UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15 (d) of the Securities - ----- Exchange Act of 1934 For the six month period ended February 28, 1997 or Transition report pursuant to Section 13 or 15 (d) of the Securities - ----- Exchange Act 1934 For the transition period from to ------------- ---------------- Commission file number: 0-17005 DEKALB Genetics Corporation ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3586793 - ------------------------------------------------------------- ------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3100 Sycamore Road, DeKalb, Illinois 60115 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) 815-758-3461 ---------------------------------------------------- (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 ------ ------- Title of class Outstanding as of February 28, 1997 - ---------------------------- ----------------------------------- Class A Common, no par value 2,394,546 Class B Common, no par value 14,746,308 Exhibit index is located on page 2 Total number of pages 12 DEKALB GENETICS CORPORATION INDEX PART 1. FINANCIAL INFORMATION (Unaudited except for the Condensed Consolidated Balance Sheet as of August 31, 1996) Page Item 1. Financial Statements Condensed Consolidated Statements of Operations for the six months ended February 28, 1997 and February 29, 1996......3 Condensed Consolidated Statements of Operations for the three months ended February 28, 1997 and February 29, 1996......4 Condensed Consolidated Balance Sheets, February 28, 1997 and February 29, 1996 and August 31, 1996.....................5 Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 1997 and February 29, 1996......6 Notes to Condensed Consolidated Financial Statements......7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................8-10 PART II. OTHER INFORMATION Item 1. Legal Proceedings.........................................11 Item 6. Exhibits and Reports on Form 8-K..........................11 DEKALB GENETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) February February 1997 1996 -------- -------- Revenues $259.4 $230.4 Cost of revenues 132.3 123.5 ------ ------ GROSS MARGIN 127.1 106.9 Selling expenses 44.5 43.0 Research and development cost 31.4 26.9 General and administrative expenses 19.1 16.2 ------ ------ OPERATING EARNINGS 32.1 20.8 Interest expense, net of interest income of $0.8 in 1997 and $0.3 in 1996 (2.4) (4.4) Other income (expense), net 0.5 (0.7) ------ ------ Earnings before income taxes 30.2 15.7 Income tax provision 11.8 6.1 ------ ------ NET EARNINGS $ 18.4 $ 9.6 ====== ====== NET EARNINGS PER SHARE $ 1.03 $ 0.61 ====== ====== DIVIDENDS PER SHARE $ 0.14 $ 0.134 ====== ======= The accompanying notes are an integral part of the financial statements. DEKALB GENETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) February February 1997 1996 -------- -------- Revenues $192.3 $180.3 Cost of revenues 93.4 95.1 ------ ------ GROSS MARGIN 98.9 85.2 Selling expenses 34.8 35.5 Research and development cost 25.4 21.4 General and administrative expense 10.9 10.0 ------ ------ OPERATING EARNINGS 27.8 18.3 Interest expense, net of interest income of $0.4 in 1997 and $0.1 in 1996 (1.1) (2.1) Other income (expense), net 0.1 (0.3) ------- ------ Earnings before income taxes 26.8 15.9 Income tax provision 10.5 6.2 ------- ------ NET EARNINGS $ 16.3 $ 9.7 ======= ======= NET EARNINGS PER SHARE $ 0.91 $ 0.61 ======== ======== DIVIDENDS PER SHARE $ 0.07 $ 0.067 ======== ========= The accompanying notes are an integral part of the financial statements. DEKALB GENETICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 AND AUGUST 31, 1996 (DOLLARS IN MILLIONS) February February August 1997 1996 1996 -------- -------- ------ (Unaudited) -------------------- Current assets: Cash and cash equivalents $28.1 $15.0 $23.3 Notes and accounts receivable, net of allowance for doubtful accounts of $4.3 at February 28, 1997, $3.6 at February 29, 1996, and $3.6 at August 31, 1996 69.6 79.7 54.6 Inventories (Note 2) 152.9 112.7 99.1 Deferred income taxes 8.2 4.7 8.2 Other current assets 7.1 5.1 4.8 ------ ------ ------ Total current assets 265.9 217.2 190.0 Investments in and advances to related 5.7 3.6 5.0 companies Intangible assets 40.9 42.8 41.6 Other assets 8.9 5.6 7.2 Property, plant and equipment, at cost 281.1 247.8 266.0 Less accumulated depreciation and (150.2) (143.2) (146.5) amortization ------ ------ ------ Net property, plant and equipment 130.9 104.6 119.5 ------ ------ ------ Total assets $ 452.3 $ 373.8 $ 363.3 ======= ======= ======= Current liabilities: Notes payable $10.1 $28.6 $ - Accounts payable, trade 45.4 34.5 13.6 Other accounts payable 39.0 25.2 34.1 Other current liabilities 55.6 49.2 39.6 ------ ----- ----- Total current liabilities 150.1 137.5 87.3 Deferred compensation and other 7.7 6.1 7.1 credits Deferred income taxes 21.7 11.1 15.3 Long-term debt, less current 85.0 85.0 85.0 maturities Shareholders' equity: Capital stock: Common, Class A; no par value, authorized 15,000,000 shares, issued 2,394,692 at February 28, 1997 and 749,453 at February 29, 1996 0.2 0.1 0.2 Common, Class B; no par value, non-voting authorized, 45,000,000 shares, issued 14,965,911 at February 28, 1997 and 4,538,698 at February 29, 1.5 0.4 1.5 1996 Capital in excess of stated value 112.3 81.6 109.7 Retained earnings 79.7 59.8 63.7 Currency translation adjustments (3.5) (5.4) (4.1) ----- ----- ----- 190.2 136.5 171.0 Less treasury stock, at cost (2.4) (2.4) (2.4) ----- ----- ----- Total shareholders' equity 187.8 134.1 168.6 ----- ----- ----- Total liabilities and shareholders' $ 452.3 $ 373.8 $ 363.3 equity ======= ======= ======= The accompanying notes are an integral part of the financial statements. DEKALB GENETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (DOLLARS IN MILLIONS) (UNAUDITED) February February 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $18.4 $9.6 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 6.2 5.4 Equity (earnings) loss, net of 0.4 (0.2) dividends of $1.8 in 1997 Other 7.3 5.4 Changes in assets and liabilities: Receivables (15.6) (22.9) Inventories (53.8) (11.8) Other current assets (2.5) (1.4) Accounts payable 36.6 37.4 Accrued expenses 13.7 14.1 Other assets and liabilities 2.9 4.8 ----- ----- Net cash flow provided by 13.6 40.4 operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and (18.6) (9.9) equipment Proceeds from sale of property, plant 0.9 0.3 and equipment Other - (3.5) ------ ------ Net cash flow used by investing ( 17.7) ( 13.1) activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings 10.0 - Principal payments made on short-term - (14.2) borrowings Dividends paid (2.4) (2.1) Other 1.9 0.7 ----- ----- Net cash flow provided (used) by 9.5 ( 15.6) financing activities Net effect of exchange rates on (0.6) 0.3 cash ----- ----- Net increase in cash and cash 4.8 12.0 equivalents Cash and cash equivalents August 31 23.3 3.0 ----- ----- Cash and cash equivalents at the end of $ 28.1 $ 15.0 February ===== ===== Supplemental Cash Flow Information - ----------------------------------------- Cash paid (refunded) during the period for: Income taxes $1.1 $(0.7) Interest $3.5 $7.2 The accompanying notes are an integral part of the financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ----------- 1.The consolidated financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's annual report on Form 10- K. In order to facilitate a better comparison of the highly seasonal seed operations of the Company, a Condensed Consolidated Balance Sheet at February 29, 1996 is included herein as part of the condensed consolidated financial statements. The Company declared a three-for-one stock split to holders of record May 10, 1996 with shares being distributed on May 24, 1996; thus, earnings per share and all other share amounts have been restated to reflect a tripling in the number of shares outstanding. The results presented are unaudited (other than the Condensed Consolidated Balance Sheet at August 31, 1996, which is derived from the Company's audited year-end balance sheet) but include, in the opinion of management, all adjustments of a normal recurring nature necessary for a fair statement of the results of operations and financial position for the respective interim periods. Certain costs and expenses incurred in the North American and international seed businesses are charged against income as sales are recognized for interim reporting purposes. The Company believes this method more closely matches revenues with expenses and results in more comparability of reporting periods within the year. Since there are only minor North American seed sales recorded in the first and fourth quarters, this method defers first quarter expenses related to sales which will occur later in the year, primarily in the second quarter; it also anticipates expenses incurred in the fourth quarter, primarily in the third quarter. Southern hemisphere international seed sales occur largely in the first and second quarters and this same method anticipates future expenses from the third and fourth quarters and matches them against the first and second quarter revenues. 2.Inventories, valued at the lower of cost or market (in millions), were as follows: February February August 1997 1996 1996 -------- -------- ------ Commercial seed $139.5 $ 99.8 $ 86.0 Swine 9.7 8.0 9.6 Supplies and other 3.7 4.9 3.5 ------ ------ ------ $ 152.9 $ 112.7 $ 99.1 ======= ======= ======= 3.The Company and its subsidiaries are defendants in various legal actions arising in the course of business activities. In the opinion of management, these actions will not result in a material adverse effect on the Company's consolidated operations or financial position. Additional information in Part II, Other Information, Item 1 - Legal Proceedings. Most potential property losses are self-insured. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- Net earnings for the first six months of fiscal 1997 were $18.4 million ($1.03 per share) compared with $9.6 million ($.61 per share) for the same period of fiscal 1996. Revenues increased 13 percent as corn selling prices in Argentina and North America increased largely due to a significant portion of the volume mix in the higher price categories. Swine segment revenues increased as the result of higher market hog prices. North American segment earnings were up $7.9 million due to largely higher corn unit margins and third party royalty payments. The increase in international seed segment earnings was due to higher corn volume and margins from increased sales of single cross hybrids in Argentina combined with higher equity earnings from Mexico. In addition, interest expense for the first six months of the current year was $2.0 million less than in the prior year first six months due to lower corporate borrowing requirements. Fiscal 1997 second quarter net earnings of $16.3 million ($.91 per share) were substantially higher than a year ago when net earnings were $9.7 million ($.61 per share). North American corn unit margins combined with increased selling prices in Argentina and royalty payments accounted for most of the improvement. Quarterly Industry Segment Revenues and Earnings ------------------------------------------------ In Millions ----------- (Unaudited) ----------- Second Quarter Year-to-Date ------------------- ------------------ February February February February 1997 1996 1997 1996 -------- -------- -------- -------- Revenues North American Seed $157.3 $142.7 $162.4 $149.1 International Seed 21.1 26.2 69.2 57.7 Swine 13.9 11.4 27.8 23.6 ------ ------ ------ ------ Total revenues $ 192.3 $ 180.3 $ 259.4 $ 230.4 ======= ======= ======= ======= Earnings North American Seed $23.5 $15.9 $23.3 $15.4 International Seed 6.2 4.2 12.1 7.2 Swine 0.3 - 0.6 0.7 ----- ----- ----- ----- Total operations 30.0 20.1 36.0 23.3 General corporate (2.1) (2.1) (3.4) (3.2) expenses Net interest expense (1.1) (2.1) (2.4) (4.4) ----- ----- ----- ----- Earnings before income 26.8 15.9 30.2 15.7 taxes Income tax provision 10.5 6.2 11.8 6.1 ----- ----- ----- ----- Net Earnings $ 16.3 $ 9.7 $ 18.4 $ 9.6 ======= ====== ======= ====== Seed - ---- North American and European sales and net earnings are primarily realized in the second and third fiscal quarters (December through May) and for that reason, the first six month's results should not be annualized. The best year-to-year comparison of seed results from these two markets is a combined total of the second and third quarters for the years compared. North American Seed ------------------- North American seed segment earnings for the first six months of fiscal 1997 were $7.9 million higher than a year ago on a nine percent increase in revenues. Corn unit margins increased over 15 percent based on sales volume mix, selling price increases, and lower production costs. Fiscal 1996 costs were negatively impacted by adverse planting and growing conditions in the summer of 1995 while current year costs benefited from above-target production yields, partly offset by a projected increase in discard costs. The corn gross margin improvements were reduced by increased operating expenses as the Company continues to expand research and development efforts. Revenues increased nearly nine percent during the first six months of fiscal 1997 compared to the corresponding period a year ago. Higher selling prices for both corn and soybeans, together with royalty payments, resulted in the increase. Royalty payments, which depend on third-party company sales, are being accrued in the future second and third quarters, consistent with the historical pattern of DEKALB sales. Corn volume to date was comparable with a year ago; however, the Company expects, based on cash payments and ship request information to date, that it will increase North American corn market share again this fiscal year. These forward-looking statements are subject to several risk factors that could cause actual results to differ from projections. Among these factors are the company's relative product performance and competitive market position, weather conditions, commodity prices, trade policies, market conditions, and results of pending litigation. Fiscal 1997 second quarter segment earnings improvement of $7.6 million was the result of the same factors described above because segment earnings for the six months occur primarily in the second quarter. International Seed ------------------ International seed segment earnings increased by $4.9 million, or 68 percent, over the prior year six month results on a 20 percent increase in revenues. Operations in Argentina and Mexico were primarily responsible for the earnings improvement. Higher unit margins, driven largely by higher selling prices for corn and sunflowers, were the major factors contributing to the improvement in Argentina. Increased demand for single-cross corn hybrids generated a volume mix shift to higher priced products. In Mexico, higher corn and sorghum sales volumes generated improved earnings from the Company's equity investment. In Argentina, a much higher than normal proportion of the season's shipments and revenues occurred in the first quarter, distorting quarter-to-quarter comparisons. Favorable cost and returned goods adjustments in the second quarter of fiscal 1997 were largely responsible for the $2 million increase in segment earnings, despite lower reported revenues in the quarter. Swine - ----- Swine segment revenues increased 18 percent over the prior year six months mainly due to higher market hog prices. The fiscal 1997 average market hog price received by the Company was $56 per hundred weight compared with $48 per hundred weight for the first six months of fiscal 1996. Although total sales volume was nearly comparable with the same period a year ago, a shift toward increased breeding stock sales was a factor in higher revenues. Swine segment profitability in the first six months of fiscal 1997 decreased $0.1 million from the same period in fiscal 1996. Total gross margin was negatively affected by the impact of high feed costs incurred during the spring and summer of 1996 and currently charged through cost of goods sold. As current inventory levels are sold, cost per unit will decrease as the result of lower feed prices incurred during and after the harvest season last fall. General - ------- The effective tax rate was 39 percent in each of the six month periods reported. For each interim period, the tax rate is determined from an estimate of full year earnings and the resultant tax. Interest expense decreased $2.0 million in fiscal 1997 due to lower corporate borrowing requirements. Financial Position - ------------------ During the first six months of fiscal 1997, net cash flow from operations was $13.6 million for the current year compared with $40.4 million of cash generated in the prior year. Cash required for seed corn production increased substantially due to a larger crop. Increased capital spending on seed production facilities also accounted for the higher cash requirements for investments. Cash requirements for the first six months were provided by earnings and existing short-term credit facilities. Committed credit lines include a $50 million revolving credit facility through December, 1999 and $6 million in facilities available through May 28, 1997. These agreements contain various restrictions on the activities of the Company as to maintenance of working capital and tangible net worth, amount and type of indebtedness, and the acquisition or disposition of capital shares or assets of the Company and its subsidiaries. Management believes its operating cash flow, other potential sources of funds, and existing lines of credit are sufficient to cover normal and expected working capital needs, capital expenditures, dividends and debt maturities. Part II OTHER INFORMATION ----------------- Item 1. Legal Proceedings - --------------------------- The Company and its subsidiaries are defendants in various legal actions arising in the course of business activities. Three of such cases involve patent related matters. On October 1, 1996 Plant Genetics Systems, a Belgian company, filed a lawsuit against the Company in the federal district court of Connecticut in which they allege that the Company is infringing U.S. Patent No. 5,561,236. That patent purports to be directed to certain genetically engineered plants and cells that exhibit resistance to certain herbicides. On October 22, 1996 two subsidiaries of Mycogen Corporation filed a lawsuit against the Company and two other defendants in the federal district court of Delaware in which they allege that the defendants are infringing U.S. Patent Nos. 5,567,600 and 5,567,862. Those patents purport to be directed to certain processes that produce or plants that exhibit certain insect resistance. On January 21, 1997, Novartis Seeds, Inc. filed a lawsuit against the Company in the federal district court of Delaware in which they allege that the Company is infringing U.S. Patent No. 5,595,733. That patent purports to be directed to certain methods for protecting certain plants against pest damage. In the opinion of management, these actions will not result in a material adverse effect on the Company's consolidated operations or financial position. The Company is also the plaintiff in various legal actions. Refer to Item 3. "Legal Proceedings'' of the Company's Form 10-K for a discussion of such actions. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------------ The annual meeting of stockholders of the Company was held on Monday, January 13, 1997. The stockholders elected four directors and the votes were cast as follows: For Withheld -------- -------- Tod R. Hamacheck 2,024,114 721 John T. Roberts 2,024,114 721 Richard O. Ryan 2,023,777 1,058 William M. Ziegler 2,023,802 1,033 There were no absentions or broker non-votes. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------------- (a) Exhibit 11 - Computation of Net Earnings per Common and Common Equivalent Shares for the six months ended February 28, 1997 and February 29, 1996 and for the six months ended February 28, 1997 and February 29, 1996. (b) Reports on Form 8-K - No Form 8-K was filed during the three months ended February 28, 1997. SIGNATURE --------- 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. DEKALB Genetics Corporation --------------------------- Date: April 9, 1997 Thomas R. Rauman --------------------- (Signature) Thomas R. Rauman Vice President-Finance, Chief Financial Officer