LAND O'LAKES REPORTS SECOND QUARTER RESULTS
Year-to-date earnings $44.3 million, Progress Against Strategic Initiatives
July 24, 2003 (Arden Hills, MN) ... Land O'Lakes, Inc., today reported its
second quarter and year-to-date financial results, while also commenting on
individual business unit performance and progress against key strategic
initiatives.
For the quarter, the company reported $1.40 billion in sales and $44.7 million
in net earnings, as compared to $1.42 billion and $48.3 million, respectively,
in the second quarter of 2002. Year-to-date, sales are $2.85 billion and net
earnings are $44.3 million, versus $2.95 billion and $47.3 million for the same
period one year ago. EBITDA (Earnings Before Interest, Taxes, Depreciation,
Amortization and other items, as defined in the company's bond indenture) are at
$85.5 million through June 30, as compared to $100.8 million one year ago.
Company officials indicated that, when litigation settlement proceeds are
excluded, 2003 first half EBITDA is $66.3 million, versus $68.1 million for the
first half of 2002. Due to the challenging operating environment, Land O'Lakes
revised its full-year EBITDA forecast from $255 million to $230 million.
Land O'Lakes also reported progress against three key strategic initiatives, as
well as positive performance in its branded, value-added and proprietary
businesses and product lines.
STRATEGIC INITIATIVES
Officials of the national dairy and agricultural cooperative reported progress
in paying down debt, portfolio management and the building of its branded
businesses.
Paying down debt. Land O'Lakes paid down term debt by approximately $12 million
during the second quarter and made an additional $14 million payment earlier
this month, bringing term-debt reduction since the start of the year to $88
million. The company closed the quarter with a long-term debt to capital ratio
of 49.5 percent, as compared to 52.4 percent one year ago.
The company retained strong liquidity, ending the quarter with cash-on-hand of
$105 million and unused borrowing authority of approximately $240 million. The
company remained in compliance with all its financing covenants.
Portfolio Management. Land O'Lakes reported continued progress in reducing
capital expenditures and exposure to market risk in Swine, significantly
reducing the size of its Cost Plus (contract) program. The company also reported
progress in "right-sizing" its dairy foods manufacturing business.
Building Branded Businesses. The company reported the successful launch of two
new branded dairy products (LAND O LAKES Spreadable Butter with Canola Oil and
LAND O LAKES Soft Baking Butter with Canola Oil); noted continued positive
momentum in CROPLAN GENETICS-branded seed and AgriSolutions crop protection
products; and indicated the strength of the LAND O LAKES Feed and Purina brands
remain the foundation for its Feed business.
DAIRY FOODS
Land O'Lakes reported a $500,000 second quarter pretax loss, as compared to a
loss of $5.4 million for the second quarter of 2002. The 2003 second quarter
results included $13.1 million in positive pretax earnings in its Value Added
Dairy Foods operations, and a pretax loss of $13.6 million in its Dairy Foods
Industrial (manufacturing) operations. Year-to-date, Dairy Foods is reporting a
pretax loss of $20.1 million, as compared to a pretax loss of $9.3 million over
the first two quarters of 2002.
Commenting on Value Added operations, company officials indicated positive
second quarter momentum resulted in year-to-date retail branded butter and
spreads volume being up 6 percent over 2002 and private label butter volumes up
2 percent over the first two quarters of last year. Total cheese volumes ran
basically even with one year ago, with a decline in retail cheese volumes offset
by increased volume in the Foodservice area. Overall Foodservice volumes were up
5.5% over the first two quarters of 2002.
Land O'Lakes officials anticipate strong volumes in Dairy Foods going forward,
as a result of the performance of new branded products; continued positive
momentum in the Foodservice area; and the company's traditionally strong fourth
quarter.
On the Industrial side of the Dairy Foods business, while there has been some
improvement in commodity prices, the industry continues to face a milk
supply/processing demand imbalance and depressed cheese, butter and milk prices
(with prices through June averaging 8-9 percent below the same period one year
ago). In addition, Land O'Lakes continued to face performance challenges related
to its Cheese and Protein International (CPI) mozzarella and whey operations,
complicated by depressed prices in both those markets. In the second quarter,
Land O'Lakes reported progress in repositioning and right-sizing its Dairy Foods
Industrial operations, with the sale of its Gustine, Calif., plant and
significant progress toward the sale of its idle Perham, Minn. manufacturing
facility.
FEED
In Feed, Land O'Lakes reported $11.5 million in pretax earnings for the second
quarter, as compared to pretax earnings of $29.4 million for the second quarter
of 2002. Year-to-date, pretax earnings in Feed are $26.7 million, down from
$32.9 million through June 2002. Company officials noted that 2002 earnings
included $32 million in proceeds from litigation settlements, while 2003
earnings included approximately $19 million in settlement proceeds.
The company continued to face significant challenges in the livestock/commodity
animal feed area, where volumes were down 13.5 percent year-to-date versus 2002.
Economic pressure on dairy and swine producers continued to constrain the
livestock feed market, as did herd reductions and geographic shifts in animal
populations. Company officials indicated futures markets are beginning to show
improvement, which could benefit producers and the feed business in the second
half.
Companion animal feed volume was up 1 percent through June. Horse feed reported
a 5 volume percent increase over the first two quarters of 2002.
Company officials also reported that cost-focused initiatives in Feed produced
nearly $10 million in savings relative to the first half of 2002.
SWINE
Swine continued to face a challenging market, although second quarter prices
began to show some improvement, which should have a positive impact on this
business segment. For the second quarter, the company reported a $1.1 million
pretax loss in Swine, as compared to a $3.5 million loss for the second quarter
of 2002. Year-to-date, Swine is reporting a pretax loss of $5.2 million, as
compared to a loss of $4.0 million through June of 2002.
Volumes in Swine reflect the company's commitment to reducing exposure to market
risk, with year-to-date volumes in the higher risk areas of Swine Programs and
Farrow-to-Finish down 13 percent and 6 percent, respectively, from one year ago.
During the quarter, Land O'Lakes offered producers in the Cost Plus (contract)
program, historically responsible for 40% of its losses in Swine, an "Early
Exit" option. Producers representing nearly 40 percent of the total hogs in Cost
Plus participated, reducing the number of hogs in the program from approximately
230,000 to 130,000. By year-end, company officials anticipate the program will
be down to approximately 60,000 hogs.
LAYERS/EGGS
Land O'Lakes participates in the layers/eggs industry through MoArk LLC, a joint
venture in which the company exercises 50% control. In Layers/Eggs, the company
is reporting a pretax loss of $277,000 for the quarter, as compared to a loss of
$7.1 million for the second quarter of 2002. Year-to-date, the company has
recorded $629,000 in pretax earnings in Layers/Eggs.
Key drivers have been improved market prices and increased volumes, up 1.4
percent to 365 million dozen eggs over the first two quarters. LAND O
LAKES-branded eggs also continued to gain momentum, with sales up from 1.6
million dozen over the first two quarters of 2002, to 2.3 million dozen through
June 2003.
SEED
Seed continued its positive performance, with second quarter pretax earnings of
$5.0 million, as compared to pretax earnings of $3.4 million for the second
quarter of 2002. Year-to-date earnings are up approximately $1 million, to $15.6
million.
This performance is attributable to the strength of the CROPLAN GENETICS brand
and solid volumes, with year-to-date corn volume up 25 percent, soybeans up 18
percent and alfalfa up 15 percent.
AGRONOMY
Land O'Lakes does its Agronomy business (crop nutrients and crop protection
products) through its 50-percent ownership position in Agriliance. Land O'Lakes
reported $42.0 million in Agronomy-related pretax earnings for the quarter,
which included Agronomy's primary spring selling season, as compared to $41.0
million for the second quarter of 2002. Year-to-date results show $33.2 million
in pretax Agronomy earnings, up about $8 million from one year ago.
The national food and agricultural cooperative will discuss its second quarter
results in a conference call scheduled for 1:00 p.m., Eastern Time, July 24,
2003. The dial-in numbers are USA -- 1-888-793-1858; International --
1-773-756-4700. The passcode is "Land O'Lakes." A replay of the conference call
will be available through August 7, 2003, at USA -- 1-888-567-0441;
International -- 1-402-998-1799. The replay access ID is #7148. Additional
materials will be available on the company's website (www.landolakesinc.com) for
an extended period of time.
Land O'Lakes is a national, farmer-owned food and agricultural cooperative, with
annual sales of approximately $6 billion. Land O'Lakes does business in all 50
states and more than 50 countries. It is a leading marketer of a full line of
dairy-based consumer, foodservice and food ingredient products across the United
States; serves its international customers with a variety of food and animal
feed ingredients; and provides farmers and local cooperatives with an extensive
line of agricultural supplies (feed, seed, crop nutrients and crop protection
products) and services.
Cautionary Statement
This press release contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on management's
current expectations and assumptions. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from the potential results discussed in the forward-looking
statements. In particular, management's predictions about strong Dairy Foods
volumes may be affected by, among other things, changes in consumer preferences
and the competitive environment. In addition, management's expectations that the
Company will receive a dividend from Agriliance in 2003 may be affected by,
among other things, the competitive environment in which Agriliance competes,
Agriliance's dependence on its suppliers and the discretion of Agriliance's
board members to declare a dividend. The Company undertakes no obligations to
publicly revise any forward-looking statements to reflect future events or
circumstances. For a discussion of additional factors that may materially affect
management's estimates and predictions, please view Land O'Lakes Annual Report
filed on Form 10-K for the year ended December 31, 2002, which can be found on
the Securities and Exchange Commission web site (www.sec.gov) and the Company's
website (www.landolakesinc.com).
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
JUNE 30, DECEMBER 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments $ 85,480 $ 64,327
Restricted cash 20,000 -
Receivables, net 392,856 567,584
Receivable from legal settlement - 96,707
Inventories 485,098 446,386
Prepaid expenses 42,868 189,246
Other current assets 43,745 13,878
- ------------------------------------------------------------------------------------------------------------
Total current assets 1,070,047 1,378,128
Investments 598,461 545,592
Property, plant and equipment, net 563,085 579,860
Property under capital lease 101,388 105,736
Goodwill, net 315,545 323,413
Other intangibles 103,020 101,770
Other assets 204,057 211,823
- ------------------------------------------------------------------------------------------------------------
Total assets $ 2,955,603 $ 3,246,322
============================================================================================================
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations $ 52,138 $ 37,829
Current portion of long-term debt 65,814 104,563
Current portion of obligation under capital lease 8,867 108,279
Accounts payable 402,731 701,786
Accrued expenses 221,422 204,629
Patronage refunds and other member equities payable 10,770 12,388
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 761,742 1,169,474
Long-term debt 972,980 1,007,308
Obligation under capital lease 94,808 -
Employee benefits and other liabilities 104,210 104,340
Deferred tax liabilities 27,907 -
Minority interests 60,060 53,687
Equities:
Capital stock 2,147 2,190
Member equities 872,972 873,659
Retained earnings 58,777 35,664
- ------------------------------------------------------------------------------------------------------------
Total equities 933,896 911,513
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------
Total liabilities and equities $ 2,955,603 $ 3,246,322
============================================================================================================
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
- ----------------------------------------------------- ---------------- ---------------- --------------- ---------------
Net sales $ 1,396,043 $ 1,419,769 2,850,495 2,952,002
Cost of sales 1,271,120 1,295,866 2,600,023 2,680,124
- ----------------------------------------------------- ---------------- ---------------- --------------- ---------------
Gross profit 124,923 123,903 250,472 271,878
Selling, general and administration 110,260 124,193 230,229 251,714
Restructuring and impairment charges 1,775 3,841 2,867 7,276
- ----------------------------------------------------- ---------------- ---------------- --------------- ---------------
Earnings (loss) from operations 12,888 (4,131) 17,376 12,888
Interest expense, net 16,891 17,401 34,276 34,948
Gain on legal settlements (10,288) (32,699) (19,177) (32,699)
Gain on sale of intangibles (550) - (550) (4,184)
Loss (gain) on divestiture of businesses 700 (1,205) 700 (1,205)
Gain on sale of investment (346) - (846) -
Equity in earnings of affiliated companies (51,414) (44,227) (50,431) (34,366)
Minority interest in earnings (loss) of subsidiaries 1,427 (1,024) 2,916 (90)
- ----------------------------------------------------- ---------------- ---------------- --------------- ---------------
Earnings before income taxes 56,468 57,623 50,488 50,484
Income tax expense 11,787 9,327 6,178 3,164
- ----------------------------------------------------- ---------------- ---------------- --------------- ---------------
Net earnings $ 44,681 $ 48,296 $ 44,310 $ 47,320
===================================================== ================ ================ =============== ===============
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2003 2002
-------------- ----------------
Cash flows from operating activities:
Net earnings $ 44,310 $ 47,320
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 54,004 52,447
Amortization of deferred financing charges 1,846 1,587
Bad debt expense 1,760 2,636
Proceeds from patronage revolvement received 1,316 261
Non-cash patronage income (1,222) (203)
Receivable from legal settlement 96,707 -
Decrease (increase) in other assets 8,302 (23,336)
(Decrease) increase in other liabilities (130) 25,863
Restructuring and impairment charges 2,867 7,276
Loss (gain) on divestiture of businesses 700 (1,205)
Equity in earnings of affiliated companies (50,431) (34,366)
Minority interests 2,916 (90)
Other (4,191) (2,141)
Changes in current assets and liabilities, net of acquisitions and
divestitures:
Receivables 168,241 107,416
Inventories (37,581) (57,268)
Other current assets 150,298 90,719
Accounts payable (300,513) (196,464)
Accrued expenses 14,155 9,700
-------------- ----------------
Net cash provided by operating activities 153,354 30,152
Cash flows from investing activities:
Additions to property, plant and equipment (34,954) (34,841)
Payments for investments (9,675) (4,669)
Proceeds from divestiture of businesses 465 1,710
Proceeds from sale of investments 3,000 21,059
Proceeds from sale of property, plant and equipment 8,015 9,828
Dividends from investments in affiliated companies 2,798 4,929
Increase in restricted cash (20,000) -
Other 2,980 2,778
-------------- ----------------
Net cash (used) provided by investing activities (47,371) 794
Cash flows from financing activities:
Increase in short-term debt 14,309 10,320
Proceeds from issuance of long-term debt 1,202 2,622
Payments on principal of long-term debt (73,052) (60,147)
Payments on principal of capital lease obligation (4,435) -
Payments for redemption of member equities (23,662) (36,472)
Other 808 2,008
-------------- ----------------
Net cash used by financing activities (84,830) (81,669)
-------------- ----------------
Net increase (decrease) in cash 21,153 (50,723)
Cash and short-term investments at beginning of period 64,327 130,169
-------------- ----------------
Cash and short-term investments at end of period $ 85,480 $ 79,446
============== ================
LAND O'LAKES, INC.
EBITDA
($ IN THOUSANDS)
(UNAUDITED)
TWELVE
THREE MONTHS ENDED SIX MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
----------------------------- ------------------------------ -------------
2003 2002 2003 2002 2003
- -------------------------------------------------- -------------- ------------- ------------- -------------- -------------
NET EARNINGS $ 44,681 $ 48,296 $ 44,310 $ 47,320 $ 95,877
Income taxes expense 11,787 9,327 6,178 3,164 812
Minority interest in earnings (loss) of subsidiaries 1,427 (1,024) 2,916 (90) 8,493
Equity in earnings of affiliated companies (51,414) (44,227) (50,431) (34,366) (38,740)
Gain on sale of investment (346) - (846) - (846)
Gain on divestiture of businesses - (1,205) - (1,205) (3,787)
Gain on sale of intangible (550) - (550) (4,184) (550)
Interest expense, net 16,891 17,401 34,276 34,948 68,174
Cash patronage income 1,671 853 1,314 57 959
Joint venture cash distributions 990 1,845 2,798 4,929 25,427
Depreciation and amortization 27,362 26,530 54,004 54,034 103,669
Non-cash impairment charges 250 2,174 342 2,903 15,678
One-time items not included in bond EBITDA (6,374) (50) (6,374) (68) (6,374)
Severance costs incurred - PMI acquisition - 459 - 671 8,032
Unrealized hedging (gain) loss (3,203) (6,231) (5,974) (11,294) 4,181
Unrestricted entities - EBITDA 1,696 2,723 3,561 3,963 18,149
- -------------------------------------------------- -------------- ------------- ------------- -------------- -------------
BOND EBITDA $ 44,868 $ 56,871 $ $85,524 $ 100,782 $ 299,154
================================================== ============== ============= ============= =============== =============
ADJUSTMENTS TO BANK EBITDA:
Finance Co. and Conroe ACS restricted for Bank (1,510)
Net legal accruals (3,841)
Restructuring charges less cash paid (1,788)
Gain on divestiture of businesses 3,787
Purina related - one-time charges 10,602
Non-cash one-time items / reserves (4,237)
Gain on sale of assets 13,377
- -------------------------------------------------- -------------
BANK EBITDA $ 315,544
================================================== =============
BANK COVENANTS
- --------------
Interest expense coverage ratio - required > 2.5 4.33 x
-
Leverage ratio - required < 4.25 2.80 x
-
Consolidated cash interest expense (1)
- --------------------------------------
INTEREST EXPENSE $ 68,174
Interest earned 7,757
Change in accrued interest 5,457
Unrestricted subs interest expense (2,924)
Non-cash amortized financing costs (5,511)
-------------
TOTAL BANK CONSOLIDATED CASH INTEREST EXPENSE $ 72,953
=============
Consolidated Indebtedness (2)
- -----------------------------
TOTAL INDEBTEDNESS (INCLUDING CAPITAL LEASE AND CAPITAL SECURITIES) $ 1,194,607
Less capital securities (190,700)
Less CPI capital lease (103,675)
Less CPI bonds (15,365)
Less other unrestricted subs debt (647)
-------------
TOTAL BANK CONSOLIDATED INDEBTEDNESS $ 884,220
=============
BOND COVERAGE RATIO
- -------------------
Interest expense coverage ratio - required > 2.5 4.45 x
-
Bond consolidated interest expense
- ----------------------------------
INTEREST EXPENSE $ 68,174
Unrestricted subs interest expense (1,055)
Capitalized interest 145
Interest on sales lease back transaction 26
-------------
TOTAL BOND CONSOLIDATED INTEREST EXPENSE $ 67,290
=============
(1) Dividends on capital securities are included in interest expense.
(2) Capital securities and external debt of unrestricted subsidiaries are
excluded from the bank indebtedness calculation as per the Credit Agreement.