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 quarterly period ended September 30, 2003*
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________.
Commission file number 333-84486
LAND O'LAKES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0365145
- ---------------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55112
- ---------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
(651) 481-2222
- --------------------------------------------------------------------------------
(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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12-b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
October 31, 2003: 1,102 shares of Class A common stock, 4,975 shares of Class B
common stock, 191 shares of Class C common stock, and 1,141 shares of Class D
common stock.
Land O'Lakes, Inc. is a cooperative. Our voting and non-voting common
equity can only be held by our members. No public market for voting and
non-voting common equity of Land O'Lakes, Inc. is established and it is
unlikely, in the foreseeable future, that a public market for our voting and
non-voting common equity will develop.
We maintain a website on the Internet through which additional information
about Land O' Lakes, Inc. is available. Our website address is
www.landolakesinc.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, press releases and earnings releases are
available, free of charge, on our website when they are released publicly or
filed with the SEC.
*Although Land O'Lakes, Inc. is not currently required to file this
Quarterly Report on Form 10-Q pursuant to Section 13 or 15(d), we are filing
voluntarily.
INDEX
PAGE
PART I. FINANCIAL INFORMATION........................................................................... 3
Item I. Financial Statements............................................................................. 3
LAND O'LAKES, INC.
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002................... 3
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
(unaudited).............................................................................................. 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited).. 5
Notes to Consolidated Financial Statements (unaudited)................................................... 6
LAND O'LAKES FARMLAND FEED LLC
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002.................. 22
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
(unaudited).............................................................................................. 23
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited).. 24
Notes to Consolidated Financial Statements (unaudited)................................................... 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 37
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 56
Item 4. Controls and Procedures......................................................................... 56
PART II. OTHER INFORMATION.............................................................................. 57
Item 1. Legal Proceedings............................................................................... 57
Item 6. Exhibits and Reports on Form 8-K................................................................ 57
SIGNATURES............................................................................................... 59
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
($ IN THOUSANDS)
(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 payable 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
================= ===============
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
($ IN THOUSANDS)
(UNAUDITED)
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
============== ============== ============= =============
Applied to:
Member equities
Allocated patronage refunds.............................. $ (6,231) $ (12,406) $ 29,633 $ 41,390
Deferred equities........................................ 1,635 (5,613) (12,896) (16,206)
------------- -------------- -------------- --------------
(4,596) (18,019) 16,737 25,184
Retained earnings........................................... 3,233 6,031 26,210 10,148
------------- ------------- ------------- -------------
$ (1,363) $ (11,988) $ 42,947 $ 35,332
============== ============== ============= =============
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
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
========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during periods for:
Interest, net of interest capitalized ........................... $ 52,970 $ 49,450
Income taxes recovered .......................................... $ (1,461) $ (21,654)
See accompanying notes to consolidated financial statements.
5
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes, Inc. (the "Company"), all normal, recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods. The statements are
condensed and therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2002 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 17, 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51," ("FIN 46"). The primary objectives of FIN 46 are to
provide guidance on the identification and consolidation of variable interest
entities, or VIEs, which are entities for which control is achieved through
means other than through voting rights. FIN 46 is effective immediately for all
new variable interest entities created or acquired after January 31, 2003 and no
later than October 1, 2003 for variable interest entities created or acquired
prior to February 1, 2003. As permitted by the Interpretation, the Company
early-adopted FIN 46 on July 1, 2003 and began consolidating its joint venture
interest in MoArk LLC ("MoArk"), an egg production and marketing company, in the
third quarter of 2003.
In May, 2003, the FASB issued Statement of Financial Accounting Standards
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The statement is effective for the Company as of January 1,
2004, and the Company is currently evaluating the impact of the standard.
2. MOARK LLC CONSOLIDATION AND PLANNED ACQUISITION OF MINORITY INTEREST
At December 31, 2002, the Company carried its 50% ownership interest in
MoArk under the equity method with an investment balance of $44.7 million.
Osborne Investments, LLC ("Osborne") owned the remaining interest in MoArk. In
2003, the Company increased its ownership from 50% to 57.5% with an additional
investment of $7.8 million. In addition, the Company has the right to acquire
(and Osborne has the right to require the Company to acquire) the remaining
42.5% of MoArk owned by Osborne for a $42.2 million minimum payment in 2007.
In accordance with the provisions of FIN 46, effective July 1, 2003, the
Company consolidated MoArk into its financial statements. Although Osborne has a
42.5% ownership interest in MoArk, the Company continues to be allocated 100% of
the income or loss from the operations of MoArk. In addition to consolidating
MoArk for accounting purposes, the Company has presumed that it will acquire the
remaining 42.5% in 2007. Effective July 1, 2003, the Company recorded this
presumed $42.2 million payment as a long-term liability at a present value of
$31.6 million using an effective interest rate of 7%.
6
Since the consolidation of MoArk impacted the comparability of several
categories on the financial statements, the table below summarizes selected
balance sheet items for MoArk as of September 30, 2003.
SEPTEMBER 30,
2003
-------------
Current assets................................. $ 95,632
Property, plant and equipment, net............. 84,928
Property under capital lease................... 12,588
Goodwill, net.................................. 63,985
Notes and short-term obligations............... 25,449
Other current liabilities...................... 35,834
Long-term debt (including current portion)..... 81,653
Obligation under capital lease (including
current portion)............................... 10,311
3. RESTRICTED CASH
On March 28, 2003, Cheese & Protein International LLC ("CPI"), a
consolidated joint venture, amended its lease for property and equipment
relating to its cheese manufacturing and whey processing plant in Tulare,
California. The amendment postponed the measurement of the fixed charge coverage
ratio requirement until March 2005. The amendment requires Land O'Lakes to
maintain a $20 million cash account (which may be replaced by a letter of credit
at the Company's option) to support the lease. The cash account or letter of
credit would only be drawn upon in the event of a CPI default and would reduce
amounts otherwise due under the lease. The requirement would be lifted pending
the achievement of certain financial targets by CPI.
4. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Trade accounts............................. $ 319,978 $ 237,106
Notes and contracts........................ 61,799 44,565
Notes from sale of trade receivables (see
Note 5).................................... 23,872 225,144
Other...................................... 74,237 79,024
------------- -----------
479,886 585,839
Less allowance for doubtful accounts....... 21,966 18,255
------------- -----------
Total receivables, net..................... $ 457,920 $ 567,584
============= ===========
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture, as well as, wholesale and retail food industries. Collections of
these receivables may be dependent upon economic returns in these industries.
The Company's credit risks are continually reviewed, and management believes
that adequate provisions have been made for doubtful accounts.
5. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100.0 million receivables
purchase facility with CoBank, ACB ("CoBank"). A wholly-owned, unconsolidated
qualifying special purpose entity ("QSPE") was established to purchase certain
receivables from the Company. CoBank has been granted an interest in the pool of
receivables owned by the QSPE. The transfers of the receivables from the Company
to the QSPE are structured as sales; and accordingly, the receivables
transferred to the QSPE are not reflected in the consolidated balance sheet.
However, the Company retains credit risk related to the repayment of the notes
receivable with the QSPE, which, in turn, is dependent upon the credit risk of
the QSPE's receivables pool. Accordingly, the Company has retained reserves for
estimated losses. The Company expects no significant gains or losses from the
facility. At September 30, 2003, $70.0 million was outstanding under this
facility. The total amount of accounts receivable sold during the three months
ended September 30, 2003 and 2002 were $448.3 million and $498.5 million,
respectively. The total amount of accounts receivable sold during the nine
months ended September 30, 2003 and 2002 were $1,694.6 million and $1,763.3
million, respectively.
7
6. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials................ $ 152,582 $ 141,849
Work in process.............. 33,021 33,707
Finished goods............... 315,192 270,830
------------- ------------
Total inventories............ $ 500,795 $ 446,386
============= ============
7. INVESTMENTS
A summary of investments is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
CF Industries, Inc........................... $ 249,502 $ 249,502
Agriliance LLC............................... 125,598 91,629
Ag Processing Inc............................ 38,400 37,854
Advanced Food Products LLC................... 28,350 27,418
CoBank, ACB.................................. 19,752 22,061
Melrose Dairy Proteins, LLC.................. 6,643 6,579
Universal Cooperatives....................... 6,473 6,473
Prairie Farms Dairy, Inc..................... 5,620 5,092
MoArk LLC.................................... -- 44,678
Other -- principally cooperatives and joint
ventures..................................... 60,834 54,306
------------- -----------
Total investments............................ $ 541,172 $ 545,592
============= ===========
8. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Dairy Foods.......................... $ 66,259 $ 66,718
Feed................................. 156,276 156,839
Seed................................. 13,414 16,948
Swine................................ 607 647
Agronomy............................. 65,255 69,823
Layers............................... 71,328 11,897
Other................................ 541 541
------------- -----------
Total goodwill....................... $ 373,680 $ 323,413
============= ===========
In the Layers segment, the consolidation and presumed minority interest
acquisition of MoArk caused goodwill to increase by $59.8 million, which was
partially offset by $0.4 million of amortization. Goodwill decreases in Dairy
Foods, Feed, Swine, and Agronomy resulted from amortization associated with
investments in joint ventures and cooperatives. The goodwill decrease of $3.5
million in the Seed segment was related to amortization and reclassifications.
8
OTHER INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Amortized other intangible assets:
Trademarks, less accumulated amortization
of $1,600 and $1,615, respectively......... $ 2,369 $ 2,725
Patents, less accumulated amortization of
$2,299 and $1,394, respectively............ 14,074 14,979
Agreements not to compete, less accumulated
amortization of $2,769 and $2,324,
respectively............................... 1,431 1,976
Other intangible assets, less accumulated
amortization of $7,835 and $7,343,
respectively............................... 10,442 5,127
------------- ------------
Total amortized other intangible assets......... 28,316 24,807
Total non-amortized other intangible assets --
trademarks.................................... 76,963 76,963
------------- ------------
Total other intangible assets................... $ 105,279 $ 101,770
============= ============
Amortization expense for the three months ended September 30, 2003 and 2002
was $1.4 million and $2.5 million, respectively. Amortization expense for the
nine months ended September 30, 2003 and 2002 was $3.7 million and $5.0 million,
respectively. The estimated amortization expense related to other intangible
assets subject to amortization for the next five years will approximate $3.1
million annually. The weighted-average life of the intangible assets subject to
amortization is approximately 12 years.
9. DEBT OBLIGATIONS
The Company had notes and short-term obligations of $81.2 million at
September 30, 2003 and $37.8 million at December 31, 2002. The Company also has
a $250 million 5-year revolving credit facility with a variable interest rate
based on LIBOR. There were no borrowings on this facility as of September 30,
2003.
A summary of long-term debt is as follow:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ----------
Term A Loan -- quarterly installments through
2006 (variable rate based on LIBOR) ......................................... $ 229,304 $ 288,270
Term B Loan -- quarterly installments through
2008 (variable rate based on LIBOR) ......................................... 204,874 231,417
Senior unsecured notes -- due 2011 (8.75%) .................................... 350,000 350,000
MoArk LLC debt -- due 2003 through 2023
(6.25% weighted average) .................................................... 81,653 --
Industrial development revenue bonds and
other secured notes payable -- due 2003
through 2016 (1.1% to 5.5%) ................................................. 16,700 26,268
Capital Securities of Trust Subsidiary --
due 2028 (7.45%) ............................................................ 190,700 190,700
Other debt .................................................................... 22,758 25,216
---------- ----------
1,095,989 1,111,871
Less current portion .......................................................... 72,434 104,563
---------- ----------
Total long-term debt .......................................................... $1,023,555 $1,007,308
========== ==========
In the nine months ended September 30, 2003, the Company made payments on
the Term A Loan of $59.0 million and Term B Loan of $26.5 million, of which
$50.0 million were voluntary prepayments. The weighted average interest rates on
short-term borrowings and notes outstanding at September 30, 2003 and December
31, 2002 were 3.65% and 3.87%, respectively.
Borrowings under the revolving credit facility and the term loans bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins depend on Land O'Lakes credit ratings. Based
upon Land O'Lakes existing credit ratings, the current LIBOR margins are 225
basis points for the revolving credit facility, 275 basis points for the Term A
Loan and 350 basis points for the Term B Loan. Spreads for the Alternative Base
Rate are 100 basis points lower than the applicable LIBOR spreads. LIBOR may be
set for one, two, three or six month periods at the election of Land O'Lakes. As
of September 30, 2003, interest rates on the Term A Loan and Term B Loan were
3.93% and 4.68%, respectively.
9
10. COMPREHENSIVE INCOME
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
Net earnings............................. $ 42,947 $ 35,332
Minimum pension liability adjustment..... (4,733) --
------------- -------------
Total comprehensive income............... 38,214 35,332
============= =============
The minimum pension liability adjustment is the Company's portion, net of
tax, of Agriliance's minimum pension liability adjustment.
11. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the three months ended September 30, 2003, the Company recorded
restructuring charges of $0.3 million in the Dairy Foods segment for the planned
closure of a facility in Volga, SD. For the three months ended September 30,
2002, the Company recorded restructuring charges of $0.2 million in the Feed
segment related to employee severance and outplacement costs for employees at
various locations.
For the nine months ended September 30, 2003, the Company recorded
restructuring charges of $2.8 million. Of this amount, Dairy Foods recorded a
restructuring charge of $1.0 million which represented severance costs for 44
employees as a result of closing a facility in Perham, MN and recorded $0.9
million for the planned closure of a facility in Volga, SD. Feed recorded a
restructuring charge of $0.6 million which represented severance costs related
to closing feed plants, and Seed recorded a restructuring charge of $0.3 million
for severance costs related to closing a facility. For the nine months ended
September 30, 2002, the Company recorded restructuring charges of $4.6 million.
Of this amount, Feed recorded a restructuring charge of $3.0 million which
represented severance and outplacement costs for 136 employees at the Ft. Dodge,
IA office facility and other feed plant facilities and Dairy Foods recorded a
restructuring charge of $1.6 million which represented severance and
outplacement costs for 82 employees for the Faribault, MN plant closure.
A summary of restructuring activities and resulting reserve for the nine
months ended September 30, 2003 is as follows:
BALANCE BALANCE
DECEMBER 31, CHARGE TO UTILIZED SEPTEMBER 30,
2002 EXPENSE IN 2003 2003
----------- ----------- --------- -----------
Termination benefits.......... $ 8,871 $ 2,827 $ (8,865) $ 2,833
Other......................... 1,604 - (401) 1,203
----------- ----------- ---------- -----------
Total......................... $ 10,475 $ 2,827 $ (9,266) $ 4,036
=========== =========== ========== ===========
IMPAIRMENT CHARGES
For the three months ended September 30, 2002, the Company recorded an
impairment charge of $0.7 million in the Feed segment for the write-down of
certain plant assets to their estimated fair value.
For the nine months ended September 30, 2003, the Company recorded
impairment charges of $0.3 million in the Seed segment and $0.1 million in the
Feed segment for write-downs of certain plant assets to their estimated fair
value. For the nine months ended September 30, 2002, the Company recorded an
impairment charge of $3.6 million. Feed recorded a $2.4 million charge related
to the write-down of certain impaired plant assets to their estimated fair
value, and Dairy Foods recorded a $1.2 million charge for impairment related to
the Faribault, MN dairy plant closure.
10
12. GAIN ON LEGAL SETTLEMENTS
During the nine months ended September 30, 2003 and 2002, the Company
recognized gains on legal settlements of $22.5 million and $36.8 million,
respectively, of which $3.4 million was recognized for the three month period
ended September 30, 2003, and $4.1 million was recognized for the three months
ended September 30, 2002. The gains represent cash received from product
suppliers against whom the Company alleged certain price-fixing claims.
13. GAIN ON SALE OF INTANGIBLES
For the nine months ended September 30, 2003, the Company recorded a $0.6
million gain on the sale of a customer list relating to the divestiture of a
joint venture in Taiwan. For the nine months ended September 30, 2002, the
Company recorded a $4.2 million gain on the sale of a customer list pertaining
to the feed phosphate distribution business.
14. (GAIN) LOSS ON DIVESTITURE OF BUSINESSES
For the nine months ended September 30, 2003, the Company recorded a loss of
$0.7 million on the divestiture of a Feed business in Taiwan. For the nine
months ended September 30, 2002, the Company recorded a gain of $4.9 million
related to the divestitures of a Crop Seed business for $3.7 million and the
Dairy Foods business in Poland for $1.2 million.
15. GAIN ON SALE OF INVESTMENT
For the nine months ended September 30, 2003, the Company recorded a gain of
$0.8 million on the sale of a Feed investment in a swine joint venture.
16. SEGMENT INFORMATION
The Company operates in six segments: Dairy Foods, Animal Feed, Crop Seed,
Swine, Agronomy and Layers.
The Dairy Foods segment produces, markets and sells products such as
butter, spreads, cheese, and other dairy related products. Products are sold
under well-recognized national brand names including LAND O LAKES, the Indian
Maiden logo and Alpine Lace, as well as under regional brand names such as New
Yorker.
The Animal Feed segment is largely made up of a 92% ownership position in
Land O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"). Land O'Lakes
Farmland Feed develops, produces, markets and distributes animal feeds such as
ingredient feed, formula feed, milk replacers, vitamins and additives.
The Crop Seed segment is a supplier and distributor of crop seed products
in the United States. A variety of crop seed is sold, including alfalfa,
soybeans, corn, forage and turf grasses.
The Swine segment has three programs: farrow-to-finish, swine aligned and
cost-plus. The farrow-to-finish program produces and sells market hogs. The
swine aligned program raises feeder pigs which are sold to local member
cooperatives. The cost-plus program provides minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation.
The Agronomy segment consists primarily of the Company's 50% ownership in
Agriliance LLC ("Agriliance"), which is accounted for under the equity method.
Agriliance markets and sells two primary product lines: crop protection
(including herbicides and pesticides) and crop nutrients (including fertilizers
and micronutrients).
The Layers segment consists of the Company's joint venture in MoArk, which
was consolidated as of July 1, 2003. MoArk produces and markets shell eggs and
egg products that are sold at retail and wholesale for consumer and industrial
use throughout the United States.
The Company allocates corporate administration expense to all of its
business segments, both directly and indirectly. Corporate staff functions that
are able to determine actual services provided to each segment allocate expense
on a direct and predetermined basis. All other corporate staff functions
allocate expense indirectly based on each segment's percent of total invested
capital. A majority of corporate administration expense is allocated directly.
11
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS OTHER CONSOLIDATED
----------- ---------- -------- -------- ---------- -------- -------- ------------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales..................... $ 782,333 $ 582,949 $ 46,483 $ 22,824 $ -- $142,129 $ 3,570 $1,580,288
Cost of sales................. 742,415 522,457 36,412 21,701 -- 121,440 1,894 1,446,319
Selling, general and
administration.............. 33,653 58,599 12,003 1,353 3,228 12,075 1,136 122,047
Restructuring and impairment
charges..................... 300 -- 2 -- -- -- -- 302
Interest expense (income),
net......................... 7,108 6,285 (212) 1,611 1,723 3,427 (629) 19,313
Gain on legal settlements..... (65) (3,290) -- -- -- -- -- (3,355)
Loss on sale of investment.... -- 26 -- -- -- -- -- 26
Equity in (earnings) loss of
affiliated companies........ (2,192) (189) -- (339) 464 (3,344) 13 (5,587)
Minority interest in earnings
of subsidiaries............. -- 723 -- -- -- -- -- 723
---------- ---------- -------- -------- ---------- -------- -------- ----------
Earnings (loss) before income
taxes....................... $ 1,114 $ (1,662) $ (1,722) $ (1,502) $ (5,415) $ 8,531 $ 1,156 $ 500
========== =========== ========= ========= =========== ======== ======== ==========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales..................... $ 710,519 $ 604,841 $ 32,094 $ 20,881 $ -- $ -- $ 3,400 $1,371,735
Cost of sales................. 671,691 532,305 28,325 24,781 -- -- 1,901 1,259,003
Selling, general and
administration............. 42,641 62,054 11,477 1,563 3,747 528 1,585 123,595
Restructuring and impairment
charges.................... -- 942 -- -- -- -- -- 942
Interest expense (income),
net ....................... 5,503 7,446 452 1,329 2,608 1,148 (434) 18,052
Gain on legal settlements..... (94) (4,042) -- -- -- -- -- (4,136)
Gain on divestiture of
businesses................ -- (24) (3,706) -- -- -- -- (3,730)
Equity in (earnings) loss of
affiliated companies........ (560) (834) -- 484 2,733 2,578 143 4,544
Minority interest in (loss)
earnings of subsidiaries.... (2,506) 1,141 -- -- -- -- -- (1,365)
----------- ----------- --------- --------- ----------- --------- --------- -----------
(Loss) earnings before income
taxes....................... $ (6,156) $ 5,853 $ (4,454) $ (7,276) $ (9,088) $ (4,254) $ 205 $ (25,170)
=========== =========== ========== ========== ============ ========== ========= ===========
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS OTHER CONSOLIDATED
----------- ---------- -------- -------- ---------- -------- -------- ------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales..................... $2,083,571 $1,779,102 $349,475 $ 66,490 $ -- $142,129 $ 10,016 $4,430,783
Cost of sales................. 1,976,664 1,579,027 298,687 64,982 -- 121,440 5,542 4,046,342
Selling, general and
administration............. 106,236 178,499 35,142 4,042 9,911 13,053 5,393 352,276
Restructuring and impairment
charges.................... 1,900 707 562 -- -- -- -- 3,169
Interest expense (income),
net........................ 21,157 16,250 1,165 4,235 6,465 6,073 (1,756) 53,589
Gain on legal settlements..... (103) (22,429) -- -- -- -- -- (22,532)
Gain on sale of intangible.... -- (550) -- -- -- -- -- (550)
Loss on divestiture of
business................... -- 700 -- -- -- -- -- 700
Gain on sale of investment.... -- (820) -- -- -- -- -- (820)
Equity in (earnings) loss of
affiliated companies........ (3,322) (921) -- (49) (44,173) (7,597) 44 (56,018)
Minority interest in earnings
of subsidiaries............. -- 3,639 -- -- -- -- -- 3,639
---------- ---------- -------- -------- ---------- -------- -------- ----------
(Loss) earnings before income
taxes...................... $ (18,961) $ 25,000 $ 13,919 $ (6,720) $ 27,797 $ 9,160 $ 793 $ 50,988
=========== ========== ======== ========= ========== ======== ======== ==========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales..................... $2,151,949 $ 1,810,564 $ 284,986 $ 66,575 $ -- $ -- $ 9,663 $4,323,737
Cost of sales................. 2,029,720 1,593,719 241,980 68,409 3 -- 5,296 3,939,127
Selling, general and
administration.............. 127,317 188,104 34,634 4,792 13,232 1,713 5,517 375,309
Restructuring and impairment
charges..................... 2,800 5,418 -- -- -- -- -- 8,218
Interest expense (income),
net ........................ 15,298 22,546 2,168 3,966 6,906 3,345 (1,229) 53,000
Gain on legal settlements..... (922) (35,913) -- -- -- -- -- (36,835)
Gain on sale of intangible.... -- (4,184) -- -- -- -- -- (4,184)
(Gain) loss on divestiture of
businesses.................. (1,281) (24) (3,706) -- -- -- 76 (4,935)
Equity in (earnings) loss of
affiliated companies........ (497) (1,402) (105) 688 (36,633) 7,752 375 (29,822)
Minority interest in (loss)
earnings of subsidiaries.... (5,075) 3,511 -- -- -- -- 109 (1,455)
---------- ----------- --------- --------- ----------- --------- --------- -----------
(Loss) earnings before income
taxes...................... $ (15,411) $ 38,789 $ 10,015 $ (11,280) $ 16,492 $ (12,810) $ (481) $ 25,314
=========== =========== ========= ========== =========== ========== ========== ==========
12
17. CONSOLIDATING FINANCIAL INFORMATION
The Company has entered into financing arrangements which are guaranteed by
the Company and certain of its wholly-owned and majority-owned subsidiaries and
limited liability companies (the "Guarantor Subsidiaries"). Such guarantees are
full, unconditional and joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries and limited liability companies (the "Non-Guarantor Subsidiaries").
The supplemental financial information reflects the investments of the Company
in the Guarantor and Non-Guarantor Subsidiaries using the equity method of
accounting.
13
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments ................... $ 12,331 $ 3,927 $ 2,557 $ 1,985 $ -- $ 20,800
Restricted cash .................. 20,000 -- -- -- -- 20,000
Receivables, net ................. 397,326 18,476 156,542 113,734 (228,158) 457,920
Inventories ...................... 290,973 50,471 106,818 52,533 -- 500,795
Prepaid expenses ................. 34,171 2,936 7,994 5,770 -- 50,871
Other current assets ............. 39,297 1,191 -- 673 -- 41,161
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ........ 794,098 77,001 273,911 174,695 (228,158) 1,091,547
Investments ........................ 1,303,099 223 18,505 9,552 (790,207) 541,172
Property, plant and equipment,
net .............................. 256,721 13,541 233,736 137,493 -- 641,491
Property under capital lease ....... -- -- -- 111,558 -- 111,558
Goodwill, net ...................... 184,334 3,224 121,862 64,260 -- 373,680
Other intangibles .................. 4,084 1,178 95,744 4,273 -- 105,279
Other assets ....................... 142,796 582 26,987 54,982 (19,188) 206,159
----------- ----------- ----------- ----------- ----------- -----------
Total assets ................ $ 2,685,132 $ 95,749 $ 770,745 $ 556,813 $(1,037,553) $ 3,070,886
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ................... $ 536 $ 2,900 $ 977 $ 114,607 $ (37,797) $ 81,223
Current portion of long-term
debt .......................... 62,890 55,171 -- 9,572 (55,199) 72,434
Current portion of obligation
under capital lease ........... -- -- -- 10,083 -- 10,083
Accounts payable ................. 357,219 14,138 95,615 38,041 (132,469) 372,544
Accrued expenses ................. 194,048 2,563 27,177 16,960 (12,255) 228,493
Patronage refunds and other
member equities payable ........ 8,900 -- -- -- -- 8,900
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities ... 623,593 74,772 123,769 189,263 (237,720) 773,677
Long-term debt ..................... 941,139 9,961 -- 82,081 (9,626) 1,023,555
Obligation under capital lease ..... -- -- -- 101,708 -- 101,708
Employee benefits and other
liabilities ...................... 111,939 89 26,674 1,310 -- 140,012
Deferred tax liabilities ........... 27,191 1,168 -- 13,519 -- 41,878
Minority interests ................. 51,924 -- 3,050 5,736 -- 60,710
Equities:
Capital stock .................... 2,143 966 502,116 91,145 (594,227) 2,143
Member equities .................. 870,813 -- -- -- -- 870,813
Accumulated other
comprehensive loss ............. (4,733) -- -- -- -- (4,733)
Retained earnings ................ 61,123 8,793 115,136 72,051 (195,980) 61,123
----------- ----------- ----------- ----------- ----------- -----------
Total equities .............. 929,346 9,759 617,252 163,196 (790,207) 929,346
----------- ----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Total liabilities and equities ..... $ 2,685,132 $ 95,749 $ 770,745 $ 556,813 $(1,037,553) $ 3,070,886
=========== =========== =========== =========== =========== ===========
14
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ----------- ------------
(UNAUDITED)
Net sales........................ $ 755,684 $ 65,744 $ 522,966 $ 235,894 $ -- $ 1,580,288
Cost of sales.................... 700,970 63,387 467,664 214,298 -- 1,446,319
----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 54,714 2,357 55,302 21,596 -- 133,969
Selling, general and administration 48,176 3,989 54,802 15,080 -- 122,047
Restructuring and impairment
charges.......................... 302 -- -- -- -- 302
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations.. 6,236 (1,632) 500 6,516 -- 11,620
Interest expense (income), net... 17,774 614 (1,609) 2,534 -- 19,313
Gain on legal settlements........ (3,148) -- (207) -- -- (3,355)
Loss on sale of investment....... -- -- 26 -- -- 26
Equity in (earnings) loss of
affiliated companies........... (6,516) -- (248) (3,297) 4,474 (5,587)
Minority interest in earnings of
subsidiaries .................. 345 -- 139 239 -- 723
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings before income
taxes.......................... (2,219) (2,246) 2,399 7,040 (4,474) 500
Income tax (benefit) expense..... (856) (1,066) -- 3,785 -- 1,863
------------ ------------ ----------- ----------- ----------- -----------
Net (loss) earnings.............. $ (1,363) $ (1,180) $ 2,399 $ 3,255 $ (4,474) $ (1,363)
============ ============ =========== =========== ============ ============
15
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------ ------------
(UNAUDITED)
Net sales ......................... $ 2,269,756 $ 164,446 $ 1,692,017 $ 304,564 $ -- $ 4,430,783
Cost of sales ..................... 2,097,762 156,713 1,501,445 290,422 -- 4,046,342
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 171,994 7,733 190,572 14,142 -- 384,441
Selling, general and
administration................... 153,430 10,438 170,352 18,056 -- 352,276
Restructuring and impairment
charges ......................... 1,902 560 707 -- -- 3,169
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations ... 16,662 (3,265) 19,513 (3,914) -- 28,996
Interest expense (income), net .... 53,344 1,955 (4,889) 3,179 -- 53,589
Gain on legal settlements ......... (19,323) -- (3,209) -- -- (22,532)
Gain on sale of intangible ........ -- -- -- (550) -- (550)
Loss on divestiture of business ... 700 -- -- -- -- 700
Gain on sale of investment ........ -- -- (820) -- -- (820)
Equity in (earnings) loss of
affiliated companies ............ (73,166) -- (804) (3,297) 21,249 (56,018)
Minority interest in earnings of
subsidiaries .................... 2,522 -- 510 607 -- 3,639
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes ........................... 52,585 (5,220) 28,725 (3,853) (21,249) 50,988
Income tax expense (benefit) ...... 9,638 (987) -- (610) -- 8,041
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ............... $ 42,947 $ (4,233) $ 28,725 $ (3,243) $ (21,249) $ 42,947
=========== =========== =========== =========== =========== ===========
16
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss) ...................... $ 42,947 $ (4,233) $ 28,725 $ (3,243) $ (21,249) $ 42,947
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization .......... 42,728 1,662 29,557 9,513 -- 83,460
Amortization of deferred financing
charges ............................. 3,489 -- -- -- -- 3,489
Bad debt expense ....................... 922 -- 1,777 -- -- 2,699
Proceeds from patronage revolvement
received ............................. 2,671 -- -- -- -- 2,671
Non-cash patronage income .............. (1,638) -- -- -- -- (1,638)
Receivable from legal settlement ....... 90,707 -- 6,000 -- -- 96,707
Deferred income tax expense ............ 6,757 -- -- -- -- 6,757
(Increase) decrease in other assets .... (6,778) 11,649 (549) (665) 5,251 8,908
Increase (decrease) in other
liabilities .......................... 5,811 (76) (1,672) (36) -- 4,027
Restructuring and impairment charges ... 1,902 560 707 -- -- 3,169
Loss on divestiture of business ........ 700 -- -- -- -- 700
Equity in (earnings) loss of affiliated
companies ............................ (73,166) -- (804) (3,297) 21,249 (56,018)
Minority interest ...................... 2,522 -- 510 607 -- 3,639
Other .................................. (14,136) 879 (1,253) 1,887 -- (12,623)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables ............................ 69,208 11,581 86,838 (28,200) 2,968 142,395
Inventories ............................ (38,142) 23,926 3,465 (5,812) -- (16,563)
Other current assets ................... 145,060 1,050 2,401 839 -- 149,350
Accounts payable ....................... (157,488) (45,681) (46,469) 1,858 (100,549) (348,329)
Accrued expenses ....................... 17,143 919 398 2,803 (7,030) 14,233
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities ............................. 141,219 2,236 109,631 (23,746) (99,360) 129,980
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment............................... (32,091) (582) (15,678) (6,978) -- (55,329)
Payments for investments ................. (9,815) -- -- -- -- (9,815)
Proceeds from divestiture of business .... 465 -- -- -- -- 465
Proceeds from sale of investments ........ -- -- 3,000 -- -- 3,000
Proceeds from sale of property, plant
and equipment .......................... 16,148 -- 1,936 -- -- 18,084
Dividends from investments in
affiliated companies.................... 5,193 -- -- -- -- 5,193
Increase in restricted cash .............. (20,000) -- -- -- -- (20,000)
Other .................................... 458 -- 2,540 -- -- 2,998
--------- --------- --------- --------- --------- ---------
Net cash used by investing activities .... (39,642) (582) (8,202) (6,978) -- (55,404)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in short-term debt ... (23,554) -- 1,165 5,659 30,060 13,330
Proceeds from issuance of long-term debt.. 6,215 -- -- -- -- 6,215
Payments on principal of long-term debt .. (106,890) (236) (92,682) (2,028) 94,710 (107,126)
Payments on principal of capital lease
obligation ............................. -- -- -- (7,171) -- (7,171)
Payments for redemption of member
equities................................ (23,797) -- -- -- -- (23,797)
Other .................................... 446 (75) (5,894) 31,379 (25,410) 446
--------- --------- --------- --------- --------- ---------
Net cash (used) provided by financing
activities ............................. (147,580) (311) (97,411) 27,839 99,360 (118,103)
--------- --------- --------- --------- --------- ---------
Net (decrease) increase in cash and
short-term investment .................. (46,003) 1,343 4,018 (2,885) -- (43,527)
Cash and short-term investments at
beginning of period ........................ 58,334 2,584 (1,461) 4,870 -- 64,327
--------- --------- --------- --------- --------- ---------
Cash and short-term investments at end of
period ................................... $ 12,331 $ 3,927 $ 2,557 $ 1,985 $ -- $ 20,800
========= ========= ========= ========= ========= =========
17
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and short-term
investments ..................... $ 58,334 $ 2,584 $ (1,461) $ 4,870 $ -- $ 64,327
Receivables, net ................... 472,165 30,057 150,447 45,377 (130,462) 567,584
Receivable from legal settlement ... 90,707 -- 6,000 -- -- 96,707
Inventories ........................ 254,517 74,397 108,493 8,979 -- 446,386
Prepaid expenses ................... 176,541 4,840 7,625 240 -- 189,246
Other current assets ............... 12,868 337 -- 673 -- 13,878
---------- ---------- ---------- ---------- ---------- ----------
Total current assets .......... 1,065,132 112,215 271,104 60,139 (130,462) 1,378,128
Investments .......................... 1,163,031 1,102 20,777 2,496 (641,814) 545,592
Property, plant and equipment, net.... 260,078 23,131 246,402 50,249 -- 579,860
Property under capital lease ......... -- -- -- 105,736 -- 105,736
Goodwill, net ........................ 187,755 13,172 121,673 813 -- 323,413
Other intangibles .................... 4,243 723 96,455 349 -- 101,770
Other assets ......................... 150,909 2,738 27,064 45,049 (13,937) 211,823
---------- ---------- ---------- ---------- ---------- ----------
Total assets .................. $2,831,148 $ 153,081 $ 783,475 $ 264,831 $ (786,213) $3,246,322
========== ========== ========== ========== ========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ..................... $ 27,040 $ 2,818 $ 59 $ 66,174 $ (58,262) $ 37,829
Current portion of long-term debt .. 104,347 64,963 -- 47 (64,794) 104,563
Obligation under capital lease ..... -- -- -- 108,279 -- 108,279
Accounts payable ................... 503,851 68,329 117,563 18,553 (6,510) 701,786
Accrued expenses ................... 158,323 1,644 45,361 4,526 (5,225) 204,629
Patronage refunds and other
member equities payable .......... 12,388 -- -- -- -- 12,388
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities...... 805,949 137,754 162,983 197,579 (134,791) 1,169,474
Long-term debt ....................... 988,696 10,197 -- 18,023 (9,608) 1,007,308
Employee benefits and other
liabilities ........................ 75,588 1,333 26,071 1,348 -- 104,340
Minority interests ................... 49,402 -- -- 4,285 -- 53,687
Equities:
Capital stock ...................... 2,190 1,084 507,956 61,123 (570,163) 2,190
Member equities .................... 873,659 -- -- -- -- 873,659
Retained earnings .................. 35,664 2,713 86,465 (17,527) (71,651) 35,664
---------- ---------- ---------- ---------- ---------- ----------
Total equities ................ 911,513 3,797 594,421 43,596 (641,814) 911,513
---------- ---------- ---------- ---------- ---------- ----------
Commitments and contingencies
Total liabilities and
equities ........................... $2,831,148 $ 153,081 $ 783,475 $ 264,831 $ (786,213) $3,246,322
========== ========== ========== ========== ========== ==========
18
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------ ------------
(UNAUDITED)
Net sales ......................... $ 695,463 $ 63,822 $ 581,423 $ 31,027 $ -- $ 1,371,735
Cost of sales ..................... 640,356 70,672 511,446 36,529 -- 1,259,003
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 55,107 (6,850) 69,977 (5,502) -- 112,732
Selling, general and
administration .................. 65,659 (5,983) 59,077 4,842 -- 123,595
Restructuring and impairment
charges ......................... -- -- 942 -- -- 942
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations ... (10,552) (867) 9,958 (10,344) -- (11,805)
Interest expense (income), net .... 18,052 989 (772) (217) -- 18,052
Gain on legal settlements ......... (4,136) -- -- -- -- (4,136)
(Gain) loss on divestiture of
businesses ...................... (3,078) (3,682) -- 3,030 -- (3,730)
Equity in loss (earnings) of
affiliated companies ............ 1,470 -- (603) -- 3,677 4,544
Minority interest in earnings
(loss) of subsidiaries .......... 3,516 -- (78) (4,803) -- (1,365)
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings before income
taxes ........................... (26,376) 1,826 11,411 (8,354) (3,677) (25,170)
Income tax (benefit) expense ...... (14,388) 1,113 (286) 379 -- (13,182)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) earnings ............... $ (11,988) $ 713 $ 11,697 $ (8,733) $ (3,677) $ (11,988)
=========== =========== =========== =========== =========== ===========
19
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------ ------------
(UNAUDITED)
Net sales ......................... $ 2,340,968 $ 167,723 $ 1,734,131 $ 80,915 $ -- $ 4,323,737
Cost of sales ..................... 2,175,800 150,725 1,523,648 88,954 -- 3,939,127
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 165,168 16,998 210,483 (8,039) -- 384,610
Selling, general and
administration .................. 172,093 16,800 177,964 8,452 -- 375,309
Restructuring and impairment
charges ......................... 2,800 -- 5,418 -- -- 8,218
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations ... (9,725) 198 27,101 (16,491) -- 1,083
Interest expense (income), net .... 52,625 3,021 (2,211) (435) -- 53,000
Gain on legal settlements ......... (36,835) -- -- -- -- (36,835)
Gain on sale of intangible ........ -- -- (4,184) -- -- (4,184)
(Gain) loss on divestiture of
businesses ...................... (2,714) (3,682) -- 1,461 -- (4,935)
Equity in (earnings) loss of
affiliated companies ............ (49,182) -- (839) -- 20,199 (29,822)
Minority interest in earnings
(loss) of subsidiaries .......... 2,800 -- 230 (4,485) -- (1,455)
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes............................ 23,581 859 34,105 (13,032) (20,199) 25,314
Income tax (benefit) expense ...... (11,751) 1,526 (782) 989 -- (10,018)
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ............... $ 35,332 $ (667) $ 34,887 $ (14,021) $ (20,199) $ 35,332
=========== =========== =========== =========== =========== ===========
20
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss) ................. $ 35,332 $ (667) $ 34,887 $ (14,021) $ (20,199) $ 35,332
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization ..... 37,908 2,885 33,963 2,524 -- 77,280
Amortization of deferred financing
charges......................... 2,289 -- -- -- -- 2,289
Bad debt expense .................. 957 -- 2,175 -- -- 3,132
Proceeds from patronage revolvement
received ........................ 319 -- -- -- -- 319
Non-cash patronage income ......... (530) -- -- -- -- (530)
(Increase) decrease in other assets (31,394) 2,673 (15,334) 6,554 5,381 (32,120)
Increase (decrease) in other
liabilities .................... 8,400 (654) (2,928) 148 -- 4,966
Restructuring and impairment
charges......................... 2,800 -- 5,418 -- -- 8,218
(Gain) loss on divestiture of
businesses...................... (2,714) (3,682) -- 1,461 -- (4,935)
Equity in (earnings) loss of
affiliated companies............. (49,182) -- (839) -- 20,199 (29,822)
Minority interest ................. 2,800 -- 230 (4,485) -- (1,455)
Other ............................. (6,988) -- 194 558 -- (6,236)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables ....................... 189,843 (10,407) 11,201 (6,791) (79,272) 104,574
Inventories ....................... (14,402) (2,569) (1,124) (887) -- (18,982)
Other current assets .............. 88,124 7,112 3,530 (14) -- 98,752
Accounts payable .................. (285,348) 2,219 (20,038) 1,730 17,133 (284,304)
Accrued expenses .................. 34,442 (4,847) 3,565 1,088 -- 34,248
--------- --------- --------- --------- ---------- ---------
Net cash provided (used) by
operating activities .............. 12,656 (7,937) 54,900 (12,135) (56,758) (9,274)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment....................... (39,355) (1,083) (14,338) (2,482) -- (57,258)
Payments for investments ............ (3,315) (4) -- (1,194) (556) (5,069)
Proceeds from divestiture of
businesses......................... 3,351 -- -- -- -- 3,351
Proceeds from sale of investments ... 18,620 270 2,044 150 -- 21,084
Proceeds from sale of property, plant
and equipment ..................... 5,963 -- 5,692 -- -- 11,655
Dividends from investments in
affiliated companies............ 8,632 -- -- -- -- 8,632
Other ............................... 3,980 -- -- -- -- 3,980
--------- --------- --------- --------- ---------- ---------
Net cash used by investing
activities ........................ (2,124) (817) (6,602) (3,526) (556) (13,625)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease) in short-term
debt .............................. 30,603 (7,588) (4,169) 8,391 15,170 42,407
Proceeds from issuance of long-term
debt............................... 4,520 229 -- 24 -- 4,773
Payments on principal of long-term
debt .............................. (87,588) -- (44,610) (2,421) 52,844 (81,775)
Payments for redemption of member
equities .......................... (36,970) -- -- -- -- (36,970)
Other ............................... (3,642) 5,994 (581) 11,102 (10,700) 2,173
--------- --------- --------- --------- ---------- ---------
Net cash (used) provided by financing
activities ........................ (93,077) (1,365) (49,360) 17,096 57,314 (69,392)
--------- --------- --------- --------- ---------- ---------
Net (decrease) increase in cash and
short-term investments ............. (82,545) (10,119) (1,062) 1,435 -- (92,291)
Cash and short-term investments at
beginning period..................... 111,054 9,090 (1,027) 11,052 -- 130,169
--------- --------- --------- --------- ---------- ---------
Cash and short-term investments at end
of period............................ $ 28,509 $ (1,029) $ (2,089) $ 12,487 $ -- $ 37,878
========= ========= ========= ========= ========== =========
21
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments..................... $ 2,557 $ 356
Receivables, net.................................... 46,946 127,382
Receivable from legal settlement.................... -- 6,000
Inventories......................................... 113,998 113,078
Prepaid expenses and other current assets........... 8,294 7,835
Note receivable -- Land O'Lakes, Inc................ 124,203 29,493
--------------- -------------
Total current assets........................ 295,998 284,144
Investments........................................... 19,808 22,973
Property, plant and equipment, net.................... 239,049 251,739
Goodwill, net......................................... 122,137 122,486
Other intangibles..................................... 96,005 96,804
Other assets.......................................... 28,478 28,762
--------------- -------------
Total assets................................ $ 801,475 $ 806,908
=============== =============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations.................... $ 977 $ 2,400
Accounts payable.................................... 102,793 121,219
Accrued expenses.................................... 29,552 48,134
--------------- -------------
Total current liabilities................... 133,322 171,753
Employee benefits and other liabilities............... 27,984 29,447
Minority interests.................................... 6,436 2,960
Equities:
Contributed capital................................. 515,376 515,376
Retained earnings................................... 118,357 87,372
--------------- -------------
Total equities.............................. 633,733 602,748
--------------- -------------
Commitments and contingencies
Total liabilities and equities........................ $ 801,475 $ 806,908
=============== =============
See accompanying notes to consolidated financial statements.
22
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
($ IN THOUSANDS)
(UNAUDITED)
Net sales............................... $ 582,259 $ 602,891 $ 1,776,015 $1,798,643
Cost of sales........................... 522,109 530,858 1,577,419 1,583,446
------------ ----------- ------------ ----------
Gross profit............................ 60,150 72,033 198,596 215,197
Selling, general and administration..... 57,509 60,378 174,947 181,208
Restructuring and impairment charges.... -- 942 707 5,418
------------ ----------- ------------ ----------
Earnings from operations................ 2,641 10,713 22,942 28,571
Interest income, net.................... (1,619) (737) (4,867) (2,081)
Gain on legal settlements............... (207) -- (3,209) --
Gain on sale of intangible.............. -- -- -- (4,184)
Loss (gain) on sale of investment....... 26 -- (820) --
Equity in earnings of affiliated
companies............................... (248) (576) (804) (839)
Minority interest in earnings of
subsidiaries............................ 378 194 1,117 680
------------ ----------- ------------ ----------
Earnings before income taxes............ 4,311 11,832 31,525 34,995
Income tax expense...................... 222 259 540 565
------------ ----------- ------------ ----------
Net earnings............................ $ 4,089 $ 11,573 $ 30,985 $ 34,430
============ =========== ============ ==========
See accompanying notes to consolidated financial statements.
23
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 30,985 $ 34,430
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.......................... 29,942 34,333
Bad debt expense....................................... 1,777 2,175
Receivable from legal settlement....................... 6,000 --
Decrease (increase) in other assets.................... 284 (15,101)
Decrease in other liabilities.......................... (1,431) (2,993)
Restructuring and impairment charges................... 707 5,418
Equity in earnings of affiliated companies............. (804) (839)
Minority interest...................................... 1,117 680
Gain on sale of investments............................ (820) --
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables............................................ 78,659 7,815
Inventories............................................ 870 875
Other current assets................................... 2,311 3,552
Accounts payable....................................... (42,947) (21,853)
Accrued expenses....................................... -- 3,919
-------------- -------------
Net cash provided by operating activities................. 106,650 52,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (16,039) (14,298)
Proceeds from sale of investments......................... 3,000 2,044
Proceeds from sale of property, plant and equipment....... 1,936 5,692
Other..................................................... 2,540 --
-------------- -------------
Net cash used by investing activities................... (8,563) (6,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt............................... (1,176) (2,000)
Proceeds from note receivable from Land O'Lakes, Inc...... 370,790 339,982
Payments on note payable to Land O'Lakes, Inc............. (465,500) (386,850)
--------------- --------------
Net cash used by financing activities..................... (95,886) (48,868)
--------------- --------------
Net increase (decrease) in cash and short-term
investments ............................................ 2,201 (3,019)
Cash and short-term investments at beginning of period...... 356 3,019
-------------- -------------
Cash and short-term investments at end of period............ $ 2,557 $ --
============== =============
See accompanying notes to consolidated financial statements.
24
LAND O'LAKES FARMLAND FEED LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes Farmland Feed LLC (the "Company"), all normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations and cash flows for the interim periods. The statements
are condensed and therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2002 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
2. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Trade accounts............................. $ 38,108 $ 22,458
Notes and contracts........................ 2,872 23,494
Notes from sale of trade receivables (see -- 83,158
Note 3)....................................
Other...................................... 18,351 8,871
------------- -----------
59,331 137,981
Less allowance for doubtful accounts....... 12,385 10,599
------------- -----------
Total receivables, net..................... $ 46,946 $ 127,382
============= ===========
3. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company along with Land O'Lakes, Inc. ("Land O'Lakes")
established a $100.0 million receivables purchase facility with CoBank, ACB
("CoBank"). A wholly-owned unconsolidated qualifying special purpose entity, LOL
Farmland Feed SPV, LLC, ("QSPE"), was established to purchase certain
receivables from the Company along with Land O'Lakes. CoBank has been granted an
interest in the receivables owned by the QSPE. The transfers of the receivables
from the Company to the QSPE are structured as sales; and accordingly, the
receivables transferred to the QSPE are not reflected in the Company's
consolidated balance sheet. However, the Company retains the credit risk related
to the repayment of the notes receivable with the QSPE, which in turn is
dependent upon the credit risk of the QSPE's receivables. Accordingly, the
Company has retained reserves for estimated losses. The Company expects no
significant gains or losses from the sale of the receivables. At September 30,
2003, $70.0 million was outstanding under this facility. The total amount of
accounts receivable sold during the three months ended September 30, 2003 and
2002 were $513.2 million and $561.5 million, respectively. The total amount of
accounts receivable sold during the nine months ended September 30, 2003 and
2002 were $1,584.3 million and $1,686.7 million, respectively.
4. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
Raw materials..................... $ 76,936 $ 83,187
Finished goods.................... 37,062 29,891
----------- -----------
Total inventories................. $ 113,998 $ 113,078
=========== ===========
25
5. INVESTMENTS
The Company's investments are as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
New Feeds, LLC.......................... $ 3,054 $ 3,033
Agland-Land O'Lakes Feed, LLC........... 2,432 2,585
Pro-Pet, LLC............................ 2,150 2,326
Northern Country Feeds, LLC............. 1,762 1,704
LOL Farmland Feed SPV, LLC.............. 1,000 1,000
CalvaAlto Liquid, LLC................... 1,302 1,302
Strauss Feeds, LLC...................... 1,336 1,041
Nutrikowi Farmland, S.A. de C.V......... 876 876
Dakotaland Feeds, LLC................... 839 744
Harmony Farms, LLC...................... -- 2,435
Other................................... 5,057 5,927
----------- -----------
Total investments....................... $ 19,808 $ 22,973
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The change in the carrying amount of goodwill for the nine months ended
September 30, 2003, is as follows.
Balance as of December 31, 2002....................... $ 122,486
Amortization expense................................ (349)
------------
Balance as of September 30, 2003...................... $ 122,137
===========
OTHER INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- ------------
Amortized other intangible assets
Trademarks, less accumulated amortization of $320 and $240, respectively...... $ 562 $ 621
Patents, less accumulated amortization of $2,299 and $1,106, respectively..... 14,074 14,978
Agreements not to compete, less accumulated amortization of $778 and $560,
respectively................................................................ 623 775
Other intangible assets, less accumulated amortization of $6,147 and
$5,991, respectively........................................................ 3,783 3,467
----------- ------------
Total amortized other intangible assets......................................... 19,042 19,841
Total non-amortized other intangible assets-trademarks.......................... 76,963 76,963
----------- ------------
Total other intangible assets................................................... $ 96,005 $ 96,804
=========== ============
Amortization expense for the three months ended September 30, 2003 and 2002
was $0.7 million and $2.1 million, respectively. Amortization expense for the
nine months ended September 30, 2003 and 2002 was $2.0 million and $3.9 million,
respectively. The estimated amortization expense related to other intangible
assets subject to amortization for the next five years will approximate $2.2
million annually. The weighted-average life of the intangible assets subject to
amortization is approximately 13 years.
7. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the nine months ended September 30, 2003, the Company recorded a
restructuring charge of $0.6 million which represented severance costs related
to closing feed plants.
For the three months ended September 30, 2002, the Company recorded
restructuring charges of $0.2 million representing severance and outplacement
costs for employees at various locations. For the nine months ended September
30, 2002, the Company recorded restructuring charges of $3.0 million
representing severance and outplacement costs for 136 employees at the Ft.
Dodge, IA office and other plant facilities.
26
A summary of the restructuring reserve for the nine months ended September
30, 2003 is as follows:
BALANCE BALANCE
DECEMBER 31, CHARGE TO UTILIZED SEPTEMBER 30,
2002 EXPENSE IN 2003 2003
------------ --------- -------- -------------
Termination benefits.......... $ 6,396 $ 615 $ 5,479 $ 1,532
=========== =========== ========= ===========
IMPAIRMENT CHARGES
For the nine months ended September 30, 2003, the Company recorded
impairment charges of $0.1 million for write-downs of certain plant assets to
their estimated fair value. For the three and nine months ended September 30,
2002, the Company recorded impairment charges of $0.7 million and $2.4 million,
respectively, for write-downs of certain plant assets to their estimated fair
value.
8. GAIN ON LEGAL SETTLEMENTS
During the nine months ended September 30, 2003, the Company recognized a
gain on legal settlements of $3.2 million, of which $0.2 was recognized in the
three months ended September 30, 2003. The gain represents cash received from
product suppliers against whom the Company alleged certain price-fixing claims.
9. GAIN ON SALE OF INTANGIBLE
In the nine months ended September 30, 2002, the Company recorded a $4.2
million gain on the sale of a customer list pertaining to the feed phosphate
distribution business.
10. GAIN ON SALE OF INVESTMENT
For the nine months ended September 30, 2003, the Company recorded a gain of
$0.8 million on the sale of a Feed investment in a swine joint venture.
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES OF PARENT DEBT
In November 2001, Land O'Lakes, which owns 92% of the Company, issued $350
million of senior notes, due 2011. These notes are guaranteed by certain
domestic, wholly-owned subsidiaries of Land O'Lakes, including the Company, and
by each domestic wholly-owned subsidiary of the Company.
This guarantee is a general unsecured obligation, ranks equally in right of
payment with all existing and future senior indebtedness of Land O'Lakes, is
senior in right of payment to all existing and future subordinated obligations
of Land O'Lakes, and is effectively subordinated to any secured indebtedness of
Land O'Lakes and its subsidiaries, including the Company, to the extent of the
value of the assets securing such indebtedness. The maximum potential amount of
future payments that the Company would be required to make is $350 million as of
September 30, 2003. Currently, the Company does not record a liability regarding
the guarantee. The Company has no recourse provision that would enable it to
recover amounts paid under the guarantee from Land O'Lakes or any other parties.
27
The notes are not guaranteed by certain majority-owned subsidiaries of the
Company (the "Non-Guarantors"). Summarized financial information of the
Non-Guarantors, which is consolidated in the financial statements of the
Company, as of and for the periods indicated, are as follows:
NINE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Total assets (end of period)... $ 30,730 $ 23,433
Net sales...................... 83,998 53,669
Net earnings................... 2,260 626
In November 2001, Land O'Lakes entered into new term facilities consisting
of a $325 million five-year Term Loan A facility and a $250 million seven-year
Term Loan B facility. These facilities are unconditionally guaranteed by certain
domestic, wholly-owned subsidiaries of Land O'Lakes, including the Company, and
by each domestic wholly-owned subsidiary of the Company. The maximum potential
payment related to this guarantee is $434 million as of September 30, 2003. The
Company does not currently record a liability related to the guarantee of the
Term Loans, and the Company has no recourse provisions that would enable it to
recover from Land O'Lakes or any other parties.
GUARANTEES OF PRODUCER LOANS
The Company guarantees certain loans to large producers financed by LOL
Finance Co. The loans totaled $14.6 million and $15.2 million at September 30,
2003 and December 31, 2002, respectively. Reserves for these guarantees of $0.7
million at both September 30, 2003 and December 31, 2002 are included in the
allowance for doubtful accounts. The maximum amount guaranteed by the Company is
$7.0 million with the remaining balance guaranteed by Land O'Lakes. There were
no write-offs related to producer loans for the nine months ended September 30,
2003. The Company would have recourse against the producer to partially offset
the liability.
The Company also guarantees certain loans to producers and dealers financed
by third party lenders. The loans totaled $2.3 million and $2.4 million at
September 30, 2003 and December 31, 2002, respectively. Reserves for these
guarantees of $0.5 million and $0.5 million at September 30, 2003 and December
31, 2002, respectively, are included in the consolidated balance sheet. There
were no write-offs related to these loans in the nine months ended September 30,
2003. The maximum potential payment related to these guarantees is $1.0 million.
The Company has no recourse against the producer or dealer to partially offset
the potential liability.
12. CONSOLIDATING FINANCIAL INFORMATION
Land O'Lakes has issued $350 million in senior notes which are guaranteed by
certain domestic wholly-owned and majority-owned subsidiaries of Land O'Lakes,
including the Company and the Company's domestic wholly-owned subsidiaries (the
"Guarantor Subsidiaries"). Such guarantees are full, unconditional and joint and
several. The Company's majority-owned subsidiaries are excluded from the
guarantee ("Non-Guarantor Subsidiaries").
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's
Non-Guarantor Subsidiaries. The supplemental financial information reflects the
investments of the Company in the Guarantor and Non-Guarantor Subsidiaries using
the equity method of accounting.
During the first quarter of 2003, Nestle Purina PetCare Company consented to
the transfer of the trademark license from Purina Mills, LLC, a wholly-owned
limited liability company, to the Company. Accordingly, the Purina Mills, LLC
financial information has been combined with Land O'Lakes Farmland Feed LLC in
the following supplemental financial information.
28
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2003
LAND
O'LAKES,
FARMLAND WHOLLY-OWNED NON-
FEED LLC CONSOLIDATED GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ... $ 2,557 $ -- $ -- $ -- $ 2,557
Receivables, net .................. 30,489 46,298 14,607 (44,448) 46,946
Inventories ....................... 88,251 18,567 7,180 -- 113,998
Prepaid expenses and other
current assets .................. 7,667 327 300 -- 8,294
Note receivable - Land
O'Lakes, Inc. ................... 124,203 -- -- -- 124,203
--------- --------- --------- --------- ---------
Total current assets ...... 253,167 65,192 22,087 (44,448) 295,998
Investments ......................... 75,308 2,533 1,303 (59,336) 19,808
Property, plant and equipment,
net .............................. 225,690 8,046 5,313 -- 239,049
Goodwill, net ....................... 118,206 3,656 275 -- 122,137
Other intangibles ................... 94,805 939 261 -- 96,005
Other assets ........................ 25,638 1,349 1,491 -- 28,478
--------- --------- --------- --------- ---------
Total assets .............. $ 792,814 $ 81,715 $ 30,730 $(103,784) $ 801,475
========= ========= ========= ========= =========
LIABILITIES
Current liabilities:
Notes and short-term obligations .. $ 977 $ 19,322 $ -- $ (19,322) $ 977
Accounts payable .................. 102,740 18,001 7,178 (25,126) 102,793
Accrued expenses .................. 25,640 1,537 2,375 -- 29,552
--------- --------- --------- --------- ---------
Total current liabilities.. 129,357 38,860 9,553 (44,448) 133,322
Employee benefits and other
liabilities ....................... 26,674 -- 1,310 -- 27,984
Minority interests .................. 3,050 -- 3,386 -- 6,436
Equities:
Contributed capital ............... 515,376 26,741 13,260 (40,001) 515,376
Retained earnings ................. 118,357 16,114 3,221 (19,335) 118,357
--------- --------- --------- --------- ---------
Total equities ............ 633,733 42,855 16,481 (59,336) 633,733
--------- --------- --------- --------- ---------
Commitments and contingencies
Total liabilities and equities ...... $ 792,814 $ 81,715 $ 30,730 $(103,784) $ 801,475
========= ========= ========= ========= =========
29
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
LAND
O'LAKES,
FARMLAND WHOLLY-OWNED NON-
FEED LLC CONSOLIDATED GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
Net sales ......................... $ 492,581 $ 30,384 $ 59,294 $ -- $ 582,259
Cost of sales ..................... 441,514 26,150 54,445 -- 522,109
--------- --------- --------- --------- ---------
Gross profit ...................... 51,067 4,234 4,849 -- 60,150
Selling, general and administration 52,538 2,264 2,707 -- 57,509
--------- --------- --------- --------- ---------
(Loss) earnings from operations ... (1,471) 1,970 2,142 -- 2,641
Interest income, net .............. (1,577) (33) (9) -- (1,619)
Gain on legal settlements ......... (207) -- -- -- (207)
Loss on sale of investment ........ 26 -- -- -- 26
Equity in (earnings) loss
of affiliated companies ......... (3,941) -- -- 3,693 (248)
Minority interest in earnings
of subsidiaries ................. 139 -- 239 -- 378
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes 4,089 2,003 1,912 (3,693) 4,311
Income tax expense ................ -- -- 222 -- 222
--------- --------- --------- --------- ---------
Net earnings (loss) ............... $ 4,089 $ 2,003 $ 1,690 $ (3,693) $ 4,089
========= ========= ========= ========= =========
30
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
LAND
O'LAKES
FARMLAND WHOLLY-OWNED
FEED LLC CONSOLIDATED NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
(UNAUDITED)
Net sales....................................... $1,580,614 $ 111,403 $ 83,998 $ -- $1,776,015
Cost of sales................................... 1,402,845 98,600 75,974 -- 1,577,419
---------- ------------ ------------ ------------ ------------
Gross profit.................................... 177,769 12,803 8,024 -- 198,596
Selling, general and administration............. 163,268 7,084 4,595 -- 174,947
Restructuring and impairment
charges....................................... 707 -- -- -- 707
---------- ------------ ---------- ---------- ----------
Earnings from operations........................ 13,794 5,719 3,429 -- 22,942
Interest (income) expense, net.................. (4,856) (33) 22 -- (4,867)
Gain on legal settlements....................... (3,209) -- -- -- (3,209)
Gain on sale of investment...................... (820) -- -- -- (820)
Equity in (earnings) loss
of affiliated companies....................... (8,816) -- -- 8,012 (804)
Minority interest in earnings
of subsidiaries............................... 510 -- 607 -- 1,117
---------- ------------ ---------- ---------- ----------
Earnings (loss) before income taxes............. 30,985 5,752 2,800 (8,012) 31,525
Income tax expense.............................. -- -- 540 -- 540
---------- ------------ ---------- ---------- ----------
Net earnings (loss)............................. $ 30,985 $ 5,752 $ 2,260 $ (8,012) $ 30,985
========== ============ ========== =========== ==========
31
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
LAND
O'LAKES
FARMLAND WHOLLY-OWNED
FEED LLC CONSOLIDATED NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................ $ 30,985 $ 5,752 $ 2,260 $ (8,012) $ 30,985
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization.................... 28,418 1,158 366 -- 29,942
Bad debt expense................................. 1,777 -- -- -- 1,777
Receivable from legal settlement................. 6,000 -- -- -- 6,000
Decrease (increase) in other assets.............. 907 351 1,726 (2,700) 284
(Decrease) increase in other liabilities ........ (11,745) 516 3,647 6,151 (1,431)
Restructuring and impairment charges ............ 707 -- -- -- 707
Equity in (earnings) loss of affiliated
companies...................................... (8,816) -- -- 8,012 (804)
Minority interest................................ 510 -- 607 -- 1,117
Gain on sale of investment....................... (820) -- -- -- (820)
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables...................................... 159,672 (20,788) (8,179) (52,046) 78,659
Inventories...................................... 4,341 (876) (2,595) -- 870
Other current assets............................. 2,406 (5) (90) -- 2,311
Accounts payable................................. (101,941) (10,104) 3,522 65,576 (42,947)
Accrued expenses................................. 2,512 (2,114) (398) -- --
--------- ---------- ---------- --------- ---------
Net cash provided (used) by operating
activities....................................... 114,913 (26,110) 866 16,981 106,650
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (15,137) (560) (342) -- (16,039)
Proceeds from sale of investments.................. 3,000 -- -- -- 3,000
Proceeds from sale of property, plant and
equipment........................................ 1,936 -- -- -- 1,936
Other.............................................. 2,540 -- -- -- 2,540
--------- --------- --------- --------- ---------
Net cash used by investing activities.............. (7,661) (560) (342) -- (8,563)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt ............ (1,176) 19,322 (2,341) (16,981) (1,176)
Proceeds from note receivable from Land
O'Lakes, Inc..................................... 370,790 -- -- -- 370,790
Payments on note payable to Land O'Lakes,
Inc.............................................. (465,500) -- -- -- (465,500)
---------- --------- --------- --------- ----------
Net cash (used) provided by financing
activities....................................... (95,886) 19,322 (2,341) (16,981) (95,886)
---------- --------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term
investments...................................... 11,366 (7,348) (1,817) -- 2,201
Cash and short-term investments at beginning of
period............................................. (8,809) 7,348 1,817 -- 356
---------- --------- --------- --------- ---------
Cash and short-term investments at end of period .... $ 2,557 $ -- $ -- $ -- $ 2,557
========= ========= ========= ========= =========
32
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
LAND
O'LAKES
FARMLAND WHOLLY-OWNED NON-
FEED LLC CONSOLIDATED GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and short-term investments ................... $ (8,809) $ 7,348 $ 1,817 $ -- $ 356
Receivables, net .................................. 195,925 21,523 6,428 (96,494) 127,382
Receivable from legal settlement .................. 6,000 -- -- -- 6,000
Inventories ....................................... 90,802 17,691 4,585 -- 113,078
Prepaid expenses and other
current assets .................................. 7,303 322 210 -- 7,835
Note receivable - Land
O'Lakes, Inc. ................................... 87,252 -- -- (57,759) 29,493
--------- --------- --------- --------- ---------
Total current assets ...................... 378,473 46,884 13,040 (154,253) 284,144
Investments ......................................... 56,471 5,749 2,196 (41,443) 22,973
Property, plant and equipment,
net .............................................. 237,758 8,644 5,337 -- 251,739
Goodwill, net ....................................... 118,017 3,656 813 -- 122,486
Other intangibles ................................... 94,068 2,639 97 -- 96,804
Other assets ........................................ 29,512 -- 1,950 (2,700) 28,762
--------- --------- --------- --------- ---------
Total assets .............................. $ 914,299 $ 67,572 $ 23,433 $(198,396) $ 806,908
========= ========= ========= ========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations .................. $ 2,400 $ -- $ 2,341 $ (2,341) $ 2,400
Accounts payable .................................. 237,919 28,105 3,656 (148,461) 121,219
Accrued expenses .................................. 41,710 3,651 2,773 -- 48,134
--------- --------- --------- --------- ---------
Total current liabilities ................. 282,029 31,756 8,770 (150,802) 171,753
Employee benefits and other
liabilities ....................................... 29,493 2,700 3,405 (6,151) 29,447
Minority interests .................................. 29 -- 2,931 -- 2,960
Equities:
Contributed capital ............................... 515,376 25,154 7,420 (32,574) 515,376
Retained earnings ................................. 87,372 7,962 907 (8,869) 87,372
--------- --------- --------- --------- ---------
Total equities ............................ 602,748 33,116 8,327 (41,443) 602,748
--------- --------- --------- --------- ---------
Commitments and contingencies
Total liabilities and equities ...................... $ 914,299 $ 67,572 $ 23,433 $(198,396) $ 806,908
========= ========= ========= ========= =========
33
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
LAND
O'LAKES
FARMLAND WHOLLY-OWNED NON-
FEED LLC CONSOLIDATED GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(UNAUDITED)
Net sales ............................. $ 529,739 $ 60,127 $ 13,025 $ -- $ 602,891
Cost of sales ......................... 466,079 53,810 10,969 -- 530,858
--------- --------- --------- --------- ---------
Gross profit .......................... 63,660 6,317 2,056 -- 72,033
Selling, general and administration.... 53,092 5,897 1,389 -- 60,378
Restructuring and impairment
charges ............................. 942 -- -- -- 942
--------- --------- --------- --------- ---------
Earnings from operations .............. 9,626 420 667 -- 10,713
Interest (income) expense, net ........ (865) 93 35 -- (737)
Equity in (earnings) loss
of affiliated companies ............. (979) (191) -- 594 (576)
Minority interest in (loss) earnings
of subsidiaries ..................... (103) 25 272 -- 194
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes 11,573 493 360 (594) 11,832
Income tax expense .................... -- -- 259 -- 259
--------- --------- --------- --------- ---------
Net earnings (loss) ................... $ 11,573 $ 493 $ 101 $ (594) $ 11,573
========= ========= ========= ========= =========
34
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND
O'LAKES
FARMLAND WHOLLY-OWNED NON-
FEED LLC CONSOLIDATED GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
Net sales ............................. $ 1,595,926 $ 162,397 $ 40,320 $ -- $ 1,798,643
Cost of sales ......................... 1,403,930 143,910 35,606 -- 1,583,446
----------- ------------ ------------ ------------ ------------
Gross profit .......................... 191,996 18,487 4,714 -- 215,197
Selling, general and administration.... 160,998 16,484 3,726 -- 181,208
Restructuring and impairment
charges ............................. 5,418 -- -- -- 5,418
----------- ------------ ------------ ------------ ------------
Earnings from operations .............. 25,580 2,003 988 -- 28,571
Interest (income) expense, net ........ (2,540) 329 130 -- (2,081)
Gain on sale of intangible ............ (4,184) -- -- -- (4,184)
Equity in (earnings) loss
of affiliated companies ............. (2,125) 443 -- 843 (839)
Minority interest in (loss) earnings
of subsidiaries ..................... (1) 231 450 -- 680
----------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes 34,430 1,000 408 (843) 34,995
Income tax expense .................... -- -- 565 -- 565
----------- ------------ ------------ ------------ ------------
Net earnings (loss) ................... $ 34,430 $ 1,000 $ (157) $ (843) $ 34,430
=========== ============ ============ ============ ============
35
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND
O'LAKES
FARMLAND WHOLLY-OWNED NON-
FEED LLC CONSOLIDATED GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).............................. $ 34,430 $ 1,000 $ (157) $ (843) $ 34,430
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization ................. 32,910 899 524 -- 34,333
Bad debt expense .............................. 2,175 -- -- -- 2,175
Decrease (increase) in other assets ........... 28,222 (157) 536 (43,702) (15,101)
(Decrease) increase in other liabilities ...... (64) (3,624) 695 -- (2,993)
Restructuring and impairment charges .......... 5,418 -- -- -- 5,418
Equity in (earnings) losses of affiliated
companies ................................... (2,125) 443 -- 843 (839)
Minority interest ............................. (1) 231 450 -- 680
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables ................................... (25,635) (4,779) (3,387) 41,616 7,815
Inventories ................................... (3,526) 2,403 1,998 -- 875
Other current assets .......................... 2,984 537 31 -- 3,552
Accounts payable .............................. 20,424 7,521 (629) (49,169) (21,853)
Accrued expenses .............................. 2,636 929 354 -- 3,919
--------- ------------ ------------ ------------ ------------
Net cash provided (used) by operating
activities .................................... 97,848 5,403 415 (51,255) 52,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ...... (13,597) (587) (114) -- (14,298)
Proceeds from sale of investments ............... 2,044 -- -- -- 2,044
Proceeds from sale of property, plant and
equipment ..................................... 5,692 -- -- -- 5,692
--------- ------------ ------------ ------------ ------------
Net cash used by investing activities ........... (5,861) (587) (114) -- (6,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt ..................... (2,000) -- -- -- (2,000)
Proceeds from note receivable from Land
O'Lakes, Inc. ................................. 288,727 -- -- 51,255 339,982
Payments on note payable to Land O'Lakes,
Inc. .......................................... (382,982) (1,610) (2,258) -- (386,850)
--------- ------------ ------------ ------------ ------------
Net cash (used) provided by financing
activities .................................... (96,255) (1,610) (2,258) 51,255 (48,868)
--------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash and short-term
investment .................................... (4,268) 3,206 (1,957) -- (3,019)
Cash and short-term investments at beginning of
period .......................................... (5,618) 4,591 4,046 -- 3,019
--------- ------------ ------------ ------------ ------------
Cash and short-term investments at end of period... $ (9,886) $ 7,797 $ 2,089 $ -- $ --
========= ============ ============ ============ ============
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussions of financial condition and results
of operations together with the financial statements and the notes to such
statements included elsewhere in this Form 10-Q.
OVERVIEW
We operate our business predominantly in the United States in six segments:
Dairy Foods, Animal Feed, Crop Seed, Swine, Agronomy and Layers. We have limited
international operations. We have investments in certain entities that are not
consolidated in our financial statements but are accounted for under the equity
or cost methods of accounting. For the nine months ended September 30, 2003, the
equity earnings from our unconsolidated businesses amounted to $56.0 million,
compared to equity earnings of $29.8 million for the nine months ended September
30, 2002. In addition, we recorded patronage income of $3.0 million for the nine
months ended September 30, 2003, compared to $4.6 million for the nine months
ended September 30, 2002. This income is recorded as an offset to product
purchases within cost of sales or as a reduction of the interest expense for
CoBank. Our investment in unconsolidated businesses amounted to $541.2 million
on September 30, 2003 and $545.6 million on December 31, 2002. Cash flow from
our equity investments for the nine months ended September 30, 2003 was $5.2
million, compared to $8.6 million for the nine months ended September 30, 2002.
Agriliance and CF Industries constitute the most significant of our investments
in unconsolidated businesses, both of which are reflected in our agronomy
results. Our investments in, and earnings from, Agriliance and CF Industries
were as follows as of and for the nine months ended:
SEPTEMBER 30,
---------------
2003 2002
---- ----
(IN MILLIONS)
AGRILIANCE:
Investment........... $ 125.6 $ 119.4
Equity in earnings... 41.6 35.3
CF INDUSTRIES:
Investment........... $ 249.5 $ 249.5
Patronage income..... -- --
We received $15.0 million in cash distributions from Agriliance in October
2003 and anticipate an additional distribution of at least $7.5 million prior to
year end. In 2002, we received $10.0 million in cash distributions from
Agriliance in October, plus an additional $7.5 million in December.
CF Industries is an inter-regional cooperative involved in the manufacture
of crop nutrients, in which we have a 38% ownership interest based on our
product purchases. As a member, we are allowed to elect one board member out of
a total of nine. Agriliance is one of CF Industries' most significant customers.
CF Industries operates in a highly cyclical industry. The oversupply of nitrogen
in the industry since 1998 and recent unexpected high natural gas cost has
resulted in depressed prices and, consequently, depressed earnings. Studies are
currently under way to determine strategic steps to address the negative
earnings situation. Depending on the outcome of these studies, we may be
required to record an impairment charge for a portion of our investment in CF
Industries later in 2003. Since CF Industries is a cooperative, we only receive
earnings from our investment when the cooperative allocates and distributes
patronage to us. No patronage was allocated and distributed to us in the last
four years because CF Industries realized losses in those years. We anticipate
that no patronage allocations will occur until these losses have been recouped.
Our $249.5 million investment in CF Industries consists of approximately $150
million in noncash patronage income from prior periods (not distributed to us)
and approximately $100 million that was acquired as part of our Countrymark
acquisition in 1998 based on Countrymark's prior business with CF Industries.
Prior to the contribution of our agronomy assets to Agriliance on July 29, 2000,
our agronomy business earned patronage income on the business it conducted with
CF Industries. Since that contribution date, Land O'Lakes has been entitled to
receive patronage income for business that Agriliance transacts with CF
Industries on behalf of our members, primarily fertilizer purchases. We believe
that these sales are on terms comparable to those available to unaffiliated
third parties.
Our Layers business, MoArk, was accounted for in the consolidated financial
statements on the equity basis of accounting through June 30, 2003. Effective
July 1, 2003, MoArk has been consolidated in the consolidated financial
statements. Financial statements for periods prior to July 1, 2003 have not been
restated.
37
SEASONALITY
Certain segments of our business are subject to seasonal fluctuations in
demand. In our Dairy Foods segment, butter sales typically increase in the fall
and winter months due to increased demand during holiday periods. Animal feed
sales tend to increase in the fourth and first quarter of each year because
cattle are less able to graze during cooler months. Most crop seed sales used to
occur in the first and second quarter of each year. However, we have seen a
trend toward selling more crop seed in the fourth and first quarter of each year
as a result of lower sales of proprietary brands and increased sales of
partnered seed brands. Agronomy product sales tend to be much higher in the
first and second quarter of each year, as farmers buy crop nutrients and crop
protection products to meet their seasonal needs.
FACTORS AFFECTING COMPARABILITY
Dairy and Agricultural Commodity Inputs and Outputs
Many of our products, particularly in our Dairy Foods, Animal Feed, Swine
and Layers segments, use dairy or agricultural commodities as inputs or
constitute dairy or agricultural commodity outputs. Consequently, our results
are affected by the cost of commodity inputs and the market price of commodity
outputs. Government regulation of the dairy industry and industry practices in
animal feed tend to stabilize margins in those segments but do not protect
against large movements in either input costs or output prices.
DAIRY FOODS. Raw milk is the major commodity input for our Dairy Foods
segment. For the nine months ended September 30, 2003, our raw milk input cost
was $1,199.3 million, or 60.7% of the cost of sales for our Dairy Foods segment.
Cream, butter and bulk cheese are also significant dairy foods commodity inputs.
Cost of sales for these inputs was $128.4 million for cream, $71.1 million for
butter and $196.0 million for bulk cheese for the nine months ended September
30, 2003. Our dairy foods outputs, namely butter, cheese and nonfat dry milk,
are also commodities.
The minimum price of raw milk and cream is set monthly by Federal regulators
based on regional prices of dairy foods products produced. These prices provide
the basis for our raw milk and cream input costs. As a result, those Dairy Foods
products for which the sales price is fixed shortly after production, such as
most bulk cheese, are not usually subject to significant commodity price risk as
the price received for the output usually varies with the cost of the
significant inputs. For the nine months ended September 30, 2003, bulk cheese,
which is generally sold the day made, represented $184.0 million, or 8.8% of our
Dairy Foods segment's net sales. Other products, such as private label butter,
which have significant net sales, are also generally sold shortly after they are
made.
We also maintain significant inventories of butter and cheese for sale to
our retail and food service customers, which are subject to commodity price
risk. Because production of raw milk and demand for butter varies seasonally, we
inventory significant amounts of butter. Demand for butter is highest during the
fall and winter, when milk supply is lowest. As a result, we produce and store
excess quantities of butter during the spring when milk supply is highest. In
addition, we maintain some inventories of cheese for aging. For the nine months
ended September 30, 2003, branded and private label retail, deli and foodservice
net sales of cheese and butter represented $747.3 million, or 35.9% of our Dairy
Foods segment's net sales.
We maintain a sizable dairy manufacturing presence in the Upper Midwest.
This region has seen significant declines in cow numbers. Since 1990, cow
numbers have declined 16% in Minnesota and 14% in Wisconsin. Over the same
period, the Minnesota/Wisconsin share of nationwide dairy manufacturing volume
has declined from 40% to 28%. This decline has put pressure on our Upper Midwest
milk input costs and is one of the factors that has resulted in significant
losses in the nine months ended September 30, 2003. We sold our Perham, MN plant
in July 2003 and will continue to explore additional initiatives to improve our
Upper Midwest dairy infrastructure in an effort to increase efficiencies and
reduce costs.
Reduced margins on our mozzarella and whey products have had a negative
impact not only on our Upper Midwest operations but also on our Cheese & Protein
International LLC ("CPI") operations. Demand for mozzarella and whey has
softened which, together with anticipated increases in mozzarella capacity in
the industry, has placed downward pressure on the margins these products
generate. Mozzarella prices in the first nine months of 2003 were approximately
$0.08 per pound lower than those in 2002. Commodity dried whey prices averaged
$0.16
38
during the first nine months, compared to $0.19 last year. We expect that the
reduced margins will continue at least through 2004.
In addition, we increased our ownership position in CPI from 70% to 95% in
December 2002. The ownership share of Mitsui of Japan, our joint venture
partner, was decreased by a corresponding amount. In June 2003, we successfully
concluded an agreement which provides for Mitsui's continued participation in
CPI. Under the agreement, Mitsui contributed an additional $1.4 million to the
venture in cash. Mitsui's participation interest as of September 30, 2003 was
approximately 4.1% due to our additional cash contributions to CPI. Under the
current agreement, Mitsui has the option to either contribute additional equity
for the Phase 2 Expansion to maintain its percentage interest or to allow its
percentage interest to be diluted. We expect that there will likely be no
further equity contributions from Mitsui. Mitsui will not have significant
control of the joint venture going forward, but will retain a put option for its
remaining interest which can be exercised beginning on December 31, 2004 and
which takes effect up to nine months following such notice. The put allows
Mitsui to sell its entire remaining interest to us at original cost, with no
interest thereon. This equates to $3.2 million plus any future equity
contributions which Mitsui may make. Mitsui may exercise the option earlier, but
only if certain specified actions are deliberately taken by CPI or Land O'Lakes
to Mitsui's material disadvantage. We do not expect that such a scenario will
occur.
ANIMAL FEED. The Animal Feed segment follows industry standards for feed
pricing. The feed industry generally prices products based on income over
ingredient cost ("IOIC") per ton of feed. This practice tends to mitigate the
impact of volatility in commodity ingredient markets on our animal feed profits.
As ingredient costs fluctuate, the changes are generally passed on to customers
through weekly or monthly changes in prices. Accordingly, net sales are
considered to be a poor indicator of performance since large fluctuations can
occur from period-to-period due to volatility in the underlying commodity
ingredient prices.
We also enter into forward contracts to supply feed, which currently
represent approximately 20% of our feed output. When we enter into these
contracts, we also generally enter into forward input supply contracts to "lock
in" our IOIC.
As dairy production has shifted from the Upper Midwest to the western United
States, we have seen a change in our feed product mix, with lower sales of
complete feed and increased sales of simple blends. Complete feed is
manufactured feed which meets the complete nutritional requirements of animals,
whereas a simple blend is a blending of unprocessed commodities to which the
producer then adds vitamins to supply the animal's nutritional needs. This
change in product mix is a result of differences in geographical practices.
Dairy producers in the western United States tend to purchase feed components
and mix them at the farm location rather than purchasing a complete feed product
delivered to the farm. Producers will purchase grain blends and concentrated
premixes from separate suppliers. This shift is reflected in increased sales of
simple blends in our Western feed region and sales increases in our subsidiaries
that manufacture premixes in the Western area. In addition, the increase in
vertical integration of swine and poultry producers has impacted our feed
product mix by increasing sales of lower margin feed products.
We have seen continued erosion of commodity feed volumes, mainly related to
the low prices in swine and dairy markets, which has resulted in a liquidation
of herds and a resulting fall in feed volumes. In the first nine months of 2003,
dairy feed volumes were down 10% compared to 2002, and there were also
reductions of 12% and 17%, respectively, in poultry and swine feed volumes. Some
of this volume reduction was deliberate, due to plant closings and rejection of
unprofitable sales opportunities. We expect lower volumes in dairy, poultry and
swine feed to continue for the remainder of the year. On the other hand, beef
livestock feed volumes have improved and are 3% higher for the nine months ended
September 30, 2003 than the same period last year. With declines in dairy
commodity prices, livestock producers also shifted from higher margin branded
feed products to lower margin commodity feeds.
SWINE. We produce and market both young feeder pigs (approximately 45
pounds) and mature market hogs (approximately 260 pounds) under three primary
programs: swine aligned, farrow-to-finish and cost-plus.
Under the swine aligned program, we own sows and raise feeder pigs that we
sell to our local member cooperatives under ten-year contracts. For the first
five years, we receive a fixed base price for our feeder pigs and are reimbursed
for feed costs. In years six through ten, the price is based on the cost of
production, plus a margin designed to achieve a target return on invested
capital. Since the price for the duration of the contract is not tied to
39
the live hog market, we do not have market risk on feeder pig prices. In
addition, there is no risk on corn or soybean meal prices since we are
reimbursed for actual feed costs. We do incur production risk if we do not
produce enough feeder pigs or if we do not produce them at a competitive cost.
Under the farrow-to-finish program, we produce and sell market hogs.
Historically, market hog price fluctuations have resulted in volatility in our
net sales and earnings. In order to mitigate this risk, we have committed to
sell substantially all of the market hogs we produce annually through 2005 under
a packer agreement. Under this packer agreement, we are paid market prices for
our hogs with a settlement based on the sales price of the pork products
produced from those hogs. This approach mitigates some of the volatility under
this program because market hog and pork product margins do not tend to move
together. We sell the balance of our market hogs on the open market. We sell
feeder pigs on the open market, as well, depending on sow farm performance and
finishing space limitations.
Under the cost-plus program, we provide minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation. We are in
the process of phasing out our existing cost-plus contracts and will not be
entering into new ones under the current structure. During the third quarter of
2003, we continued to reduce our hog exposure by offering our cost-plus
producers an early exit option. During the first nine months of 2003, producers
representing about 100,000 hogs elected the early exit option, leaving 90,000
hogs on the cost-plus program. The majority of the remaining cost-plus contracts
will expire in late 2003 and early 2004, and the last cost-plus contracts will
expire in early 2005. The program incurred pre-tax losses of $2.0 million for
the nine months ended September 30, 2003 and $3.1 million for the nine months
ended September 30, 2002.
Historically, Purina Mills reported results of its swine business together
with its feed business. Accordingly, the portion of our swine business which we
acquired from Purina Mills in October 2001 is reported within our Feed segment.
Purina Mills operates its swine business under the pass-through program and the
market risk sharing program. Under the pass-through program, we enter into
commitments to purchase weanling and feeder pigs from producers and generally
have commitments to immediately resell the animals to swine producers. The
market risk sharing program provides minimum price floors to producers for
market hogs. The price floor in our market risk sharing program floats with the
market price of hogs and the cost of swine feed. For the nine months ended
September 30, 2003, the Purina Mills swine business generated a loss of $0.7
million compared to a loss of $2.5 million for the nine months ended September
30, 2002.
LAYERS. MoArk produces and markets shell eggs and egg products. MoArk's sales
and earnings fluctuate depending on egg prices. For the nine months ended
September 30, 2003, egg prices averaged $0.87 per dozen as measured by Urner
Barry South Central Large, as compared to egg prices of $0.71 for the nine
months ended September 30, 2002. This change contributed to earnings before
income taxes improving in the Layer segment to $9.2 million for the nine months
ended September 30, 2003, compared to a loss of $12.8 million for the nine
months ended September 30, 2002.
40
RESULTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------
2003 2002
------------------- -------------------
% OF % OF
$ AMOUNT TOTAL $ AMOUNT TOTAL
-------- ----- --------- -----
(DOLLARS IN MILLIONS)
NET SALES
Dairy foods............................. $ 782.3 49.5 $ 710.5 51.8
Animal feed............................. 582.9 36.9 604.8 44.1
Crop seed............................... 46.5 2.9 32.1 2.3
Swine................................... 22.8 1.4 20.9 1.5
Agronomy................................ -- -- -- --
Layers.................................. 142.1 9.0 -- --
Other................................... 3.7 0.3 3.4 0.3
-------- ----- -------- -----
Total net sales....................... $1,580.3 $1,371.7
======== ========
% OF % OF
NET NET
$ AMOUNT SALES $ AMOUNT SALES
-------- ----- -------- -----
COST OF SALES
Dairy foods ............................ $ 742.4 94.9 $ 671.7 94.5
Animal feed ............................ 522.5 89.6 532.3 88.0
Crop seed .............................. 36.4 78.3 28.3 88.2
Swine .................................. 21.7 95.2 24.8 118.7
Agronomy ............................... -- -- -- --
Layers ................................. 121.4 85.4 -- --
Other .................................. 1.9 51.4 1.9 55.9
-------- ---- -------- -----
Total cost of sales .................. 1,446.3 91.5 1,259.0 91.8
Selling, general and administration .... 122.0 7.7 123.6 9.0
Restructuring and impairment charges ... 0.3 0.0 0.9 0.1
-------- ---- -------- -----
Earnings (loss) from operations ........ 11.6 0.7 (11.8) 0.9
Interest expense, net .................. 19.3 1.2 18.1 1.3
Gain on legal settlements .............. (3.4) 0.2 (4.1) 0.3
Gain on divestiture of businesses ...... -- -- (3.7) 0.3
Equity in (earnings) loss of
affiliated companies ................. (5.6) 0.4 4.5 0.3
Minority interest in earnings
(loss) of subsidiaries ............... 0.7 0.0 (1.4) 0.1
-------- ---- -------- -----
Earnings (loss) before income taxes .... 0.5 0.0 (25.2) 1.8
Income tax expense (benefit) ........... 1.9 0.1 (13.2) 1.0
-------- ---- -------- -----
Net loss ............................... $ (1.4) 0.1 $ (12.0) 0.9
======== ==== ======== =====
The following table shows selected financial data for the three months
ended September 30 for MoArk, which was consolidated into our Layers segment
effective July 1, 2003.
2003 2002
--------- ---------
Sales.................................. $ 142.1 $ 113.7
Cost of sales.......................... 121.4 107.2
--------- ---------
Gross profit........................... $ 20.7 $ 6.5
========= =========
THREE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
NET SALES
Net sales for the three months ended September 30, 2003 increased $208.6
million, or 15.2%, to $1,580.3 million, compared to net sales of $1,371.7
million for the three months ended September 30, 2002. The consolidation of
MoArk, effective July 1, 2003, contributed $142.1 million of the increase. The
rest of the increase in net sales was mainly due to higher sales of cheese,
butter and milk, which were partially offset by lower sales of livestock feed.
Dairy Foods. Net sales for the three months ended September 30, 2003 increased
$71.8 million, or 10.1%, to $782.3 million, compared to net sales of $710.5
million for the three months ended September 30, 2002. For the three months
ended September 30, 2003, average commodity prices for butter increased $0.18
per pound, while average commodity prices for cheese increased $0.42 per pound
compared to the same period in 2002. The impact
41
of these market price changes increased net sales of butter by $10.9 million and
increased net sales of cheese by $12.9 million. Retail and foodservice butter
volumes increased 2.6 million pounds, representing an increase in net sales of
$0.8 million from the same period last year. Private label butter volumes
decreased 0.6 million pounds representing a decrease in net sales of $0.3
million over the prior year period. Bulk cheese sales increased $4.1 million for
the three month period ended September 30, 2003, compared to the three months
ended September 30, 2002. Retail cheese volumes decreased 3.5 million pounds
compared to the same period last year due to competitive pricing pressures. This
resulted in a decrease in sales of $6.4 million. Deli cheese volumes decreased
1.6 million pounds from the prior year period, which resulted in a decrease in
sales of $2.9 million. Foodservice cheese sales increased 0.8 million pounds
which resulted in an increase in sales of $1.0 million over the prior year
period. Sales for the three months ended September 30, 2003 under our wholesale
milk marketing program increased $29.3 million compared to the same period in
2002. Volume changes in other product categories accounted for the remaining
sales increase of $22.4 million.
Animal Feed. Net sales for the three months ended September 30, 2003
decreased $21.9 million, or 3.6%, to $582.9 million, compared to net sales of
$604.8 million for the three months ended September 30, 2002. Sales of livestock
feeds decreased $18.4 million, primarily due to the effects of depressed
commodity prices in dairy, the impact of integration efforts within the
industry, an increase in competitive pressures and the continued shift of
production from the Upper Midwest to the Western United States. Sales of
lifestyle feed products decreased $3.7 million, primarily due to volume
decreases in our grass cattle feed, partially offset by volume increases in
horse, lab and zoo feeds. Ingredient sales decreased $2.1 million, as a result
of industry economic pressures. Sales in our international division declined
$1.3 million, as we exited some of these businesses in the second half of 2002.
Sales of animal health farm and ranch products increased $11.7 million, as we
formed a new joint venture to handle sales of these products. Sales in our other
wholly-owned and majority-owned subsidiaries decreased by $5.9 million as they
were impacted by lower volumes resulting from poor feed industry economics.
Sales in other categories decreased $2.2 million.
Crop Seed. Net sales for the three months ended September 30, 2003 increased
$14.4 million, or 44.9%, to $46.5 million, compared to net sales of $32.1
million in 2002. Alfalfa sales increased $4.0 million, due to the selling of
excess inventory. Corn sales increased $10.4 million, primarily due to volume
changes for returned seed, as well as selling program adjustments. Soybean sales
increased $5.0 million in 2003, primarily as a result of volume changes due to
low crop year-end inventory disposals, as well as selling program accrual
adjustments. Volumes and changes in product mix in other seed categories were
the primary cause of the remaining sales decrease of $5.0 million.
Swine. Net sales for the three months ended September 30, 2003 increased
$1.9 million, or 9.1%, to $22.8 million, compared to $20.9 million for the three
months ended September 30, 2002. The increase in average market hog prices of
$9.37 per hundredweight to $44.15, compared to $34.78 for the prior-year period,
along with the increase in feeder pig prices, increased sales by $3.5 million.
We signed a packer agreement, effective September 25, 2000, which ties the price
we receive for market hogs to the price that the packer receives for pork
products. For the three months ended September 30, 2003, this agreement
decreased our sales by $0.6 million, compared to the three months ended
September 30, 2002. The number of market hogs sold decreased by 7,961 and the
number of feeder pigs sold decreased by 9,015, with a corresponding sales
decrease of $1.0 million.
Layers. Net sales for the three months ended September 30, 2003 increased
$28.4 million, or 25.0%, to $142.1 million, compared to $113.7 million for the
three months ended September 30, 2002. Note that the 2002 amount was not
included in the Company's overall sales since MoArk was not consolidated into
our Layers segment until July 1, 2003 and prior periods were not restated.
During the three months ended September 30, 2003, the average market price of
eggs per dozen was $0.96 as compared to $0.75 in 2002 period. The number of eggs
sold (all egg sizes and types) increased to 182 million dozen in the third
quarter of 2003 as compared to 171 million dozen in the 2002 quarter. During the
three months ended September 30, 2003, LAND O LAKES-branded egg sales increased
to 1.1 million dozen, up 38% as compared to the 2002 period.
COST OF SALES
Cost of sales for the three months ended September 30, 2003 increased $187.3
million, or 14.9%, to $1,446.3 million, compared to cost of sales of $1,259.0
million for the three months ended September 30, 2002. Cost of sales as a
percent of net sales decreased 0.3 percentage points to 91.5% for the three
months ended September 30, 2003,
42
compared to 91.8% for the three months ended September 30, 2002. The
consolidation of MoArk, effective July 1, 2003, contributed $121.4 million of
the increase in cost of sales. The remaining increase in cost of sales was
mainly due to increased commodity prices for cheese, butter and milk, partially
offset by cost control efforts and lower livestock feed volumes.
Dairy Foods. Cost of sales for the three months ended September 30, 2003
increased $70.7 million, or 10.5%, to $742.4 million, compared to cost of sales
of $671.7 million for the three months ended September 30, 2002. For the three
months ended September 30, 2003, average butter market prices increased $0.18
per pound, while average cheese market prices increased $0.42 per pound compared
to the same period in 2002. The impact of these market price changes increased
cost of sales of butter by $10.5 million and increased cost of sales of cheese
by $17.6 million. Increased volume of branded butter increased cost of sales by
$0.8 million, while the slight decrease in private label butter volume decreased
cost of sales $0.3 million. Increased sales of bulk cheese resulted in increased
cost of sales of $5.2 million. Reduced volumes of retail cheese and deli cheese
resulted in decreased cost of sales of $5.3 million and $2.2 million,
respectively. Offsetting these decreases in cheese volumes was an increase in
the volume for foodservice cheese, which increased cost of sales by $0.9
million. Cost of sales in the 2003 period under our wholesale milk marketing
program increased $34.3 million compared to the 2002 period. Volume changes in
other categories increased cost of sales by $9.2 million.
Animal Feed. Cost of sales for the three months ended September 30, 2003
decreased $9.8 million, or 1.8%, to $522.5 million, compared to $532.3 million
for the three months ended September 30, 2002. Cost of sales of livestock feeds
decreased $6.9 million, as we continued to experience volume declines, primarily
in our dairy and swine areas. Volumes continued to be under pressure due to the
effects of depressed commodity prices in dairy, the impact of integration
efforts within the industry, competitive pressures and the geographic shift in
production. Producer economics in the dairy and swine areas has pressured income
and affected feed purchasing decisions. Cost of sales of lifestyle feed products
declined $1.7 million, primarily due to volume declines in grass cattle feed
sales, which were somewhat offset by volume increases for horse, lab and zoo
feeds. Ingredient cost of sales increased $0.5 million as a result of changes in
product mix. Cost of sales in our international division declined $1.0 million,
as we exited some of the businesses in the second half of 2002. Cost of sales
for animal health, farm and ranch products increased by $11.4 million, as we
formed a new joint venture to handle sales of these products. Cost of sales in
our other wholly-owned or majority-owned subsidiaries declined $6.1 million, as
volumes decreased, primarily due to poor feed industry economics. Cost of sales
in other categories decreased $1.6 million. Cost of sales decreased $1.1 million
due to an increase in patronage rebates from other inter-regional cooperatives.
Cost of sales in our manufacturing and distribution areas decreased by $2.0
million, as we continued integration efforts. An unrealized hedging loss of $0.3
million for the three months ended September 30, 2003, compared to an unrealized
hedging loss of $1.6 million for the three months ended September 30, 2002,
decreased cost of sales by $1.3 million.
Crop Seed. Cost of sales for the three months ended September 30, 2003
increased $8.1 million, or 28.6%, to $36.4 million, compared to cost of sales of
$28.3 million for the three months ended September 30, 2002. Cost of sales for
alfalfa increased $3.2 million, due to the selling of excess inventory. Corn
cost of sales increased $9.1 million over the prior-year period, primarily due
to the adjustment of volumes related to return accruals. Cost of sales for
soybeans increased $2.4 million, due to the closing of hedges and the impact of
crop year-end inventory disposals. Volumes and changes in product mix in other
seed categories were the primary cause of the remaining decrease in cost of
sales of $6.7 million.
Swine. Cost of sales for the three months ended September 30, 2003 decreased
$3.1 million, or 12.5%, to $21.7 million, compared to $24.8 million for the
three months ended September 30, 2002. Reduced volumes and lower costs under our
Cost Plus program decreased cost of sales by $3.4 million, partially offset by
higher input costs for corn and soybean meal which increased cost of sales by
$0.8 million. An unrealized hedging gain decreased cost of sales by $0.4 million
for the three months ended September 30, 2003, compared to an unrealized hedging
loss of $0.1 million for the three months ended September 30, 2002, resulting in
a net decrease in cost of sales of $0.5 million.
Layers. Cost sales for the three months ended September 30, 2003 increased
$14.2 million, or 13.2%, to $121.4 million, compared to $107.2 million for the
three months ended September 30, 2002. Note that the 2002 amount was not
included in the Company's overall cost of sales since MoArk was not consolidated
into our Layers segment until July 1, 2003 and prior periods were not restated.
During the three months ended September 30, 2003, the average cost of eggs (all
egg sizes and types) per dozen was $0.54 as compared to $0.51 in 2002 period.
43
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the three months ended
September 30, 2003 decreased $1.6 million, or 1.3%, to $122.0 million, compared
to selling, general and administration expense of $123.6 million for the three
months ended September 30, 2002. The decrease was primarily due to spending
reductions associated with our ongoing cost control efforts as well as a gain on
the sale of a dairy facility, partially offset by the consolidation of MoArk,
effective July 1, 2003. Selling, general and administration expense as a percent
of net sales decreased 1.3 percentage points to 7.7% for the three months ended
September 30, 2003 from 9.0% for the three months ended September 30, 2002.
RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended September 30, 2003, we recorded restructuring
charges of $0.3 million in the Dairy Foods segment for the planned closure of a
facility in Volga, SD. For the three months ended September 30, 2002 we recorded
restructuring and impairment charges of $0.9 million in the Feed segment, which
consisted of employee severance and outplacement costs for employees and various
locations for $0.2 million, and write-downs of certain plant assets to their
estimated fair value for $0.7 million.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2003 was $19.3
million, compared to $18.1 million for the three months ended September 30,
2002. The consolidation of MoArk, effective July 1, 2003, increased interest
expense by $2.3 million and additional interest expense related to the CPI
capital lease increased interest by $1.0 million. These factors were partially
offset by debt payments and reduced interest rates on term loans. Average debt
balances decreased by $79.8 million as compared to the three months ended
September 30, 2002. Combined interest rates for borrowings, excluding CoBank
patronage, averaged 6.94% for the three months ended September 30, 2003,
compared to 7.11% for the three months ended September 30, 2002.
GAIN ON LEGAL SETTLEMENTS
In the fourth quarter of 1999, a class action lawsuit alleging illegal price
fixing was filed against various vitamin product suppliers. Initially, we were a
party to this action as a member of the class. In February 2000, however, we
decided to pursue our claims against the defendant outside the class action. In
December 2002, we reached settlements for $97 million with several defendants
against whom we claimed had illegally fixed the prices of various vitamin
products we purchased. As a result of these settlements, a gain on legal
settlements was recorded in December 2002 and net cash proceeds of $97 million
were received in January 2003. During the third quarter of 2003, we settled with
additional defendants and received approximately $3.4 million. When combined
with the settlement proceeds received from similar claims since the commencement
of these actions, we have received, cumulatively, approximately $172 million
from the settling defendants, which represents the vast majority of our vitamin
purchases. We continue to pursue similar claims against a few other vitamin
product suppliers.
As a result of the settlement, we recorded a gain on legal settlements of
$3.4 million for the three months ended September 30, 2003 compared to a gain on
legal settlements of $4.1 million for the three months ended September 30, 2002.
GAIN ON DIVESTITURE OF BUSINESSES
For the three months ended September 30, 2002, we recorded a gain of $3.7
million on the divestiture of a crop seed business.
EQUITY IN EARNINGS OR LOSS OF AFFILIATED COMPANIES
For the three months ended September 30, 2003, equity in earnings of
affiliated companies was $5.6 million, compared to losses of $4.5 million for
the three months ended September 30, 2002. Of the $10.1 million improvement in
equity earnings, $5.9 million related to MoArk and $1.5 million related to
Agriliance. The remaining increase of $2.7 million related primarily to various
dairy and agronomy investments.
44
MINORITY INTEREST IN EARNINGS OR LOSS OF SUBSIDIARIES
For the three months ended September 30, 2003, we recorded minority interest
in earnings of subsidiaries of $0.7 million, compared to a loss of $1.4 million
for the three months ended September 30, 2002.
INCOME TAXES
We recorded income tax expense of $1.9 million for the three months ended
September 30, 2003, compared to an income tax benefit of $13.2 million for the
three months ended September 30, 2002. The increase in income tax expense was
primarily due to increased earnings.
NET LOSS
Net losses decreased $10.6 million to $1.4 million for the three months
ended September 30, 2003, compared to a net loss of $12.0 million for the three
months ended September 30, 2002. The decrease in losses resulted primarily from
improved earnings in the Layers, Swine, and Dairy Foods segments, partially
offset by reduced earnings in the Feed segment.
45
NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2002
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
2003 2002
------------------- -------------------
% OF % OF
$ AMOUNT TOTAL $ AMOUNT TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
NET SALES
Dairy foods....................................... $2,083.6 47.0 $2,151.9 49.8
Animal feed....................................... 1,779.1 40.2 1,810.6 41.9
Crop seed......................................... 349.5 7.9 285.0 6.6
Swine............................................. 66.5 1.5 66.6 1.5
Agronomy.......................................... -- -- -- --
Layers............................................ 142.1 3.2 -- --
Other............................................. 10.0 0.2 9.6 0.2
-------- ---- -------- -----
Total net sales................................. $4,430.8 $4,323.7
======== ========
% OF % OF
NET NET
$ AMOUNT SALES $ AMOUNT SALES
-------- ---- -------- -----
COST OF SALES
Dairy foods ...................................... $1,976.7 94.9 $2,029.7 94.3
Animal feed ...................................... 1,579.0 88.8 1,593.7 88.0
Crop seed ........................................ 298.7 85.5 242.0 84.9
Swine ............................................ 65.0 97.7 68.4 102.7
Agronomy ......................................... -- -- -- --
Layers ........................................... 121.4 85.4 -- --
Other ............................................ 5.5 55.0 5.3 55.2
-------- ---- -------- -----
Total cost of sales ............................ 4,046.3 91.3 3,939.1 91.1
Selling, general and administration .............. 352.3 8.0 375.3 8.7
Restructuring and impairment charges ............. 3.2 0.1 8.2 0.2
-------- ---- -------- -----
Earnings from operations ......................... 29.0 0.7 1.1 0.0
Interest expense, net ............................ 53.6 1.2 53.0 1.2
Gain on legal settlements ........................ (22.5) 0.5 (36.8) 0.9
Gain on sale of intangibles ...................... (0.6) 0.0 (4.2) 0.1
Loss (gain) on divestiture of businesses ......... 0.7 0.0 (4.9) 0.1
Gain on sale of investment ....................... (0.8) 0.0 -- --
Equity in earnings of affiliated companies ....... (56.0) 1.3 (29.8) 0.7
Minority interest in earnings (loss) of
subsidiaries ................................... 3.6 0.1 (1.5) 0.0
-------- ---- -------- -----
Earnings before income taxes ..................... 51.0 1.2 25.3 0.6
Income tax expense (benefit) ..................... 8.0 0.2 (10.0) 0.2
-------- ---- -------- -----
Net earnings ..................................... $ 42.9 1.0 $ 35.3 0.8
======== ==== ======== =====
The following table shows selected financial data for the nine months ended
September 30 for MoArk, which was consolidated into our Layers segment effective
July 1, 2003.
2003 2002
-------- --------
Sales............................................ $ 376.7 $ 333.0
Cost of sales.................................... 336.6 311.6
-------- --------
Gross profit..................................... $ 40.1 $ 21.4
======== ========
NET SALES
Net sales for the nine months ended September 30, 2003 increased $107.1
million, or 2.5%, to $4,430.8 million, compared to net sales of $4,323.7 million
for the nine months ended September 30, 2002. The consolidation of MoArk,
effective July 1, 2003, increased net sales by $142.1 million. The decline in
net sales, excluding the impact of the consolidation of Moark, was due to
declines in Dairy Foods and Animal Feed sales, partially offset by increased
sales in the Crop Seed segment.
Dairy Foods. Net sales for the nine months ended September 30, 2003
decreased $68.3 million, or 3.2%, to $2,083.6 million, compared to net sales of
$2,151.9 million for the nine months ended September 30, 2002. For the nine
months ended September 30, 2003, average commodity prices for butter decreased
$0.01 per pound, while average commodity prices for cheese increased $0.07 per
pound compared to the same period in 2002. The impact
46
of these market price changes decreased net sales of butter by $13.3 million and
left net sales of cheese the same as the nine months ended September 30, 2002.
Retail and foodservice butter volumes increased 6.1 million pounds representing
an increase in net sales of $5.3 million from the same period last year. Private
label butter volumes increased 1.0 million pounds representing an increase in
net sales of $1.9 million over the prior year period. Bulk cheese sales
decreased $9.2 million for the period ended September 30, 2003, compared to the
nine months ended September 30, 2002. Retail cheese volumes decreased 9.0
million pounds compared to the same period last year due to competitive pricing
pressures. This resulted in a decrease in sales of $16.8 million. Deli cheese
volumes decreased 3.4 million pounds from the prior year period, which resulted
in a decrease in sales of $6.0 million. Foodservice cheese sales increased 7.6
million pounds which resulted in an increase in sales of $11.0 million over the
prior year period. Sales in International decreased $9.2 million due to the sale
of the Poland cheese plant in June 2002. Sales in 2003 under our wholesale milk
marketing program decreased $24.7 million compared to 2002. Volume changes in
other product categories accounted for the remaining sales decrease of $7.3
million.
Animal Feed. Net sales for the nine months ended September 30, 2003
decreased $31.5 million, 1.7%, to $1,779.1 million, compared to net sales of
$1,810.6 million for the nine months ended September 30, 2002. Sales of
livestock feeds decreased $35.8 million, as volume decreased in our dairy,
feedlot and swine areas, as producer economics continued to be unfavorable, and
this more than offset year-to-date increases in commodity prices. Volumes
continued to be under pressure due to the effects of an excess supply of animal
protein in the market, the impact of depressed commodity prices in dairy, swine
and poultry, integration efforts in the industry, an increase in competitive
pressures and a geographic shift in dairy production from the Upper Midwest to
the Western United States. Sales of lifestyle feed products declined $3.1
million, primarily due to volume decreases in grass cattle feed, which were
partially offset by volume increases in horse, lab and zoo feeds and some
increases in commodity prices. Ingredient sales increased $4.5 million, as a
result of increasing commodity prices and product mix changes. We also
experienced a decrease of $4.0 million in animal milk product sales, as volumes
returned to historical levels compared to record volumes in the same period of
2002. Sales in our feed additive business decreased $6.2 million, as feed
industry economics continued to be unfavorable. Sales in our co-phosphates area
declined $4.2 million, as we exited that business in 2002. Sales in our
international division declined $8.8 million, as we exited some of these
businesses in the second half of 2002. Sales of animal health, farm and ranch
products increased $28.1 million, as we formed a new joint venture to handle
sales of these products. Sales in our other wholly-owned and majority-owned
subsidiaries declined $14.0 million, as their volume declined due to unfavorable
feed industry economics. Sales in other categories increased $12.0 million.
Crop Seed. Net sales for the nine months ended September 30, 2003 increased
$64.5 million, or 22.6%, to $349.5 million, compared to net sales of $285.0
million for the nine months ended September 30, 2002. Alfalfa sales increased
$5.7 million, or 18.4%, due to increased volumes related to selling off excess
inventory. Volume growth and product mix in both proprietary and partnered
categories resulted in increased corn sales of $45.9 million, or 51.8%. Soybean
sales increased $26.5 million in 2003, or 34.5%, as a result of increased
volumes and sales price. Weak markets primarily decreased forage and turf sales
by $5.0 million and $1.5 million, respectively. Sales of inoculation/coatings
decreased $4.3 million, mainly as a result of selling the wholesale business
last fall. Cotton volumes decreased, resulting in a $1.9 million sales decrease.
Volume decreases in other seed categories resulted in a sales decrease of $0.9
million.
Swine. Net sales for the nine months ended September 30, 2003 decreased $0.1
million, or 0.1%, to $66.5 million, compared to $66.6 million for the nine
months ended September 30, 2002. Reduced supply, caused in part by a reduction
in the U.S. breeding herd, increased the average market hog price for the nine
months ended September 30, 2003 to $41.43 per hundredweight versus an average
market price of approximately $36.97 for the nine months ended September 30,
2002. The average price per feeder pig sold on the open market increased $7.00,
from $32.83 for the nine months ended September 30, 2002 to $39.83 for the nine
months ended September 30, 2003. The increase in average market hog prices of
$4.47 per hundredweight along with the increase in feeder pig prices increased
sales by $5.2 million. We signed a packer agreement, effective September 25,
2000, which ties the price we receive for market hogs to the price that the
packer receives for pork products. For the nine months ended September 30, 2003,
this agreement decreased our sales by $1.7 million, compared to the nine months
ended September 30, 2002. The number of market hogs sold decreased by 23,214 and
the number of feeder pigs sold decreased by 36,327, with a corresponding sales
decrease of $3.6 million.
47
Layers. Net sales for the nine months ended September 30, 2003 increased $43.7
million, or 13.1%, to $376.7 million, compared to $333.0 million for the nine
months ended September 30, 2002. Note that the 2002 amount and the first six
months of 2003 were not included in the Company's overall sales since MoArk was
not consolidated into our Layers segment until July 1, 2003 and prior periods
were not restated. During the first nine months of 2003, the average market
price of eggs per dozen was $0.87 as compared to $0.71 in the first nine months
of 2002. The number of eggs (all egg sizes and types) sold was 450 million dozen
in the first nine months of 2003 as compared to approximately the same volume in
the 2002 period. During the nine months ended September 30, 2003, LAND O'
LAKES-branded egg sales increased to 3.2 million dozen, up 23% as compared to
the first nine months of 2002.
COST OF SALES
Cost of sales for the nine months ended September 30, 2003 increased $107.2
million, or 2.7%, to $4,046.3 million, compared to cost of sales of $3,939.1
million for the nine months ended September 30, 2002. The consolidation of
MoArk, effective July 1, 2003, increased cost of sales by $121.4 million. The
decrease in cost of sales, excluding the impact of the MoArk consolidation, is
primarily attributed to the Dairy Foods segment and cost control efforts. Cost
of sales as a percent of net sales increased 0.2 percentage points to 91.3% for
the nine months ended September 30, 2003, compared to 91.1% for the same period
in the prior year.
Dairy Foods. Cost of sales for the nine months ended September 30, 2003
decreased $53.0 million, or 2.6%, to $1,976.7 million, compared to cost of sales
of $2,029.7 million for the nine months ended September 30, 2002. For the nine
months ended September 30, 2003, average butter market prices decreased $0.01
per pound, while average cheese market prices increased $0.07 per pound compared
to the same period in 2002. The impact of these market price changes decreased
cost of sales of butter by $13.2 million and increased cost of sales of cheese
by $3.9 million. Increased volumes of both branded butter and private label
butter increased cost of sales by $4.6 million and $1.9 million, respectively.
Reduced sales of bulk cheese resulted in decreased cost of sales of $20.4
million. Reduced volumes of retail cheese and deli cheese resulted in decreased
cost of sales of $14.2 million and $4.8 million, respectively. Offsetting these
decreases in cheese volumes was an increase in the volumes for foodservice
cheese. The increase in cost of sales for foodservice cheese was $9.8 million.
Cost of sales in 2003 under our wholesale milk marketing program decreased $20.6
million compared to 2002. Cost of sales in International decreased $8.2 million
due to the sale of the Poland cheese plant in June 2002. Volume changes in other
categories increased cost of sales by $8.2 million.
Animal Feed. Cost of sales for the nine months ended September 30, 2003
decreased $14.7 million, or 0.9%, to $1,579.0 million compared to $1,593.7
million for the nine months ended September 30, 2002. Cost of sales of livestock
feeds decreased $6.5 million, as volume decreases in dairy, feedlot and swine
feed sales were slightly offset by higher commodity prices, which increased
input costs. Producer economics in the dairy and swine areas has pressured
margins. Volumes declined due to the effects of an excess supply of animal
protein in the market, the impact of depressed commodity prices in dairy, swine
and poultry, integration efforts in the industry, competitive pressures and a
geographic shift in dairy production. Cost of sales of lifestyle feed products
increased $5.1 million, as volume increases for horse, lab and zoo feeds were
somewhat offset by volume declines in grass cattle feed. Commodity prices have
increased input costs in these areas. Ingredient cost of sales increased $1.0
million, as a result of increased commodity prices and changes in product mix.
We also experienced a decrease of $4.7 million for animal milk products, as
volumes returned to historical levels compared to record volumes in the same
period of 2002. Cost of sales in our feed additives area decreased $5.4
million, as this sector has also been impacted by unfavorable industry
economics. Cost of sales in our co-phosphates operation declined $3.7 million,
as we exited this business during 2002. Cost of sales in our international
division declined $7.6 million, as we exited some of the businesses in the
second half of 2002. Cost of sales for animal health farm and ranch products
increased by $27.3 million, as we formed a new joint venture to handle the sale
of these products. Cost of sales in our other wholly-owned and majority-owned
subsidiaries declined $15.2 million due to lower volumes resulting from poor
feed industry economics. Cost of sales in other categories increased $10.0
million. Cost of sales decreased $1.1 million due to an increase in patronage
rebates from other inter-regional cooperatives. Costs in our manufacturing and
distribution areas decreased cost of sales by $12.4 million, as we continue
integration efforts. An unrealized hedging gain of $3.8 million for the nine
months ended September 30, 2003, compared to an unrealized hedging gain of $2.3
million for the nine months ended September 30, 2002, decreased cost of sales by
$1.5 million.
48
Crop Seed. Cost of sales for the nine months ended September 30, 2003
increased $56.7 million, or 23.4%, to $298.7 million, compared to cost of sales
of $242.0 million for the nine months ended September 30, 2002. Cost of sales
for alfalfa increased $6.9 million, or 27.2%, due to increased sales volumes and
the selling excess inventory. Continued volume growth in both proprietary and
partnered corn resulted in increased cost of sales of $44.2 million, or 60.9%
over the prior-year period. Cost of sales for soybeans increased $17.2 million,
or 24.3%, due to an increase in sales volume. Weak forage and turf sales
resulted in decreased cost of sales of $4.6 and $1.8 million respectively. Cost
of sales related to the sale of our wholesale inoculation/coatings business
contributed to reduced cost of $2.4 million. Lower cotton volumes decreased
sales by $1.8 million. Product mix in other seed categories accounted for a
decrease in cost of sales of $2.0 million. An unrealized hedging gain on soybean
futures contracts of $1.3 million for the nine months ended September 30, 2003
compared to an unrealized hedging gain of $2.3 million for the nine months ended
September 30, 2002 increased cost of sales by $1.0 million.
Swine. Cost of sales for the nine months ended September 30, 2003 decreased
$3.4 million, or 5.0%, to $65.0 million, compared to $68.4 million for the nine
months ended September 30, 2002. Reduced volumes and lower costs under our Cost
Plus program decreased cost of sales by $4.6 million partially offset by higher
input costs which increased cost of sales by $2.4 million. An unrealized hedging
gain decreased cost of sales by $1.8 million for the nine months ended September
30, 2003, compared to an unrealized hedging gain of $0.6 million for the nine
months ended September 30, 2002, resulting in a net decrease in cost of sales of
$1.2 million.
Layers. Cost sales for the nine months ended September 30, 2003 increased
$25.0 million, or 8.0%, to $336.6 million, compared to $311.6 million for the
nine months ended September 30, 2002. Note that the 2002 amount and the first
six months of 2003 were not included in the Company's overall cost of sales
since MoArk was not consolidated into our Layers segment until July 1, 2003 and
prior periods were not restated. During the first nine months of 2003, the
average cost of eggs (all egg sizes and types) per dozen was $0.53 as compared
to $0.52 in the first nine months of 2002.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the nine months ended
September 30, 2003 decreased $23.0 million, or 6.1%, to $352.3 million, compared
to selling, general and administration expense of $375.3 million for the nine
months ended September 30, 2002. The consolidation of MoArk increased selling,
general and administration by $12.0 million. The decrease in selling, general
and administration was primarily due to spending reductions associated with our
ongoing cost control efforts as well as gains on the sale of two dairy
manufacturing facilities. Selling, general and administration expense as a
percent of net sales decreased 0.7 percentage points from 8.7% for the nine
months ended September 30, 2002 to 8.0% for the nine months ended September 30,
2003.
RESTRUCTURING AND IMPAIRMENT CHARGES
For the nine months ended September 30, 2003, Land O'Lakes recorded
restructuring and impairment charges of $3.2 million, compared to $8.2 million
for the nine months ended September 30, 2002. These charges related to the
announced closures of certain manufacturing facilities within various business
segments.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2003 was $53.6
million, compared to $53.0 million for the nine months ended September 30, 2002.
Average debt balances decreased by $81.2 million as compared to the nine months
ended September 30, 2002. Combined interest rates for borrowings, excluding
CoBank patronage, averaged 6.83% for the nine months ended September 30, 2003,
compared to 7.02% for the nine months ended September 30, 2002. The impact of
favorable interest rates on the term loans was offset by approximately $3
million in additional interest expense related to the CPI capital lease and $2.3
million due to the consolidation of MoArk.
GAIN ON LEGAL SETTLEMENTS
In the fourth quarter of 1999, a class action lawsuit, alleging illegal price
fixing, was filed against various vitamin product suppliers. Initially, we were
a party to this action as a member of the class. In February 2000, however, we
decided to pursue our claims against the defendant outside the class action. In
December 2002, we reached settlements for $97 million with several defendants
against whom we claimed had illegally fixed the prices of
49
various vitamin products we purchased. As a result of these settlements, a gain
on legal settlements was recorded in December 2002 and net cash proceeds of $97
million were received in January 2003. During 2003, we settled with additional
defendants and received approximately $12.1 million in the nine months ended
September 30, 2003. When combined with the settlement proceeds received from
similar claims since the commencement of these actions, we have received,
cumulatively, approximately $172 million from the settling defendants, which
represents the vast majority of our vitamin purchases. We continue to pursue
similar claims against a few other vitamin product suppliers.
During the first quarter of 2003, we also settled a claim against certain
suppliers of methionine, an amino acid that we purchase and use in certain of
our products. We alleged that certain methionine suppliers had illegally engaged
in price fixing. For the nine months ended September 30, 2003, we received $10.4
million from the settling defendants. When combined with the settlement proceeds
received from similar claims since the commencement of these actions, we have
received, cumulatively, approximately $12 million from the settling defendants.
We do not expect to receive additional settlements based on this claim.
As a result of the above settlements, we recorded a gain on legal
settlements of $22.5 million for the nine months ended September 30, 2003
compared to a gain on legal settlements of $36.8 million for the nine months
ended September 30, 2002.
GAIN ON SALE OF INVESTMENT
For the nine months ended September 30, 2003, we recorded a $0.8
million gain on the sale of an Animal Feed investment in a Purina Mills swine
joint venture.
GAIN ON SALE OF INTANGIBLES
For the nine months ended September 30, 2003, we recorded a gain of $0.6
million on the sale of an Animal Feed customer list in Taiwan. For the nine
months ended September 30, 2002, we recorded a gain of $4.2 million on the sale
of a customer list pertaining to the feed phosphate distribution business.
LOSS OR GAIN ON DIVESTITURE OF BUSINESSES
For the nine months ended September 30, 2003, we recorded a loss of $0.7
million on the divestiture of our Animal Feed business in Taiwan. For the nine
months ended September 30, 2002, we recorded a gain of $4.9 million related on
the divestiture of our dairy foods Poland business for $1.2 and a crop seed
business for $3.7 million.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the nine months ended September 30, 2003, equity in earnings of
affiliated companies was $56.0 million, compared to earnings of $29.8 million
for the nine months ended September 30, 2002. Results for the nine months ended
September 30, 2003 included earnings from Agriliance of $41.6 million compared
to earnings of $35.3 million for the nine months ended September 30, 2002. The
increase was primarily driven by improved crop protection product margins,
partially offset by increased selling, general and administration expense. We
recorded earnings from MoArk of $4.3 million, prior to the consolidation,
effective July 1, 2003, compared to a loss of $7.8 million for the nine months
ended September 30, 2002. In addition, MoArk equity investments had a gain of
$3.3 million for the three months ended September 30, 2003. The increase in
MoArk related earnings was driven by improved market prices for eggs, in part as
a result of a declining chick hatch and changes in response to new animal
welfare guidelines. Earnings from other equity investments increased to $6.8
million in the first nine months of 2003, compared to $2.3 million in the first
nine months of 2002.
MINORITY INTEREST IN LOSS OR EARNINGS OF SUBSIDIARIES
For the nine months ended September 30, 2003, we recorded minority interest
in earnings of subsidiaries of $3.6 million, compared to a loss of $1.5 million
for the nine months ended September 30, 2002.
50
INCOME TAXES
We recorded income tax expense of $8.0 million for the nine months ended
September 30, 2003, compared to income tax benefit of $10.0 million for the nine
months ended September 30, 2002. The increase in income tax expense was
primarily due to increased earnings.
NET EARNINGS
Net earnings increased $7.6 million, or 21.5%, to $42.9 million for the nine
months ended September 30, 2003, compared to net earnings of $35.3 million for
the nine months ended September 30, 2002. The increase in earnings was primarily
due to increased earnings in the Layers and Agronomy segments, offset by the
$14.3 million decrease in gain on legal settlements compared to the prior
nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
We rely on cash from operations, borrowings under our bank facilities, bank
term debt and other institutionally placed funded debt as the main sources for
financing working capital requirements and additions to property, plant and
equipment as well as acquisitions and joint ventures. Other sources of funding
consist of leasing arrangements, a receivables securitization and the sale of
non-strategic assets. Total long-term debt was $1,023.6 million as of September
30, 2003 compared to $1,007.3 million as of December 31, 2002. The increase was
due to the consolidation of MoArk, largely offset by debt repayments.
Net cash provided by operating activities was $130.0 million for the nine
months ended September 30, 2003, compared to net cash used of $9.3 million for
the nine months ended September 30, 2002. Receipt of proceeds from legal
settlements of $119.2 million and the cash generated from the revolving
receivables securitization program were the primary reasons for the $139.3
million increase in cash provided by operating activities.
Net cash flows used by investing activities was $55.4 million for the nine
months ended September 30, 2003 and $13.6 million for the nine months ended
September 30, 2002. The change was primarily due to an increase in restricted
cash and proceeds from the sale of investments in 2002.
Net cash flows used by financing activities was $118.1 million for the nine
months ended September 30, 2003 and $69.4 million for the nine months ended
September 30, 2002. For the nine months ended September 30, 2003, we made
payments of $107.1 million on existing long-term debt and payments of $23.8
million for redemption of member equities. At the same time, we increased
short-term debt by $13.3 million to finance seasonal working capital needs. For
the nine months ended September 30, 2002, we made payments of $81.8 million on
existing long-term debt and payments of $37.0 million for redemption of member
equities, while increasing our short-term debt by $42.4 million to cover
seasonal working capital needs.
Our principal liquidity requirements are to service our debt and meet our
working capital and capital expenditure needs. As of September 30, 2003 we had
$1,023.6 million outstanding in long-term debt, including $190.7 million of
Capital Securities, and $153.7 million outstanding in short-term debt. In
addition, as of September 30, 2003, $205.2 million was available under a $250
million revolving credit facility for working capital and general corporate
purposes, after giving effect to $44.8 million of outstanding letters of credit,
which reduce availability. The revolving credit facility was undrawn as of
September 30, 2003. Total equities as of September 30, 2003 were $929.3 million.
We are working towards a renewal of our $250 million revolving credit
facility, which is set to expire on June 28, 2004. In light of recent
improvements in the high-yield markets, we are simultaneously exploring
alternatives to prepay a portion of our existing term debt with the proceeds of
new term debt, which will defer most of our near term amortization payments.
Finally, we intend to expand our existing receivables securitization facility
(described below) from $100 million to $200 million, by incorporating
receivables related to our Dairy Foods operations. The proceeds from the
expanded securitization would be used to prepay additional term debt. We
currently expect to complete these transactions by year-end or soon thereafter.
51
Although we expect to meet our financial covenants going forward, as part
of this refinancing, we will seek some modest relief from our lenders with
regard to the leverage ratio covenant. This covenant is expected to be tight in
the first quarter of 2004, primarily because the $97 million in vitamin
settlement receipts received in January of 2003 fall out of the 4-quarter
rolling average calculation at that time. We do not anticipate any difficulties
in obtaining the requested relief.
The principal term loans consist of a syndicated Term Loan A Facility with
a remaining balance of $229.3 million and an expiration date of October 10,
2006, and a syndicated Term Loan B Facility with a remaining balance of $204.9
million and an expiration date of October 10, 2008. As noted above, our $250.0
million revolving credit facility terminates on June 28, 2004.
Borrowings under the term loans and the revolving credit facility bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins are dependent upon Land O'Lakes credit ratings.
The Term Loan A Facility is prepayable at any time without penalty. The Term
Loan B Facility is prepayable with a penalty of 1% through October 10, 2004 and
no penalty thereafter. The term loans are subject to mandatory prepayments,
subject to certain limited exceptions, in an amount equal to (1) 50% of excess
cash flow of Land O'Lakes and the restricted subsidiaries, (2) 100% of the net
cash proceeds of asset sales and dispositions of property of Land O'Lakes and
the restricted subsidiaries, to the extent not reinvested, (3) 100% of any
casualty or condemnation receipts by Land O'Lakes and the restricted
subsidiaries, to the extent not used to repair or replace assets, (4) 100% of
joint venture dividends or distributions received by Land O'Lakes or the
restricted subsidiaries, to the extent that they relate to the sale of property,
casualty or condemnation receipts, or the issuance of any equity interest in the
joint venture, (5) 100% of net cash proceeds from the sale of inventory or
accounts receivable in a securitization transaction and (6) 100% of net cash
proceeds from the issuance of unsecured senior or subordinated indebtedness
issued by Land O'Lakes. During the first nine months of 2003, we made payments
of $59.0 million on the Term Loan A Facility and $26.5 million on the Term Loan
B Facility, of which $35.5 million was mandatory and $50.0 million was
voluntary. In addition, during the month of October 2003 we made a scheduled
payment of $14.3 million on the Term Loan A Facility.
The amortization schedules for the Term Loan A and Term Loan B Facilities
are provided below.
TERM LOAN A TERM LOAN B
------------ ------------
2002 (paid) $ 36,729,853 $ 18,583,371
2003 (paid through October)... 73,297,256 26,542,782
2004.......................... 64,491,867 1,508,154
2005.......................... 85,989,157 2,510,842
2006.......................... 64,491,867 2,510,842
2007.......................... -- 2,510,842
2008.......................... -- 195,833,167
------------ ------------
Total.................... $325,000,000 $250,000,000
============ ============
In November 2001, we issued $350 million of senior notes. These notes bear
interest at a fixed rate of 8.75% and mature on November 15, 2011. The notes are
callable beginning in year six at a redemption price of 104.375%. In years seven
and eight, the redemption price is 102.917% and 101.458%, respectively. The
notes are callable at par beginning in year nine.
In 1998, Capital Securities in an amount of $200 million were issued by our
trust subsidiary, and the net proceeds were used to acquire a junior
subordinated note of Land O'Lakes. The holders of these securities are entitled
to receive dividends at an annual rate of 7.45% until the securities mature in
2028 and correspond to the payment terms of the junior subordinated debentures
which are the sole asset of the trust subsidiary. Interest payments on the
debentures can be deferred for up to five years, and the obligations under the
debentures are junior to all of our debt. As of September 30, 2003, the
outstanding balance of Capital Securities was $190.7 million.
The credit agreements relating to the term loans and revolving credit
facility and the indenture relating to the 8.75% senior notes impose certain
restrictions on us, including restrictions on our ability to incur indebtedness,
make payments to members, make investments, grant liens, sell our assets and
engage in certain other activities. In addition, the credit agreements relating
to the term loans and revolving credit facility require us to maintain an
interest coverage ratio of at least 2.50 to 1. Our ratio was 3.38 to 1 as of and
for the year ended December 31, 2002, and 4.49 to 1 as of and for the twelve
months period ended September 30, 2003. We are also required to maintain a
52
leverage ratio of no greater than 4.25 to 1. The actual leverage ratio as of
December 31, 2002 was 3.85 to 1 and 2.81 to 1 as of September 30, 2003. The
required leverage ratio steps down to 3.75 to 1 as of October 11, 2003 and
remains constant thereafter.
Indebtedness under the term loans and revolving credit facility is secured
by substantially all of the material assets of Land O'Lakes and its wholly-owned
domestic subsidiaries (other than LOL Finance Co. and LOLFC, LLC) and Land
O'Lakes Farmland Feed and its wholly-owned domestic subsidiaries (other than LOL
Farmland Feed SPV, LLC), including real and personal property, inventory,
accounts receivable, intellectual property and other intangibles, other than
those receivables which have been sold in connection with our receivables
securitization. Indebtedness under the term loans and revolving credit facility
is also guaranteed by our wholly-owned domestic subsidiaries (other than LOL
Finance Co. and LOLFC, LLC) and Land O'Lakes Farmland Feed and its wholly-owned
domestic subsidiaries (other than LOL Farmland Feed SPV, LLC). The 8.75% senior
notes are unsecured but are guaranteed by the same entities that guaranty the
obligations under the term loans and revolving credit facility.
We expect that funds from operations and available borrowings under our
revolving credit facility and receivables securitization facility will provide
sufficient working capital for at least the next twelve months to operate our
business, to make expected capital expenditures and to meet liquidity
requirements, including debt service on the term debt, the revolving credit
facilities and the 8.75% senior notes.
The current ratings from Moody's Investors Service ("Moody's) and Standard
and Poor's Investors Service ("S&P") on our secured and unsecured debt are as
follows:
FACILITY (MATURITY) MOODY'S S&P
$250 million senior secured (2004) (Revolving Credit Facility) B1 B+
$229 million senior secured (2006) (Term Loan A) B1 B+
$205 million senior secured (2008) (Term Loan B) B1 B+
$350 million 8.75% senior unsecured (2011) B2 B-
$191 million 7.45% Trust preferred B3 CCC
Moody's debt rating outlook is stable and S&P's debt rating outlook is
negative.
OFF-BALANCE SHEET ARRANGEMENTS
In order to reduce overall financing costs, Land O'Lakes entered into a
revolving receivables securitization program with CoBank in December 2001 for up
to $100 million in advances against eligible receivables. Under this program,
Land O'Lakes, Land O'Lakes Farmland Feed and Purina Mills sell feed, seed and
certain swine receivables to LOL Farmland Feed SPV, LLC, a limited purpose
wholly-owned subsidiary of Land O'Lakes Farmland Feed. This subsidiary is a
qualifying special purpose entity ("QSPE") under applicable accounting rules.
The QSPE was established for the limited purpose of purchasing and obtaining
financing for these receivables. The transfers of the receivables to the QSPE
are structured as sales and, in accordance with applicable accounting rules,
these receivables are not reflected in the consolidated balance sheets of Land
O'Lakes Farmland Feed or Land O'Lakes. The QSPE purchases the receivables with a
combination of cash initially received from CoBank, equal to the present value
of eligible receivables multiplied by the agreed advance rate; and notes, equal
to the unadvanced present value of the receivables. Land O'Lakes and the other
receivables sellers are subject to credit risk related to the repayment of the
QSPE notes, which in turn is dependent upon the ultimate collection on the
QSPE's receivables pool. Accordingly, we have retained reserves for estimated
losses. As of September 30, 2003, $70 million was drawn under the securitization
facility. As noted above, we expect to expand the revolving securitization
program in January 2004, by up to $100 million with the addition of certain
Dairy Foods receivables.
In addition, we lease various equipment and real properties under long-term
operating leases. Total consolidated rental expense was $35.0 million for the
nine months ended September 30, 2003, and $21.7 million for the nine months
ended September 30, 2002. Most of the leases require the payment of ongoing
operating expenses applicable to the leased assets. We expect that in the normal
course of business most leases that expire will be renewed or replaced by other
leases.
53
CPI CAPITAL LEASE
Cheese & Protein International LLC ("CPI"), a consolidated joint venture of
Land O'Lakes, leases the real property and certain equipment relating to its
cheese manufacturing and whey processing plant in Tulare, California ("the
Lease"). The Lease is accounted for as a capital lease in our financial
statements, and as of September 30, 2003 the lease balance was $101.5 million.
The Lease base term commenced on April 30, 2002 and expires on the fifth
anniversary, unless CPI requests, and the lessor approves, one or more one-year
base term extensions, which could extend the base term to no more than ten
years. We have entered into a Support Agreement in connection with the Lease.
Pursuant to this agreement, we can elect one of the following options in the
event CPI defaults on its obligations under the Lease: (i) assume the
obligations of CPI, (ii) purchase the leased assets, (iii) fully cash
collateralize the Lease, or (iv) nominate a replacement lessee to be approved by
the lessor. The lease agreement requires among other things, that CPI maintain
certain financial ratios including minimum tangible net worth and a minimum
fixed charge coverage ratio. In addition, CPI is restricted as to borrowings and
changes in ownership.
On March 28, 2003, the Lease contract was amended. The amendment postponed
the measurement of the fixed charge coverage ratio until March 2005. In
addition, Land O'Lakes established a $20 million cash account (which may be
replaced with a letter of credit, at our option) which supports the lease. The
cash account or letter of credit would only be drawn upon in the event of a CPI
default, and would reduce amounts otherwise due under the lease. This support
requirement will be lifted when certain financial targets are achieved by CPI.
The lease payments disclosed below are based on current lease rates, an assumed
interest rate of 6%, and a ten-year lease term. The actual lease payments will
vary with short-term interest rate fluctuations, as interest per the lease
agreement is based on LIBOR. At the conclusion of the lease term, CPI is
obligated to pay the remaining lease balance.
MOARK CAPITAL LEASES
MoArk has capital leases with a balance as of September 30, 2003 of $10.3
million for land, building, machinery and equipment at various locations. The
interest rates on the capital leases range from 5.22% to 7.93% with the weighted
average rate being 6.92%. The weighted average term until maturity is 6 years.
CONTRACTUAL OBLIGATIONS
At September 30, 2003, we had certain contractual obligations, which require
us to make payments as follows:
PAYMENTS DUE BY PERIOD (AS OF SEPTEMBER 30, 2003)
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ----- ----------- --------- --------- ---------
(IN THOUSANDS)
Revolving Credit Facility(1) $ -- $ -- $ -- $ -- $ --
Notes and Short-Term Obligations............... 81,223 81,223 -- -- --
Long-Term Debt(2).............................. 1,095,989 72,434 194,545 220,836 608,174
Capital Lease (3).............................. 111,791 10,083 22,461 21,446 57,801
Operating Leases............................... 87,132 25,982 25,463 15,269 20,418
---------- -------- -------- ---------- --------
Total Contractual Obligations................ $1,376,135 $189,722 $242,469 $ 257,551 $686,393
========== ======== ======== ========== ========
- -----------
(1) Maximum $250 million facility, of which $205.2 million was available as of
September 30, 2003. A total of $44.8 million of this commitment was
unavailable due to outstanding letters of credit.
(2) Refer to Term Loan A and Term Loan B obligations in certain events as
explained in "Liquidity and Capital Resources." See "Off-balance Sheet
Arrangements" for information concerning our receivables securitization
program.
(3) Amount represents the present value of future minimum lease payments for the
capital leases.
We expect our total capital expenditures to be approximately $90 million to
$100 million in 2003. Of such amounts, we currently estimate that a minimum
range of $35 million to $45 million of ongoing maintenance capital expenditures
is required each year. We had $55.3 million in capital expenditures for the nine
months ended September 30, 2003, compared to $57.3 million in capital
expenditures for the nine months ended September 30, 2002. We estimate that our
total depreciation and amortization expense will be approximately $100 million
to $110 million in 2003. We had $83.5 million in depreciation and amortization
expense for the nine months ended
54
September 30, 2003, compared to $77.3 million for the nine months ended
September 30, 2002.
We have made cash payments to members, which were subject to Board approval,
in the nine months ended September 30, 2003 of $23.8 million for revolvement,
cash patronage, and estates and age retirements. We expect a minimal amount to
be paid in the rest of 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 17, 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51," ("FIN 46"). The primary objectives of FIN 46 are to
provide guidance on the identification and consolidation of variable interest
entities, or VIEs, which are entities for which control is achieved through
means other than through voting rights. FIN 46 is effective immediately for all
new variable interest entities created or acquired after January 31, 2003 and no
later than October 1, 2003 for variable interest entities created or acquired
prior to February 1, 2003. As permitted by the Interpretation, we early-adopted
FIN 46 on July 1, 2003 and began consolidating our joint venture interest in
MoArk LLC ("MoArk"), an egg production and marketing company, in the third
quarter of 2003.
In May, 2003, the FASB issued Statement of Financial Accounting Standards
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The statement is effective for the Company as of January 1,
2004, and we are currently evaluating the impact of the standard.
FORWARD-LOOKING STATEMENTS
This Form 10-Q for the three months ended September 30, 2003 includes
forward-looking statements. These forward-looking statements can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "could," "should," "seeks," "pro forma," "as adjusted," "anticipates,"
"intends," or other variations thereof, including their use in the negative, or
by discussions of strategies, plans or intentions. Although we believe that our
plans, intentions and expectations reflected in, or suggested by, such
forward-looking statements are reasonable, you should be aware that actual
results could differ materially from those projected by the forward-looking
statements. Because actual results may differ, readers are cautioned not to
place undue reliance on forward-looking statements. We assume no obligation to
update such forward-looking statements or to update the reasons that actual
results could differ materially from those anticipated in such forward-looking
statements.
o OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL
OUR OBLIGATIONS UNDER OUR DEBT OBLIGATIONS AND OPERATE OUR BUSINESS.
o SERVICING OUR INDEBTEDNESS REQUIRES A SIGNIFICANT AMOUNT OF CASH, AND
OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
o DESPITE OUR SUBSTANTIAL LEVERAGE, WE ARE ABLE TO INCUR MORE DEBT, WHICH
MAY INTENSIFY THE RISKS ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE.
o RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS LIMIT OUR ABILITY TO FINANCE
FUTURE OPERATIONS OR CAPITAL NEEDS OR ENGAGE IN OTHER BUSINESS
ACTIVITIES THAT MAY BE IN OUR INTEREST.
o IF CHEESE & PROTEIN INTERNATIONAL, LLC DEFAULTS ON ITS LEASE, THE
COMPANY MAY BE REQUIRED TO ASSUME THE OBLIGATION UNDER THE LEASE.
o CHANGES IN CONSUMER PREFERENCES AND DISTRIBUTION CHANNELS COULD DECREASE
OUR REVENUES AND CASH FLOW.
o COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS.
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o AN OVERSUPPLY OF FOOD PROTEIN IN THE U.S. MARKET COULD CONTINUE TO
REDUCE OUR NET SALES AND CASH FLOWS.
o CHANGES IN THE MARKET PRICES OF THE DAIRY AND AGRICULTURAL COMMODITIES
THAT WE USE AS INPUTS AS WELL AS THE PRODUCTS WE MARKET MAY CAUSE OUR
OPERATING PROFIT AND THE LIKELIHOOD OF RECEIVING DIVIDENDS FROM OUR
JOINT VENTURES TO DECREASE.
o DECREASE IN MILK SUPPLY COULD DECREASE OUR SALES AND INCREASE OUR COST
OF PRODUCTION.
o WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS AND TO
CONTROL THE JOINT VENTURE ARE LIMITED.
o A CONTINUATION OF THE DEPRESSED OPERATING RESULTS OF CF INDUSTRIES COULD
LEAD TO AN IMPAIRMENT OF OUR INVESTMENT IN CF INDUSTRIES.
o WE MAY NOT SUCCESSFULLY IMPLEMENT THE STRATEGIES RELATING TO OUR RECENT
ACQUISITIONS OR ACHIEVE THE ANTICIPATED BENEFITS FROM THESE
ACQUISITIONS.
o OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US
TO POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR
BUSINESS.
o PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT OUR
BUSINESS REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY FEDERAL AND
STATE REGULATORS.
For a discussion of additional factors that could cause actual results to
differ materially from the anticipated results or other expectations expressed
in our forward-looking statements, see the discussion of risk factors set forth
in our Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the nine months ended September 30, 2003 the Company did not experience
significant changes in market risk exposures that materially affect the
quantitative and qualitative disclosures presented in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or in other factors that could significantly
affect these controls subsequent to the date of their evaluation and there were
no corrective actions with regard to significant deficiencies or material
weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently and from time to time involved in litigation incidental to
the conduct of our business. The damages claimed against us in some of these
cases are substantial. In the third quarter of 2003, three separate lawsuits
were filed against the Company by Ohio alpaca producers in which it is alleged
that the Company manufactured and sold animal feed that caused the death of, or
damage to, certain of the producers' alpacas. It is possible that additional
lawsuits or claims relating to this matter could be brought against the Company.
Although the amount of liability that may result from these matters cannot be
ascertained, we do not currently believe that, in the aggregate, after
consideration of insurance coverage, they will result in liabilities material to
our consolidated financial condition, future results of operations or cash flow.
In December 2002, we reached settlements with defendants against whom we
claimed had illegally fixed the prices for various vitamin and methionine
products we purchased. As a result of the settlements, we received net proceeds
of approximately $97 million in January 2003. Additional proceeds received in
the nine months ended September 30, 2003 total $22.5 million. When combined with
the settlement proceeds received from similar claims settled since the
commencement of these actions, we have received cumulatively approximately $184
million from the settling defendants. These claims that have been settled
represent the vast majority of our vitamin and methionine purchases. We continue
to pursue similar claims against a few other vitamin product suppliers. With
respect to these remaining claims, we anticipate a Minnesota trial in 2004.
In a letter dated January 18, 2001, we were identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible party for
the hazardous waste located at the Hudson Refinery Superfund Site in Cushing,
Oklahoma. The letter invited us to enter into negotiations with the EPA for the
performance of a remedial investigation and feasibility study in connection with
the site and also demanded that we reimburse the EPA approximately $8.9 million
for remediation expenses already incurred at the site. We have responded to the
EPA denying any responsibility. No further communication has been received from
the EPA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT DESCRIPTION
3.1 Restated Articles of Incorporation of Land O'Lakes, Inc., as
amended, August 1998. (1)
3.2 By-Laws of Land O'Lakes Inc., as amended, February 2003 (2)
4.1 Credit Agreement among Land O'Lakes, Inc., the Lenders party
thereto and The Chase Manhattan Bank, dated as of October
11, 2001. (1)
4.2 First Amendment dated November 6, 2001 to the Credit
Agreement dated October 11, 2001. (1)
4.3 Second Amendment dated February 15, 2002 to the Credit
Agreement dated October 11, 2001. (1)
4.4 Guarantee and Collateral Agreement among Land O'Lakes, Inc.
and certain of its subsidiaries and The Chase Manhattan
Bank, dated as of October 11, 2001. (1)
4.5 Indenture dated as of November 14, 2001, among Land O'Lakes,
Inc. and certain of its subsidiaries, and U.S. Bank,
including Form of 8.75% Senior Notes due 2011 and Form of
8.75% Senior Notes due 2011. (1)
4.6 Registration Rights Agreement dated November 14, 2001 by and
among Land O'Lakes, Inc. and certain of its subsidiaries,
J.P. Morgan Securities Inc., SPP Capital Partners, LLC,
SunTrust Robinson Capital Markets, Inc., Tokyo-Mitsubishi
International plc and U.S. Bancorp Piper Jaffray, Inc. (1)
4.7 Purchase Agreement by and between Land O'Lakes, Inc., and
certain of its subsidiaries, J.P. Morgan Securities Inc.,
SPP Capital Partners, LLC, SunTrust Robinson Capital
Markets, Inc., Tokyo-Mitsubishi International plc and U.S.
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Bancorp Piper Jaffray, Inc., dated as of November 8,
2001. (1)
4.8 Form of Old Note (included in Exhibit 4.5). (1)
4.9 Form of New Note (included in Exhibit 4.5). (1)
31.1 Certification Pursuant to 15 U.S,C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification Pursuant to 15 U.S,C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
(1) Incorporated by reference to the identical exhibit to the Registrant's
Registration Statement on Form S-4 filed March 18, 2002.
(2) Incorporated by reference to the identical exhibit to the Company's
Form 10-Q for the quarterly period ended March 31, 2003, filed on April
14, 2003.
* Filed electronically herewith
(b) REPORTS ON FORM 8-K
On July 24, 2003 the Company furnished a Report on Form 8-K containing
the Company's second quarter earnings press release.
On October 8, 2003 the Company furnished a Report on Form 8-K to report
that Standard & Poor's Rating Services had downgraded the secured and
the unsecured debt of the Company.
On October 23, 2003 the Company furnished a Report on Form 8-K
containing the Company's third quarter press release.
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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 thereunto duly authorized on the 14th day of November, 2003.
LAND O'LAKES, INC.
By /s/ Daniel Knutson
-----------------------------------------------------
Daniel Knutson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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