FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
May 31, 1994 Number 2-67985
FARMLAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Kansas 44-0209330
(State of Incorporation) (I.R.S. Employer Identification No.)
3315 North Oak Trafficway, Kansas City, Missouri
(Address of principal executive offices)
64116
(Zip Code)
816-459-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes {X} No { }
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
May 31 August 31
1994 1993
(Amounts in Thousands)
CURRENT ASSETS
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . $ 7,000 $ 28,373
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 438,537 320,980
Inventories (note 2) . . . . . . . . . . . . . . . . . . . . . . . 510,242 496,690
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 11,990 4,610
Other current assets . . . . . . . . . . . . . . . . . . . . . . . 99,971 64,747
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,067,740 $ 915,400
NET PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . $ 499,203 $ 504,378
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 126,562 $ 116,891
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,873,542 $ 1,719,981
. . . . . . . . . . . . . . . . . . . . . . . . . . . . =============== ===============
<FN>
See Accompanying notes to condensed consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
May 31 August 31
1994 1993
---------- -----------
(Amounts in Thousands)
CURRENT LIABILITIES
Accounts and notes payable . . . . . . . . . . . . . . . . . . . . $ 408,664 $ 504,497
Current maturities of long-term debt . . . . . . . . . . . . . . . 198,383 31,947
Customers' advances on product purchases . . . . . . . . . . . . . 17,034 11,586
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 175,735 106,851
. . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- --------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . $ 799,816 $ 654,881
. . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- --------------
LONG-TERM DEBT (excluding current maturities) . . . . . . . . . . . . . . $ 459,116 $ 485,861
. . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- --------------
DEFERRED INCOME TAXES (note 1) . . . . . . . . . . . . . . . . . . . . . $ 3,402 $ 2,169
. . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- --------------
MINORITY OWNERS' EQUITY IN SUBSIDIARIES . . . . . . . . . . . . . . . . . $ 14,457 $ 15,363
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
INCOME BEFORE INCOME TAXES, PATRONAGE REFUNDS AND
APPROPRIATION FOR EARNED SURPLUS (note 1) . . . . . . . . . . . . . $ 43,687 $ -0-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
CAPITAL SHARES AND EQUITIES
Common shares, $25 par value - Authorized 50,000,000 shares . . . . $ 373,451 $ 379,996
Other equities . . . . . . . . . . . . . . . . . . . . . . . . . . 179,613 181,711
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
TOTAL CAPITAL SHARES AND EQUITIES . . . . . . . . . . . . . . . . . . . . $ 553,064 $ 561,707
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
TOTAL LIABILITIES AND EQUITIES . . . . . . . . . . . . . . . . . . . . . $ 1,873,542 $ 1,719,981
. . . . . . . . . . . . . . . . . . . . . . . . . . . . =============== ================
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
May 31 May 31
1994 1993
(Amounts in Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,981,747 $ 3,360,033
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,700,939 3,141,330
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 280,808 $ 218,703
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Selling, general & administrative expenses . . . . . . . . . . . . . . . $ 218,372 $ 179,704
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Other income (deductions):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . $ (38,310) $ (25,097)
Operations of joint ventures . . . . . . . . . . . . . . . . . . . 4,568 (10,147)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,037 7,881
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Total other income (deductions) . . . . . . . . . . . . . . . . . . . . . $ (23,705) $ (27,363)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Income before income taxes, minority owners' interest
and patronage refunds (note 1) . . . . . . . . . . . . . . . . . . $ 38,731 $ 11,636
Minority owners' interest in net (income) loss of subsidiaries . . . . . $ 4,956 $ (636)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Income before income taxes and patronage refunds (note 1) . . . . . . . . $ 43,687 $ 11,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . =============== ==============
<FN>
See Accompanying notes to condensed consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
May 31 May 31
1994 1993
(Amounts in Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,980,844 $ 1,444,526
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,859,360 1,343,788
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,484 $ 100,738
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Selling, general & administrative expenses . . . . . . . . . . . . . . . $ 83,146 $ 57,177
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Other income (deductions):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . $ (11,199) $ (8,167)
Operations of joint ventures . . . . . . . . . . . . . . . . . . . 5,474 (3,564)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,377 4,060
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Total other income (deductions) . . . . . . . . . . . . . . . . . . . . . $ (2,348) $ (7,671)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Income before income taxes, minority owners' interest
and patronage refunds (note 1) . . . . . . . . . . . . . . . . . . $ 35,990 $ 35,890
Minority owners' interest in net (income) loss of subsidiaries . . . . . $ 1,504 $ (636)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Income before income taxes and patronage refunds (note 1) . . . . . . . . $ 37,494 $ 35,254
. . . . . . . . . . . . . . . . . . . . . . . . . . . . =============== ==============
<FN>
See Accompanying notes to condensed consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
May 31 May 31
1994 1993
-------------- --------------
(Amounts in Thousands)
Cash flows from operating activities:
Income before income taxes and patronage refunds . . . . . . . . . $ 43,687 $ 11,000
Adjustments to reconcile income before income taxes and
patronage refunds to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 49,591 40,827
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (8,081) (1,897)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (54,617) (88,662)
Inventories . . . . . . . . . . . . . . . . . . . . . . . 23,380 (64,735)
Other assets . . . . . . . . . . . . . . . . . . . . . . (39,007) (27,327)
Accounts payable . . . . . . . . . . . . . . . . . . . . 54,916 55,303
Advances on product purchases . . . . . . . . . . . . . . 5,448 3,649
Accrued interest and other liabilities . . . . . . . . . 46,146 2,043
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Net cash provided by (used in) operating activities . . . . . . . . . . . $ 121,463 $ (69,799)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Cash flows from investing activities:
Advances to borrowers by finance companies . . . . . . . . . . . . $ -0- $ (490,677)
Collections from borrowers by finance companies . . . . . . . . . . -0- 464,321
Proceeds from disposal of investments and notes receivable . . . . 27,056 8,740
Acquisition of investments and notes receivable . . . . . . . . . . (14,935) (20,309)
Acquisition of businesses (note 4) . . . . . . . . . . . . . . . . (33,251) (10,500)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (47,782) (78,845)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 14,399 11,796
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . $ (54,513) $ (115,474)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Cash flows from financing activities:
Net decrease of demand loan certificates . . . . . . . . . . . . . $ (1,484) $ (13,477)
Proceeds from bank loans and notes payable . . . . . . . . . . . . 1,183,819 696,225
Payments on bank loans and notes payable . . . . . . . . . . . . . (1,287,651) (572,194)
Proceeds from issuance of subordinated debt certificates . . . . . 43,868 59,562
Payments for redemption of subordinated debt certificates . . . . . (29,026) (13,916)
Increase of checks and drafts outstanding . . . . . . . . . . . . . -0- 25,439
Payments for redemption of equities . . . . . . . . . . . . . . . . (158) (13,489)
Payments of patronage refunds and dividends . . . . . . . . . . . . -0- (17,946)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,309 330
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Net cash provided by (used in) financing activities . . . . . . . . . . . $ (88,323) $ 150,534
. . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------- --------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . $ (21,373) $ (34,739)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 28,373 34,739
. . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 7,000 $ -0-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . =============== ===============
<FN>
See accompanying notes to condensed consolidated financial statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL STATEMENTS
The information included in these condensed consolidated financial
statements reflects all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the results for the interim periods presented. Certain
reclassifications have been made to the condensed consolidated statements of
operations of the prior year to conform with the current year presentation.
In accordance with the bylaws of Farmland Industries, Inc. ("Farmland") and
its cooperative subsidiaries, patronage refunds are apportioned and distributed
or patronage losses are apportioned at the end of each fiscal year. As this
apportionment is determined only at the end of each fiscal year, and since the
provision for income taxes, dividends, and the resultant amount of net income
(loss) transferred to surplus are dependent upon the determination of the amount
of the patronage refund or patronage loss, Farmland Industries, Inc. and
subsidiaries ("the Company") has historically made no provisions for income
taxes or patronage refunds in its interim financial statements. Therefore, the
amount of interim income before income taxes and patronage refunds has been
reflected as a separate item in the accompanying May 31, 1994 condensed
consolidated balance sheet.
(2) INVENTORIES
Major components of inventories at May 31, 1994, and August 31, 1993, are as
follows:
May 31 August 31
1994 1993
(Amounts in Thousands)
Finished and in-process products . . . . . . . . . . . $ 285,521 $ 285,947
Materials . . . . . . . . . . . . . . . . . . . . . . 41,888 43,857
Supplies . . . . . . . . . . . . . . . . . . . . . . . 39,612 41,388
Beef . . . . . . . . . . . . . . . . . . . . . . . . 23,064 27,754
Grain . . . . . . . . . . . . . . . . . . . . . . . . 110,152 91,990
. . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
$ 500,237 $ 490,936
LIFO adjustment . . . . . . . . . . . . . . . . . . . 10,005 5,754
. . . . . . . . . . . . . . . . . . . . . . . . --------------- --------------
$ 510,242 $ 496,690
=============== ===============
All inventories, other than supplies, grain and certain beef and petroleum
inventories, are valued at the lower of first-in, first-out (FIFO) cost or
market. Supplies are valued at cost. The Company follows a policy of hedging
its grain inventory and transactions. Grain inventories are valued at market
adjusted for the net unrealized gains or losses on open grain contracts. Crude
oil, refined petroleum products, beef and beef by-products are valued at the
lower of last-in, first-out (LIFO) cost or market. In applying the lower of cost
or market valuation method in the case of petroleum LIFO inventory, the general
practice is modified to conform to the integral view of interim financial
statements. Accordingly, a seasonal market value decline below cost of LIFO
inventories, at an interim date, which is reasonably expected to be restored by
year-end, is not recognized in interim results of operations since no loss is
expected to be incurred in the annual period. At May 31, 1994, the carrying
value of petroleum inventories stated under the LIFO method was $88,432,000.
This exceeded the market value of such inventory by $564,000. However, based on
historical prices of energy products and seasonal market price variations, the
market value decline below cost is expected to be a temporary seasonal price
fluctuation.
Had the lower of first-in, first-out (FIFO) cost or market been used to
value these petroleum products, inventories at May 31, 1994 would have been
lower by $10,005,000. The LIFO valuation method had the effect of increasing
income before income taxes and patronage for the nine months ended May 31, 1994
and 1993 by $4,251,000 and $5,901,000, respectively and had the effect of
decreasing income before income taxes and patronage refunds for the three months
ended May 31, 1994 and 1993 by $9,265,000 and $2,414,000, respectively.
The carrying value of beef inventories stated under the LIFO method was
$20,712,000 at May 31, 1994. The LIFO method of accounting for beef inventories
had no effect on the carrying value of inventories or on the income reported for
the three and nine months ended May 31, 1994 and 1993, because market value of
these inventories was lower than LIFO or FIFO cost.
(3) CONTINGENCIES
On July 28, 1983, Farmland sold the stock of Terra Resources, Inc.
("Terra"), a wholly-owned subsidiary engaged in oil and gas exploration and
production operations, and exited its oil and gas exploration and production
activities. The gain from the sale of Terra amounted to $237,200,000 for tax
reporting purposes. During 1983, and prior to the sale of the Terra stock,
Farmland received certain distributions from Terra totaling $24,800,000. For tax
purposes, Farmland claimed intercorporate dividends-received deductions for the
entire amount of such distributions.
On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory
notice to Farmland asserting deficiencies in federal income taxes (exclusive of
statutory interest thereon) in the aggregate amount of $70,775,000. The
asserted deficiencies relate primarily to the Company's tax treatment of the
sale of the Terra stock and the distributions received from Terra prior to the
sale. The IRS asserts that Farmland incorrectly treated the Terra sale gain as
income against which certain patronage-sourced operating losses could be offset,
and that, as a nonexempt cooperative, Farmland was not entitled to an
intercorporate dividends-received deduction in respect of the 1983 distribution
by Terra. It further asserts that Farmland incorrectly characterized gains for
tax purposes aggregating approximately $14,600,000, and a loss of approximately
$2,300,000, from the disposition of certain other assets. On June 11, 1993,
Farmland filed a petition in the United States Tax Court contesting the asserted
deficiencies in their entirety. March 6, 1995 is the date set for trial.
If the IRS ultimately prevails on all of the adjustments asserted in the
statutory notice, Farmland would have additional federal and state income tax
liabilities aggregating approximately $85,800,000 plus accumulating statutory
interest thereon through May 31, 1994, of approximately $145,000,000. In
addition, such adjustments would affect the computation of Farmland's taxable
income for its 1989 tax year and, as a result, could increase Farmland's federal
and state income taxes for that year by approximately $5,000,000 plus applicable
statutory interest thereon.
No provision has been made in the consolidated financial statements for
federal or state income taxes (or interest thereon) in respect of the IRS claims
described above. Farmland believes that it has meritorious positions with
respect to all of these claims and will continue to vigorously pursue their
favorable resolution through the pending litigation.
In the opinion of Bryan Cave, Farmland's special tax counsel, it is more
likely than not that the courts will ultimately conclude that (i) Farmland's
treatment of the Terra sale gain was substantially, if not entirely, correct;
and (ii) Farmland properly claimed a dividends-received deduction in respect of
the 1983 distributions which it received from Terra prior to the sale of the
Terra stock. Counsel has further advised, however, that none of the issues
involved in these disputes is free from doubt, and that there can be no
assurance that the courts will ultimately rule in favor of Farmland on any of
these issues.
Should the IRS ultimately prevail on all of its asserted claims, the
claimed federal and state income taxes as well as accrued interest would become
immediately due and payable, and would be charged to current operations. In
such case, the Company would be required to renegotiate its agreements with
banks to maintain compliance with various provisions of such agreements,
including working capital, minimum net worth and funded indebtedness
provisions. However, no assurance can be given that such renegotiation would be
successful. Alternatives could include other financing arrangements or the
possible sale of assets.
(4) ACQUISITION OF BUSINESSES
In December 1993, Farmland acquired 100% ownership of seven international
grain trading companies (collectively referred to as "Tradigrain"), for
approximately $31,028,000 in cash and in October 1993, Farmland acquired
approximately 53% of the common stock of National Carriers, Inc. in Liberal,
Kansas for approximately $2,223,000 in cash.
The purchase method of accounting has been used to account for these
acquisitions. The results of operations of the acquired enterprises have been
included in the accompanying consolidated statements of operation from the dates
of acquisition. The pro forma effects of these acquisitions on the accompanying
consolidated financial statements are not significant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Farmland Industries, Inc. ("Farmland") is a regional farm supply and
marketing cooperative. Farmland and subsidiaries (the"Company") conducts
business primarily in two operating areas. On the input side of the
agricultural industry, the Company operates as a farm supply cooperative. On
the output side of the agricultural industry, the Company operates as a
processing and marketing cooperative.
Farm supply operations consists of three product divisions--petroleum, crop
production and feed. Products of the petroleum division are principally refined
fuels, propane, by-products of petroleum refining and a complete line of car,
truck and tractor tires and accessories. Principal products of the crop
production division are nitrogen, phosphate and potash based plant nutrients and
a complete line of plant protection products. Products of the feed division
include swine, beef, poultry, mineral and specialty feeds, feed ingredients and
animal health products. The Company distributes farm supply products at
wholesale. Its customers are primarily local farm cooperative associations
which are members and owners of Farmland. These local cooperatives distribute
products primarily to farmers and ranchers who utilize the products in the
production of farm crops and livestock.
Cooperative marketing operations include the storage and marketing of
grain, processing pork and beef, and marketing fresh pork, processed pork, fresh
beef and boxed beef. Hogs and grain are supplied to the Company primarily by
members. Cattle are purchased from producers in the proximity of beef plants at
Liberal and Dodge City, Kansas. The Company has made arrangements for beef
producers to become members and supply cattle to the Company on a patronage
basis.
Geographically, the Company's markets are mid-western states which comprise
the corn belt and the wheat belt. A substantial portion of the Company's supply
and marketing products are produced in facilities owned by the Company or
operated by the Company under long-term lease arrangements. No material part of
the business of any segment of the Company is dependent on a single customer or
a few customers.
The Company's revenues depend to a large extent on conditions in
agriculture and may be volatile due to factors beyond the Company's control,
such as weather, crop failures, federal agricultural programs, production
efficiencies, and direct imports or exports. In addition, global variables
which affect supply, demand and price of crude oil and refined fuels impact the
Company's petroleum operations. Management cannot determine the extent to which
future operations of the Company may be impacted by these factors. The
Company's cash flow and net income may be volatile as conditions affecting
agriculture and markets for the Company's products change.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company maintains two primary sources for debt capital: a continuous
public offering of its debt securities and bank lines of credit.
The Company's debt securities are offered through a wholly-owned
broker/dealer subsidiary on a best-efforts basis. The types of securities
offered include certificates payable on demand and subordinated debt
certificates which mature in five, ten and twenty years. The total amount of
such debt outstanding and the flow of funds to, or from, the Company as a result
of this public offering are influenced by the rate of interest which Farmland
establishes for each type of debt certificate offered and by options of Farmland
to call for redemption certain of its outstanding debt certificates. During the
nine months ended May 31, 1994, the outstanding balance of demand loan and
subordinated debt certificates increased $13,358,000.
In May 1994, Farmland entered into a $650 million syndicated credit
facility provided by The National Bank for Cooperatives, Rabobank Nederland and
other domestic and international banking institutions. Under this syndicated
loan agreement, short-term borrowings of up to $450 million are available to the
Company to finance seasonal operating and inventory levels and to support
letters of credit issued by participating banks on behalf of Farmland. In
addition, revolving term loans of up to $200 million are available for facility
additions. At May 31, 1994, $186.0 million was borrowed under the short-term
credit line, $25.8 million was being utilized for support of letters of credit
issues on behalf of Farmland by participating banks and $50.0 million was
borrowed under revolving term loans.
The syndicated credit facility contains provisions which require the
Company to maintain consolidated working capital of not less than $150 million
and to maintain consolidated net worth of not less than $475 million. In
addition, the agreement requires the Company to maintain funded indebtedness and
senior funded indebtedness of not more than 52% and 43% of capitalization,
respectively. All computations are based on consolidated financial data
adjusted to exclude nonrecourse subsidiaries as defined in the credit agreement.
Computed in accordance with the loan agreements, at May 31, 1994, working
capital was $192.5 million, net worth was $596.8 million and funded indebtedness
and senior funded indebtedness were 43.7% and 19.5% of capitalization,
respectively.
In addition to the syndicated credit facility, Farmland maintains other
borrowing agreements. At May 31, 1994, $42.0 million was borrowed under such
agreements. Financial covenants of these arrangements are not more restrictive
than Farmland's syndicated credit facility.
Management considers these arrangements for debt capital to be adequate for
the Company's present operating and capital plans. However, alternative
financing arrangements are continuously evaluated.
In December 1993, Farmland acquired 100% ownership of seven international
grain brokerage companies (collectively referred to as "Tradigrain").
Tradigrain has borrowing agreements with various international banks which
provide financing and letters of credit to support current international grain
trading transactions. Obligations of Tradigrain under these loan agreements are
nonrecourse to the Company.
National Beef Packing Company L.P. ("NBPC"), 58%-owned by Farmland,
completed a restructuring of its bank credit facility in May 1994. Borrowings
covered by this loan agreement are nonrecourse to Farmland or its other
affiliates. Repayments to Farmland of the subordinated notes and distributions
to NBPC's partners are restricted under the bank credit agreement to prior
payment in full to the bank of all principal of and interest on the nonrecourse
debt. At May 31, 1994, Farmland had advanced $38.2 million to NBPC.
Leveraged leasing has been utilized to finance railcars, and a substantial
portion of plant nutrients production equipment. Under the most restrictive
covenants of its leases, the Company has agreed to maintain working capital of
at least $75 million, consolidated funded indebtedness not greater than 65% of
consolidated capitalization, and consolidated senior funded indebtedness not
greater than 50% of consolidated capitalization.
Major uses of cash during the nine months ended May 31, 1994 include
payments of $103.8 million on bank loans and other notes, $47.8 million for
capital expenditures, $33.3 million for acquisition of businesses and $14.9
million for acquisition of investments. Major sources of cash include $121.5
million from operations, $13.4 million from an increase in the balance of demand
loan and subordinated debt certificates outstanding, $41.5 million from
dispositions of investments, a dragline and other assets, and $21.4 million
provided from the 1993 year end cash balance.
The Internal Revenue Service issued a statutory notice to Farmland
asserting significant deficiencies in federal income taxes and statutory
interest thereon. Farmland filed a petition in the United States Tax Court
contesting the asserted deficiencies in their entirety. See note 3 of the notes
to the condensed consolidated financial statements.
RESULTS OF OPERATIONS
Operating results for any quarter are not necessarily indicative of the
results expected for the full year. The principal businesses of the Company are
highly seasonal. The majority of sales of farm supply products occurs in the
spring months, revenues in the beef business and in grain marketing historically
are concentrated in the summer months and summer is the lowest sales period for
pork products. In view of the seasonality of the Company's businesses, it must
be emphasized that the results for the three months and nine months ended May
31, 1994 should not be annualized to project a full year's results.
NINE MONTHS ENDED MAY 31, 1994 COMPARED WITH NINE MONTHS ENDED MAY 31, 1993
SALES
Sales for the nine months ended May 31, 1994 increased $1.62 billion or
48.3% compared with the corresponding period of the prior year. The increase
includes $1.39 billion higher sales of agricultural output products, $201.1
million higher sales of farm production input products and $29.8 million higher
sales of other products and services.
Sales of output products increased primarily because of business
acquisitions. Food marketing sales increased $903.9 million principally because
beef operations, acquired on April 15, 1993, had sales of $143.2 million in the
one and one-half month period ended May 31, 1993, and sales of $885.2 million in
the nine months ended May 31, 1994. Sales of pork products increased $162
million primarily due to the acquisition of a plant at Monmouth, Illinois in
February 1993. In addition, grain sales increased $486.9 million primarily due
to higher unit sales of corn and milo.
Sales of input products increased due to $199.4 million higher sales of
crop production products and $48.8 million higher sales of formula feed and feed
ingredients. Petroleum sales decreased $47.1 million.
Sales of crop production products increased because unit sales of plant
nutrients increased approximately 18% and because the average price of these
products increased approximately 10%. Feed sales increased because unit sales
of formula feeds and ingredients increased approximately 12% and 11%,
respectively. In addition, feed ingredients prices increased 7%.
Sales of petroleum products decreased mostly because of $11.9 million lower
sales of propane, $6.2 million lower sales of natural gas liquids ("NGL's") and
$30.2 million lower sales of refined fuels. Propane sales decreased principally
because grain drying activities were less extensive in the current year than in
the prior year reflecting the decline in the amount of grain harvested. Sales
of NGL's decreased because these products were consumed in 1994 in processing
activities at the refinery. During the prior year, production at the refinery
was suspended approximately 40 days for scheduled maintenance and during the
maintenance period NGL's were sold. Refined fuel sales decreased because the
average selling price was 12% lower than in the prior year. Unit sales of
refined fuels exceeded the prior year by approximately 6%.
INCOME BEFORE INCOME TAXES AND PATRONAGE REFUNDS
Income before income taxes and patronage refunds for the nine months ended
May 31,1994 increased $32.7 million compared with the corresponding period of
the prior year. Results in the Company's crop production and in petroleum
operations increased $38.2 million and $23.3 million, respectively. In
addition, the Company's share of net income from joint ventures engaged in plant
nutrients operations increased $17.6 million. These increases were partly
offset by a $24.6 million decrease in results from grain marketing, a $9.1
million decrease in results from food marketing and by $13.2 million higher
interest expense.
Results from petroleum operations increased $23.3 million primarily because
unit margins on diesel fuels with low levels of sulfur (required by the
Environmental Protection Agency for diesel fuel sold after September 30, 1993)
were higher than in the corresponding period of the prior year. These margins
were significantly higher immediately after the crossover to the low sulfur
level diesel. In addition, margins on other refined fuels improved because
crude oil costs decreased and because production at the Coffeyville, Kansas
refinery was substantially higher than in the prior year.
Operating profits of the crop production business in the nine months ended
May 31, 1994 increased $38.2 million compared with the corresponding period of
the prior year. This increase resulted from higher unit sales and unit margins
which increased in response to stronger market conditions. Demand for plant
nutrients in 1994 was stronger than in 1993 due to an increase in the number of
acres under cultivation, principally corn acreage (corn acreage harvested was
relatively low in 1993 due to wet weather and the resulting floods). In
addition, demand for plant nutrients was stimulated by favorable weather
conditions during the fall and spring application seasons. The increased demand
for plant nutrients translated into higher unit sales and margins and
contributed significantly to the Company's increased operating results for the
nine months ended May 31, 1994.
The grain marketing business had a loss of $24.4 million in the nine months
ended May 31, 1994 compared with an operating profit of $.2 million in the
corresponding period of the prior year. The loss is attributable to negative
unit margins on domestic and international grain transactions and higher
domestic operating expenses.
Operating profit of the food marketing business in the nine months ended
May 31, 1994 decreased $9.1 million compared with the corresponding period of
the prior year. The Company's beef operations, acquired on April, 15, 1993, had
an operating loss of $8.2 million in the current nine-month period compared with
an operating profit of $2.5 million in the one and one-half month period ending
May 31, 1993. The loss in the current nine months was primarily a result of
intense competition in the beef industry and unusually high cattle prices.
Operating profit from pork processing and marketing in the nine months
ended May 31, 1994 increased $1.6 million compared with the corresponding period
of the previous year. This increase was principally due to higher unit sales
mostly offset by $23.7 million higher selling, general and administrative
expenses. These expenses increased primarily because operations of the
Monmouth, Illinois pork plant were included in the Company's operations
for the full nine-month period ended May 31, 1994. This plant was
acquired in February 1993.
Selling, general and administrative expenses in the nine months ended May
31, 1994 increased $38.6 million compared with the corresponding period of the
prior year. Approximately, $23.7 million of the increase is in pork marketing,
$4.1 million of the increase is in grain marketing, and $10.8 million is a
result of business acquisitions, principally Tradigrain, NBPC and National
Carriers, Inc.
Interest expense increased primarily due to an increase of the level of
borrowed funds.
THREE MONTHS ENDED MAY 31, 1994 COMPARED WITH THE THREE MONTHS ENDED MAY 31,
1993.
The changes in sales and income before income taxes and patronage refunds
for the three months ended May 31, 1994, compared to the corresponding period of
the prior year, are primarily as discussed in the nine months comparison, except
for operating profit in the petroleum business. Operating profit in the
petroleum business decreased in the three months ended May 31, 1994 compared
with the corresponding period of 1993 due to higher crude oil costs.
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal year 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." Under
SFAS 106, the expected costs of providing such benefits are accrued during the
active service period of the employee rather than accounting for such costs on a
pay-as-you-go (cash) basis. The effect of implementation of SFAS 106, including
amortization (over 20 years) of previously unrecognized costs related to the
service period already rendered (the transition obligation) was insignificant.
In the first quarter of fiscal year 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) 109,
"Accounting for Income Taxes." Under SFAS 109, deferred tax assets and
liabilities are determined based upon the tax effect of differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
SFAS 109 generally allows recognition of deferred tax assets if future
realization of the tax benefit is more likely than not. The effect of
implementation of SFAS 109 at September 1, 1993 was insignificant.
Statement of Financial Accounting Standards (SFAS) 112, "Employer's
Accounting for Postemployment Benefits", was issued by the Financial Accounting
Standards Board (FASB) in November 1992 and is effective for fiscal years
beginning after December 15, 1993 (the Company's 1995 fiscal year). SFAS 112
establishes standards of accounting and reporting for the estimated cost of
benefits provided to former or inactive employees. Management expects that the
adoption of SFAS 112 will not have a significant impact on the Company's
consolidated financial statements.
Statement of Financial Accounting Standards (SFAS) 115, "Accounting for
Certain Investments in Debt and Equity Securities," was issued by the Financial
Accounting Standards Board (FASB) in May 1993 and is effective for fiscal years
beginning after December 15, 1993 (the Company's 1995 fiscal year). SFAS 115
expands the use of fair value accounting and the reporting for certain
investments in debt and equity securities. Management expects the adoption of
SFAS 115 will not have a significant impact on the Company's consolidated
financial statements.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed below are filed as part of Form 10-Q for quarter ended
May 31, 1994.
Exhibit No. Exhibit
Instruments Defining Rights of Owners of Indebtedness not Registered:
4.B(1) Credit Agreement for Farmland Industries, Inc., dated May 19, 1994.
4.B(2) List identifying contents of all omitted exhibits, schedules, and
other documents.
(b) No reports on Form 8-K were filed during the quarter ended May 31, 1994.
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 hereunto duly authorized.
FARMLAND INDUSTRIES, INC.
(Registrant)
By: /s/ JOHN F. BERARDI
John F. Berardi
Executive Vice President
and Chief Financial Officer
Date: July 14, 1994