred by the EPA were the direct result of damage caused by owners subsequent to the
Company, including negligent salvage activities and lack of maintenance. On January 6, 2009, the
EPA issued a Unilateral Administrative Order (UAO) directing the Company to perform remedial
design and remedial action (RD/RA) at the Site. The Company filed its Notice of Intent to Comply
with the UAO on February 10, 2009. On April 20, 2009, the EPA issued its authorization to proceed
with RD/RA activities. In addition, the Company is analyzing the amount and extent of its
insurance coverage that may be available to further mitigate its ultimate exposure. At the present
time, the Companys request for coverage has been denied. The Company initiated litigation against
two carriers on February 18, 2009. As of September 30, 2009, based on the most recent facts and
circumstances available to the Company, an $8.9 million environmental reserve recorded in 2008
remained in the Companys consolidated financial statements.
On October 27, 2008, the Office of the Attorney General of the State of Florida issued Civil
Investigative Demands (CIDs) to MoArk and its wholly owned subsidiary, Norco Ranch, Inc.
(Norco). The CIDs seek documents and information relating to the production and sale of eggs and
egg products. MoArk and Norco are cooperating with the Office of the Attorney General of the State
of Florida. We cannot predict what, if any, impact this inquiry and any results from such inquiry
could have on the future financial position or results of operations of MoArk, Norco or the
Company.
Between September 2008 and January 2009, a total of twenty-two related class action lawsuits
were filed against a number of producers of eggs and egg products in three different jurisdictions
alleging violations of antitrust laws. MoArk was named as a defendant in twenty-one of the cases.
Norco Ranch, Inc., was named as a defendant in thirteen of the cases. The Company was named as a
defendant in seven cases. The cases have been consolidated for pretrial proceedings in the
District Court for the Eastern District of Pennsylvania, and two separate consolidated amended
class action complaints have been filed, which supersede the earlier filed complaints: one on
behalf of those persons who purchased eggs or egg products directly from defendants, and the second
on behalf of indirect purchasers (i.e., persons who purchased eggs or egg products from
defendants customers). The consolidated amended complaints allege concerted action by producers
of shell eggs to restrict output and thereby increase the price of shell eggs and egg products. The Plaintiffs in these suits seek unspecified damages and injunctive relief on
behalf of all purchasers of eggs and egg products, as well as attorneys fees and costs. MoArk,
Norco and the Company deny the allegations set forth in the complaints. The Company cannot predict
what, if any, impact these lawsuits could have on the future financial position or results of
operations of MoArk, Norco, or the Company.
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Table of Contents
In December 2008, the Company experienced a fire at a dairy facility in Tulare, California.
The carrying value of the damaged building and supplies inventory was minimal. Costs to repair the
damaged property are covered under the terms of applicable insurance policies, subject to
deductibles. The Company expects to receive insurance proceeds for reconstruction costs which, when
received, could result in a gain on insurance settlement.
In May 2008, the Company experienced a fire at a Feed facility located in Caldwell, Idaho.
Damage was extensive and caused operations to cease. Costs of repair or replacement of property,
plant, and equipment and replacement of inventory were covered under the terms of applicable
insurance policies, subject to deductibles. A receivable of $1.0 million related to the carrying
value of the inventory and property, plant and equipment remained recorded as of September 30,
2009. The Company expects to receive insurance proceeds in excess of its deductible.
In 2007, a fire occurred at a Layers egg processing facility located in Anderson, Missouri.
Damage was extensive and caused operations to cease. Costs of repair or replacement of inventory,
property and equipment, and business interruption are covered under the terms of applicable
insurance policies, subject to deductibles. In 2008, MoArk received insurance proceeds related to
the repair or replacement of inventory and property and equipment and recorded a gain of $2.0
million. MoArk expects to receive additional proceeds related to replacement of capital assets and
business interruption which, when received, could result in additional gains on insurance
settlements.
In 2005, MoArk sold its Lakeview, California property and simultaneously entered into an asset
lease agreement for a portion of the property. This agreement required the Company to treat the
proceeds received as a financing transaction. Therefore, no gain was recognized on the transaction
at that time. In January 2009, MoArk renegotiated the terms of the lease. The new lease qualifies
for sales-leaseback accounting and has been classified as an operating lease pursuant to ASC 840,
Leases. As such, $3.3 million of previously deferred gain on the sale of the property was
recognized for the nine months ended September 30, 2009. The Company will continue to ratably
recognize the remainder of the deferred gain of $1.6 million over the life of the new lease.
18. Subsequent Events
On October 29, 2009 the Company announced that it had refinanced its principal debt facilities
in order to, among other things, extend the term of its debt portfolio, a significant portion of
which was scheduled to mature in 2010 and 2011, to provide liquidity for general corporate purposes
and to take advantage of lower interest rates. The refinancing included the following elements:
the call of the Companys 8.75% Senior Unsecured Notes and 9.00% Senior Secured Notes, which are
expected to be redeemed on December 15, 2009; the issuance of new secured private placement term
debt; the replacement of the existing $400 million credit facility with a new $375 million
revolving credit facility; and the amendment of the Companys existing $400 million receivables
securitization facility. See Note 8 Debt Obligations for more information. Once the Senior
Unsecured Notes and the Senior Secured Notes have been redeemed, the Companys obligation to file
periodic reports with the SEC will terminate. Accordingly, the Company does not plan to make any
filings with the SEC after it submits its Form 10-Q Report for the period ended September 30, 2009,
which is expected to be filed on or before November 13, 2009.
In October 2009, the Company notified certain of its customers, primarily dealers and
cooperatives, of a voluntary recall of certain lots of defective sorghum seed. The defective seed
was manufactured by a vendor of the Company and the defect was a result of a sterile inbred, which
prevented the sorghum seeds from producing grain unless fertilized by pollen from adjacent fields.
The Company is currently formalizing the recall and settlement process with the responsible vendor
and accordingly, expects the recall to have no material effect on the Companys results of
operations.
The Company has evaluated all subsequent events through November 13, 2009, the date of filing
this Form 10-Q.
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19. Segment Information
The Company operates in five segments: Dairy Foods, Feed, Seed, Agronomy and Layers.
Dairy Foods 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.
Feed is largely comprised of the operations of Land OLakes Purina Feed LLC (Land OLakes
Purina Feed), the Companys wholly owned subsidiary. Land OLakes Purina Feed develops, produces,
markets and distributes animal feeds such as ingredient feed, formula feed, milk replacers,
vitamins and additives.
Seed is a supplier and distributor of crop seed products, primarily in the United States. A
variety of crop seed is sold, including corn, soybeans, alfalfa and forage and turf grasses.
Agronomy consists primarily of the operations of Winfield Solutions, LLC (Winfield), a
wholly owned subsidiary. Winfield operates primarily as a wholesale distributor of crop protection
products, including herbicides, pesticides, fungicides and adjuvants. Agronomy also includes the
Companys 50% ownership in Agriliance, which operates retail agronomy distribution businesses and
is accounted for under the equity method.
Layers consists of the Companys MoArk subsidiary. MoArk produces, distributes and markets
shell eggs that are sold to retail and wholesale customers for consumer and industrial use,
primarily in the United States.
Other/Eliminated includes the Companys remaining operations and the elimination of
intersegment transactions. Other operations consist principally of a captive insurance company, a
finance company, and a special purpose entity related to the Companys securitization facility.
The Companys management uses earnings before income taxes to evaluate a segments
performance. The Company allocates corporate administrative expense, interest expense, and
centrally managed expenses, including insurance and employee benefits expense, to all of its
business segments, both directly and indirectly. Corporate administrative functions that are able
to determine actual services provided to each segment allocate expense on a direct basis. Interest
expense is allocated based on working capital usage. All other corporate administrative functions
and centrally managed expenses are allocated indirectly based on a predetermined measure such as a
percentage of total invested capital or headcount.
20
Table of Contents
Segment information for the three and nine months ended September 30, 2009 and 2008 is as
follows:
Other/ | ||||||||||||||||||||||||||||
Dairy Foods | Feed | Seed | Agronomy | Layers | Eliminations | Consolidated | ||||||||||||||||||||||
For the three months ended September 30, 2009: |
||||||||||||||||||||||||||||
Net sales (1) |
$ | 776,070 | $ | 833,378 | $ | (14,643 | ) | $ | 482,862 | $ | 110,579 | $ | (10,722 | ) | $ | 2,177,524 | ||||||||||||
Cost of sales (2) |
715,955 | 764,932 | (25,081 | ) | 431,895 | 110,434 | (10,873 | ) | 1,987,262 | |||||||||||||||||||
Selling, general and administrative |
49,096 | 64,453 | 23,450 | 30,594 | 10,424 | 1,395 | 179,412 | |||||||||||||||||||||
Restructuring and impairment |
| 704 | | | 99 | | 803 | |||||||||||||||||||||
Interest expense (income), net |
3,680 | 6,118 | (66 | ) | 1,785 | 2,210 | (1,265 | ) | 12,462 | |||||||||||||||||||
Other income, net |
| (300 | ) | | | | | (300 | ) | |||||||||||||||||||
Equity in (earnings) loss of affiliated companies |
(1,519 | ) | (1,754 | ) | (11 | ) | 2,567 | 1,695 | | 978 | ||||||||||||||||||
Earnings (loss) before income taxes |
$ | 8,858 | $ | (775 | ) | $ | (12,935 | ) | $ | 16,021 | $ | (14,283 | ) | $ | 21 | $ | (3,093 | ) | ||||||||||
For the three months ended September 30, 2008: |
||||||||||||||||||||||||||||
Net sales (1) |
$ | 984,888 | $ | 990,757 | $ | 45,014 | $ | 642,168 | $ | 135,470 | $ | (14,367 | ) | $ | 2,783,930 | |||||||||||||
Cost of sales (2) |
953,080 | 947,907 | 37,627 | 486,925 | 132,696 | (10,905 | ) | 2,547,330 | ||||||||||||||||||||
Selling, general and administrative |
52,057 | 69,483 | 18,641 | 46,943 | 14,339 | 3,179 | 204,642 | |||||||||||||||||||||
Gain on insurance settlement |
| | | | (4,032 | ) | | (4,032 | ) | |||||||||||||||||||
Interest expense (income), net |
4,519 | 9,296 | (3,944 | ) | 2,318 | 4,481 | (1,301 | ) | 15,369 | |||||||||||||||||||
Equity in loss (earnings) of affiliated companies |
656 | (878 | ) | | (11,602 | ) | (1,717 | ) | | (13,541 | ) | |||||||||||||||||
Earnings (loss) before income taxes |
$ | (25,424 | ) | $ | (35,051 | ) | $ | (7,310 | ) | $ | 117,584 | $ | (10,297 | ) | $ | (5,340 | ) | $ | 34,162 | |||||||||
For the nine months ended September 30, 2009: |
||||||||||||||||||||||||||||
Net sales (1) |
$ | 2,242,329 | $ | 2,578,104 | $ | 1,124,303 | $ | 1,681,743 | $ | 368,584 | $ | (55,726 | ) | $ | 7,939,337 | |||||||||||||
Cost of sales (2) |
2,076,214 | 2,351,198 | 984,556 | 1,500,481 | 354,356 | (56,889 | ) | 7,209,916 | ||||||||||||||||||||
Selling, general and administrative |
147,496 | 188,291 | 67,639 | 77,760 | 27,056 | 231 | 508,473 | |||||||||||||||||||||
Restructuring and impairment |
7,441 | 1,173 | | | 1,422 | | 10,036 | |||||||||||||||||||||
Interest expense (income), net |
8,781 | 18,362 | 3,313 | 4,862 | 6,675 | (3,693 | ) | 38,300 | ||||||||||||||||||||
Other expense (income), net |
| 107 | | 4,046 | (11,181 | ) | | (7,028 | ) | |||||||||||||||||||
Equity in (earnings) loss of affiliated companies |
(6,586 | ) | (5,399 | ) | (88 | ) | 9,270 | 280 | | (2,523 | ) | |||||||||||||||||
Earnings (loss) before income taxes |
$ | 8,983 | $ | 24,372 | $ | 68,883 | $ | 85,324 | $ | (10,024 | ) | $ | 4,625 | $ | 182,163 | |||||||||||||
For the nine months ended September 30, 2008: |
||||||||||||||||||||||||||||
Net sales (1) |
$ | 3,070,416 | $ | 2,858,333 | $ | 920,207 | $ | 2,123,009 | $ | 455,208 | $ | (58,379 | ) | $ | 9,368,794 | |||||||||||||
Cost of sales (2) |
2,906,720 | 2,639,800 | 817,433 | 1,863,880 | 395,756 | (53,590 | ) | 8,569,999 | ||||||||||||||||||||
Selling, general and administrative |
143,891 | 201,947 | 61,749 | 104,549 | 36,255 | 13,939 | 562,330 | |||||||||||||||||||||
Restructuring and impairment |
41 | | | | | | 41 | |||||||||||||||||||||
Gain on insurance settlement |
| | | | (4,032 | ) | | (4,032 | ) | |||||||||||||||||||
Interest expense (income), net |
10,321 | 23,040 | (5,201 | ) | 13,400 | 10,433 | (3,902 | ) | 48,091 | |||||||||||||||||||
Other expense, net |
| 12 | | | | | 12 | |||||||||||||||||||||
Equity in earnings of affiliated companies |
(4,801 | ) | (1,785 | ) | (1,252 | ) | (14,020 | ) | (16,241 | ) | | (38,099 | ) | |||||||||||||||
Earnings (loss) before income taxes |
$ | 14,244 | $ | (4,681 | ) | $ | 47,478 | $ | 155,200 | $ | 33,037 | $ | (14,826 | ) | $ | 230,452 | ||||||||||||
|
||||||||||||||||||||||||||||
(1) Net sales includes intersegment sales of: | ||||||||||||||||||||||||||||
Other/ | ||||||||||||||||||||||||||||
Dairy Foods | Feed | Seed | Agronomy | Layers | Eliminations | Consolidated | ||||||||||||||||||||||
For the three months ended: September 30, 2009 |
$ | 2,991 | $ | 9,507 | $ | (3,263 | ) | $ | 2,023 | $ | | $ | (11,258 | ) | $ | | ||||||||||||
For the three months ended: September 30, 2008 |
1,705 | 16,946 | (1,590 | ) | 60 | | (17,121 | ) | | |||||||||||||||||||
For the nine months ended: September 30, 2009 |
7,185 | 28,089 | 18,755 | 4,164 | | (58,193 | ) | | ||||||||||||||||||||
For the nine months ended: September 30, 2008 |
6,128 | 38,209 | 11,483 | 10,955 | | (66,775 | ) | | ||||||||||||||||||||
(2) Cost of sales includes unrealized hedging (gains) losses of: | ||||||||||||||||||||||||||||
Other/ | ||||||||||||||||||||||||||||
Dairy Foods | Feed | Seed | Agronomy | Layers | Eliminations | Consolidated | ||||||||||||||||||||||
For the three months ended: September 30, 2009 |
$ | 8,291 | $ | (2,555 | ) | $ | (1,698 | ) | $ | (67 | ) | $ | (33 | ) | $ | (266 | ) | $ | 3,672 | |||||||||
For the three months ended: September 30, 2008 |
(354 | ) | 19,407 | 10,048 | | 2,075 | 1,184 | 32,360 | ||||||||||||||||||||
For the nine months ended: September 30, 2009 |
(16,703 | ) | (18,909 | ) | (8,609 | ) | (775 | ) | (507 | ) | 6,901 | (38,602 | ) | |||||||||||||||
For the nine months ended: September 30, 2008 |
(4,611 | ) | 25,617 | 10,393 | | 2,695 | 1,399 | 35,493 |
21
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20. Consolidating Financial Information
The Company has entered into financing arrangements which are guaranteed by the Company and
certain of its wholly owned subsidiaries (the Guarantor Subsidiaries). Such guarantees are full,
unconditional and joint and several. The Guarantor Subsidiaries consist primarily of Winfield
Solutions, LLC and Land OLakes Purina Feed LLC. The Non-Guarantor Subsidiaries consist primarily
of: MoArk, LLC; LOL SPV, LLC; LOL Finance Co.; wholly owned foreign subsidiaries and various
majority-owned consolidated joint ventures.
In January and February 2008, the Company acquired partial interests in four joint ventures
which are part of Winfield, but are non-guarantors of the Companys financing arrangements.
Accordingly, the consolidated joint ventures financial information has been included with the
non-guarantor subsidiaries as of and for six months ended June 30, 2008. Subsequently, in July
2008, three of the four joint ventures were deconsolidated due to renegotiated operating agreements
and corresponding ownership changes. Accordingly, one remaining consolidated joint ventures
financial information has been included with the non-guarantor subsidiaries as of and for the three
and nine months ended September 30, 2009 and 2008. The financial information related to the three
deconsolidated joint ventures was included in the non-guarantor subsidiaries until the date of
deconsolidation and subsequently has been included as equity method investments in the financial
results of Winfield.
The following supplemental financial information sets forth, on an unconsolidated basis,
balance sheet, statement of operations and cash flow information for Land OLakes, Guarantor
Subsidiaries and Land OLakes 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.
22
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
September 30, 2009
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
September 30, 2009
Land | ||||||||||||||||||||
OLakes, Inc. | Consolidated | Non-Guarantor | ||||||||||||||||||
Parent Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 4,069 | $ | 2,353 | $ | 23,312 | $ | | $ | 29,734 | ||||||||||
Receivables, net |
43,793 | 658,580 | 788,004 | (283,790 | ) | 1,206,587 | ||||||||||||||
Intercompany receivables, net |
169,128 | 75,159 | 1,240 | (245,527 | ) | | ||||||||||||||
Inventories |
439,493 | 580,437 | 68,902 | | 1,088,832 | |||||||||||||||
Prepaid assets |
34,411 | 4,946 | 2,894 | | 42,251 | |||||||||||||||
Other current assets |
51,261 | 8,555 | 971 | | 60,787 | |||||||||||||||
Total current assets |
742,155 | 1,330,030 | 885,323 | (529,317 | ) | 2,428,191 | ||||||||||||||
Investments |
1,149,660 | 58,576 | 16,151 | (965,713 | ) | 258,674 | ||||||||||||||
Property, plant and equipment, net |
281,237 | 296,787 | 115,822 | | 693,846 | |||||||||||||||
Goodwill, net |
191,541 | 64,532 | 20,584 | | 276,657 | |||||||||||||||
Other intangibles, net |
1,406 | 108,547 | 6,453 | | 116,406 | |||||||||||||||
Other assets |
53,130 | 40,531 | 68,581 | (3,925 | ) | 158,317 | ||||||||||||||
Total assets |
$ | 2,419,129 | $ | 1,899,003 | $ | 1,112,914 | $ | (1,498,955 | ) | $ | 3,932,091 | |||||||||
LIABILITIES AND EQUITIES |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Notes and short-term obligations |
$ | 120,001 | $ | 2,704 | $ | 767,700 | $ | (279,793 | ) | $ | 610,612 | |||||||||
Current portion of long-term debt |
10 | 54 | 2,517 | | 2,581 | |||||||||||||||
Accounts payable |
282,626 | 615,290 | 38,811 | (7,887 | ) | 928,840 | ||||||||||||||
Intercompany payables, net |
| 244,882 | 645 | (245,527 | ) | | ||||||||||||||
Customer advances |
363 | 31,906 | 1,246 | | 33,515 | |||||||||||||||
Accrued liabilities |
113,787 | 240,180 | 29,463 | (35 | ) | 383,395 | ||||||||||||||
Patronage refunds and other member equities payable |
39,600 | | | | 39,600 | |||||||||||||||
Total current liabilities |
556,387 | 1,135,016 | 840,382 | (533,242 | ) | 1,998,543 | ||||||||||||||
Long-term debt |
513,317 | 82 | 21,832 | | 535,231 | |||||||||||||||
Employee benefits and other liabilities |
327,090 | 28,744 | 6,007 | | 361,841 | |||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Equities: |
||||||||||||||||||||
Capital stock |
1,439 | (34 | ) | 2,935 | (2,901 | ) | 1,439 | |||||||||||||
Additional paid-in capital |
| 196,909 | 77,429 | (274,338 | ) | | ||||||||||||||
Member equities |
964,665 | | | | 964,665 | |||||||||||||||
Accumulated other comprehensive loss |
(166,876 | ) | (18 | ) | 22 | (4 | ) | (166,876 | ) | |||||||||||
Retained earnings |
223,107 | 538,304 | 150,166 | (688,470 | ) | 223,107 | ||||||||||||||
Total Land OLakes, Inc. equities |
1,022,335 | 735,161 | 230,552 | (965,713 | ) | 1,022,335 | ||||||||||||||
Noncontrolling interests |
| | 14,141 | | 14,141 | |||||||||||||||
Total equities |
1,022,335 | 735,161 | 244,693 | (965,713 | ) | 1,036,476 | ||||||||||||||
Total liabilities and equities |
$ | 2,419,129 | $ | 1,899,003 | $ | 1,112,914 | $ | (1,498,955 | ) | $ | 3,932,091 | |||||||||
23
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended September 30, 2009
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended September 30, 2009
Land | ||||||||||||||||||||
OLakes, Inc. | Consolidated | Non-Guarantor | ||||||||||||||||||
Parent Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 736,074 | $ | 1,246,917 | $ | 194,533 | $ | | $ | 2,177,524 | ||||||||||
Cost of sales |
663,456 | 1,138,820 | 184,986 | | 1,987,262 | |||||||||||||||
Gross profit |
72,618 | 108,097 | 9,547 | | 190,262 | |||||||||||||||
Selling, general and administrative |
75,621 | 85,042 | 18,749 | | 179,412 | |||||||||||||||
Restructuring and impairment |
| 704 | 99 | | 803 | |||||||||||||||
(Loss) earnings from operations |
(3,003 | ) | 22,351 | (9,301 | ) | | 10,047 | |||||||||||||
Interest expense (income), net |
16,438 | (2,125 | ) | (1,851 | ) | | 12,462 | |||||||||||||
Other income |
| (300 | ) | | | (300 | ) | |||||||||||||
Equity in (earnings) losses of affiliated companies |
(16,874 | ) | (2,152 | ) | 1,695 | 18,309 | 978 | |||||||||||||
(Loss) earnings before income taxes |
(2,567 | ) | 26,928 | (9,145 | ) | (18,309 | ) | (3,093 | ) | |||||||||||
Income tax expense (benefit) |
1,747 | 565 | (1,099 | ) | | 1,213 | ||||||||||||||
Net (loss) earnings |
(4,314 | ) | 26,363 | (8,046 | ) | (18,309 | ) | (4,306 | ) | |||||||||||
Less: net earnings (loss) attributable to noncontrolling interests |
| 213 | (205 | ) | | 8 | ||||||||||||||
Net (loss) earnings attributable to Land OLakes, Inc. |
$ | (4,314 | ) | $ | 26,150 | $ | (7,841 | ) | $ | (18,309 | ) | $ | (4,314 | ) | ||||||
24
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2009
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2009
Land | ||||||||||||||||||||
OLakes, Inc. | Consolidated | Non-Guarantor | ||||||||||||||||||
Parent Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 3,268,855 | $ | 4,072,076 | $ | 598,406 | $ | | $ | 7,939,337 | ||||||||||
Cost of sales |
2,959,634 | 3,681,201 | 569,081 | | 7,209,916 | |||||||||||||||
Gross profit |
309,221 | 390,875 | 29,325 | | 729,421 | |||||||||||||||
Selling, general and administrative |
220,625 | 244,485 | 43,363 | | 508,473 | |||||||||||||||
Restructuring and impairment |
7,441 | 1,173 | 1,422 | | 10,036 | |||||||||||||||
Earnings (loss) from operations |
81,155 | 145,217 | (15,460 | ) | | 210,912 | ||||||||||||||
Interest expense (income), net |
54,681 | (6,351 | ) | (10,030 | ) | | 38,300 | |||||||||||||
Other (income) expense, net |
(7,147 | ) | 119 | | | (7,028 | ) | |||||||||||||
Equity in (earnings) losses of affiliated companies |
(150,481 | ) | (6,084 | ) | 280 | 153,762 | (2,523 | ) | ||||||||||||
Earnings (loss) before income taxes |
184,102 | 157,533 | (5,710 | ) | (153,762 | ) | 182,163 | |||||||||||||
Income tax expense |
24,269 | 1,092 | 100 | | 25,461 | |||||||||||||||
Net earnings (loss) |
159,833 | 156,441 | (5,810 | ) | (153,762 | ) | 156,702 | |||||||||||||
Less: net earnings (loss) attributable to noncontrolling interest |
| 11 | (3,142 | ) | | (3,131 | ) | |||||||||||||
Net earnings (loss) attributable to Land OLakes, Inc. |
$ | 159,833 | $ | 156,430 | $ | (2,668 | ) | $ | (153,762 | ) | $ | 159,833 | ||||||||
25
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2009
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2009
Land | ||||||||||||||||||||
OLakes, Inc. | Consolidated | Non-Guarantor | ||||||||||||||||||
Parent Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net earnings (loss) attributable to Land OLakes, Inc. |
$ | 159,833 | $ | 156,430 | $ | (2,668 | ) | $ | (153,762 | ) | $ | 159,833 | ||||||||
Adjustments to reconcile net earnings (loss) attributable to
Land OLakes, Inc. to net cash provided by operating
activities: |
||||||||||||||||||||
Depreciation and amortization |
30,817 | 28,487 | 8,566 | | 67,870 | |||||||||||||||
Amortization of deferred financing costs |
1,270 | 342 | 256 | | 1,868 | |||||||||||||||
Bad debt expense |
2,551 | 1,965 | 1,963 | | 6,479 | |||||||||||||||
Proceeds from patronage revolvement received |
205 | 31 | | | 236 | |||||||||||||||
Non-cash patronage income |
(640 | ) | (158 | ) | | | (798 | ) | ||||||||||||
Deferred income tax expense |
41,501 | | | | 41,501 | |||||||||||||||
(Increase) decrease in other assets |
(196 | ) | 921 | (2 | ) | 41 | 764 | |||||||||||||
Increase (decrease) in other liabilities |
20,250 | 32 | (58 | ) | | 20,224 | ||||||||||||||
Restructuring and impairment |
7,441 | 1,173 | 1,422 | | 10,036 | |||||||||||||||
Loss on divestiture of a business |
| 407 | | | 407 | |||||||||||||||
(Gain) loss on sale of investments |
(6,970 | ) | 12 | | | (6,958 | ) | |||||||||||||
Gain on foreign currency exchange contracts on sale of
investment |
(177 | ) | | | | (177 | ) | |||||||||||||
Equity in (earnings) losses of affiliated companies |
(150,481 | ) | (6,084 | ) | 280 | 153,762 | (2,523 | ) | ||||||||||||
Dividends from investments in affiliated companies |
27,670 | 4,918 | 3,552 | | 36,140 | |||||||||||||||
Net earnings (loss) attributable to noncontrolling interests |
| 11 | (3,142 | ) | | (3,131 | ) | |||||||||||||
Other |
(318 | ) | (113 | ) | (3,600 | ) | | (4,031 | ) | |||||||||||
Changes in current assets and liabilities, net of acquisitions
and divestitures: |
||||||||||||||||||||
Receivables |
140,695 | (160,262 | ) | 164,692 | (264,266 | ) | (119,141 | ) | ||||||||||||
Inventories |
(63,453 | ) | 26,328 | 31,161 | | (5,964 | ) | |||||||||||||
Prepaids and other current assets |
687,491 | 413,509 | 2,113 | | 1,103,113 | |||||||||||||||
Accounts payable |
(134,681 | ) | (124,257 | ) | (2,436 | ) | 15,068 | (246,306 | ) | |||||||||||
Customer advances |
(642,817 | ) | (369,511 | ) | 138 | | (1,012,190 | ) | ||||||||||||
Accrued liabilities |
(85,347 | ) | 41,740 | (13,875 | ) | 3,483 | (53,999 | ) | ||||||||||||
Net cash provided by operating activities |
34,644 | 15,921 | 188,362 | (245,674 | ) | (6,747 | ) | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Additions to property, plant and equipment |
(61,926 | ) | (30,136 | ) | (16,713 | ) | | (108,775 | ) | |||||||||||
Acquisitions, net of cash acquired |
| | (2,745 | ) | | (2,745 | ) | |||||||||||||
Investments in affiliates |
(400 | ) | (490 | ) | (2,400 | ) | | (3,290 | ) | |||||||||||
Proceeds from divestiture of a business |
| 2,698 | | | 2,698 | |||||||||||||||
Proceeds from sale of investments |
16,951 | 14 | | | 16,965 | |||||||||||||||
Proceeds from foreign currency exchange contracts on sale of
investments |
518 | | | | 518 | |||||||||||||||
Proceeds from sale of property, plant and equipment |
142 | 1,199 | 152 | | 1,493 | |||||||||||||||
Insurance proceeds for replacement assets |
| 6,538 | | | 6,538 | |||||||||||||||
Change in notes receivable |
6,788 | (1,144 | ) | (18,330 | ) | | (12,686 | ) | ||||||||||||
Other |
| 250 | | | 250 | |||||||||||||||
Net cash used by investing activities |
(37,927 | ) | (21,071 | ) | (40,036 | ) | | (99,034 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Increase (decrease) in short-term debt |
100,004 | 460 | (144,895 | ) | 245,674 | 201,243 | ||||||||||||||
Proceeds from issuance of long-term debt |
| 50 | 4,409 | | 4,459 | |||||||||||||||
Principal payments on long-term debt and capital lease
obligations |
(37 | ) | (93 | ) | (1,820 | ) | | (1,950 | ) | |||||||||||
Payments for redemption of member equities |
(95,762 | ) | | | | (95,762 | ) | |||||||||||||
Payments for debt issuance costs |
(1,486 | ) | | | | (1,486 | ) | |||||||||||||
Other |
(352 | ) | 58 | (1,515 | ) | | (1,809 | ) | ||||||||||||
Net cash provided (used) by financing activities |
2,367 | 475 | (143,821 | ) | 245,674 | 104,695 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents |
(916 | ) | (4,675 | ) | 4,505 | | (1,086 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
4,985 | 7,028 | 18,807 | | 30,820 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 4,069 | $ | 2,353 | $ | 23,312 | $ | | $ | 29,734 | ||||||||||
26
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
December 31, 2008
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
December 31, 2008
Land | ||||||||||||||||||||
OLakes, Inc. | Non- | |||||||||||||||||||
Parent | Consolidated | Guarantor | ||||||||||||||||||
Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 4,985 | $ | 7,028 | $ | 18,807 | $ | | $ | 30,820 | ||||||||||
Receivables, net |
130,313 | 580,897 | 941,107 | (548,056 | ) | 1,104,261 | ||||||||||||||
Intercompany receivables, net |
238,447 | 9,633 | 1,240 | (249,320 | ) | | ||||||||||||||
Inventories |
377,150 | 606,765 | 100,063 | | 1,083,978 | |||||||||||||||
Prepaid assets |
686,331 | 410,295 | 4,379 | | 1,101,005 | |||||||||||||||
Other current assets |
105,190 | 16,715 | 1,599 | | 123,504 | |||||||||||||||
Total current assets |
1,542,416 | 1,631,333 | 1,067,195 | (797,376 | ) | 3,443,568 | ||||||||||||||
Investments |
1,058,744 | 57,027 | 16,517 | (817,801 | ) | 314,487 | ||||||||||||||
Property, plant and equipment, net |
252,638 | 294,212 | 111,411 | | 658,261 | |||||||||||||||
Goodwill, net |
191,936 | 64,532 | 20,708 | | 277,176 | |||||||||||||||
Other intangibles, net |
2,113 | 111,763 | 7,106 | | 120,982 | |||||||||||||||
Other assets |
71,684 | 40,553 | 58,485 | (3,884 | ) | 166,838 | ||||||||||||||
Total assets |
$ | 3,119,531 | $ | 2,199,420 | $ | 1,281,422 | $ | (1,619,061 | ) | $ | 4,981,312 | |||||||||
LIABILITIES AND EQUITIES |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Notes and short-term obligations |
$ | 19,998 | $ | 2,244 | $ | 912,595 | $ | (525,467 | ) | $ | 409,370 | |||||||||
Current portion of long-term debt |
281 | 50 | 2,533 | | 2,864 | |||||||||||||||
Accounts payable |
418,156 | 739,547 | 41,247 | (22,955 | ) | 1,175,995 | ||||||||||||||
Intercompany payables, net |
| 246,342 | 2,978 | (249,320 | ) | | ||||||||||||||
Customer advances |
643,180 | 401,417 | 1,108 | | 1,045,705 | |||||||||||||||
Accrued liabilities |
185,234 | 198,440 | 43,338 | (3,518 | ) | 423,494 | ||||||||||||||
Patronage refunds and other member
equities payable |
37,751 | | | | 37,751 | |||||||||||||||
Total current liabilities |
1,304,600 | 1,588,040 | 1,003,799 | (801,260 | ) | 3,095,179 | ||||||||||||||
Long-term debt |
512,785 | 71 | 19,099 | | 531,955 | |||||||||||||||
Employee benefits and other liabilities |
325,294 | 29,047 | 4,063 | | 358,404 | |||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Equities: |
||||||||||||||||||||
Capital stock |
1,611 | (34 | ) | 2,935 | (2,901 | ) | 1,611 | |||||||||||||
Additional paid-in capital |
| 200,643 | 73,885 | (274,528 | ) | | ||||||||||||||
Member equities |
947,141 | | | | 947,141 | |||||||||||||||
Accumulated other comprehensive loss |
(150,277 | ) | (15 | ) | (31 | ) | 46 | (150,277 | ) | |||||||||||
Retained earnings |
178,377 | 381,679 | 158,739 | (540,418 | ) | 178,377 | ||||||||||||||
Total Land OLakes, Inc. equities |
976,852 | 582,273 | 235,528 | (817,801 | ) | 976,852 | ||||||||||||||
Noncontrolling interests |
| (11 | ) | 18,933 | | 18,922 | ||||||||||||||
Total equities |
976,852 | 582,262 | 254,461 | (817,801 | ) | 995,774 | ||||||||||||||
Total liabilities and equities |
$ | 3,119,531 | $ | 2,199,420 | $ | 1,281,422 | $ | (1,619,061 | ) | $ | 4,981,312 | |||||||||
27
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended September 30, 2008
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended September 30, 2008
Land | ||||||||||||||||||||
OLakes, Inc. | Consolidated | Non-Guarantor | ||||||||||||||||||
Parent Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 1,002,391 | $ | 1,546,956 | $ | 234,583 | $ | | $ | 2,783,930 | ||||||||||
Cost of sales |
967,545 | 1,364,877 | 214,908 | | 2,547,330 | |||||||||||||||
Gross profit |
34,846 | 182,079 | 19,675 | | 236,660 | |||||||||||||||
Selling, general and administrative |
76,873 | 110,853 | 16,916 | | 204,642 | |||||||||||||||
Gain on insurance settlement |
| | (4,032 | ) | | (4,032 | ) | |||||||||||||
(Loss) earnings from operations |
(42,027 | ) | 71,226 | 6,791 | | 35,990 | ||||||||||||||
Interest expense (income), net |
21,628 | (2,520 | ) | (3,739 | ) | | 15,369 | |||||||||||||
Equity in earnings of affiliated companies |
(94,946 | ) | (1,159 | ) | (1,717 | ) | 84,281 | (13,541 | ) | |||||||||||
Earnings before income taxes |
31,291 | 74,905 | 12,247 | (84,281 | ) | 34,162 | ||||||||||||||
Income tax expense (benefit) |
2,729 | 71 | (996 | ) | | 1,804 | ||||||||||||||
Net earnings |
28,562 | 74,834 | 13,243 | (84,281 | ) | 32,358 | ||||||||||||||
Less: net earnings attributable to noncontrolling interests |
| | 3,796 | | 3,796 | |||||||||||||||
Net earnings attributable to Land OLakes, Inc. |
$ | 28,562 | $ | 74,834 | $ | 9,447 | $ | (84,281 | ) | $ | 28,562 | |||||||||
28
Table of Contents
LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2008
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2008
Land | ||||||||||||||||||||
OLakes, Inc. | ||||||||||||||||||||
Parent | Consolidated | Non-Guarantor | ||||||||||||||||||
Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 3,896,230 | $ | 4,703,485 | $ | 769,079 | $ | | $ | 9,368,794 | ||||||||||
Cost of sales |
3,637,022 | 4,281,579 | 651,398 | | 8,569,999 | |||||||||||||||
Gross profit |
259,208 | 421,906 | 117,681 | | 798,795 | |||||||||||||||
Selling, general and administrative |
225,915 | 279,591 | 56,824 | | 562,330 | |||||||||||||||
Restructuring and impairment |
41 | | | | 41 | |||||||||||||||
Gain on insurance settlement |
| | (4,032 | ) | | (4,032 | ) | |||||||||||||
Earnings from operations |
33,252 | 142,315 | 64,889 | | 240,456 | |||||||||||||||
Interest expense (income), net |
50,495 | 3,593 | (5,997 | ) | | 48,091 | ||||||||||||||
Other expense, net |
| 12 | | | 12 | |||||||||||||||
Equity in earnings of affiliated companies |
(230,312 | ) | (2,140 | ) | (16,241 | ) | 210,594 | (38,099 | ) | |||||||||||
Earnings before income taxes |
213,069 | 140,850 | 87,127 | (210,594 | ) | 230,452 | ||||||||||||||
Income tax expense |
20,439 | 44 | 1,959 | | 22,442 | |||||||||||||||
Net earnings |
192,630 | 140,806 | 85,168 | (210,594 | ) | 208,010 | ||||||||||||||
Less: net earnings attributable to noncontrolling interest |
| | 15,380 | | 15,380 | |||||||||||||||
Net earnings attributable to Land OLakes, Inc. |
$ | 192,630 | $ | 140,806 | $ | 69,788 | $ | (210,594 | ) | $ | 192,630 | |||||||||
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LAND OLAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2008
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2008
Land | ||||||||||||||||||||
OLakes, Inc. | Non- | |||||||||||||||||||
Parent | Consolidated | Guarantor | ||||||||||||||||||
Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net earnings attributable to Land OLakes, Inc. |
$ | 192,630 | $ | 140,806 | $ | 69,788 | $ | (210,594 | ) | $ | 192,630 | |||||||||
Adjustments to reconcile net earnings attributable to Land OLakes, Inc. to net cash provided (used) by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
27,944 | 31,989 | 7,843 | | 67,776 | |||||||||||||||
Amortization of deferred financing costs |
1,467 | | 1,946 | | 3,413 | |||||||||||||||
Bad debt expense |
2,100 | 2,216 | 1,415 | | 5,731 | |||||||||||||||
Proceeds from patronage revolvement received |
1,769 | 8 | | | 1,777 | |||||||||||||||
Non-cash patronage income |
(622 | ) | (3,555 | ) | | | (4,177 | ) | ||||||||||||
Deferred income tax benefit |
(20,707 | ) | | | | (20,707 | ) | |||||||||||||
Increase in other assets |
(479 | ) | (1,676 | ) | (226 | ) | 112 | (2,269 | ) | |||||||||||
Increase (decrease) in other liabilities |
21,349 | 51 | (1 | ) | | 21,399 | ||||||||||||||
Restructuring and impairment |
41 | | | | 41 | |||||||||||||||
Loss on sale of investments |
| 12 | | | 12 | |||||||||||||||
Gain on insurance settlement |
| | (4,032 | ) | | (4,032 | ) | |||||||||||||
Equity in earnings of affiliated companies |
(230,312 | ) | (2,140 | ) | (16,241 | ) | 210,594 | (38,099 | ) | |||||||||||
Dividends from investments in affiliated companies |
23,126 | 1,900 | 7,626 | | 32,652 | |||||||||||||||
Net earnings attributable to noncontrolling interests |
| | 15,380 | | 15,380 | |||||||||||||||
Other |
(2,121 | ) | (611 | ) | 207 | | (2,525 | ) | ||||||||||||
Changes in current assets and liabilities, net of acquisitions and divestitures: |
||||||||||||||||||||
Receivables |
300,146 | (317,561 | ) | (66,882 | ) | (328,283 | ) | (412,580 | ) | |||||||||||
Inventories |
(54,400 | ) | (23,993 | ) | (24,530 | ) | | (102,923 | ) | |||||||||||
Prepaids and other current assets |
411,463 | 391,431 | 7,898 | | 810,792 | |||||||||||||||
Accounts payable |
(60,983 | ) | 73,775 | 6,150 | (3,931 | ) | 15,011 | |||||||||||||
Customer advances |
(513,476 | ) | (401,929 | ) | (17,611 | ) | | (933,016 | ) | |||||||||||
Accrued liabilities |
24,313 | 133,366 | (5,152 | ) | 2,289 | 154,816 | ||||||||||||||
Net cash provided (used) by operating activities |
123,248 | 24,089 | (16,422 | ) | (329,813 | ) | (198,898 | ) | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Additions to property, plant and equipment |
(64,472 | ) | (36,682 | ) | (19,379 | ) | | (120,533 | ) | |||||||||||
Acquisitions, net of cash acquired |
(1,743 | ) | (1,096 | ) | (6,201 | ) | | (9,040 | ) | |||||||||||
Investments in affiliates |
(50,625 | ) | | (235 | ) | | (50,860 | ) | ||||||||||||
Distributions from investments in affiliated companies |
1,400 | 71 | 7,353 | | 8,824 | |||||||||||||||
Proceeds from sale of investments |
| 49 | | | 49 | |||||||||||||||
Proceeds from sale of property, plant and equipment |
3,676 | 1,708 | 197 | | 5,581 | |||||||||||||||
Insurance proceeds for replacement assets |
| | 5,321 | | 5,321 | |||||||||||||||
Change in notes receivable |
145 | 604 | (12,355 | ) | | (11,606 | ) | |||||||||||||
Other |
(167 | ) | | 3,216 | | 3,049 | ||||||||||||||
Net cash used by investing activities |
(111,786 | ) | (35,346 | ) | (22,083 | ) | | (169,215 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Increase (decrease) in short-term debt |
24,632 | (2,773 | ) | 37,013 | 329,813 | 388,685 | ||||||||||||||
Proceeds from issuance of long-term debt |
| | 496 | | 496 | |||||||||||||||
Principal payments on long-term debt and capital lease obligations |
(32 | ) | (405 | ) | (13,701 | ) | | (14,138 | ) | |||||||||||
Payments for redemption of member equities |
(94,896 | ) | | | | (94,896 | ) | |||||||||||||
Distribution to members |
48,700 | | (48,700 | ) | | | ||||||||||||||
Other |
(38 | ) | | | | (38 | ) | |||||||||||||
Net cash used by financing activities |
(21,634 | ) | (3,178 | ) | (24,892 | ) | 329,813 | 280,109 | ||||||||||||
Net decrease in cash and cash equivalents |
(10,172 | ) | (14,435 | ) | (63,397 | ) | | (88,004 | ) | |||||||||||
Cash and cash equivalents at beginning of period |
12,411 | 17,036 | 87,392 | | 116,839 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 2,239 | $ | 2,601 | $ | 23,995 | $ | | $ | 28,835 | ||||||||||
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Item 2. Managements 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 five segments: Dairy Foods,
Feed, Seed, Agronomy and Layers. For the three months ended September 30, 2009, we reported net
sales of $2.2 billion and net losses of $4.3 million compared to net sales of $2.8 billion and net
earnings of $28.6 million for the three months ended September 30, 2008. For the nine months ended
September 30, 2009, we reported net sales of $7.9 billion and net earnings of $159.8 million
compared to net sales of $9.4 billion and net earnings of $192.6 million for the nine months ended
September 30, 2008. The decrease in net earnings was primarily driven by decreased margins in
Agronomy due to reduced volumes and unfavorable pricing and lower commodity prices within Dairy
Foods and Layers, partially offset by increased earnings in Seed and Feed due to changes from
unrealized hedging losses for the nine months ended September 30, 2008, to unrealized hedging gains
for the same period in the current year.
On March 6, 2007, the Company announced that one of its indirect wholly owned subsidiaries,
Forage Genetics Inc. filed a motion to intervene in a lawsuit brought against the U.S. Department
of Agriculture (USDA) by the Center for Food Safety, the Sierra Club, two individual farmers/seed
producers (together, the Plaintiffs) and others regarding Roundup Ready® Alfalfa. The plaintiffs
claim that the USDA did not sufficiently assess the potential environmental impact of its decision
to approve Roundup Ready® Alfalfa in 2005. The Monsanto Company and several independent alfalfa
growers also filed motions to intervene in the lawsuit. On March 12, 2007, the United States
District Court for the Northern District of California (the Court) issued a preliminary
injunction enjoining all future plantings of Roundup Ready® Alfalfa beginning March 30, 2007. The
Court specifically permitted plantings until that date only to the extent the seed to be planted
was purchased on or before March 12, 2007. On May 3, 2007, the Court issued a permanent injunction
enjoining all future plantings of Roundup Ready® Alfalfa until after an environmental impact study
can be completed and a deregulation petition is approved. Roundup Ready® Alfalfa planted before
March 30, 2007 may be grown, harvested and sold to the extent certain court-ordered cleaning and
handling conditions are satisfied. In January 2008, the USDA filed a notice of intent to file an
Environmental Impact Study (the EIS). Despite delays in the completion of the draft EIS, the
Company anticipates that the USDA will issue its EIS in early 2010. Although the Company believes
the outcome of the EIS will be favorable, which would allow for the reintroduction of the product
into the market in 2010, there are approximately $3.1 million of purchase commitments with seed
producers over the next year and $33.4 million of inventory as of September 30, 2009, which could
negatively impact future earnings if the results of the study are unfavorable or delayed.
In a letter dated January 18, 2001, the Company was identified by the United States
Environmental Protection Agency (EPA) as a potentially responsible party in connection with
hazardous substances and wastes at the Hudson Refinery Superfund Site in Cushing, Oklahoma. The
letter invited the Company to enter into negotiations with the EPA for the performance of a
remedial investigation and feasibility study at the Site and also demanded that the Company
reimburse the EPA approximately $8.9 million for removal costs already incurred at the Site. In
March 2001, the Company responded to the EPA denying any responsibility with respect to the costs
incurred for the remediation expenses incurred through that date. On February 25, 2008, the
Company received a Special Notice Letter (Letter) from the EPA inviting the Company to enter into
negotiations with the EPA to perform selected remedial action for remaining contamination and to
resolve the Companys potential liability for the Site. In the Letter, the EPA claimed that it has
incurred approximately $21.0 million in response costs at the Site through October 31, 2007 and is
seeking reimbursement of these costs. The EPA has also stated that the estimated cost of the
selected remedial action for remaining contamination is $9.6 million. The Company maintains that
the costs incurred by the EPA were the direct result of damage caused by owners subsequent to the
Company, including negligent salvage activities and lack of maintenance. On January 6, 2009, the
EPA issued a Unilateral Administrative Order (UAO) directing the Company to perform remedial
design and remedial action (RD/RA) at the Site. The Company filed its Notice of Intent to Comply
with the UAO on February 10, 2009. On April 20, 2009, the EPA issued its authorization to proceed
with RD/RA activities. In addition, the Company is analyzing the
amount and extent of its insurance coverage that may be available to further mitigate its
ultimate exposure. At the present time, the Companys request for coverage has been denied. The
Company initiated litigation against two carriers on February 18, 2009. As of September 30, 2009,
based on the most recent facts and circumstances available to the Company, an $8.9 million
environmental reserve recorded in 2008 remained in the Companys consolidated financial statements.
In October 2009, the Company notified certain of its customers, primarily dealers and
cooperatives, of a voluntary recall of certain lots of defective sorghum seed. The defective seed
was manufactured by a vendor of the Company and the defect was a result of a sterile inbred, which
prevented the sorghum seeds from producing grain unless fertilized by pollen from adjacent fields.
The Company is currently formalizing the recall and settlement process with the responsible vendor
and accordingly, expects the recall to have no material effect on the Companys results of
operations.
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Table of Contents
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 be highest in the first and fourth quarters 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
second quarter of each year, as farmers buy crop protection products to meet their seasonal
planting needs.
Dairy and Agricultural Commodity Inputs and Outputs
Many of our products, particularly in our Dairy Foods, Feed and Layers segments, use dairy or
agricultural commodities as inputs or our products 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 manufactured. 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 nine
months ended September 30, 2009, bulk cheese, which is generally priced on the date of make,
represented approximately 10% of the Dairy Foods segments net sales. For the nine months ended
September 30, 2009, bulk milk, which also is not subject to significant commodity price risk,
represented approximately 34% of the Dairy Foods segments net sales.
We maintain significant inventories of butter and cheese for sale to our retail and
foodservice customers, which are subject to commodity price risk. Because production of raw milk
and demand for butter varies seasonally, we place into inventory significant amounts of butter.
Demand for butter typically 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 nine months ended
September 30, 2009, retail and foodservice net sales represented approximately 36% of Dairy Foods
net sales. We also maintain inventory of nonfat dry milk, which is a by-product of our butter
production process. The nonfat dry milk is held in inventory until it is sold to customers.
Market prices for commodities such as butter, cheese and nonfat dry milk can have a
significant impact on both the cost of products produced and the price for which products are sold.
In the past three years, the lowest monthly CME (Chicago Mercantile Exchange) market price for
butter was $1.11 in January 2009 and the highest monthly market price was $1.73 in October 2008.
In the past three years, the lowest monthly CME market price for block cheese was $1.08 in January
2009 and the highest monthly market price was $2.10 in May 2008. In the past three years, the
lowest monthly NASS (National Agricultural Statistics Survey) market price for nonfat dry milk was
$0.82 in March 2009 and the highest monthly market price was $2.06 in October 2007. The per pound
average market prices for the three months and six months ended September 30 are as follows:
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Per pound market price average: |
||||||||||||||||
Butter |
$ | 1.22 | $ | 1.62 | $ | 1.18 | $ | 1.45 | ||||||||
Block cheese |
1.28 | 1.86 | 1.21 | 1.92 | ||||||||||||
Nonfat dry milk (NASS) |
0.89 | 1.33 | 0.85 | 1.33 |
Feed. The Feed segment follows industry standards for feed pricing. The feed industry
generally prices products based on income over ingredient cost (IOIC) per ton of feed, which
represents net sales less ingredient costs. This practice tends to lessen 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. However,
margins can still be impacted by competitive pressures and changes in manufacturing and
distribution costs.
We enter into forward sales contracts to supply feed to customers, which currently represent
approximately 13% of our Feed sales. When we enter into these contracts, we also generally enter
into forward purchase contracts on the underlying commodities to lock in our gross margins.
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Changes in commodity grain prices can have an impact on the mix of products we sell. When
grain prices are relatively high, the demand for complete feed tends to rise since many livestock
producers are also grain growers and sell their grain in the market and purchase complete feed as
needed. When grain prices are relatively low, these producers tend to feed their grain to their
livestock and purchase premixes and supplements to provide complete nutrition to their animals.
Complete feed has a far lower margin per ton than supplements and premixes. However, during
periods of relatively high grain prices, although our margins per ton are lower, we tend to sell
substantially more tonnage because the grain portion of complete feed makes up the majority of its
weight.
Complete feed is manufactured to meet the complete nutritional requirements of animals,
whereas a simple blend is a blend of processed commodities to which the producer then adds
supplements and premixes. As dairy production has shifted 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, supplements and premixes. 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 may purchase grain blends and concentrated premixes from separate suppliers. This
shift is reflected in increased sales of simple blends in our western Feed region and increases in
sales of premixes in our manufacturing subsidiaries in the West.
We have seen continued erosion of commodity feed volumes, mainly related to producer
integration in the swine and poultry sectors as well as conscious efforts made by management to
exit some of this low-margin business and place increased focus on value-added business. We expect
continued pressure on volumes in dairy, poultry and swine feed to continue as further integration
occurs in these industries.
Layers. MoArk, LLC (MoArk) produces, distributes and markets shell eggs. MoArks sales and
earnings are driven, in large part, by egg prices. For the nine months ended September 30, 2009,
egg prices averaged $1.03 per dozen, as measured by the Urner Barry Midwest Large market, compared
to $1.35 per dozen for the nine months ended September 30, 2008.
Derivative Commodity Instruments
In the normal course of operations, we purchase commodities such as milk, butter and soybean
oil in Dairy Foods, soybean meal and corn in Feed and soybeans in Seed. Derivative commodity
instruments, primarily futures and options contracts offered through regulated commodity exchanges,
are used to reduce our exposure to changes in commodity prices. These contracts are not designated
as hedges. The futures and options contracts for open positions are marked-to-market each month and
these unrealized gains or losses (unrealized hedging gains and losses) are recognized in earnings
and are fully taxed and applied to retained earnings in our consolidated balance sheet. Amounts
recognized in earnings before income taxes (reflected in cost of sales) for the three months and
nine months ended September 30 are as follows:
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Unrealized hedging gain (loss) |
$ | (3.7 | ) | $ | (32.6 | ) | $ | 39.4 | $ | (35.7 | ) |
Vendor Rebates
We receive vendor rebates primarily from seed and chemical suppliers. Rebates are recorded as
earned when evidence exists to support binding arrangements (which in most cases is either written
agreements between the Company and the vendor or published vendor rebate programs) or in the
absence of such arrangements, when cash is received. Certain rebate arrangements for our Agronomy
and Seed segments are not finalized until various times during the vendors crop year program.
Accordingly, the amount of rebates reported in any given period can vary substantially, largely as
a result of when the arrangements are formally executed. The Company may, on occasion, enter into
inventory purchase commitments with vendors in order to achieve an optimal rebate return.
Recoverability of Long-Lived Assets
The Company tests for the impairment of goodwill and other unamortized trademarks and license
agreements on at least an annual basis and whenever events or circumstances make it likely that an
impairment may have occurred, such as a significant adverse change in the business climate. The
Company performed its annual impairment test of goodwill and other unamortized trademarks and
license agreements during the fourth quarter of 2008 and concluded that no write downs or
impairments were required at that time. While the Company currently believes that goodwill and
unamortized trademarks and license agreements are not impaired, materially different assumptions
regarding the future performance of its businesses could result in significant impairment losses.
Specifically, within Feed, changes in the current business conditions could bring about significant
differences between actual and projected financial results and cause the Company to incur an
impairment loss related to its goodwill or unamortized trademarks or license agreements. We will
continue to monitor the economic situation, the business environment and our outlook for our full
fiscal year to determine whether a triggering event has occurred.
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Table of Contents
Unconsolidated Businesses
We have investments in certain entities that are not consolidated in our financial statements.
Investments in which we hold a 20% to 50% ownership interest are accounted for under the equity
method and provided earnings for the three months and nine months ended September 30 as follows:
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
(Losses) earnings from unconsolidated businesses |
$ | (1.0 | ) | $ | 13.5 | $ | 2.5 | $ | 38.1 |
We also hold investments in other cooperatives which are stated at cost plus unredeemed
patronage refunds received, or estimated to be received, in the form of capital stock and other
equities. Investments held in less than 20%-owned companies are stated at cost.
Our investment in unconsolidated businesses was $258.7 million as of September 30, 2009 and
$314.5 million as of December 31, 2008. Cash flow from investments in unconsolidated businesses
was $36.1 million for the nine months ended September 30, 2009 compared to $41.5 million for the
nine months ended September 30, 2008. The decline in cash flow was primarily due to decreased
distributions received from affiliated companies in Layers due to lower egg markets during the nine
months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Agriliance LLC (Agriliance), a 50%-owned joint venture which is reflected in our Agronomy
segment and is accounted for under the equity method, constitutes the most significant of our
investments in unconsolidated businesses. Historically, Agriliances sales and earnings have been
principally derived from the wholesale distribution of crop nutrients and crop protection products
manufactured by others and have primarily occurred in the second quarter of each calendar year.
Effective September 1, 2007, Agriliance distributed the wholesale crop protection business to Land
OLakes, Inc. and the wholesale crop nutrient business to CHS Inc. (CHS).
On April 9, 2009, Agri-AFC, LLC (Agri-AFC), a joint venture between Alabama Farmers
Cooperative, Inc. and Winfield Solutions, LLC, a Land OLakes wholly owned subsidiary, entered into
an operating lease and an asset
purchase agreement related to nine former Agriliance retail locations located in Georgia and
Mississippi, immediately began operating the retail locations and purchased the working capital,
primarily inventory, associated with these locations for $18.3 million. Agri-AFC completed this
transaction on July 31, 2009 and acquired the property, plant and equipment located at these sites
for $2.9 million in cash.
The Company also noted that as part of Agriliances ongoing restructuring, CHS purchased nine
retail sites in September 2009 and the Company will purchase 34 retail sites in October 2009. The
Company anticipates that the restructuring will be substantially complete by the end of March 2010.
On an aggregate basis, we expect to receive approximately $100 million in dividends from Agriliance
as a result of these asset sales, net of the cost of the properties and working capital that we
acquired.
Our investment in Agriliance was $116.1 million as of September 30, 2009 and $176.2 million as
of December 31, 2008. We recorded $10.2 million of losses related to Agriliance for the nine
months ended September 30, 2009 compared to $10.8 million of equity earnings for the nine months
ended September 30, 2008. Agriliances results were unfavorably impacted primarily due to lower
margins in crop nutrients.
For the three and nine months ended September 30, 2009, the Company received a $25.0 million
dividend distribution from Agriliance and for the three and nine months ended September 30, 2008,
the Company received a $20.0 million dividend distribution from Agriliance.
34
Table of Contents
Results of Operations
Three months ended September 30, 2009 as compared to three months ended September 30, 2008
Overview of Results
For the three months ended September 30, | |||||||||||||
2009 | 2008 | Increase (Decrease) | |||||||||||
($ in millions) | |||||||||||||
Net earnings (loss)
|
$ | (4.3 | ) | $ | 28.6 | $ | (32.9 | ) | |||||
Net earnings decreased $32.9 million in the three months ended September 30, 2009 compared to
the same period in the prior year. Net earnings include the impact of the year-to-year change in
unrealized hedging gains and losses on derivative contracts due to volatility in commodity markets.
Unrealized hedging gains and losses in earnings represent the change in value of open derivative
instruments from one period to another versus what will be effectively realized by the Company once
the instruments expire and the underlying commodity purchases or product sales being hedged occur.
Net earnings included $2.3 million and $20.1 million for unrealized hedging losses, net of income
taxes, for the three months ended September 30, 2009 and 2008, respectively.
|
|||||||||||||
Excluding the unrealized hedging losses, the Companys net earnings decreased $50.7 million
compared to the same period last year. Decreased net earnings were driven primarily by earnings
declines in Agronomy due to the earlier completion of binding arrangements governing vendor
rebates, which were recorded in the first and second quarters versus the third quarter, compared to
the same period in the prior year and lower volumes, in Seed due to higher sales returns and in
Layers due to the effect of lower egg prices, partially offset by improved performance in Dairy
Foods and Feed due to favorable pricing.
| |||||||||||||
Net sales |
$ | 2,177.5 | $ | 2,783.9 | $ | (606.4 | ) | ||||||
Net sales declined in Dairy Foods, Agronomy, Feed, Seed and Layers by $208.8 million, $159.3
million, $157.4 million, $59.7 million and $24.9 million, respectively, compared to the same period
in 2008. The decrease in net sales was primarily driven by lower markets in milk, cheese and eggs,
lower volume in Agronomy as customers built inventory ahead of price increases in the fall of 2008,
reducing demand in 2009, economic and competitive pressures in Feed and significantly higher sales
returns in Seed. A discussion of net sales by business segment is found below under the caption
Net Sales and Gross Profit by Business Segment.
|
|||||||||||||
Gross profit |
$ | 190.3 | $ | 236.6 | $ | (46.3 | ) | ||||||
Gross profit decreased by $46.3 million in the three months ended September 30, 2009 largely
driven by the earlier finalization of binding arrangments for vendor rebates earned in Agronomy,
which were recorded in the first and second quarters versus the third quarter, compared to the same
period in the prior year and meaningfully lower egg markets. These decreases were partially offset
by improved margins in Dairy Foods, Feed and Seed, partly caused by an improvement in unrealized
hedging losses from $32.6 million for the three months ended September 30, 2008 to $3.7 million for
the three months ended September 30, 2009. A discussion of gross profit by business segment is
found below under the caption Net Sales and Gross Profit by Business Segment.
|
|||||||||||||
Gain on insurance settlement |
$ | | $ | 4.0 | $ | (4.0 | ) | ||||||
In 2007, MoArk experienced a fire at a facility located in Anderson, Missouri. Damage was
extensive and caused operations to cease. Costs of repair or replacement of inventory, property,
plant and equipment were covered under the terms of applicable insurance policies, subject to
deductibles. As of and for the three and nine months ended September 30, 2008, Layers received
$3.3 million of total insurance proceeds for the capital asset replacement and recorded a gain on
insurance settlement of $2.0 million. Additionally, as of and for the three and nine months ended
September 30, 2008, Layers received $2.0 million of total insurance proceeds related to the
settlement of a fraud loss claim involving a former employee during the years 2002 through 2004.
The proceeds were recorded as a gain on insurance settlement.
|
|||||||||||||
Selling, general and administrative expense |
$ | 179.4 | $ | 204.6 | $ | (25.2 | ) | ||||||
The decrease in selling, general and administrative expense compared to the prior year was
primarily due to reduced expenses in Agronomy of $16.3 million due to lower employee costs and the
deconsolidation of certain joint ventures in the third quarter of 2008 and in Feed of $5.0 million
due to decreased employee costs.
|
|||||||||||||
Restructuring and impairment charges |
$ | 0.8 | $ | | $ | 0.8 | |||||||
During the three months ended September 30, 2009, Feed incurred restructuring charges of $0.7
million primarily related to employee severance due to reorganization of Feed personnel. Layers
incurred restructuring charges of $0.1 million as a result of an announced facility closure in
Berino, New Mexico.
|
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For the three months ended September 30, | ||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||
($ in millions) | ||||||||||||
Interest expense, net |
$ | 12.5 | $ | 15.4 | $ | (2.9 | ) | |||||
The favorable variance in interest expense compared to the prior year was primarily due to
lower interest rates.
|
||||||||||||
Equity in (losses) earnings of affiliated companies |
$ | (1.0 | ) | $ | 13.5 | $ | 14.5 | |||||
Decreased equity in earnings of affiliated companies is primarily related to lower earnings
from investments in the Agronomy and Layers segments. Results for the three months ended September
30, 2009, included equity losses from Agriliance of $3.0 million compared to equity earnings of
$7.4 million for the same period of 2008. In Layers, equity method investments incurred losses of
$1.7 million for the three months ended September 30, 2009, compared to equity earnings of $1.7
million for the same period of 2008, primarily due to lower egg prices. A discussion of net
earnings for Agriliance can be found under the caption Overview Unconsolidated Businesses.
|
||||||||||||
Income tax expense |
$ | 1.2 | $ | 1.8 | $ | (0.6 | ) |
Income tax expense for the three months ended September 30, 2009 and September 30, 2008
resulted in an effective tax rate of (39.2)% and 5.3%, respectively. As a cooperative, earnings
from member business that meet certain requirements, known as patronage income, are deductible
from taxable income. The federal and state statutory rate applied to nonmember business activity
was 38.3% for the three month periods ended September 30, 2009 and 2008. Income tax expense and
the difference between the effective tax rate and statutory tax rate, vary each year based upon
patronage business activity and the level of profitability of nonmember business during each of the
comparable years.
Net Sales and Gross Profit by Business Segment
Our reportable segments consist of business units that offer similar products and services
and/or have similar customers. We have five segments: Dairy Foods, Feed, Seed, Agronomy and Layers.
Dairy Foods
For the three months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
776.1 | $ | 984.9 | (21.2 | )% | |||||||
Gross profit |
60.1 | 31.8 | 89.0 | % | ||||||||
Gross profit % of net sales |
7.7 | % | 3.2 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | (352.2 | ) | |
Volume impact |
143.4 | |||
Total decrease |
$ | (208.8 | ) |
The net sales decrease for the three months ended September 30, 2009, when compared to the
same period in the prior year was primarily driven by the unfavorable pricing / mix variance of
$352.2 million, mostly due to lower milk, cheese and butter market prices. These lower market
prices caused net sales to decline in industrial operations, dairy solutions (previously referred
to as foodservice), retail superspreads and consumer cheese of $280.3 million, $31.9 million, $23.0
million and $15.6 million, respectively, compared to the same period last year. The favorable
volume variance of $143.4 million was driven primarily by industrial operations, dairy solutions
and retail superspreads, as volumes increased $120.2 million, $15.8 million and $9.1 million,
respectively, compared to the prior year.
Increase (decrease) | ||||
Gross Profit Variance | (In millions) | |||
Margin / product mix impact |
$ | 31.5 | ||
Volume impact |
5.4 | |||
Unrealized hedging |
(8.6 | ) | ||
Total increase |
$ | 28.3 |
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The favorable margin / mix variance of $31.5 million was primarily due to favorable pricing in
retail butter and consumer cheese versus the prior year. Volume was also favorable by $5.4
million, primarily due to increases in industrial operations. The higher margin
/ mix and volume variances were partially offset by an $8.3 million unrealized hedging loss
compared to an unrealized hedging gain of $0.3 million during the same period in 2008.
Feed
For the three months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 833.4 | $ | 990.8 | (15.9 | )% | ||||||
Gross profit |
68.4 | 42.9 | 59.4 | % | ||||||||
Gross profit % of net sales |
8.2 | % | 4.3 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | (104.7 | ) | |
Volume impact |
(52.7 | ) | ||
Total decrease |
$ | (157.4 | ) |
The $104.7 million unfavorable pricing / mix variance was primarily due to sales declines in
livestock, ingredients, lifestyle and premix of $44.6 million, $26.8 million, $17.3 million and
$12.1 million, respectively. Commodity blends and cattle accounted for the largest decreases in
the livestock category due to competitive pressures and ingredient costs. Companion animal and
horse within lifestyle declined as a result of poor economic conditions as customers sought
lower-priced products. Ingredients and premix declined primarily due to falling commodity prices
which resulted in unfavorable pricing. The unfavorable volume variance of $52.7 million was
primarily due to declines in the livestock category. Dairy, commodity blends and poultry
experienced competitive pressures and difficult market environments, resulting in volume decreases
of $23.0 million, $9.1 million and $3.0 million, respectively. Ingredients volumes also decreased
over the same time period by $22.9 due to lower production of dried distillers grains. In
lifestyle, volume increased $12.6 million in companion animal feed, which was partially offset by
declines of $2.7 million and $2.0 in aqua and horse feed, respectively.
Increase (decrease) | ||||
Gross Profit Variance | (In millions) | |||
Margin / product mix impact |
$ | 5.1 | ||
Volume impact |
(1.5 | ) | ||
Unrealized hedging |
22.0 | |||
Total increase |
$ | 25.5 |
The margin / mix variance was primarily due to increases in lifestyle and livestock by $3.5
million and $3.3 million, respectively, and lower distribution and manufacturing costs by $4.1
million, partially offset by decreased gross profit of $4.5 million in ingredients and $4.3 million
in premix. In livestock, favorable margins in commodity blends and dairy as a result of favorable
pricing and ingredient costs and in lifestyle, companion animal and horse gross profits increased
due to favorable pricing and ingredient costs. These favorable margins were partially offset by
lower margins in ingredients and premix due to unfavorable ingredient costs and pricing. Lower
volume negatively impacted gross profit by $1.5 million. In livestock, dairy volumes declined by
$3.5 million due to poor economic conditions and were partially offset by increased volumes of $1.4
million in lifestyle, primarily in companion animal. In addition, unrealized hedging gains were
$2.6 million in the current year versus unrealized hedging losses of $19.4 million in the prior
year favorably impacted gross profit by $22.0 million.
Seed
For the three months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | (14.6 | ) | $ | 45.0 | (132.4 | )% | |||||
Gross profit |
10.4 | 7.4 | 40.5 | % | ||||||||
Gross profit % of net sales |
(71.2 | )% | 16.4 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | 16.7 | ||
Volume impact |
(76.3 | ) | ||
Total decrease |
$ | (59.6 | ) |
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Table of Contents
The $16.7 million positive pricing / mix variance was primarily related to favorable corn
marketing program costs of $10.2 million and $4.5 million due to the timing of retail sales over
the same period in the prior year. The $76.3 million unfavorable volume variance
was driven by a decrease in soybean and corn volume of $46.0 million and $33.3, respectively,
due to higher returns during the same period in the prior year. Although the Company accrues for
sales returns as sales occur, the level of returns experienced during the three months ended
September 30, 2009, exceeded our estimated sales returns. Accordingly, the higher level of sales
returns resulted in net negative sales for the three months ended September 30, 2009.
Increase (decrease) | ||||
Gross Profit Variance | (In millions) | |||
Margin / product mix impact |
$ | 9.2 | ||
Volume impact |
(17.9 | ) | ||
Unrealized hedging |
11.7 | |||
Total increase |
$ | 3.0 |
The $9.2 million favorable margin / product mix variance was primarily driven by a decrease in
corn and soybean marketing program costs of $4.0 million and $2.0 million, respectively, compared
to the same time period in 2008. The unfavorable volume impact of $17.9 million was due to declines
in soybeans and corn of $14.4 million and $2.4 million, respectively. Soybeans decreased due to a
wetter than average planting season, which delayed planting and resulted in higher soybean returns.
Corn decreased due to lower corn acreage planted, which resulted in higher corn returns. A $11.7
million increase in unrealized hedging gains also contributed to the higher gross profit in the
three months ended 2009 compared to the prior year.
Layers
For the three months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 110.6 | $ | 135.5 | (18.4 | )% | ||||||
Gross profit |
0.1 | 2.8 | (96.4 | )% | ||||||||
Gross profit %
of net sales |
0.1 | % | 2.1 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | (28.9 | ) | |
Volume impact |
4.0 | |||
Total decrease |
$ | (24.9 | ) |
The $28.9 million negative pricing / mix variance was primarily driven by lower egg prices for
the three months ended September 30, 2009 compared to the same period in 2008. The average quoted
price for the three months ended September 30 based on the Urner Barry Midwest Large market
decreased to $0.93 per dozen in 2009 compared to $1.20 per dozen in 2008. Of the $4.0 million
favorable volume variance, $3.0 million was the result of increased commodity eggs sales, which
reflects consumer demand for lower priced eggs and an additional $1.0 million was due to increased
sales of specialty eggs over the same period in 2008.
Increase (decrease) | ||||
Gross Profit Variance | (In millions) | |||
Margin / product mix impact |
$ | (5.0 | ) | |
Volume impact |
0.2 | |||
Unrealized hedging |
2.1 | |||
Total decrease |
$ | (2.7 | ) |
The gross profit decrease was primarily attributable to lower average market price of eggs
compared to the prior year, partially offset by lower feed costs. Unrealized hedging losses also
decreased by $2.1 million, which contributed to a higher gross profit for the three months ended
September 30, 2009 compared to the same period in 2008.
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Table of Contents
Agronomy
For the three months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 482.9 | $ | 642.2 | (24.8 | )% | ||||||
Gross profit |
51.0 | 155.2 | (67.1 | )% | ||||||||
Gross profit % of net sales |
10.6 | % | 24.2 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | (83.5 | ) | |
Volume impact |
(90.0 | ) | ||
Acquisitions and divestitures |
14.2 | |||
Total decrease |
$ | (159.3 | ) |
The $90.0 million unfavorable volume variance was due to lower volumes across most product
groups, particularly glyphosates and insecticides, as customers increased inventory levels in the
fall of 2008 ahead of price increases which lowered demand in 2009. Unfavorable weather also
decreased volumes in seed treatments, micronutrients and adjuvants and lower commodity prices
decreased volume in fungicides. The unfavorable pricing / mix variance of $83.5 million was
primarily due to unfavorable pricing in glyphosates as a result of market conditions in the current
year compared to the same time period in 2008. The acquisitions and divestitures category includes
the unfavorable impact of four joint ventures that were distributed to the Company in early January
and February 2008 by Agriliance and partially offset by the favorable impact of the Soy Genetics
acquisition and the acquisition of nine former Agriliance retail sites by Agri-AFC. In July 2008,
three of the joint ventures were deconsolidated and accounted for under the equity method after the
joint venture agreements were renegotiated. As a result, sales are no longer recorded for these
entities in the consolidated financial statements.
Increase (decrease) | ||||
Gross Profit Variance | (In millions) | |||
Margin / product mix impact |
$ | (79.3 | ) | |
Volume impact |
(23.4 | ) | ||
Unrealized hedging |
0.3 | |||
Acquisitions and divestitures |
(1.8 | ) | ||
Total decrease |
$ | (104.2 | ) |
Gross profit decreased by $104.2 million primarily due to the earlier completion of binding
arrangements related to vendor rebate programs, which were recorded in the first and second
quarters versus the third quarter, and negatively impacted the third quarter by $66.2 million when
compared to the same period in the prior year. The negative $23.4 million volume variance was due
to customers building inventory in the fall of 2008. The acquisitions and divestitures category
includes a $1.8 million unfavorable impact of three joint ventures that were deconsolidated in July
2008, partially offset by the acquisition of nine former Agriliance retail sites by Agri-AFC.
Nine months ended September 30, 2009 as compared to nine months ended September 30, 2008
Overview of Results
For the nine months ended September 30, | ||||||||||||
Increase | ||||||||||||
2009 | 2008 | (Decrease) | ||||||||||
($ in millions) | ||||||||||||
Net earnings |
$ | 159.8 | $ | 192.6 | $ | (32.8 | ) |
Net earnings decreased $32.8 million in the nine months ended September 30, 2009 compared to
the same period in the prior year. Net earnings include the impact of the year-to-year change in
unrealized hedging gains and losses on derivative contracts due to volatility in commodity markets.
Unrealized hedging gains and losses in earnings represent the change in value of open derivative
instruments from one period to another versus what will be effectively realized by the Company once
the instruments expire and the underlying commodity purchases or product sales being hedged occur.
In 2009, net earnings included $24.3 million, net of income taxes, for unrealized hedging gains
compared to unrealized hedging losses of $22.1 million for the nine months ended September 30,
2008, net of income taxes.
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Table of Contents
In 2009, net earnings also included a $6.9 million gain, net of income taxes, related to our
investment in Golden Oval Eggs, LLC (Golden Oval) and restructuring and impairment charges of
$6.3 million, net of income taxes. Excluding the unrealized hedging gains and losses, the gain
related to the Golden Oval investment and the restructuring and impairment charges, the Companys
net earnings decreased $79.8 million compared to the same period last year. Net earnings were
driven by earnings declines in Agronomy due to unfavorable pricing and market conditions, Dairy
Foods due to lower market prices versus the prior year, in Layers due to the effect of lower egg
prices, partially offset by increased earnings in Feed and Seed due to favorable increased pricing.
For the nine months ended September 30, | ||||||||||||
Increase | ||||||||||||
2009 | 2008 | (Decrease) | ||||||||||
($ in millions) | ||||||||||||
Net sales |
$ | 7,939.3 | $ | 9,368.8 | $ | (1,429.5 | ) | |||||
The decrease in net sales was primarily due to lower market prices in Dairy Foods and lower
volume in Agronomy as customers built inventory ahead of price increases in the fall of 2008,
reducing demand in 2009. Net sales decreased in Dairy Foods, Agronomy, Feed and Layers by $828.1
million, $441.3 million, $280.2 million and $86.6 million, respectively and increased in Seed by
$204.1 million. A discussion of net sales by business segment is found below under the caption
Net Sales and Gross Profit by Business Segment.
|
||||||||||||
Gross profit |
$ | 729.4 | $ | 798.8 | $ | (69.4 | ) | |||||
Gross profit decreased in the nine months ended September 30, 2009, primarily due to decreased
volume and margins in Agronomy and depressed markets in Layers compared to the same time period in
2008, partially offset by unrealized hedging gains of $39.4 million for the nine months ended
September 30, 2009 compared to unrealized hedging losses of $35.7 million for the nine months ended
September 30, 2008. 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 |
$ | 508.5 | $ | 562.3 | $ | (53.8 | ) | |||||
The decrease in selling, general and administrative expense compared to the prior year was
primarily due to lower costs in Agronomy of $26.8 million primarily as a result of an accounting
change for joint ventures to the equity method in July 2008 that were consolidated in the prior
period, lower employee costs in Feed of $13.7 million and reduced employee and administrative costs
in Layers of $9.2 million.
|
||||||||||||
Restructuring and impairment charges |
$ | 10.0 | $ | | $ | 10.0 | ||||||
Restructuring and impairment charges were $10.0 million during the nine months ended September
30, 2009. Dairy Foods incurred impairment charges of $5.3 million to write down fixed assets to
fair value and $2.1 million for restructuring charges, primarily for employee severance, related to
the announced closure of a facility in Madison, Wisconsin. Layers incurred impairment and
restructuring charges of $1.4 million related to an announced facility closure in Berino, New
Mexico and Feed incurred restructuring charges of $1.2 million primarily related to a
reorganization of personnel.
|
||||||||||||
Interest expense, net |
$ | 38.3 | $ | 48.1 | $ | (9.8 | ) | |||||
The favorable variance in interest expense compared to the prior year was primarily due to
lower interest rates.
|
||||||||||||
Equity in earnings of affiliated companies |
$ | 2.5 | $ | 38.1 | $ | (35.6 | ) | |||||
Equity in earnings of affiliated companies decreased primarily due to decreased earnings in
the Layers and Agronomy segments. In Layers, equity method investments had losses of $0.3 million
for the nine months ended September 30, 2009, compared to equity earnings of $16.2 million for the
same period of 2008 primarily due to lower egg prices. Results for the nine months ended September
30, 2009 included equity losses from Agriliance of $10.2 million compared to equity earnings of
$10.8 million for the same period of 2008. A discussion of net earnings for Agriliance can be
found under the caption Overview General Unconsolidated Businesses.
|
||||||||||||
Income tax expense |
$ | 25.5 | $ | 22.4 | $ | 3.1 | ||||||
Income tax expense for the nine months ended September 30, 2009 and September 30, 2008
resulted in an effective tax rate of 14.0% and 9.7%, respectively. As a cooperative, earnings from
member business that meet certain requirements, known as patronage income are deductible from
taxable income. The federal and state statutory rate applied to nonmember business activity was
38.3% for the six month periods ended September 30, 2009 and 2008. Income tax expense and the
difference between the effective tax rate and statutory tax rate vary each year based upon patronage business activity and the level and
profitability of nonmember business during each of the comparable years.
|
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Table of Contents
Net Sales and Gross Profit by Business Segment
Our reportable segments consist of business units that offer similar products and services
and/or have similar customers. We have five segments: Dairy Foods, Feed, Seed, Layers and Agronomy.
Dairy Foods
For the nine months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 2,242.3 | $ | 3,070.4 | (27.0 | )% | ||||||
Gross profit |
166.1 | 163.7 | 1.5 | % | ||||||||
Gross profit % of
net sales |
7.4 | % | 5.3 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | (955.6 | ) | |
Volume impact |
127.5 | |||
Total decrease |
$ | (828.1 | ) |
The impact of the unfavorable pricing / mix variance on net sales of $955.6 million was mainly
due to lower market prices in milk, butter, cheese and nonfat dry milk. This caused net sales for
industrial operations, dairy solutions (previously referred to as foodservice) and retail
superspreads to decrease $782.4 million, $82.2 million and $44.2 million, respectively, compared to
the same period last year. The favorable volume variance of $127.5 million was primarily related
to increases in industrial operations, retail superspreads and dairy solutions, of $98.3 million,
$38.9 million and $28.5 million, respectively and was partially offset by decreased volume in
international and resale of $27.9 million.
Increase (decrease) | ||||
Gross Profit Variance | (In millions) | |||
Margin / product mix impact |
$ | (14.2 | ) | |
Volume impact |
4.5 | |||
Unrealized hedging |
12.1 | |||
Total increase |
$ | 2.4 |
The negative margin / mix variance of $14.2 million was primarily due to depressed markets,
particularly early in the year, compared to the prior year. The negative margin / mix variance was
offset by increased volume of $4.5 million, primarily in industrial operations and increased
unrealized hedging gains of $12.1 million compared to the same period in 2008.
Feed
For the nine months ended September 30, | ||||||||||||
($ in millions) | 2008 | 2007 | % change | |||||||||
Net sales |
$ | 2,578.1 | $ | 2,858.3 | (9.8 | )% | ||||||
Gross profit |
226.9 | 218.5 | 3.8 | % | ||||||||
Gross profit % of net sales |
8.8 | % | 7.6 | % |
Increase (decrease) | ||||
Net Sales Variance | (In millions) | |||
Pricing / product mix impact |
$ | (158.7 | ) | |
Volume impact |
(121.5 | ) | ||
Total decrease |
$ | (280.2 | ) |
The $158.7 million unfavorable pricing / mix variance was primarily due to the effect of
commodity price decreases, which decreased sales in ingredients and milk replacers by $88.3 million
and $34.4 million, respectively. In addition sales declined $29.7 million in commodity blends and
$22.9 million in companion animal due to competitive pressures and unfavorable pricing. The
negative volume variance of $121.5 million was primarily due to declines in dairy, cattle, horse
and commodity blends of $62.0 million, $29.1 million, $22.4 million and $19.9 million,
respectively, primarily driven by unfavorable commodity prices and poor economic conditions over
the same period as the prior year. These volume declines were partially offset by increased volume
in companion animal of $40.5 million.
41
Table of Contents
Increase | ||||
Gross Profit Variance | (decrease) | |||
(In millions) | ||||
Margin / product mix impact |
$ | (20.5 | ) | |
Volume impact |
(15.6 | ) | ||
Unrealized hedging |
44.5 | |||
Total increase |
$ | 8.4 |
The unfavorable margin / mix variance of $20.5 million was a result of decreased margins of
$13.2 million, $9.5 million and $5.7 million in premix, ingredients and livestock, respectively,
due to competitive pressures and unfavorable ingredient cost positions, partially offset by
increased margins in lifestyle products, primarily $3.6 million in companion animal and $2.7
million in horse feed as a result of lower ingredient costs and favorable pricing. The unfavorable
volume variance of $15.6 million was primarily due to volume declines in dairy, horse and cattle
feed of $11.2 million, $7.4 million and $6.6 million, respectively, offset partially by increased
volume in companion animal of $10.2 million. Offsetting the unfavorable margin and volume variances
were unrealized hedging gains of $18.9 million for the nine months ended September 30, 2009,
compared to unrealized hedging losses of $25.6 million in the same period in 2008.
Seed
For the nine months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 1,124.3 | $ | 920.2 | 22.2 | % | ||||||
Gross profit |
139.7 | 102.8 | 35.9 | % | ||||||||
Gross profit % of
net sales |
12.4 | % | 11.2 | % |
Increase | ||||
Net Sales Variance | (decrease) | |||
(In millions) | ||||
Pricing / product mix impact |
$ | 254.6 | ||
Volume impact |
(50.5 | ) | ||
Total increase |
$ | 204.1 |
The $254.6 million pricing / mix variance was primarily related to an increase in corn and
soybean sales of $101.8 million and $90.0 million, respectively. The $50.5 million unfavorable
volume variance was primarily due to decreased soybeans and alfalfa volumes of $16.5 million and
$11.2 million, respectively, as a result of the timing of shipments between the current and prior
year, as well as reduced volume in corn of $12.8 million due to fewer acres being planted.
Increase | ||||
Gross Profit Variance | (decrease) | |||
(In millions) | ||||
Margin / product mix impact |
$ | 30.5 | ||
Volume impact |
(12.6 | ) | ||
Unrealized hedging |
19.0 | |||
Total increase |
$ | 36.9 |
The $30.5 million positive margin / product mix variance was primarily due to increases in
soybeans, corn and alfalfa, of $13.0 million, $12.9 million and $6.3 million, respectively, due to
higher pricing. The $12.6 million unfavorable volume variance was primarily due to a $2.2 million
decrease in soybeans due to the timing of shipments, a $1.9 million decrease in corn as a result of
fewer acres planted and a $3.9 million decrease in alfalfa due to dealers carrying over inventory
from the prior year compared to the same time period in the prior year. Offsetting the unfavorable
volume variance were unrealized hedging gains of $8.6 million for the nine months ended September
30, 2009, compared to unrealized hedging losses of $10.4 million for the nine months ended
September 30, 2008.
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Table of Contents
Layers
For the nine months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 368.6 | $ | 455.2 | (19.0 | )% | ||||||
Gross profit |
14.2 | 59.5 | (76.1 | )% | ||||||||
Gross profit %
of net sales |
3.9 | % | 13.1 | % |
Increase | ||||
Net Sales Variance | (decrease) | |||
(In millions) | ||||
Pricing / product mix impact |
$ | (105.4 | ) | |
Volume impact |
18.8 | |||
Total decrease |
$ | (86.6 | ) |
The $105.4 million negative pricing / mix variance was primarily driven by significantly lower
egg prices for the nine months ended September 30, 2009 compared to the same period in 2008. The
average quoted price based on the Urner Barry Midwest Large market decreased to $1.03 per dozen in
2009 compared to $1.35 per dozen in 2008. The $18.8 million positive volume variance was primarily
related to increased sales of commodity eggs as customers switched to lower-priced eggs.
Increase | ||||
Gross Profit Variance | (decrease) | |||
(In millions) | ||||
Margin / product mix impact |
$ | (51.1 | ) | |
Volume impact |
2.6 | |||
Unrealized hedging |
3.2 | |||
Total decrease |
$ | (45.3 | ) |
The gross profit decrease was primarily attributable to the decline in the average market
price of eggs. The impact of lower egg prices were offset slightly by decreased prices for eggs
purchased for resale, lower feed costs and unrealized hedging gains of $0.5 million for the nine
months ended September 30, 2009, compared to unrealized hedging losses of $2.7 million during the
same period in 2008.
Agronomy
For the nine months ended September 30, | ||||||||||||
($ in millions) | 2009 | 2008 | % change | |||||||||
Net sales |
$ | 1,681.7 | $ | 2,123.0 | (20.8 | )% | ||||||
Gross profit |
181.3 | 259.1 | (30.0 | )% | ||||||||
Gross profit % of net sales |
10.8 | % | 12.2 | % |
Increase | ||||
Net Sales Variance | (decrease) | |||
(In millions) | ||||
Pricing / product mix impact |
$ | 9.2 | ||
Volume impact |
(432.7 | ) | ||
Acquisitions and divestitures |
(17.8 | ) | ||
Total decrease |
$ | (441.3 | ) |
The net sales decline for the nine months ended September 30, 2009, compared to the nine
months ended September 30, 2008 was primarily volume driven. The $432.7 million unfavorable volume
variance was due to lower volumes across most product groups, particularly glyphosates and
fungicides, as customers increased inventory levels in the fall of 2008 ahead of price increases
which lowered demand in 2009. This was partially offset by a $9.2 million favorable pricing
variance due to favorable market conditions and product pricing in the current year compared to the
same time period in 2008. The acquisitions and divestitures category includes the unfavorable
impact of four joint ventures that were distributed to the Company in early January and February
2008 by Agriliance, partially offset by the favorable impact of the Soy Genetics acquisition and
the acquisition of nine former Agriliance retail sites by Agri-AFC. In July 2008, three of the
joint ventures were deconsolidated and accounted for under the equity method after the joint
venture agreements were renegotiated. As a result sales are no longer recorded for these entities
in the consolidated financial statements.
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Increase | ||||
Gross Profit Variance | (decrease) | |||
(In millions) | ||||
Margin / product mix impact |
$ | (7.5 | ) | |
Volume impact |
(53.7 | ) | ||
Unrealized hedging |
0.7 | |||
Acquisitions and divestitures |
(17.3 | ) | ||
Total decrease |
$ | (77.8 | ) |
Gross profit decreased by $77.8 million primarily due to decreased volumes across most product
groups due to customers building inventory in the fall of 2008. The margin / mix also declined
$7.5 million primarily due to unfavorable fertilizer pricing in the joint ventures in the current
year compared to 2008. The acquisitions and divestitures category includes a $24.8 million
unfavorable impact of three joint ventures that were deconsolidated in July 2008, a positive $1.7
million impact of the Soy Genetics acquisition and a positive $5.8 million impact of the
acquisition of nine former Agriliance retail sites by Agri-AFC.
Liquidity and Capital Resources
Overview
We rely on cash from operations, borrowings under our bank facilities and other
institutionally-placed 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 a receivables securitization facility, leasing
arrangements and the sale of non-strategic assets.
Total long-term debt, including the current portion, was $537.8 million at September 30, 2009
compared to $534.8 million at December 31, 2008.
Our primary sources of debt at September 30, 2009 include a $400 million revolving credit
facility, of which $100.0 million was outstanding, a $400 million receivables securitization
facility of which $400.0 million was outstanding, $149.7 million in 9.00% senior secured notes,
$174.0 million in 8.75% senior unsecured notes and $190.7 million of 7.45% capital securities.
At September 30, 2009, $14.7 million of our long-term debt and $3.7 million of capital lease
obligations was attributable to MoArk. We do not provide any guarantees or support for MoArks
debt. In addition, we had $4.9 million of other miscellaneous long-term debt at September 30,
2009.
Our principal liquidity requirements are to service our debt and meet our working capital and
capital expenditure needs. At September 30, 2009, we had available cash and cash equivalents on
hand of $29.7 million. Total equities, excluding noncontrolling interests of $14.1 million, were
$1,022.3 million at September 30, 2009.
Our total liquidity is as follows:
As of | As of | As of | ||||||||||
September 30, | September 30, | December 31, | ||||||||||
2009 | 2008 | 2008 | ||||||||||
($ in millions) | ||||||||||||
Cash and cash equivalents |
$ | 29.7 | $ | 28.8 | $ | 30.8 | ||||||
Availability on revolving credit facility |
258.8 | 176.7 | 188.6 | |||||||||
Availability on receivable securitization program |
| | 120.0 | |||||||||
Availability on the Agriliance credit facility |
| | | |||||||||
Availability on MoArk revolving credit facility |
40.0 | 40.0 | 40.0 | |||||||||
Total liquidity |
$ | 328.5 | $ | 245.5 | $ | 379.4 |
On October 29, 2009, the Company announced that it had refinanced its principal debt
facilities and revolving credit facility to provide liquidity for general corporate purposes and to
take advantage of lower interest rates. The refinancing included the following elements: the call
of the Companys 8.75% Senior Unsecured Notes and 9.00% Senior Secured Notes; the issuance of new
secured private placement term debt; the replacement of the existing $400 million revolving credit
facility with a new $375 million revolving credit facility; and the amendment of the Companys
existing $400 million receivables securitization facility. See further discussions of our debt
refinancing herein under Principal Debt Facilities.
We expect that funds from operations and available borrowings under our revolving credit
facility and receivables securitization facility will provide sufficient working capital to operate
our business to make expected capital expenditures and to meet liquidity requirements for the next
twelve months.
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Cash Flows
For the Nine Months Ended | ||||||||
September 30, | ||||||||
Operating Activities | 2009 | 2008 | ||||||
($ in millions) | ||||||||
Net earnings attributable to Land OLakes, Inc. |
$ | 159.8 | $ | 192.6 | ||||
Adjustments to reconcile net earnings attributable to Land OLakes, Inc. to
net cash used by operating activities |
167.9 | 76.4 | ||||||
Changes in current assets and liabilities, net of acquisitions and divestitures |
(334.5 | ) | (467.9 | ) | ||||
Net cash used by operating activities |
$ | (6.7 | ) | $ | (198.9 | ) |
Net cash used by operating activities decreased $192.2 million in the nine months ended
September 30, 2009 compared to the same period in 2008.
Although net earnings attributable to Land OLakes, Inc. decreased by $32.8 million in the
nine months ended September 30, 2009 compared to the same period in 2008, that decrease was offset
by the decreased working capital requirements of $133.4 million and higher non-cash charges in
2009. The decreased working capital requirements are primarily related to seasonal requirements
for the Agronomy and Seed businesses.
Investing Activities
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
($ in millions) | ||||||||
Additions to property, plant and equipment |
$ | (108.8 | ) | $ | (120.5 | ) | ||
Acquisitions, net of cash acquired |
(2.7 | ) | (9.0 | ) | ||||
Investments in affiliates |
(3.3 | ) | (50.9 | ) | ||||
Distributions from investments in affiliated companies |
| 8.8 | ||||||
Proceeds from divestiture of businesses |
2.7 | | ||||||
Proceeds from sale of investments |
17.0 | 0.1 | ||||||
Proceeds from foreign currency exchange contracts on sale of investment |
0.5 | | ||||||
Proceeds from sale of property, plant and equipment |
1.5 | 5.6 | ||||||
Insurance proceeds for replacement assets |
6.5 | 5.3 | ||||||
Change in notes receivable |
(12.7 | ) | (11.6 | ) | ||||
Other |
0.3 | 3.0 | ||||||
Net cash used by investing activities |
$ | (99.0 | ) | $ | (169.2 | ) |
Net cash used by investing activities decreased $70.2 million for the nine months ended
September 30, 2009 compared to the same period from the prior year. In the nine months ended
September 30, 2009, spending on property, plant and equipment decreased $11.7 million, while
investments in affiliates decreased $47.6 million. Additionally, in 2009 proceeds from sale of
investments increased by $16.9 million due to proceeds received from the sale of investments in
Golden Oval Eggs, LLC and Agronomy Company of Canada Ltd.
We expect total capital expenditures to be approximately $150 million in 2009. Of such
amount, we currently estimate that a minimum range of $50 million to $60 million of ongoing
maintenance capital expenditures will be required.
Financing Activities
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
($ in millions) | ||||||||
Increase in short-term debt |
$ | 201.2 | $ | 388.7 | ||||
Proceeds from issuance of long-term debt |
4.5 | 0.5 | ||||||
Principal payments on long-term debt and capital lease obligations |
(1.9 | ) | (14.1 | ) | ||||
Payments for redemption of member equities |
(95.8 | ) | (94.9 | ) | ||||
Payments for debt issuance costs |
(1.5 | ) | | |||||
Other |
(1.8 | ) | (0.1 | ) | ||||
Net cash provided by financing activities |
$ | 104.7 | $ | 280.1 |
Net cash provided by financing activities decreased $175.4 million for the nine months ended
September 30, 2009 compared to the same period from the prior year. The change is primarily due to
decreased short term borrowings of $187.4 million on the securitization and revolving credit
facilities, which were used to partially fund the current working capital requirements and a
reduction in principal payments on long-term debt of $12.2 million.
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Principal Debt Facilities
On October 29, 2009, the Company announced that it had refinanced its principal debt
facilities in order to, among other things, extend the term of its debt portfolio, a significant
portion of which was scheduled to mature in 2010 and 2011, to provide liquidity for general
corporate purposes and to take advantage of lower interest rates. The refinancing included the
following elements: the call of the Companys 8.75% Senior Unsecured Notes and 9.00% Senior Secured
Notes, which are expected to be redeemed on December 15, 2009; the issuance of new secured private
placement term debt; the replacement of the existing $400 million revolving credit facility with a
new $375 million revolving credit facility; and the amendment of the Companys existing $400
million receivables securitization facility.
Until its replacement on October 29, 2009, the Company maintained a $400 million five-year
revolving credit facility, which was scheduled to mature in August 2011. Borrowings bore interest
at a variable rate (either LIBOR or an Alternative Base Rate) plus an applicable margin. The margin
was dependent upon the Companys leverage ratio. Based on the Companys leverage ratio at the end
of September 2009, the LIBOR margin for the revolving credit facility was 275 basis points and the
spread for the Alternative Base Rate was 175 basis points. At September 30, 2009, $100.0 million
was outstanding on the revolving credit facility and $258.8 million was available after giving
effect to $41.2 million of outstanding letters of credit, which reduce availability. At December
31, 2008, there was no outstanding balance on the revolving credit facility and $188.6 million was
available after giving effect to $36.4 million of outstanding letters of credit, which reduce
availability.
As noted above, on October 29, 2009, the Company entered into a replacement $375 million
revolving credit facility led by CoBank, ACB, as administrative agent, bookrunner, collateral agent
and joint lead arranger, and Banc of America Securities LLC, as joint lead arranger (the CoBank
Revolving Credit Facility).
Under the terms of the CoBank Revolving Credit Facility, lenders have committed to make
advances and issue letters of credit until April 2013 in an aggregate amount not to exceed $375
million. Borrowings will bear interest at a variable rate (either LIBOR or an Alternative Base
Rate) plus an applicable margin. The margin is dependent upon the Companys leverage ratio. Based
on the leverage ratio at the end of September 2009, the LIBOR margin for the CoBank Revolving
Credit Facility would be 275 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 Companys election.
The borrowings under the CoBank Revolving Credit Facility will be secured, on a pari passu
basis with the new private placement notes, by substantially all the Companys material assets and
the assets and guarantees of certain of the Companys wholly owned domestic subsidiaries. The
credit agreement imposes certain restrictions on the Company and certain of its subsidiaries,
including, but not limited to, the Companys ability to incur additional indebtedness, make
payments to members, make investments, grant liens, sell assets and engage in certain other
activities.
The Companys $400 million, five-year receivables securitization facility arranged by CoBank
ACB was amended and extended on October 29, 2009 and now matures in 2013. The Company and certain
wholly owned consolidated entities sell Dairy Foods, Feed, Seed, Agronomy and certain other
receivables to LOL SPV, LLC, a wholly owned, consolidated special purpose entity (the SPE). The
SPE enters into borrowings which are effectively secured solely by the SPEs receivables. The SPE
has its own separate creditors that are entitled to be satisfied out of the assets of the SPE prior
to any value becoming available to the Company. Borrowings under the receivables securitization
facility bear interest at LIBOR plus an applicable margin. The amendment increased the margin from
87.5 basis points to 225 basis points. Apart from the interest rate and the tenor of the facility,
all material terms of the facility were unchanged by the amendment. At September 30, 2009 and
December 31, 2008, the SPEs receivables were $636.3 million and $771.3 million, respectively. At
September 30, 2009 and December 31, 2008, outstanding balances under the facility, recorded as
notes and short-term obligations, were $400.0 million $280.0 million, respectively and availability
was $0 and $120.0 million, respectively.
The Company also had $75.5 million as of September 30, 2009, and $74.5 million as of December
31, 2008, of notes and short-term obligations outstanding under a revolving line of credit and
other borrowing arrangements for a wholly owned subsidiary that provides operating loans and
facility financing to farmers and livestock producers.
Additionally, the Company had $20.0 million outstanding as of September 30, 2009 and December
31, 2008 of notes and short term obligations under a credit facility with Agriliance, a 50/50 joint
venture with CHS. The purpose of the credit facility is to provide additional working capital
liquidity and allows the Company to borrow from or lend to Agriliance at a variable rate of LIBOR
plus 100 basis points.
The Companys MoArk subsidiary maintains a $40 million revolving credit facility, which is
subject to a borrowing base limitation. Borrowings bear interest at a variable rate (either LIBOR
or an Alternative Base Rate) plus an applicable margin. At September 30, 2009 and December 31,
2008, the outstanding borrowings were $0. MoArks facility is not guaranteed by the Company nor is
it secured by Company assets. The facility is scheduled to mature on June 1, 2012.
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The Companys Agri-AFC, LLC (Agri-AFC) subsidiary maintains a $45 million revolving credit
facility, which is subject to a borrowing base limitation. The revolving credit facility matures in
March 2010. Borrowings bear interest at a variable rate of LIBOR plus 250 basis points. At
September 30, 2009 and December 31, 2008, the outstanding borrowings were $15.1 million and $34.9
million, respectively. Agri-AFCs facility is not guaranteed by the Company nor is it secured by
Company assets, but it does contain a minimum net worth covenant which could require the Company to
make subordinated loans or equity infusions into Agri-AFC if Agri-AFCs net worth falls below
certain levels. The revolving credit facility is subject to certain debt covenants, which were all
satisfied as of September 30, 2009.
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 prepayments on the Companys term loans. These
notes bear interest at a fixed rate of 9.00% per annum, payable on June 15 and December 15 each
year. The notes became callable in December 2007 at a redemption price of 104.5%. In December
2008, the redemption price became 102.25%. The notes are callable at par beginning on December 15,
2009. The Company has provided irrevocable notice that it intends to call these notes at par on
that date. The balance outstanding for these notes at September 30, 2009 was $149.7 million.
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 8.75% per annum, payable
on May 15 and November 15 each year. The notes became callable in November 2006 at a redemption
price of 104.375%. In November 2007, the redemption price declined to 102.917% and in November
2008, the redemption price declined to 101.458%. The notes are callable at par beginning on
November 15, 2009. The Company has provided irrevocable notice that it intends to call these notes
at par on December 15, 2009. The balance outstanding for these notes at September 30, 2009 was
$174.0 million.
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 OLakes. 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. At September 30, 2009, the outstanding balance of
Capital Securities was $190.7 million.
The credit agreements relating to the revolving credit facility and the indentures relating to
the 8.75% senior unsecured notes and the 9.00% 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
note purchase agreement relating to the private placement facility and the credit agreement
relating to the revolving credit facility require us to maintain certain interest coverage and
leverage ratios. Land OLakes debt covenants were all satisfied as of September 30, 2009.
Indebtedness under the revolving credit facility is secured by substantially all of the
material assets of Land OLakes and its wholly owned domestic subsidiaries (other than MoArk, LLC,
LOL Finance Co., LOLFC, LLC (a subsidiary of LOL Finance Co.) and LOL 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 revolving credit facility is also guaranteed by our wholly
owned domestic subsidiaries (other than MoArk, LLC, LOL Finance Co., LOLFC, LLC, and LOL SPV, LLC).
The 9.00% senior notes are secured by a second lien on essentially all of the assets which secure
the revolving credit agreement, and are guaranteed by the same entities. The 8.75% senior notes are
unsecured but are guaranteed by the same entities that guarantee the obligations under the
revolving credit facility. The new private placement notes, when issued on December 15, 2009, will
be secured on a first lien, pari passu basis with the revolving credit facility.
As part of its overall refinancing, the Company provided an irrevocable redemption notice to
the holders of the notes issued under the Indenture governing $350 million in aggregate principal
amount of 8.75% Senior Unsecured Notes due 2011, dated as of November 14, 2001, (the Unsecured
Notes) and the holders of the notes issued under the Indenture governing $175 million in aggregate
principal amount of 9.00% Senior Secured Notes due 2010, dated as of December 23, 2003 (the
Secured Notes) (the Unsecured Notes and Secured Notes, together, the Called Notes). The
redemption notice provides that the Called Notes will be redeemed at par on December 15, 2009. The
remaining principal balance of the outstanding Unsecured Notes and Secured Notes as of October 29,
2009 was $174 million and $149.7 million, respectively. Once the Called Notes have been redeemed,
the Companys obligation to file periodic reports with the Securities and Exchange Commission (the
SEC) will terminate. Accordingly, the Company does not plan to make any filings with the SEC
after it submits its Form 10-Q Report for the period ended September 30, 2009.
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The Company also entered into a Note Purchase Agreement with certain institutional lenders
that governs the issuance of $325 million of privately placed notes (the New Notes). The New
Notes will be issued and sold in three series, as follows: $155 million aggregate principal amount
of 6.24% notes, due December 2016, (ii) $85 million aggregate principal amount of 6.67% notes, due
December 2019 and (iii) $85 million aggregate principal amount of 6.77% notes, due December 2021.
The sale of the New Notes will occur on or about December 15, 2009, and the Company will apply the proceeds to the redemption
of the Called Notes. The New Notes will be secured, on a pari passu basis with the debt issued
under the CoBank Revolving Credit Facility (described above), by substantially all the Companys
material assets and the assets and guarantees of certain of the Companys wholly owned domestic
subsidiaries. The Note Purchase Agreement imposes certain restrictions on the Company and certain
of its subsidiaries, including, but not limited to, the Companys ability to incur additional
indebtedness, make payments to members, make investments, grant liens, sell assets and engage in
certain other activities.
In December 2008, the Company entered into a transaction with the City of Russell, Kansas (the
City), whereby, the City purchased the Companys Russell, Kansas feed facility (the Facility)
by issuing $4.9 million in industrial development revenue bonds due December 2018 and leased the
Facility back to the Company for an identical term under a capital lease. The Citys bonds were
purchased by the Company. Because the City has assigned the lease to a trustee for the benefit of
the Company as the sole bondholder, the Company, in effect, controls enforcement of the lease
against itself. As a result of the capital lease treatment, the Facility will remain a component
of property, plant and equipment in the Companys consolidated balance sheet and no gain or loss
was recognized related to this transaction. The capital lease obligation and the corresponding
bond investment have been eliminated upon consolidation. Additional bonds may be issued to cover
the costs of certain improvements to the facility. The maximum amount of bonds authorized for
issuance is $6.0 million.
Capital Leases
MoArk had capital leases at September 30, 2009 of $3.7 million for land, buildings, machinery
and equipment at various locations. The interest rates on the capital leases range from 7.00% to
8.25% with a weighted average rate of 7.00%. The weighted average term until maturity is two
years. Land OLakes does not provide any guarantees or support for MoArks capital leases.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 . This
statement modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing
only two levels of GAAP, authoritative and non-authoritative accounting literature. Effective July
2009, the FASB Accounting Standards Codification (ASC), also known collectively as the
Codification, is considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases issued by the SEC.
Non-authoritative guidance and literature would include, among other things, FASB Concepts
Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice
Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by
topic so that users can more easily access authoritative accounting guidance. It is organized by
topic, subtopic, section, and paragraph, each of which is identified by a numerical designation.
Following the Codification, the FASB will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASU) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the changes to the
Codification. This statement and the application of the Codification was effective for and adopted
by the Company as of July 1, 2009. All accounting references have been updated, and therefore SFAS
references have been replaced with ASC references.
In December 2008, the FASB issued ASC 715-20-65-2, Employers Disclosures about
Postretirement Benefit Plan Assets (ASC 715-20-65-2), which requires that an employer disclose
the following information about the fair value of plan assets: 1) how investment allocation
decisions are made, including the factors that are pertinent to understanding investment policies
and strategies; 2) the major categories of plan assets; 3) the inputs and valuation techniques used
to measure the fair value of plan assets; 4) the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for the period; and 5) significant
concentrations of risk within plan assets. At initial adoption, application of this guidance would
not be required for earlier periods that are presented for comparative purposes. The adoption of
this guidance in 2009 will increase the disclosures within the Companys consolidated financial
statements related to the assets of its defined benefit pension and other postretirement benefit
plans. This guidance will be effective for fiscal years ending after December 15, 2009, with early
application permitted. The Company will adopt this guidance as of December 31, 2009.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets
(SFAS 166), which has not been integrated into the Codification as of September 30, 2009. This
guidance removes the concept of a qualifying special-purpose entity (QSPE) and removes the
exception from applying consolidation guidance to these entities. SFAS 166 also clarifies the
requirements for isolation and limitations on portions of financial assets that are eligible for
sale accounting. This statement is effective for fiscal years beginning after November 15, 2009.
Accordingly, the Company will adopt SFAS 166 as of January 1, 2010. The Company is currently
evaluating the impact of adopting this standard on the consolidated financial statements.
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In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46R (SFAS
167), which has not been integrated into the Codification as of September 30, 2009. SFAS 167
requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement
requires an ongoing reassessment and eliminates the quantitative approach previously required for
determining whether an entity is the primary beneficiary. This statement is effective for fiscal
years beginning after November 15, 2009. Accordingly, the Company will adopt SFAS 167 as of January
1, 2010. The Company is currently evaluating the impact of adopting this standard on the
consolidated financial statements.
During 2009, the FASB has issued several ASUs ASU No. 2009-01 through ASU No. 2009-15. ASU
2009-01 amended the Codification, ASC 105, for the issuance of SFAS 168 discussed above. Except for
the ASU discussed below, the ASUs entail technical corrections to existing guidance or affect
guidance related to specialized industries or topics and therefore have minimal, if any, impact on
the Company.
In August 2009, FASB issued ASU No. 2009-05 which amends Fair Value Measurements and
Disclosures Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of
liabilities. This update requires clarification for circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques: 1) a valuation technique that
uses either the quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation
technique that is consistent with the principles in ASC Topic 820 such as the income and market
approach to valuation. The amendments in this update also clarify that when estimating the fair
value of a liability, a reporting entity is not required to include a separate input or adjustment
to other inputs relating to the existence of a restriction that prevents the transfer of the
liability. This update further clarifies that if the fair value of a liability is determined by
reference to a quoted price in an active market for an identical liability, that price would be
considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability
has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value
measurement if no adjustments to the quoted price of the asset are required. This update is
effective for the Company beginning October 1, 2009. The Company does not anticipate the adoption
of ASU No. 2009-05 to have a material impact to the consolidated financial statements.
Critical Accounting Policies
Our significant accounting policies are described in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for
the year ended December 31, 2008. The accounting policies used in preparing our interim 2009
consolidated financial statements are the same as those described in our Form 10-K.
Forward-Looking Statements
The information presented in this Form 10-Q under the headings Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking
statements. The forward-looking statements are based on the beliefs of our management as well as on
assumptions made by and information currently available to us at the time the statements were made.
When used in the Form 10-Q, the words anticipate, believe, estimate, expect, may, will,
could, should, seeks, pro forma and intend and similar expressions, as they relate to us
are intended to identify the forward-looking statements. All forward-looking statements
attributable to persons acting on our behalf or us are expressly qualified in their entirety by the
cautionary statements set forth here and in Part II. Other Information Item 1A. Risk Factors on
pages 52 to 53. We undertake no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or for any other reason. Although
we believe that these statements are reasonable, you should be aware that actual results could
differ materially from those projected by the forward-looking statements. For a discussion of
factors that could cause actual results to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements, see the discussion of risk factors set
forth in Part II. Other Information Item 1A Risk Factors on pages 52 to 53. Because actual
results may differ, readers are cautioned not to place undue reliance on forward-looking
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the nine months ended September 30, 2009, the Company did not experience significant
changes in market risk exposures that materially affected the quantitative and qualitative
disclosures presented in the Companys Annual Report on Form 10-K for the year ended December 31,
2008.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The Companys disclosure controls and procedures are designed to provide reasonable assurance
that the information required to be disclosed in the reports filed under the Securities Exchange
Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the
time periods specified by the SEC and that it is accumulated and communicated to our management,
including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), to allow timely
decisions regarding required disclosures.
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As of the end of the period covered by this report, our management, with the participation of
the CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15 and 15d-15 of the Exchange Act. Based on this evaluation, our CEO and CFO concluded
that, as of September 30, 2009, the Companys disclosure controls and procedures were not effective
because the material weaknesses in our internal control over financial reporting as of December 31,
2008, had not been fully remediated.
(b) Remediation and Changes in Internal Control over Financial Reporting
As reported in the Companys Form 10-K for the year ended December 31, 2008, as filed with the
Securities and Exchange Commission on March 20, 2009, in connection with the Companys assessment
of the effectiveness of its internal control over financial reporting at the end of its fiscal
year, management identified material weaknesses in the internal controls over financial reporting
as described below, which continued as of September 30, 2009.
Inadequate interim periodic close process
Management did not maintain adequate policies and procedures in our Seed and Agronomy segments
to ensure that accurate interim financial results were prepared on a timely basis under our normal
periodic financial close process. This material weakness resulted in accounting errors in prior
periods in the Seed and Agronomy segments that were subsequently corrected.
Personnel lacked adequate accounting expertise and business knowledge
Management did not maintain a sufficient complement of personnel in the Agronomy segment with
an appropriate level of accounting knowledge, experience with the business and training in the
application of generally accepted accounting principles commensurate with the Companys financial
accounting and reporting requirements and low materiality thresholds. As a result of this material
weakness, controls were not effective in prior periods to ensure significant accounting estimates
and elimination of intercompany transactions were appropriately reviewed, analyzed and modified on
a timely basis to prevent and detect material errors.
Remediation and Changes in Internal Control over Financial Reporting:
As of September 30, 2009, we have taken the following actions to address the material
weaknesses in the Seed and Agronomy segments including: (a) enhancing the current quarterly close
process and review of the variance analyses as part of the close process to assess items at
appropriate materiality levels, (b) adding procedures to the monthly variance analyses which
address the timeliness and accuracy of those reviews, (c) adding accounting resources to ensure
complete and timely recording of accounting transactions at quarter end, and (d) implementing new
training procedures to ensure personnel are adequately trained to perform their job
responsibilities. At September 30, 2009, the changes in internal control over financial reporting
as described above, had not been in operation for a period of time sufficient to test their
effectiveness. Therefore, these material weaknesses have not been remediated as of September 30,
2009.
(c) Change in internal controls
In addition to our progress relating to the remediation efforts noted above, during the third quarter of
2009, we completed the implementation of a new Enterprise Resource
Planning (ERP) system in Dairy
Foods. Implementation of this new ERP system involved significant changes in business processes that
management believes will provide meaningful benefits, including more standardized and efficient
processes. While we believe that this new system and the related changes to internal controls will
strengthen our internal controls over financial reporting, there are inherent risks in implementing any new
ERP system and we will continue to evaluate and test these control changes
Other than the change mentioned above, no other changes in our internal control over financial reporting occurred during the third quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Other than the change mentioned above, no other changes in our internal control over financial reporting occurred during the third quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
We are currently and from time to time involved in litigation and environmental claims incidental
to the conduct of business. The damages claimed in some of these cases are substantial. Although
the amount of liability that may result from these matters cannot be ascertained, we do not
currently believe that, in the aggregate, they will result in liabilities material to the Companys
consolidated financial condition, future results of operations or cash flows.
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On March 6, 2007, the Company announced that one of its indirect wholly owned subsidiaries,
Forage Genetics Inc. filed a motion to intervene in a lawsuit brought against the U.S. Department
of Agriculture (USDA) by the Center for Food Safety, the Sierra Club, two individual farmers/seed
producers (together, the Plaintiffs) and others regarding Roundup Ready® Alfalfa. The plaintiffs
claim that the USDA did not sufficiently assess the potential environmental impact of its decision
to approve Roundup Ready® Alfalfa in 2005. The Monsanto Company and several independent alfalfa
growers also filed motions to intervene in the lawsuit. On March 12, 2007, the United States
District Court for the Northern District of California (the Court) issued a preliminary
injunction enjoining all future plantings of Roundup Ready® Alfalfa beginning March 30, 2007. The
Court specifically permitted plantings until that date only to the extent the seed to be planted was purchased on or before March 12, 2007. On May 3,
2007, the Court issued a permanent injunction enjoining all future plantings of Roundup Ready®
Alfalfa until after an environmental impact study can be completed and a deregulation petition is
approved. Roundup Ready® Alfalfa planted before March 30, 2007 may be grown, harvested and sold to
the extent certain court-ordered cleaning and handling conditions are satisfied. In January 2008,
the USDA filed a notice of intent to file an Environmental Impact Study (the EIS). Despite delays
in the completion of the draft EIS, the Company anticipates that the USDA will issue its EIS in
early 2010. Although the Company believes the outcome of the EIS will be favorable, which would
allow for the reintroduction of the product into the market in 2010, there are approximately $3.1
million of purchase commitments with seed producers over the next year and $33.4 million of
inventory as of September 30, 2009, which could negatively impact future earnings if the results of
the study are unfavorable or delayed.
In a letter dated January 18, 2001, the Company was identified by the United States
Environmental Protection Agency (EPA) as a potentially responsible party in connection with
hazardous substances and wastes at the Hudson Refinery Superfund Site in Cushing, Oklahoma. The
letter invited the Company to enter into negotiations with the EPA for the performance of a
remedial investigation and feasibility study at the Site and also demanded that the Company
reimburse the EPA approximately $8.9 million for removal costs already incurred at the Site. In
March 2001, the Company responded to the EPA denying any responsibility with respect to the costs
incurred for the remediation expenses incurred through that date. On February 25, 2008, the
Company received a Special Notice Letter (Letter) from the EPA inviting the Company to enter into
negotiations with the EPA to perform selected remedial action for remaining contamination and to
resolve the Companys potential liability for the Site. In the Letter, the EPA claimed that it has
incurred approximately $21.0 million in response costs at the Site through October 31, 2007 and is
seeking reimbursement of these costs. The EPA has also stated that the estimated cost of the
selected remedial action for remaining contamination is $9.6 million. The Company maintains that
the costs incurred by the EPA were the direct result of damage caused by owners subsequent to the
Company, including negligent salvage activities and lack of maintenance. On January 6, 2009, the
EPA issued a Unilateral Administrative Order (UAO) directing the Company to perform remedial
design and remedial action (RD/RA) at the Site. The Company filed its Notice of Intent to Comply
with the UAO on February 10, 2009. On April 20, 2009, the EPA issued its authorization to proceed
with RD/RA activities. In addition, the Company is analyzing the amount and extent of its
insurance coverage that may be available to further mitigate its ultimate exposure. At the present
time, the Companys request for coverage has been denied. The Company initiated litigation against
two carriers on February 18, 2009. As of September 30, 2009, based on the most recent facts and
circumstances available to the Company, an $8.9 million environmental reserve recorded in 2008
remained in the Companys consolidated financial statements.
On October 27, 2008, the Office of the Attorney General of the State of Florida issued Civil
Investigative Demands (CIDs) to MoArk and its wholly owned subsidiary, Norco Ranch, Inc.
(Norco). The CIDs seek documents and information relating to the production and sale of eggs and
egg products. MoArk and Norco are cooperating with the Office of the Attorney General of the State
of Florida. We cannot predict what, if any, impact this inquiry and any results from such inquiry
could have on the future financial position or results of operations of MoArk, Norco or the
Company.
Between September 2008 and January 2009, a total of twenty-two related class action lawsuits
were filed against a number of producers of eggs and egg products in three different jurisdictions
alleging violations of antitrust laws. MoArk was named as a defendant in twenty-one of the cases.
Norco Ranch, Inc., was named as a defendant in thirteen of the cases. The Company was named as a
defendant in seven cases. The cases have been consolidated for pretrial proceedings in the
District Court for the Eastern District of Pennsylvania, and two separate consolidated amended
class action complaints have been filed, which supersede the earlier filed complaints: one on
behalf of those persons who purchased eggs or egg products directly from defendants, and the second
on behalf of indirect purchasers (i.e. persons who purchased eggs or egg products from
defendants customers). The consolidated amended complaints allege concerted action by producers
of shell eggs to restrict output and thereby increase the price of shell eggs and egg products.
The Plaintiffs in these suits seek unspecified damages and injunctive relief on behalf of all
purchasers of eggs and egg products, as well as attorneys fees and costs. MoArk, Norco and the
Company deny the allegations set forth in the complaints. The Company cannot predict what, if any,
impact these lawsuits could have on the future financial position or results of operations of
MoArk, Norco, or the Company.
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Item 1A. Risk Factors
For a discussion of risk factors that may materially affect our estimates and results, please
see the risk factors contained in our Form 10-K for the year ended December 31, 2008, which can be
found on the Securities and Exchange Commissions website (www.sec.gov). Set forth below is a
summary of the Companys material risk factors:
| COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS. | ||
| THE CURRENT ECONOMIC DOWNTURN COULD ADVERSELY AFFECT THE COMPANYS BUSINESS AND FINANCIAL RESULTS. | ||
| THE CURRENT CREDIT CRISIS COULD NEGATIVELY AFFECT THE OPERATIONS OF OUR SUPPLIERS AND CUSTOMERS. | ||
| OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR MARGINS, PARTICULARLY THOSE RELATED TO OUR SALES OF ROUNDUP READY® ALFALFA. | ||
| THE GEOGRAPHIC SHIFT IN DAIRY PRODUCTION HAS DECREASED SALES AND MARGINS AND COULD CONTINUE TO NEGATIVELY IMPACT OUR SALES AND MARGINS. | ||
| CURRENT AND THREATENED LITIGATION COULD INCREASE OUR EXPENSES, REDUCE OUR PROFITABILITY, AND, IN SOME CASES, ADVERSELY AFFECT OUR BUSINESS REPUTATION. | ||
| CHANGES IN CONSUMER PREFERENCES AND DISTRIBUTION CHANNELS COULD DECREASE OUR DAIRY FOODS REVENUES AND CASH FLOWS. | ||
| OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY WEATHER CONDITIONS. | ||
| INCREASED ENERGY AND GAS COSTS COULD INCREASE OUR EXPENSES AND REDUCE OUR PROFITABILTIY. | ||
| OUTBREAKS OF DISEASE CAN REDUCE OUR NET SALES AND OPERATING MARGINS. | ||
| CHANGES IN THE MARKET PRICES OF THE COMMODITIES THAT WE USE AS INPUTS AS WELL AS THE PRODUCTS WE MARKET MAY CAUSE OUR MARGINS TO DECLINE AND REDUCE THE LIKELIHOOD OF RECEIVING DIVIDENDS FROM OUR JOINT VENTURES. | ||
| WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS AND TO CONTROL THE JOINT VENTURE ARE LIMITED. | ||
| CERTAIN OF OUR BUSINESSES MAY BE ADVERSELY AFFECTED BY OUR DEPENDENCE UPON OUR SUPPLIERS. | ||
| THE MANNER IN WHICH WE PAY FOR CERTAIN OF OUR INPUTS AND OTHER PRODUCTS THAT WE DISTRIBUTE EXPOSES US TO SUPPLIER-SPECIFIC RISK. | ||
| INCREASED FINANCIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER OUR DEBT FACILITIES AND TO OPERATE OUR BUSINESSES. | ||
| SERVICING OUR INDEBTEDNESS REQUIRES A SIGNIFICANT AMOUNT OF CASH, AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. | ||
| IF CREDITORS OF OUR SUBSIDIARIES AND JOINT VENTURES MAKE CLAIMS WITH RESPECT TO THE ASSETS AND EARNINGS OF THESE COMPANIES, SUFFICIENT FUNDS MAY NOT BE AVAILABLE TO REPAY OUR INDEBTEDNESS AND WE MAY NOT RECEIVE THE CASH WE EXPECT FROM INTERCOMPANY TRANSFERS. | ||
| THE COLLATERAL PLEDGED IN SUPPORT OF OUR DEBT OBLIGATIONS MAY NOT BE VALUABLE ENOUGH TO SATISFY ALL THE BORROWINGS SECURED BY THE COLLATERAL. |
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| 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. | ||
| 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. | ||
| A CHANGE IN THE ASSUMPTIONS USED TO VALUE OUR REPORTING UNITS OR OUR INDEFINITE-LIVED INTANGIBLE ASSETS COULD NEGATIVELY AFFECT OUR CONSOLIDATED RESULTS OF OPERATIONS AND NET WORTH. | ||
| 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. | ||
| STRIKES 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. |
Item 5. Other Information
Item 6. Exhibits
(a) | Exhibits |
EXHIBIT | DESCRIPTION | |
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.* |
* | Filed electronically herewith |
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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 November, 2009.
LAND OLAKES, INC. | ||||
By | /s/ Daniel Knutson | |||
Daniel E. Knutson | ||||
Senior Vice President and Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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