FORM 10-Q/A
(Amendment No. 2)
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
November 30, 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
November 30
1994 August 31
Restated 1994
-------------- ---------------
(Amounts in Thousands)
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ -0- $ 44,084
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 380,854 394,906
Inventories (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 590,826 538,314
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10,769 15,159
Other current assets . . . . . . . . . . . . . . . . . . . . . . . 95,060 103,980
-------------- ---------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . $ 1,077,509 $ 1,096,443
-------------- ---------------
Investments and Long-Term Receivables . . . . . . . . . . . . . . . . . $ 197,094 $ 189,601
-------------- ---------------
Property, Plant and Equipment:
Property, plant and equipment, at cost . . . . . . . . . . . . . . $ 1,218,935 $ 1,202,159
Less accumulated depreciation and amortization . . . . . . . . . . 711,943 700,869
-------------- ---------------
Net Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . $ 506,992 $ 501,290
-------------- ---------------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,783 $ 139,297
-------------- ---------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,920,378 $ 1,926,631
============== ===============
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
November 30
1994 August 31
Restated 1994
-------------- ---------------
(Amounts in Thousands)
Current Liabilities:
Accounts and notes payable . . . . . . . . . . . . . . . . . . . . $ 442,479 $ 548,476
Current maturities of long-term debt . . . . . . . . . . . . . . . 34,943 27,840
Customers' advances on product purchases . . . . . . . . . . . . . 74,466 24,438
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 224,731 204,985
-------------- ---------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . $ 776,619 $ 805,739
-------------- ---------------
Long-Term Debt (excluding current maturities) . . . . . . . . . . . . . . $ 493,161 $ 517,806
-------------- ---------------
Deferred Income Taxes (Note 1) . . . . . . . . . . . . . . . . . . . . . $ 6,340 $ 6,340
-------------- ---------------
Minority Owners' Equity in Subsidiaries . . . . . . . . . . . . . . . . . $ 11,453 $ 11,733
Net Income (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,945 $ -0-
-------------- ---------------
Capital Shares and Equities:
Common shares, $25 par value - Authorized
50,000,000 shares . . . . . . . . . . . . . . . . . . . . . . $ 399,361 $ 363,562
Other equities . . . . . . . . . . . . . . . . . . . . . . . . . . 185,499 221,451
-------------- ---------------
Total Capital Shares and Equities . . . . . . . . . . . . . . $ 584,860 $ 585,013
-------------- ---------------
Total Liabilities and Equities . . . . . . . . . . . . . . . . . . . . . $ 1,920,378 $ 1,926,631
============== ===============
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
----------------------------------
November 30 November
1994 1993
Restated Restated
--------------- ---------------
(Amounts in Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,616,167 $ 1,473,992
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 1,481,889 1,383,764
--------------- ---------------
Gross income . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,278 $ 90,228
--------------- ---------------
Selling, general & administrative expenses . . . . . . . . . . . . $ 75,346 $ 65,905
--------------- ---------------
Other income (deductions):
Interest expense . . . . . . . . . . . . . . . . . . . . . . $ (13,443) $ (13,133)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 4,642 2,930
--------------- ---------------
Total other income (deductions) . . . . . . . . . . . . . . . . . . $ (8,801) $ (10,203)
---------------- ----------------
Income before income taxes, equity in net income (loss)
of investees and minority owners' interest in
net loss of subsidiaries . . . . . . . . . . . . . . . . . . $ 50,131 $ 14,120
Income tax (expense) (Note 1) . . . . . . . . . . . . . . . . . . . (8,768) (759)
---------------- ----------------
Income before equity in net income (loss) of investees
and minority owners' interest in
net loss of subsidiaries . . . . . . . . . . . . . . . . . . $ 41,363 $ 13,361
Equity in net income (loss) of investees (Note 4) . . . . . . . . . 6,370 (4,067)
Minority owners' interest in net loss
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 212 1,441
--------------- ---------------
Net income (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . $ 47,945 $ 10,735
=============== ===============
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
---------------------------------
November 30 November 30
1994 1993
Restated Restated
-------------- ---------------
(Amounts in Thousands)
Cash flows from operating activities:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47, 945 $ 10,735
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 16,435 16,625
Equity in (income) loss of investee . . . . . . . . . . . . . (6,370) 4,067
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (628) (1,616)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . 12,724 (15,518)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (52,512) (56,782)
Other current assets . . . . . . . . . . . . . . . . . . 14,036 (51,809)
Accounts payable . . . . . . . . . . . . . . . . . . . . (23,860) 29,795
Advances on product purchases . . . . . . . . . . . . . . 50,028 28,461
Other current liabilities . . . . . . . . . . . . . . . . 856 9,348
-------------- ---------------
Net cash provided by (used in) operating activities . . . . . . . . . . . $ 58,654 $ (26,694)
-------------- ----------------
Cash flows from investing activities:
Proceeds from disposal of investments and notes receivable . . . . $ 6,502 $ 2,829
Acquisition of investments and notes receivable . . . . . . . . . . (9,232) (10,038)
Acquisition of businesses . . . . . . . . . . . . . . . . . . . . -0- (2,223)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (20,764) (21,407)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 1,312 8,504
-------------- ---------------
Net cash provided by (used in) investing activities . . . . . . . . . . . $ (22,182) $ (22,335)
--------------- ----------------
Cash flows from financing activities:
Net increase of demand loan certificates . . . . . . . . . . . . . $ 3,768 $ 7,999
Proceeds from bank loans and notes payable . . . . . . . . . . . . 191,610 256,530
Payments on bank loans and notes payable . . . . . . . . . . . . . (300,727) (295,803)
Proceeds from issuance of subordinated debt certificates . . . . . 9,092 14,472
Payments for redemption of subordinated debt certificates . . . . . (3,433) (3,857)
Increase of checks and drafts outstanding . . . . . . . . . . . . . 57,536 40,063
Payments for redemption of equities . . . . . . . . . . . . . . . . (12,166) (16)
Payments of patronage refunds and dividends . . . . . . . . . . . . (26,236) -0-
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 1,268
-------------- ---------------
Net cash provided by (used in) financing activities . . . . . . . . . . . $ (80,556) $ 20,656
--------------- ---------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . $ (44,084) $ (28,373)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 44,084 28,373
-------------- ---------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ -0- $ -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
Unless the context requires otherwise, (i) "Farmland" or the "Company"
herein refers to Farmland Industries, Inc. and its consolidated subsidiaries,
and (ii) all references herein to "year" or "years" are to fiscal years ended
August 31.
The information included in these Condensed Consolidated Financial
Statements of Farmland 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.
In accordance with the bylaws of Farmland and its cooperative subsidiaries,
the member-sourced portion of income before income taxes is determined
annually and distributed to members of Farmland as patronage refunds.
The member-sourced portion of such income is determined on
the basis of the quantity or value of business done by Farmland during the year
with or for patrons entitled to receive patronage refunds. As this
determination is made only after the end of the fiscal year, and since the
appropriation of earned surplus is dependent on the determination of the amount
of patronage refunds, and in view of the fact that the portion of the annual
patronage refund to be paid in cash and Farmland equity (common stock,
associate member common stock or capital credits) is determined (by the
Farmland Board of Directors at its discretion) after the amount of the annual
patronage refund has been determined, Farmland makes no provision for
patronage refunds in its interim financial statements. Therefore, the amount
of net income has been reflected as a separate item in the accompanying
November 30, 1994 Condensed Consolidated Balance Sheet.
As patronage refunds are an integral part of the computation of income
taxes, the Company has historically not provided for income taxes in interim
period financial statements. However, in accordance with generally accepted
accounting principles, effective with the accompanying restated financial
statements for the three months ended November 30, 1994, the Company commenced
including a provision for estimated income taxes in its interim financial
statements. For the three months ended November 30, 1994, the Company estimated
an effective tax rate based on historic effective rates. The effect of this
change was to include an estimated income tax provision for the three months
ended November 30, 1994 of $8,768,000. The actual effective rate may be subject
to revision. Based on the effective tax rate for 1994, the Condensed
Consolidated Financial Statements for the three months ended November 30, 1993
have been restated to include an interim income tax expense
of $759,000.
(2) Inventories
Major components of inventories at November 30, 1994, and August 31, 1994,
are as follows:
November 30 August 31
1994 1994
--------------- ----------
(Amounts in Thousands)
Finished and in-process products . . . . $ 313,956 $ 286,381
Materials . . . . . . . . . . . . . . . 46,586 51,428
Supplies . . . . . . . . . . . . . . . . 41,602 39,885
Beef . . . . . . . . . . . . . . . . . 25,451 24,267
Grain . . . . . . . . . . . . . . . . . 163,231 136,353
--------------- ---------------
$ 590,826 $ 538,314
=============== ===============
Grain inventories are valued at market adjusted for the net unrealized
gains or losses on open grain contracts. Crude oil, refined petroleum
products, cattle and beef by-products are valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories are valued at the lower
of first-in, first-out (FIFO) cost or market. Supplies are valued at cost.
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 November 30, 1994, the carrying value of petroleum inventories
stated under the LIFO method was $100,654,000. This exceeded the market value
of such inventory by $18,034,000. 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 November 30, 1994 would have been
lower by $8,689,000.
The carrying value of beef inventories stated under the LIFO method was
$25,451,000 at November 30, 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 months ended November 30, 1994 because market value of
these inventories was lower than LIFO or FIFO cost.
(3) Contingencies
In July 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.
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 $70,800,000.
The asserted deficiencies relate primarily to the Company's tax treatment of
the $237,200,000 gain resulting from its sale of the stock of Terra
and the IRS's contention that Farmland incorrectly treated the Terra
sale gain as income against which certain patronage-sourced operating
losses could be offset. The statutory notice further asserts that
Farmland incorrectly characterized for tax purposes gains aggregating
approximately $14,600,000, and a loss of approximately $2,300,000,
from dispositions of certain other assets and that Farmland was not entitled to
a claimed intercorporate dividends-received deduction with respect to a
$24,800,000 distribution received in 1983 from Terra.
On June 11, 1993, Farmland filed a petition in the United States Tax Court
contesting the asserted deficiencies in their entirety. The case was tried on
June 13-15, 1995. Prior to trial, the IRS withdrew its challenge to Farmland's
claimed intercorporate dividends-received deduction and several other minor
issues were resolved. The parties will submit post-trial briefs to the court in
September and November 1995.
If the United States Tax Court decides in favor of the IRS on all
unresolved issues raised in the statutory notice, Farmland would have additional
federal and state income tax liabilities aggregating approximately $85,800,000
plus accumulating statutory interest thereon (approximately $173,400,000 before
tax benefits of the interest deduction, through June 30, 1995), or $259,200,000
in the aggregate at June 30, 1995. In addition, such a decision 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
b y approximately $5,000,000 plus applicable statutory interest thereon.
Finally, the additional federal and state income taxes and accrued interest
thereon, which would be owed based on an adverse decision, would become
immediately due and payable unless the Company appealed the decision and posted
the requisite bond to stay assessment and collection.
The liability resulting from an adverse decision would be charged to
current operations and would have a material adverse effect on the Company and
may affect its ability to pay, when due, principal and interest on the Company's
indebtedness. In order to pay any such tax claim, the Company would have to
consider new financing arrangements, including the incurrence of indebtedness
and the sale of assets. Moreover, the Company would be required to renegotiate
the Credit Agreement with its bank lenders, as well as other existing financing
agreements with certain other parties, not only to permit such new financing
arrangements, but also to cure events of default under the Credit Agreement and
certain of such other existing agreements and to maintain compliance with
various requirements of the Credit Agreement and such other existing financing
agreements, including working capital and funded indebtedness provisions, in
order to avoid default thereunder. No assurance can be given that such
financing arrangements or such renegotiation would be successfully concluded.
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.
In the opinion of Bryan Cave, Farmland's special tax counsel, it is more
likely than not that the courts will ultimately conclude that Farmland's
treatment of the Terra sale gain was substantially, if not entirely, correct.
Such counsel has further advised, however, none of the issues involved in this
dispute is free from doubt, and there can be no assurance that the courts will
ultimately rule in favor of Farmland on any of these issues.
The Company has been designated by the Environmental Protection Agency
as a potentially responsible party ("PRP") under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), at
various sites.
The Company currently is aware of probable obligations for environmental
matters at 23 properties. As of November 30, 1994, the Company has made an
environmental accrual of $8,562,000 ($8.4 million at May 31, 1995). The Company
periodically reviews and, as appropriate, revises its environmental accruals.
Based on current information and regulatory requirements, the Company believes
that the accruals established for environmental expenditures are adequate.
The Company's actual final costs of addressing certain environmental
matters are not quantifiable, and therefore have not been accrued, because
such matters are in preliminary stages and the timing, extent and costs of
various actions which governmental authorities may require are currently
unknown. Management also is aware of other environmental matters for which
there is a reasonable possibility that the Company will incur costs to
resolve. It is possible that the costs of resolution of the matters described
in this paragraph may exceed the liabilities which, in the opinion of
management, are probable and which costs are reasonably estimable at
November 30, 1994. In the opinion of management, it is reasonably possible
for such costs to be approximately an additional $29,000,000 (an additional
$24,00,000 at May 31, 1995).
At November 30, 1994, the Company was involved in two administrative
proceedings brought by Region VII of the Environmental Protection Agency
("EPA") with respect to alleged violations under the Emergency Planning and
Community Right-to-Know Act and RCRA at the Coffeyville refinery.
Specifically, the two administrative proceedings are described as follows:
(1) The Company is a party to an administrative enforcement action
brought by Region VII of the EPA which alleges violations of the
Emergency Planning and Community Right-to-Know Act and the release
reporting requirements of CERCLA at its Coffeyville, Kansas refinery.
This proceeding involves alleged violations of release reporting
requirements and seeks a civil penalty in the amount of $350,000.
(2) The Company is a party to an administrative enforcement action
brought by Region VII of the EPA which alleges violations of RCRA
at its Coffeyville, Kansas refinery. In this proceeding, the EPA
has proposed a civil penalty in the amount of approximately
$1.4 million.
Subsequently, the Company became involved in an administrative
proceeding brought by Region VII of the EPA with respect to alleged
violations under the Clean Air Act. The Company has been informed
by the U.S. Department of Justice of its intent to bring an
enforcement action alleging certain violations of the Clean Air
Act at its Coffeyville, Kansas refinery. The U.S. Department of
Justice has informed the Company that it will seek a civil penalty
of at least $1.6 million.
The Company is currently negotiating with the EPA concerning
all of these matters and believes that such negotiations may result in
compromise settlements. Absent such settlements, the Company may
contest the EPA's allegations. Accordingly, no provision has been
made in the Company's financial statements for these proposed
penalties.
See "Business Matters Invovling the Environment" contained in the Company's
Annual Report on Form 10-K, as amended by form 10-K/A (Amendment No. 1), for
the year ended August 31, 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition, Liquidity and Capital Resources
The Company has historically maintained two primary sources for debt
capital: a substantially continuous public offering of its debt securities (the
''continuous debt program'') and bank lines of credit.
The Company's debt securities issued under the continuous debt program
generally are offered on a best-efforts basis through the Company's wholly owned
broker-dealer subsidiary, Farmland Securities Company, and through American
Heartland Investments, Inc. (which is not affiliated with Farmland), and also
may be offered by selected unaffiliated broker-dealers. The types of securities
offered in the continuous debt program include certificates payable on demand
and five- and ten-year subordinated debt certificates. The total amount of such
debt outstanding and the flow of funds to, or from, the Company as a result of
the continuous debt program 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 three months ended November 30, 1994, the outstanding balance of
demand loan and subordinated debt certificates increased $9.4 million.
Farmland has a $650.0 million Credit Agreement. The Credit Agreement
provides short-term credit of up to $450.0 million to finance seasonal
operations and inventory, and revolving term credit of up to $200.0 million. At
November 30, 1994, short-term borrowings under the Credit Agreement were
$139.0 million, revolving term borrowings were $80.0 million and
$59.1 million was being utilized to support letters of credit issued on
behalf of Farmland by participating banks.
As of November 30, 1994, Farmland paid commitment fees under the
Credit Agreement of 1/8 of 1% annually on the unused portion of
the short-term commitment and 1/4 of 1% annually on the unused portion
of the revolving term commitment. In addition, Farmland must maintain
consolidated working capital of not less than $150.0 million,
consolidated net worth of not less than $475.0 million and funded
indebtedness and senior funded indebtedness of not more than 52% and 43% of
Combined Total Capitalization (as defined in the Credit Agreement),
respectively. All computations are based on consolidated financial data
adjusted to exclude nonrecourse subsidiaries (as defined in the Credit
Agreement). At November 30, 1994, Farmland was in compliance with all covenants
under the Credit Agreement. The Credit Agreement expires in May 1997.
The Company maintains other borrowing arrangements with banks and financial
institutions. Under such agreements, at November 30, 1994, $48.3 million was
borrowed and letters of credit issued by banks amounted to $2.2 million.
Financial covenants of these arrangements generally are not more restrictive
than under the Credit Agreement.
In the opinion of management, these arrangements for debt capital are
adequate for the Company's present operating and capital plans. However,
alternative financing arrangements are continuously evaluated.
National Beef Packing Company, L.P. ("NBPC"), 58%-owned by Farmland (such
interest having increased to 68% effective March 1, 1995), maintains borrowing
agreements with a group of banks which provide financing support for
its beef packing operations. Such borrowings are nonrecourse to Farmland
or Farmland's other affiliates. At November 30, 1994, $82.6 million was
available under this agreement of which $59.4 million was
borrowed and $8.5 million was utilized to support letters of credit. In
addition, NBPC has incurred certain long-term borrowings from Farmland. NBPC
has pledged certain assets to Farmland and such group of banks to support its
borrowings.
Tradigrain, which is comprised of seven international grain trading
subsidiaries of Farmland, 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 Farmland or Farmland's other affiliates.
Leveraged leasing has been utilized to finance railcars and a substantial
portion of the Company's fertilizer production equipment. Under the most
restrictive covenants of its leases, the Company has agreed to maintain working
capital of at least $75.0 million, Consolidated Funded Debt of not greater
than 65% of Consolidated Capitalization and Senior Funded Debt of not greater
than 50% of Consolidated Capitalization (all as defined in the most
restrictive lease).
As a cooperative, Farmland's member-sourced net earnings (i.e., income
from business done with or for members) are distributed to its voting members,
associate members and patrons in the form of common equity, capital credits or
cash. For this purpose, net income or loss was determined in accordance
with the requirements of federal income tax law up to 1994 and is determined
in accordance with generally accepted accounting principles in 1995 and
after. Other income is treated as "nonmember-sourced income".
Nonmember-sourced income is subject to income tax and after-tax earnings are
transferred to earned surplus. Under Farmland's bylaws, the member-sourced
income is distributed to members as patronage refunds unless the earned
surplus account, at the end of that year, is lower than 30% of the sum of the
prior year-end balance of outstanding common stock, associate member stock,
capital credits, nonmember capital and patronage refunds for reinvestment.
In such cases, member-sourced income is reduced by the lesser of 15% or an
amount required to increase the earned surplus account to the required
30%. The amount by which the member-sourced income is so reduced is treated
as nonmember-sourced income. The member-sourced income remaining is
distributed to members as patronage refunds. For the years 1992, 1993 and
1994, the earned surplus account exceeded the required amount by $49.5 million,
$3.8 million and $2.3 million, respectively.
Generally, a portion of the patronage refund is distributed in cash and
the balance (the "invested portion") is distributed in common stock, associate
member common stock or capital credits (depending on the membership status of
the recipient), or the Board of Directors may determine to distribute the
invested portion in any other form or forms of equities. The invested portion
of the patronage refund is determined annually by the Board of Directors,
but the invested portion of the patronage refund is not deductible for federal
income tax purposes when it is issued unless at least 20% of the amount of the
patronage refund is paid in cash. The invested portion of the patronage
refund is a source of funds from operations which is retained for use in
the business and increases Farmland's equity base. Common stock and associate
member common stock representing the invested portion of patronage refunds may
be redeemed by cash payments from Farmland to holders thereof who participate
in Farmland's base capital plan. Capital credits and other equities of
Farmland and Farmland Foods, Inc., a 99% owned subsidiary ("Foods"), may be
redeemed under other equity redemption plans. The base capital plan and other
equity redemption plans are described in the Form 10-K under "Business Equity
Redemption Plans" .
Major uses of cash during the three months ended November 30, 1994 include
net payments of $109.1 million to decrease the balance of bank loans and other
notes outstanding, $26.2 million for patronage refunds and dividends distributed
from income of the 1994 fiscal year, $20.8 million for capital expenditures,
$12.1 million for the redemption of equities under the Farmland base capital
p l an and special redemption plan and $9.2 million for acquisition of
investments. Major sources of cash include $58.7 million from operations,
$57.5 million from an increase in the balance of checks and drafts outstanding
and $9.4 million from an increase in the balance of demand loan and subordinated
debt outstanding.
The IRS 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
GENERAL
The Company conducts business primarily in two operating areas: inputs
and outputs. 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.
The Company's farm supply operations consist of three principal product
divisionsCpetroleum, crop production and feed. Principal products of the
petroleum division are refined fuels, propane, by-products of petroleum
refining and a complete line of car, truck and tractor tires, batteries and
accessories. Principal products of the crop production division are
nitrogen, phosphate and potash fertilizers, and, through the Company's
ownership in the Wilfarm joint venture, a complete line of insecticides,
herbicides and mixed chemicals. Principal products of the feed division
include swine, dairy, pet, beef, poultry, mineral and
specialty feeds, feed ingredients and supplements, animal health products and
livestock services. The Company's three farm supply divisions produce and
distribute products principally at wholesale. Over 50% of the
Company's farm supply products sold in 1994 were produced in plants owned
by the Company or operated by the Company under long-term lease arrangements.
Approximately 65% of the Company's sales of farm supply products sold in 1994
were to farm cooperative associations which are members of Farmland.
These farm cooperatives distribute products primarily to farmers and ranchers
in states which comprise the corn belt and the wheat belt and who utilize
the products in the production of farm crops and livestock.
On the output side, the Company's processing and marketing operations
include the storage and marketing of grain, the processing of pork and beef,
and the marketing of fresh pork, processed pork and fresh beef. In 1994,
approximately 61% of the hogs processed and 46% of the grain marketed were
supplied to the Company by its members. Substantially all of the Company's
pork and beef products sold in 1994 were processed in plants owned by the
Company.
A substantial portion of the Company's farm supply, pork and beef 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, margins and net income 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 U.S. imports and exports. In addition,
various federal and state regulations to protect the environment encourage
farmers to reduce the amount of fertilizer and other chemical applications.
Global variables which affect supply, demand and price of crude oil,
refined fuels, natural gas and other commodities may impact the Company's
operations. Historically, changes in the costs of raw materials used in
the manufacture of the Company's finished products have not necessarily
resulted in corresponding changes in the prices at which such products have
been sold by the Company. Management cannot determine the extent to which
these factors may impact future operations of the Company. The Company's
cash flow and net income may continue to be volatile as conditions affecting
agriculture and markets for the Company's products change.
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. Historically, the majority of sales of farm supply
products occur in the spring. Revenues in the beef business and in grain
marketing historically have been concentrated in the summer 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 ended November 30, 1994 should not be annualized to project
a full year's results.
Three Months Ended November 30, 1994 Compared With Three Months Ended November
30, 1993
Sales
Sales for the three months ended November 30, 1994 increased $142.2 million
or 9.6% compared with the corresponding period of the prior year. The increase
includes $117.0 million higher sales of agricultural output products, $22.1
million higher sales of farm production input products and $3.1 million higher
sales of other products and services.
Sales of agricultural output products increased principally because grain
sales reported in the three months ended November 30, 1994 (which reflect an
increase of $95.6 million) include operations of a grain trading company
acquired in May 1994 and sales at elevators in Utah and Idaho which Farmland
leased in February 1994. These operations were not included in financial
reports of the Company for the first quarter of the prior year. In addition,
sales of beef and pork increased $15.1 million and $6.3 million, respectively.
This increase resulted from higher unit sales of beef and pork partly offset by
lower unit prices of pork.
The increased sales of agricultural input products includes $52.9
million higher sales of crop production products, $17.2 million in lower sales
of petroleum products and $13.6 million lower feed sales. Sales of crop
production products increased because unit prices of plant nutrients increased
approximately 19% and unit sales of these products increased approximately 4%.
Sales of petroleum products decreased because of lower refined fuel and propane
prices and lower propane unit sales. Feed sales decreased because of lower
formula feed unit sales and because of lower prices of formula feed and feed
ingredients.
Net Income
Net income of $47.9 million for the three months ended November 30, 1994
increased $37.2 million compared with the corresponding period of the prior
year. Operating profit in the Company's crop production and food marketing
businesses increased $33.2 million and $23.1 million, respectively. In
addition, the Company's share of net income from joint ventures engaged in crop
production and beef packing operations increased $5.5 million and $4.5 million,
respectively. These increases were partially offset by decreased operating
profits of $13.8 million in petroleum, $2.8 million higher general corporate
expenses and an $8.0 million increase of the provision for income taxes.
Operating profit of the crop production business increased in the three
months ended November 30, 1994 as a result of higher prices of nitrogen-based
products coupled with decreased per unit costs of natural gas (the principal raw
material used in production of nitrogen-based plant nutrients). Income of crop
production joint ventures increased because of 15% higher market prices of
phosphate fertilizers.
Operating profit of the food marketing business increased in the three
months ended November 30, 1994 compared with the corresponding period of the
prior year with improved results in pork and beef. Pork processing and
marketing operating profit increased $19.0 million primarily due to increased
margins on fresh pork products partially offset by slightly higher promotional
expenses. Operating profits in the beef business were $2.0 million in the three
months ended November 30, 1994 compared with a loss of $2.1 million in the
corresponding period of the prior year. This increase is attributable to higher
market prices for beef and the availability of cattle at more favorable cost
levels. In addition, the income of Hyplains Beef, a 50%-owned joint venture,
increased due to higher unit production and sales of boxed beef products.
Results from petroleum operations decreased due to lower unit sales of
refined fuels and propane coupled with lower prices for refined fuels.
The increase of operating profits of the crop production and food marketing
businesses in the three months ended November 30, 1994 (as described above) are
attributable to favorable spreads between selling prices and raw material costs
(natural gas in the case of nitrogen-based fertilizers and live hogs and cattle
in the food marketing business). These price and cost factors are beyond the
control of the Company's management and have been volatile in the past.
Accordingly, management cannot determine the extent to which these factors will
continue to favorably affect the Company's business. The Company's cash flow
and income may continue to be volatile as conditions affecting agriculture,
costs and markets for the Company's products change.
Selling, general and administrative expenses increased $9.4 million in the
three months ended November 30, 1994 compared with the corresponding period the
prior year. Approximately $6.6 million of the increase was directly connected
to business segments, primarily the output businesses (grain, beef and pork) and
related to increased sales. Corporate general expenses, not identified to
business segments, increased $2.8 million ensuing primarily from higher cost of
variable compensation plans and employee pension expenses.
The estimated effective tax rate for the three months ended November 30,
1994 is based on historical effective rates. The actual effective tax rate may
be subject to subsequent refinement or revision. The effective tax rate for
fiscal year 1994 has been used to provide income taxes for the three months
ended November 30, 1993.
Recent Accounting Pronouncements
In the first quarter of 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 112, ''Employer's Accounting for
Postemployment Benefits'' (''Statement 112''), which was issued by FASB in
November 1992. Statement 112 establishes standards of accounting and reporting
for the estimated cost of benefits provided to former or inactive employees.
The effect of the Company's implementation of Statement 112 at September 1, 1994
was insignificant.
In the first quarter of 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, ''Accounting for Certain
Investments in Debt and Equity Securities'' (''Statement 115''), which was
issued by the Financial Accounting Standards Board (''FASB'') in May 1993.
Statement 115 expands the use of fair value accounting and the reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. The effect of the Company's
implementation of Statement 115 at September 1, 1994 was insignificant.
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/A Amendment No. 2
for quarter ended November 30, 1994.
None
(b) No reports on Form 8-K were filed during the quarter ended November 30,
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: September 19, 1995