LAND O'LAKES, INC.
NEWS RELEASE
FOR MORE INFORMATION, CONTACT:
Lydia Botham -- 651-481-2123
Dave Karpinski -- 651-481-2360
LAND O'LAKES REPORTS THIRD QUARTER RESULTS
Year-to-date sales $4.4 billion, net earnings $42.9 million
October 23, 2003 (Arden Hills, Minn.) -- Land O'Lakes, Inc. today reported its
third quarter and year-to-date financial results, while also commenting on
individual business unit performance and progress against key strategic
initiatives.
Year-to-date, sales are $4.4 billion with net earnings of $42.9 million,
compared to sales of $4.3 billion and net earnings of $35.3 million in the first
nine months of 2002. For the third quarter, traditionally the company's weakest,
Land O'Lakes is reporting $1.58 billion in sales and a net loss of $1.4 million,
compared to $1.4 billion in sales and a net loss of $12.0 million in 2002.
Bond EBITDA for the third quarter was $30.6 million, versus $35.4 million in the
third quarter of 2002. For the first nine months of 2003, Bond EBITDA was $116.1
million, versus $136.2 million last year. Excluding litigation settlements, the
year-to-date 2003 Bond EBITDA was $93.6 million, down 5.8% versus the 2002 Bond
EBITDA of $99.4 million for the first three quarters, before settlements. The
company indicated that it was lowering its full-year Bond EBITDA forecast from
$230 million to $210 million.
Land O'Lakes reported progress against its key strategic initiatives.
STRATEGIC INITIATIVES
Land O'Lakes continues to report 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 $25 million during the
third quarter and made another $16 million payment in October. Year-to-date,
principal payments on the company's term debt have totaled $121 million. As Land
O'Lakes closed the third quarter, its long-term debt to capital ratio was 3
percentage points better than one year ago.
The company maintained strong liquidity, ending the quarter with a combination
of cash-on-hand and unused borrowing authority totaling more than $225 million.
Land O'Lakes remained in compliance with all its financing covenants.
Growing Branded Businesses. Land O'Lakes completed the roll out of two new Dairy
Foods products--LAND O LAKES Spreadable Butter with Canola Oil and LAND O LAKES
Soft Baking Butter with Canola Oil. Consumer acceptance of these
soft-from-the-refrigerator products has been strong and sales are running ahead
of forecasts. Land O'Lakes also continues to build on the strength of its brands
in Deli Cheese, where branded volume was up 3%.
In Ag Services, Land O'Lakes CROPLAN GENETICS brand is helping drive a record
year in Seed; sales for the AgriSolutions-branded crop protection product line
are up nearly 30% over a year ago; and the company's feed brands (LAND O LAKES
and Purina) remain formidable assets.
1
Proactive Portfolio Management. Land O'Lakes continued efforts to reduce its
invested capital and exposure to market risk in Swine. Year-to-date, volume in
Farrow-to-Finish and higher-risk Swine Programs was down 12%.
The company is continuing efforts to reposition underperforming manufacturing
assets in the Upper Midwest. Land O'Lakes completed the sale of its Perham,
Minn., plant and will close its Volga, S.D., plant once Davisco Foods
International's new cheese manufacturing facility in Lake Norden, S.D., is fully
operational. Land O'Lakes has a milk supply and cheese marketing agreement with
Davisco in place.
DAIRY FOODS
Dairy Foods is reporting a pretax loss of $19.0 million dollars through
September, as compared to a loss of $15.4 million over the first three quarters
of 2002. Dairy Food sales through September were $2.1 billion, down about 3%
from one year ago.
Dairy Foods Value Added operations achieved $21.7 million in pretax earnings
through September, as compared to $23.5 one year ago. Year-to-date volumes for
retail butter and spreads, driven by the strength of the LAND O LAKES brand,
were up 3.3% versus 2002. In Deli, overall volumes were down 4%, while volume in
higher-margin, branded Deli Cheese lines was up 3%. Through September, total
cheese volume was about 2% behind one year ago, with a significant decline in
retail cheese volumes being offset by volume increases in foodservice cheese.
Overall Foodservice volume was up about 4.5%, driven primarily by strong sales
in the school and casual and mid-scale restaurant channels.
Despite recent market improvements, Land O'Lakes continues to face significant
challenges in its Dairy Foods Industrial (manufacturing) operations. Industrial
is reporting a year-to-date pretax loss of $40.6 million, as compared to a $38.9
million loss in 2002. While there have been recent improvements in dairy
markets, year-to-date average milk, butter, whey and nonfat dry milk prices
still remain below the first three quarters of 2002, while cheese prices are up
about 6.5%.
Finally, the allocation of additional staff and resources to resolve performance
issues at Cheese and Protein International (CPI), the company's world-class
cheese production plant in Tulare, Calif., is showing results. Early packaging
issues have been resolved, and customer approval rates and make allowances in
both cheese and whey have shown improvement. Land O'Lakes continues to position
CPI for the scheduled Phase II expansion, which should significantly reduce
per-unit costs.
FEED
Feed sales through September were $1.8 billion, and remain basically even with
one year ago. Feed's year-to-date pretax earnings of $25.0 million, were down
from $38.8 million through September of 2002. However, the 2002 earnings
included $35.9 million in vitamin litigation settlement revenues, as compared to
$22.4 million in litigation settlements over the first three quarters of this
year. Factoring out litigation settlements, 2003 pretax earnings in Feed are
running approximately even with 2002.
Feed's livestock volumes are down 12% through September, with swine feed down
17% and dairy feed down 10%. Depressed dairy and swine markets have been key
factors in volume declines. In the beef feed area, volume is up 3% year-to-date
and 6% for the third quarter. Overall, lifestyle feed is down 4%, primarily due
to a 12% decline in grass cattle feed volumes. The company realized growth in
other lifestyle feed segments including companion animal feed, with volume up 2%
for the year, and horse feed, with volume up 6% through September.
SWINE
Year-to-date, swine prices averaged $41.44/cwt, compared to $37.15/cwt for the
same period one year ago. As a result, the company is reporting a $6.7 million
loss in Swine through September, as compared to an $11.3 million loss over the
same period last year.
2
LAYERS/EGGS
MoArk, the joint venture through which Land O'Lakes participates in the egg
market, continues to deliver improved performance--reflecting stronger egg
prices over the first three quarters of 2003. The egg business generated $9.2
million in earnings, as compared to a loss of $12.8 million over the same period
last year. Also contributing to this improved performance was approximately $4
million in growth-related synergies and cost-saving initiatives.
Dollar sales in eggs totaled $377 million through September, up 13% from one
year ago. LAND O LAKES-branded eggs continued to perform well, with sales of
3.2 million dozen through September, a 23% increase over one year ago.
SEED
Seed is reporting $13.9 million in earnings through the third quarter, as
compared to $10.0 million through the third quarter of 2002. Seed sales volumes
through September are up 32% in corn, 27% in soybeans and 10% in alfalfa.
AGRONOMY
Land O'Lakes is reporting $27.8 million in pretax earnings in Agronomy through
September, generated primarily through its 50% ownership in the Agriliance joint
venture. These earnings are up from $16.5 million one year ago. Notably,
Agriliance (which operates on a September 1-August 31 fiscal year) has reported
increased earnings for three consecutive years.
INVESTOR CALL
Land O'Lakes, Inc. third quarter earnings call for investors will begin at 1:00
p.m., Eastern Time, Thursday, October 23, 2003. Presentation materials related
to the call will be made available on Thursday morning at Land O'Lakes Web site,
www.landolakesinc.com, under the heading "Our Company," then "Investor Call" and
will be available through November 6, 2003.
The dial-in numbers are:
USA - 1-888-323-5253
International - 1-773-756-4622
Passcode: "Land O'Lakes"
A replay of the conference call will be available through November 6, 2003, at:
USA - 1-800-754-7907
International - 1-402-220-0367
The replay access ID is #8403
Land O'Lakes is a national, farmer-owned food and agricultural cooperative, with
annual sales of approximately $6 billion. Land O'Lakes does business in all 50
states and more than 50 countries. It is a leading marketer of a full line of
dairy-based consumer, foodservice and food ingredient products across the United
States; serves its international customers with a variety of food and animal
feed ingredients; and provides farmers and local cooperatives with an extensive
line of agricultural supplies (feed, seed, crop nutrients and crop protection
products) and services.
-30-
CAUTIONARY STATEMENT
This document contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 that are based on management's
current expectations and assumptions. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from the potential results discussed in the forward-looking
statements. For a further discussion of important risk factors that may
materially affect management's estimates and Land O'Lakes results, please see
the risk factors contained in Land O'Lakes Annual Report filed on Form 10-K for
the year ended December 31, 2002 which can be found, free of charge, on the
Securities and Exchange Commission web site (www.sec.gov) and the company's
website (www.landolakesinc.com).
3
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments $ 20,800 $ 64,327
Restricted cash 20,000 -
Receivables, net 457,920 567,584
Receivable from legal settlement - 96,707
Inventories 500,795 446,386
Prepaid expenses 50,871 189,246
Other current assets 41,161 13,878
----------- -----------
Total current assets 1,091,547 1,378,128
Investments 541,172 545,592
Property, plant and equipment, net 641,491 579,860
Property under capital lease 111,558 105,736
Goodwill, net 373,680 323,413
Other intangibles 105,279 101,770
Other assets 206,159 211,823
----------- -----------
Total assets $ 3,070,886 $ 3,246,322
=========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations $ 81,223 $ 37,829
Current portion of long-term debt 72,434 104,563
Current portion of obligation under capital lease 10,083 108,279
Accounts payable 372,544 701,786
Accrued expenses 228,493 204,629
Patronage refunds and other member equities payable 8,900 12,388
----------- -----------
Total current liabilities 773,677 1,169,474
Long-term debt 1,023,555 1,007,308
Obligation under capital lease 101,708 -
Employee benefits and other liabilities 140,012 104,340
Deferred tax liabilities 41,878 -
Minority interests 60,710 53,687
Equities:
Capital stock 2,143 2,190
Member equities 870,813 873,659
Accumulated other comprehensive loss (4,733) -
Retained earnings 61,123 35,664
----------- -----------
Total equities 929,346 911,513
----------- -----------
Commitments and contingencies
----------- -----------
Total liabilities and equities $ 3,070,886 $ 3,246,322
=========== ===========
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- --------- ---------
Net sales $ 1,580,288 $ 1,371,735 4,430,783 4,323,737
Cost of sales 1,446,319 1,259,003 4,046,342 3,939,127
----------- ----------- --------- ---------
Gross profit 133,969 112,732 384,441 384,610
Selling, general and administration 122,047 123,595 352,276 375,309
Restructuring and impairment charges 302 942 3,169 8,218
----------- ----------- --------- ---------
Earnings (loss) from operations 11,620 (11,805) 28,996 1,083
Interest expense, net 19,313 18,052 53,589 53,000
Gain on legal settlements (3,355) (4,136) (22,532) (36,835)
Gain on sale of intangibles - - (550) (4,184)
(Gain) loss on divestiture of businesses - (3,730) 700 (4,935)
Loss (gain) on sale of investment 26 - (820) -
Equity in (earnings) loss of affiliated companies (5,587) 4,544 (56,018) (29,822)
Minority interest in earnings (loss) of subsidiaries 723 (1,365) 3,639 (1,455)
----------- ----------- --------- ---------
Earnings (loss) before income taxes 500 (25,170) 50,988 25,314
Income tax expense (benefit) 1,863 (13,182) 8,041 (10,018)
----------- ----------- --------- ---------
Net (loss) earnings $ (1,363) $ (11,988) $ 42,947 $ 35,332
=========== =========== ========= =========
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net earnings $ 42,947 $ 35,332
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization 83,460 77,280
Amortization of deferred financing charges 3,489 2,289
Bad debt expense 2,699 3,132
Proceeds from patronage revolvement received 2,671 319
Non-cash patronage income (1,638) (530)
Receivable from legal settlement 96,707 -
Deferred income tax expense 6,757 -
Decrease (increase) in other assets 8,908 (32,120)
Increase in other liabilities 4,027 4,966
Restructuring and impairment charges 3,169 8,218
Loss (gain) on divestiture of businesses 700 (4,935)
Equity in earnings of affiliated companies (56,018) (29,822)
Minority interests 3,639 (1,455)
Other (12,623) (6,236)
Changes in current assets and liabilities, net of acquisitions and
divestitures:
Receivables 142,395 104,574
Inventories (16,563) (18,982)
Other current assets 149,350 98,752
Accounts payable (348,329) (284,304)
Accrued expenses 14,233 34,248
-------- --------
Net cash provided (used) by operating activities 129,980 (9,274)
Cash flows from investing activities:
Additions to property, plant and equipment (55,329) (57,258)
Payments for investments (9,815) (5,069)
Proceeds from divestiture of businesses 465 3,351
Proceeds from sale of investments 3,000 21,084
Proceeds from sale of property, plant and equipment 18,084 11,655
Dividends from investments in affiliated companies 5,193 8,632
Increase in restricted cash (20,000) -
Other 2,998 3,980
-------- --------
Net cash used by investing activities (55,404) (13,625)
Cash flows from financing activities:
Increase in short-term debt 13,330 42,407
Proceeds from issuance of long-term debt 6,215 4,773
Payments on principal of long-term debt (107,126) (81,775)
Payments on principal of capital lease obligation (7,171) -
Payments for redemption of member equities (23,797) (36,970)
Other 446 2,173
-------- --------
Net cash used by financing activities (118,103) (69,392)
-------- --------
Net decrease in cash and short-term investments (43,527) (92,291)
Cash and short-term investments at beginning of period 64,327 130,169
-------- --------
Cash and short-term investments at end of period $ 20,800 $ 37,878
======== ========
LAND O'LAKES, INC.
EBITDA
($ IN THOUSANDS)
(UNAUDITED)
TWELVE
THREE MONTHS ENDED NINE MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------ --------------
2003 2002 2003 2002 2003
---------- ----------- ----------- ----------- --------------
NET (LOSS) EARNINGS $ (1,363) $ (11,988) $ 42,947 $ 35,332 $ 106,502
Income taxes expense (benefit) 1,863 (13,182) 8,041 (10,018) 15,857
Minority interest in earnings (loss) of
subsidiaries 723 (1,365) 3,639 (1,455) 10,581
Equity in (earnings) loss of affiliated
companies (5,587) 4,544 (56,018) (29,822) (48,871)
Interest expense, net 19,313 18,052 53,589 53,000 69,435
Cash (non-cash) patronage income 607 (174) 1,921 (117) 1,740
Joint venture cash distributions 4,945 3,703 7,743 8,632 26,669
Depreciation and amortization 29,456 25,535 83,460 79,569 107,590
Non-cash impairment charges - 728 342 3,631 14,950
One-time items not included in bond EBITDA (5,995) (3,730) (13,765) (9,119) (13,822)
Severance costs incurred - PMI acquisition - 211 - 882 7,821
Unrealized hedging (gain) loss (923) 3,903 (6,897) (7,391) (645)
Unrestricted entities - EBITDA (12,449) 9,123 (8,888) 13,086 (3,423)
-------- -------- --------- --------- ----------
BOND EBITDA $ 30,590 $ 35,360 $ 116,114 $ 136,210 $ 294,384
======== ======== ========= ========= ==========
ADJUSTMENTS TO BANK EBITDA:
Finance Co. and Conroe ACS restricted for Bank (1,043)
Net legal accruals (3,841)
Restructuring charges less cash paid (753)
Purina related - one-time charges 8,839
Non-cash one-time items / reserves (8,067)
Gain on sale of assets 19,429
----------
BANK EBITDA $ 308,948
==========
BANK COVENANTS
Interest expense coverage ratio - required (greater than or equal to) 2.5 4.49 x
Leverage ratio - required (less than or equal to) 4.25 2.81 x
Consolidated cash interest expense (1)
Interest expense $ 69,435
Interest earned 9,701
Change in accrued interest 1,642
Unrestricted subs interest expense (5,726)
Non-cash amortized financing costs (6,227)
----------
TOTAL BANK CONSOLIDATED CASH INTEREST EXPENSE $ 68,825
==========
Consolidated Indebtedness (2)
TOTAL INDEBTEDNESS (INCLUDING CAPITAL LEASES AND CAPITAL SECURITIES) $1,289,003
Less capital securities (190,700)
Less CPI capital lease (101,480)
Less MoArk capital lease (10,311)
Less MoArk debt (107,102)
Less CPI bonds (10,000)
Less other unrestricted subs debt (774)
----------
TOTAL BANK CONSOLIDATED INDEDTEDNESS $ 868,636
==========
BOND COVERAGE RATIO
Interest expense coverage ratio - required (greater than or equal to) 2.5 4.42 x
Bond consolidated interest expense
INTEREST EXPENSE $ 69,435
Unrestricted subs interest expense (2,958)
Capitalized interest 145
Interest on sales lease back transaction 39
----------
TOTAL BOND CONSOLIDATED INTEREST EXPENSE $ 66,661
==========
- -----------
(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.