February 3, 2006
Ms. April Sifford
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-7010
Re: Land O'Lakes, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2004 Filed
March 30, 2005 File No. 333-84486
Dear Ms. Sifford:
On behalf of Land O'Lakes, Inc. (the "Company"), I am writing in response to the
comments made by the staff (the "Staff") of the Securities and Exchange
Commission (the "Commission") in its letter dated January 26, 2006 (the "Comment
Letter") with respect to the Company's annual report on Form 10-K for the year
ended December 31, 2004 (File No. 333-84486) ("Form 10-K").
For the convenience of the Staff's review, we have set forth the comments
contained in the Staff's Comment Letter above each of the Company's
corresponding responses.
STAFF COMMENT:
1. We have reviewed your response to comment 2 of our letter dated
November 30, 2005 and understand you have accounted for the option to
purchase the remaining 42.5% of MoArk, LLC under EITF 00-04. Tell us if
the put and call options were issued as a single free standing
instrument, as separate free standing instruments, or embedded in the
shares (minority interest). Based on the form of issuance, reconcile
your accounting treatment at present value with that discussed in
paragraph 16 of EITF 00-04 and the provisions of EITF 00-06, if
applicable. In your response, please confirm that these instruments
meet the scope requirements for application of EITF 00-04 verses EITF
00-06.
MANAGEMENT RESPONSE:
The put and call options were established pursuant to MoArk's joint venture
agreement with the Company and the other minority interest member. The options
are part and parcel of each member's ownership interest in the joint venture,
have no independent economic value and cannot be separated from that member's
rights and obligations under the joint venture agreement.
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EITF 00-04 is applicable in this instance because at the time the LLC was
formed, the minority interest holder and the Company entered into a contract
related to the LLC's equity shares and both the call option and the put option
are on the same terms. Since EITF 00-06 addresses freestanding derivative
contracts that are indexed to, and sometimes settled in, the stock of a
consolidated subsidiary, it is not applicable in this case.
Paragraph 16 of EITF 00-04 requires that embedded put and call options which are
not mandatorily redeemable be accounted for as a financing of the minority
interest and that the parent consolidate 100 percent of the subsidiary. The
contracted minimum purchase price was measured at present value and is accreted
to the future purchase price amount through charges to interest expense, in
accordance with paragraph 16 of EITF 00-04.
STAFF COMMENT:
2. We note that you intend to expand your disclosures related to
derivative commodity instruments in the footnotes to the financial
statements. Please provide us with a draft of the disclosure you
propose to include in future filings. Additionally, we understand you
classify changes in fair values of your futures contracts and interest
rate swaps in cost of sales and interest expense, respectively. In your
expanded disclosure, please identify the line item classification as
your current disclosure simply states these amounts are included in net
earnings.
MANAGEMENT RESPONSE:
As noted in our response letter dated December 20, 2005, the Company stated that
it will expand its disclosure in Note 1 of Notes to Consolidated Financial
Statements related to derivative commodity instruments in future Form 10-K
filings to include a description of the commodities hedged and the risk
management policy established to limit the use of hedging derivatives. The
expanded disclosure will also include the specific line item classification for
futures contracts and interest rate swaps. A draft of Note 1 of Notes to the
Consolidated Financial Statements for the Company's December 31, 2005 Form 10-K
is as follows:
DERIVATIVE COMMODITY INSTRUMENTS In the normal course of operations, the
Company purchases commodities such as milk, butter and soybean oil in the
Dairy Foods segment; soybean meal and corn in the Feed segment; and
soybeans in the Seed segment. Derivative commodity instruments, consisting
primarily of futures contracts offered through regulated commodity
exchanges, are used to reduce exposure to changes in commodity prices.
These contracts are not designated as hedges under Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The futures contracts are
marked-to-market each month and gains and losses ("unrealized hedging
gains and losses") are recognized in cost of sales. The Company has
established formal position limits to monitor its hedging activities and
generally does not use derivative commodity instruments for speculative
purposes.
The Company uses interest rate swaps to help manage its exposure to
interest rate fluctuations. The objective of the swaps is to maintain an
appropriate balance between fixed and floating rate exposures. Changes in
the fair value of the interest rate swaps designated and effective as fair
value hedges are recorded as an adjustment to interest expense and are
offset by the fair value adjustment to the underlying hedged debt.
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The Company will continue to make the disclosures related to derivative
commodity instruments similar to those set forth in Note 10 on page 82, Note 13
on page 83 and Note 22 on page 92 of Notes to the Consolidated Financial
Statements included in the annual report on Form 10-K for 2004.
STAFF COMMENT:
3. We have reviewed your response to comment 11 of our letter dated November
30, 2005 and understand that your disclosure stating no amounts are
outstanding as of December 31, 2004 refers to the amounts outstanding at
the QSPE owed to CoBank. We also understand that you have $362,123 and
$181,320 in notes receivable from the QSPE as of December 31, 2004 and
2003. Please tell us the amount of trade receivables balance outstanding
held by the QSPE as of December 31, 2004 and 2003. We note these trade
receivables serve as the funding for your note receivables as no amounts
are due to CoBank. In your response, please also identify the amount of
reserves retained in your financial statements for potential losses on
collection of the note receivable from the QSPE. Confirm that these reserve
amounts and the related activity are included in the disclosures in note 25
on page 93.
MANAGEMENT RESPONSE:
As of December 31, 2004 and 2003, the QSPE held outstanding trade receivables of
$357,640 and $193,051, respectively. The QSPE also held notes payable to the
Company of $362,123 and $181,320, respectively, as of December 31, 2004 and
2003. Since there were no outstanding amounts due to CoBank at December 31,
2004, the difference between the note payable to the Company and the accounts
receivable held at the QSPE is due to cash collections received and applied to
the receivables balance but not yet remitted to the Company under the Note. At
December 31, 2003, the QSPE had $20 million outstanding due to CoBank which was
used to pay a portion of the Note Payable to the Company. After adjusting for
this Note balance, the remaining difference between the QSPE's trade receivables
balance and the amount due to the Company is attributable to cash applied to the
receivables but not yet remitted to the Company under the Note.
The Company's allowance for doubtful accounts reserve as of December 31, 2004
and 2003 includes $7,674 and $7,941, respectively, for potential losses on
collection of the notes receivable from the QSPE. These reserve amounts and
related activity are included in the disclosures in Note 25 of Notes to the
Consolidated Financial Statements on page 93.
STAFF COMMENT:
4. We understand you intend to expand your disclosures under paragraph
17(f)(2) of SFAS 140 related to the securitization facility as discussed in
your response to comment 12 of our letter dated November 30, 2005.
Paragraph 17(f)(4) of SFAS 140 states cash flows between the transferor and
the QSPE should be disclosed. Such cash flows would include the
identification of amounts received from the QSPE from new sales of trade
receivables and from collections under current notes receivable outstanding
during each period presented in the financial statements. We believe your
proposed disclosure should include a discussion of all related cash flows
between you and the QSPE. Additionally, based on your response to comment
11, we believe you should clarify your disclosure regarding the amounts
outstanding under the receivables purchase outstanding. Please provide us
with the proposed disclosure you intend to include in future filings.
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MANAGEMENT RESPONSE:
As noted in the response letter dated December 20, 2005, the Company will expand
its disclosure concerning the securitization facility in its Notes to
Consolidated Financial Statements in future filings. Specifically, the Company
will address characteristics of the securitization facility, including the
business purpose for the facility. Additional disclosures of the cash flows
between the QSPE and the Company for each period presented will also be
included. In addition, the Company will clarify that the amounts outstanding
refer to amounts owed by the QSPE to CoBank. The proposed disclosure in Note 5
of Notes to Consolidated Financial Statements is as follows:
In December 2001, the Company established a $100 million (expanded to $200
million in 2004) receivables purchase facility with CoBank, ACB ("CoBank")
in an effort to reduce the Company's overall financing costs. A
wholly-owned, unconsolidated special purpose entity ("SPE") was
established for the limited purpose of purchasing and obtaining financing
for these receivables. The transfers of the receivables from the Company
to the SPE are structured as sales; accordingly, the receivables
transferred to the SPE are not reflected in the Company's consolidated
balance sheets. The Company sells the receivables to the SPE in exchange
for a note equal to the present value of the receivables, adjusted for
risk of loss. Amounts owing on the note are paid back to the Company upon
collection of the receivables by the SPE or when the SPE enters into
borrowings with CoBank. Accordingly, cash flows between the Company and
the SPE represent collections on the notes receivable outstanding, which
were $5,658.4 million and $2,606.2 million in 2004 and 2003, respectively.
The Company is subject to credit risk related to the repayment of the
notes receivable with the SPE, which, in turn, is dependent upon the
collection of the SPE's receivables pool. The Company has retained
reserves for estimated losses. The Company expects no significant gains or
losses from the facility. At December 31, 2004, the SPE had no borrowings
outstanding with CoBank under this facility and at December 31, 2003, the
SPE had $20.0 million of outstanding borrowings with CoBank.
STAFF COMMENT:
5. Tell us where you have classified the cash flows relating to your
receivables purchase facility in your statements of cash flows.
MANAGEMENT RESPONSE:
The Company reports the cash flows relating to the receivables purchase facility
in "Net cash provided by operating activities" as a change in receivables. Such
classification is consistent with comments made by the SEC at the 2004 AICPA
National Conference on current SEC and PCAOB developments.
STAFF COMMENT:
6. In your response to comment 14 of our letter dated November 30, 2005, we
understand you believe the purchase of Land O' Lakes Farmland Feed LLC
should be considered on a step-by-step basis. You state that an analysis
of the fair value of net assets acquired was performed to determine how to
allocate the $37.1 million in negative goodwill from your purchase of the
remaining 8% in 2004 and concluded it should be allocated in its entirety
to reduce the goodwill recognized in the two previous purchases in 1999
and 2001. Please tell us to what extent the results of this analysis
performed in 2004 indicated the previously recognized goodwill balance of
$137.5 million was impaired in prior periods and why such impairments were
not previously recorded.
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MANAGEMENT RESPONSE:
As of December 31, 2000, the Company owned 69% of Land O'Lakes Farmland Feed
LLC. Farmland Industries, Inc. ("Farmland") owned the other 31%. In 2001, the
Company acquired Purina Mills, Inc. and contributed the entire business to Land
O'Lakes Farmland Feed LLC, thereby increasing its ownership in the LLC from 69%
to 92%. The Company recorded $137.5 million of goodwill related to the Purina
Mills acquisition and assigned it to the Company's Feed segment.
The LLC's minority holder, Farmland, filed for Chapter 11 bankruptcy protection
on May 31, 2002. As part of its reorganization, Farmland sought to liquidate its
investment in the LLC. The potential market for Farmland's minority interest was
severely limited given the inherent lack of voting power represented by an 8%
member and by the fact that the joint venture guaranteed the Company's senior
debt facilities and had pledged substantially all of its assets as collateral in
support of certain of such facilities. In addition, the shares representing the
minority interests were themselves pledged as collateral to support those same
facilities. Given these conditions, the Company was able to purchase Farmland's
8% minority interest at a price below book value, which resulted in negative
goodwill. The Company's 2004 and 2003 goodwill impairment tests, which were
performed in accordance with SFAS 142, indicated no impairment for the Feed
reporting unit, which consists primarily of the goodwill acquired through the
Purina Mills acquisition.
CLOSING COMMENT:
In connection with our responses to the SEC's comments above, we acknowledge
that:
- The Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
- Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
- The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
We hope that this letter responds adequately to the Staff's questions. If you
have any further comments or questions, please contact me at (651) 481-2710.
Thank you for your time and consideration.
Sincerely,
/s/ Daniel Knutson
Senior Vice President and Chief Financial Officer
Cc: Mr. Ryan Milne
Ms. Shannon Buskirk
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