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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Not applicable.
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.
Documents incorporated by reference: None.
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
December 31, 2003: 1,094 shares of Class A common stock, 4,914 shares of Class B
common stock, 190 shares of Class C common stock, and 1,142 shares of Class D
common stock.
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* Although Land O'Lakes, Inc. is not currently required to file this Annual
Report on Form 10-K pursuant to Section 13 or 15(d), we are filing
voluntarily.
INDEX
PART I.
Forward Looking Statements.................................. 2
Item 1. Business.................................................... 2
Business Segments........................................... 2
Description of the Cooperative.............................. 13
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 21
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 65
Item 8. Financial Statements and Supplementary Data................. 66
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 66
Item 9A. Controls and Procedures..................................... 66
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 66
Item 11. Executive Compensation...................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 76
Item 13. Certain Relationships and Related Transactions.............. 76
Item 14. Principal Accountant Fees and Services...................... 76
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 77
Signatures.................................................. 82
1
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" contains forward-looking
statements. The forward-looking statements are based on the beliefs of our
management as well as on assumptions made by and information currently available
to us at the time the statements were made. When used in the Form 10-K, the
words "anticipate", "believe", "estimate", "expect", "may", "will", "could",
"should", "seeks", "pro forma" and "intend" and similar expressions, as they
relate to us are intended to identify the forward-looking statements. All
forward-looking statements attributable to persons acting on our behalf or us
are expressly qualified in their entirety by the cautionary statements set forth
here and in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Risk Factors" on pages 54 to 64. We undertake no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events or for any other reason. Although
we believe that these statements are reasonable, you should be aware that actual
results could differ materially from those projected by the forward-looking
statements. For a discussion of 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 "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors" on pages 54 to 64. Because actual results
may differ, readers are cautioned not to place undue reliance on forward-looking
statements.
WEBSITE
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 of Form 8-K, press releases and earnings releases are
available, free of charge, on our website as soon as practicable after they are
released publicly or filed with the SEC.
PART I
ITEM 1. BUSINESS.
Unless context requires otherwise, when we refer to "Land O'Lakes," the
"Company," "we," "us", or "our," we mean Land O'Lakes, Inc. together with its
consolidated subsidiaries.
OVERVIEW
We produce dairy products, animal feed and crop seed in the United States.
In 1921, we were formed as a cooperative designed to meet the needs of dairy
farmers located in the Midwestern United States. We have expanded our business
through acquisitions and joint ventures to diversify our product portfolio, to
leverage our portfolio of brand names, to achieve economies of scale and to
extend our geographic coverage. We operate our business through three primary
segments: dairy foods, feed and seed. In addition, we generate operational and
financial benefits from our three other segments, consisting of swine, agronomy
and layers. We also have additional operations and interests in a group of joint
ventures and investments that are not consolidated in our six operating
segments.
BUSINESS SEGMENTS
See notes to the Company's consolidated financial statements attached to
this annual report on Form 10-K for financial information on our business
segments.
DAIRY FOODS
Overview. We produce, market and sell butter, spreads, cheese and other
related dairy products. We sell our products under our national brand names and
trademarks, including LAND O LAKES, the Indian Maiden logo and Alpine Lace, as
well as under our regional brands such as New Yorker. Our network of 13 dairy
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manufacturing facilities is geographically diverse and allows us to support our
customers on a national scale. Our customer base includes national supermarket
and supercenter chains, industrial customers, including major food processors,
and major foodservice customers, including restaurants, schools, hotels and
airlines.
Products. We manufacture over 300 dairy-based food products. Our principal
dairy products and activities include:
Butter. We produce and market branded butter under our proprietary
LAND O LAKES brand name for retail and foodservice customers. In addition,
we produce nonbranded butter for our private label and industrial
customers. Our butter products include salted butter, unsalted butter,
light butter, whipped butter and flavored butter.
Spreads. We produce and market a variety of spreads, including
margarine, nonbutter spreads and butter blends. These products are
primarily marketed under the LAND O LAKES brand and are sold to our retail,
foodservice and industrial customers.
Cheese. We produce and sell cheese for retail sale in deli and dairy
cases, to foodservice businesses and to industrial customers. Our deli case
cheese products are marketed under the LAND O LAKES, Alpine Lace and New
Yorker brand names. Our dairy case cheese products are sold under the LAND
O LAKES brand name. We also sell cheese products to private label
customers. We offer a broad selection of cheese products including cheddar,
monterey jack, mozzarella, provolone, American and other processed cheeses.
Other. We manufacture nonfat dry milk and whey for sale to our
industrial customers. We produce nonfat dry milk by drying the nonfat milk
byproduct of our butter manufacturing process. It is used in processed
foods, such as instant chocolate milk. Whey is a valued protein-rich
byproduct of the cheesemaking process which is used in processed foods,
sports drinks and other nutritional supplements.
Raw Milk Wholesaling. We purchase raw milk from our members and sell
it directly to other dairy manufacturers, particularly fluid milk
processors. We generate substantial revenues but negligible margins on
these sales. See "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Wholesaling and Brokerage
Activities."
New Products. In May 2002 we introduced Fresh Buttery Taste, a
buttery tasting spread with a touch of sweet cream. In June 2003, we
introduced two new dairy case products, LAND O LAKES Soft Baking Butter
with Canola Oil and LAND O LAKES Spreadable Butter with Canola Oil.
Sales, Marketing and Advertising. In order to meet the needs of our
retail, foodservice and industrial customers, we have sales efforts designed to
service each of these customer bases. Our retail customers are serviced through
direct sales employees and independent national food brokers. Our retail sales
force consists of 63 employees that service our larger retail customers, such as
supermarket and supercenter chains, and manage our national food broker
relationship.
We market our products to our industrial customers through six dedicated
salespeople. Our industrial customers generally maintain a direct relationship
with our facility managers in order to coordinate delivery and ensure that our
products meet their specifications.
Our foodservice products are primarily sold through independent regional
food brokers and food distributors. In addition, we employ 23 salespeople who
are responsible for maintaining these regional food broker relationships and
marketing to our large foodservice customers directly.
Distribution. We contract with third-party trucking companies to
distribute our dairy products throughout the United States in refrigerated
trucks. Our dairy products are shipped to our customers either directly from the
manufacturing facilities or from one of our five regional distribution centers
located in New Jersey, Georgia, Illinois, California and Ohio. As most of our
dairy products are perishable, our distribution facilities are designed to
provide necessary temperature controls in order to ensure quality and freshness
of our products. The combination of our strategically located manufacturing and
distribution facilities and our logistics capabilities enables us to provide our
customers with a highly efficient distribution system.
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Production. We produce our dairy products at 13 manufacturing facilities
strategically located throughout the United States. We also have contractual
arrangements whereby we engage other dairy processors to produce some of our
products. We believe the geographic distribution of our plants allows us to
service our customers in a timely and efficient manner. In 2003, we processed
approximately 7.6 billion pounds of milk, primarily into butter and cheese.
Butter is produced by separating the cream from milk, pasteurizing it and
churning the cream until it hardens into butter. Butter production levels
fluctuate due to the seasonal availability of milk and butterfat. The cheese
manufacturing process involves adding a culture and a coagulant to milk. Over a
period of hours, the milk mixture hardens to form cheese. At that point, whey is
removed and separately processed. Finally, the cheese is salted, shaped and
aged.
Supply and Raw Materials. Our principal raw material for production of
dairy products is milk. During 2003, we sourced approximately 93% of our raw
milk from our members. We enter into milk supply agreements with all of our
dairy members to ensure our milk supply. These contracts typically provide that
we will pay the producer an advance for the milk during the month of delivery
and then will settle the final price in the following month for an amount
determined by us which typically includes a premium over Federal market order
prices. These contracts provide that we will purchase all of the milk produced
by our members for a fixed period of time, generally one year or less. As a
result, we often purchase more milk from our members than we require for our
production operations. There are three principal reasons for doing this: first,
we need to sell a certain percentage (which is not less than 10% of the amount
procured and depends on which Federal market order the milk is subject to) of
our raw milk to fluid dairy processors in order to participate in the Federal
market order system, which enables us to have a lower input cost for our milk;
second, it decreases our need to purchase additional supply during periods of
low milk production in the United States (typically August, September and
October); and third, it ensures that our members have a market for the milk they
produce during periods of high milk production. We enter into fixed-price
forward sales contracts with some of our large industrial cheese customers which
historically represented 10-15% of our processed milk volume. We simultaneously
enter into milk supply agreements with a fixed price in order to ensure our
margins on these contracts. We also purchase cream, bulk cheese and bulk butter
as raw materials for production of our dairy products. We typically enter into
annual agreements with fluid processors to purchase all of their cream
production. We typically purchase bulk cheese and butter pursuant to annual
contracts. These cheese and butter contracts provide for annual targets and
delivery schedules and are based on market prices. In isolated instances, we
purchase these commodities on the open market at current market prices. We refer
to this type of transaction as a spot market purchase.
Customers. We sell our dairy products directly and indirectly to over 500
customers. Our products are sold in over 5,000 retail locations, including
supermarkets and supercenters, convenience stores, warehouse club stores and
military commissaries. In addition, we sell our products through food brokers
and distributors to foodservice providers such as major restaurant chains,
schools, hotels and airlines.
Research and Development. We seek to offer our customers product
innovations designed to meet their needs. In addition, we work on product and
packaging innovations to increase overall demand for our products and improve
product convenience. In 2003, we spent $10.2 million on dairy research and
development, and we employ approximately 64 individuals in research capacities
at our dedicated dairy foods research facility.
Competition. The bulk of the dairy industry consists of national and
regional competitors. Our branded cheese products compete with products from
national competitors such as Kraft, Borden and Sargento as well as several
regional competitors. For butter, our competition comes primarily from regional
brands, such as Challenge and Kellers, and from private label products. We face
increased competitive pressures because our retail customers are consolidating.
We rely on the strength of our brands to help differentiate our products from
our competition. We believe our branded products compete on the basis of brand
name recognition, product quality and reputation and customer support. Products
in the private label and industrial markets compete primarily based on price. We
believe our product quality and consistency of supply distinguishes our products
in these markets.
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FEED
Overview. Through Land O'Lakes Farmland Feed, we manufacture and market
feed for both the commercial and lifestyle sectors of the animal feed market in
the United States. Our commercial feed products are used by farmers and
specialized livestock producers who derive income from the sale of milk, eggs,
poultry and livestock. Our lifestyle feed products are used by customers who own
animals principally for non-commercial purposes. Margins on our lifestyle feed
products are significantly higher than those on our commercial feed products. We
market our lifestyle animal feed products, other than dog and cat food, under
the brands Purina, Chow and the "Checkerboard" Nine Square logo. We also market
our animal feed products under the LAND O LAKES Feed label. We operate a
geographically diverse network of 81 feed mills, which permits us to distribute
our animal feed nationally through our network of approximately 1,300 local
member cooperatives, approximately 3,550 independent dealers operating under the
Purina brand name and directly to customers. We believe we are a leader among
feed companies in animal feed research and development with a focus on enhancing
animal performance, productive capacity and early stage development. For
example, we developed and introduced milk replacer products for young animals,
and our patented product formulations make us the only supplier of certain milk
replacer products. These products allow dairy cows to return to production
sooner after birthing and increase the annual production capacity of cows. Other
than certain insignificant investments and sales, we operate our feed business
entirely through our Land O'Lakes Farmland Feed joint venture.
Products. We sell commercial and lifestyle animal feed which are based
upon proprietary formulas. We also produce commercial animal feed to meet our
customers' specifications. We sell feed for a wide variety of animals, such as
dairy cattle, beef cattle, swine, poultry, horses and other specialty animals
such as laboratory and zoo animals. Our principal feed products and activities
include:
Complete Feed. These products provide a balanced mixture of grains,
proteins, nutrients and vitamins which meet the entire nutritional
requirement of an animal. They are sold as ground meal, in pellets or in
extruded pieces. Sales of complete feeds typically represent the majority
of net sales. We generally sell our lifestyle animal feed as complete feed.
We market our lifestyle animal feed through the use of our trademarks,
namely, Purina, Chow and the "Checkerboard" Nine Square logo.
Supplements. These products provide a substantial part of a complete
ration for an animal, and typically are distinguished from complete feed
products by their lack of the bulk grain portion of the feed. Commercial
livestock producers typically mix our supplements with their own grain to
provide complete animal nutrition.
Premixes. These products are concentrated additives for use in
combination with bulk grain and a protein source, such as soybean meal.
Premixes consist of a combination of vitamins and minerals that are sold to
commercial animal producers and to other feed mill operators for mixing
with bulk grains and proteins.
Simple Blends. These products are a blend of processed commodities,
generally steam-rolled corn or barley, that are mixed at the producer's
location with a feed supplement to meet the animal's nutritional
requirements. These products are highly price competitive and generally
have low margins. These products are primarily used by large dairies in the
western United States.
Milk Replacers. Milk replacers are sold to commercial livestock
producers to meet the nutritional requirements of their young animals while
increasing their overall production capability by returning the parent
animal to production faster. We market these products primarily under our
Maxi Care, Cow's Match and Amplifier Max brand names. We have patents that
cover certain aspects of our milk replacer products and processes. Our two
principal milk replacer patents expire in April 2015 and April 2020.
Ingredient Merchandising. In addition to selling our own products, we
buy and sell or broker for a fee soybean meal and other feed ingredients.
We market these ingredients to our local member cooperatives and to other
feed manufacturers which use them to produce their own feed. Although this
activity generates substantial revenues, it is a very low-margin business
with a minimal capital investment. We are generally able to obtain feed
inputs at a lower cost as a result of our ingredient
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merchandising business because of lower per unit costs associated with
larger purchases and volume discounts.
Sales, Marketing and Advertising. We employ approximately 350 direct
salespeople in regional territories. In our commercial feed business, we provide
our customers with information and technical assistance through trained animal
nutritionists whom we either employ or have placed with our local member
cooperatives. Our advertising and promotional expenditures are focused on higher
margin products, specifically our lifestyle animal feed and milk replacers. We
advertise in recreational magazines to promote our lifestyle animal feed
products. To promote our horse feed products, we have dedicated promoters who
travel to rodeos and other horse related events. We promote our milk replacers
with print advertising in trade magazines. We spent $21.2 million on advertising
and promotion for the year ended December 31, 2003.
Distribution. We distribute our animal feed nationally primarily through
our network of approximately 1,300 local member cooperatives and approximately
3,550 Purina-branded dealers or directly to customers. We deliver our products
primarily by truck using independent carriers, supplemented by our own fleet.
Deliveries are made directly from our feed mills to delivery locations within
each feed mill's geographic area.
Production. The basic feed manufacturing process consists of grinding
various grains and protein sources into meal and then mixing these materials
with certain nutritional additives, such as vitamins and minerals. The resulting
products are sold in a variety of forms, including meal, pellets, blocks and
liquids. Our products are formulated based upon proprietary research pertaining
to nutrient content. As of December 31, 2003 we operated 81 feed mills across
the United States. We have reduced the number of feed mills we operate by
eliminating the overlap between our existing facilities and those we acquired as
part of our Purina Mills acquisition. Consistent with current industry capacity
utilization, our facilities operate below their capacity.
Supply and Raw Materials. We purchase the bulk components of our products
from various suppliers. These bulk components include corn, soybean meal and
grain byproducts. In order to reduce transportation costs, we arrange for
delivery of these products to occur at our feed mill operations throughout the
United States. We purchase vitamins and minerals from multiple vendors,
including vitamin, pharmaceutical and chemical companies.
Customers. Our customers primarily include large commercial corporations,
local cooperatives, private feed dealers and individual producers. In the case
of local cooperatives, the cooperative either uses these products in their own
feed manufacturing operations or resells them to their customers. Our customers
purchase our animal feed products for a variety of reasons, including our
ability to provide products that fulfill some or all of their animals
nutritional needs, our knowledge of animal nutrition, our ability to maintain
quality control and our available capacity.
Research and Development. Our animal feed research and development focuses
on enhancing animal performance, productive capacity and early stage
development. Additionally, we dedicate significant resources to developing
proprietary formulas that allow us to offer our commercial customers alternative
feed formulations using lower cost ingredients. We employ 89 people in various
animal feed research and development functions at our research and development
facilities. In 2003, we spent $9.7 million on research and development.
Competition. The animal feed industry is highly fragmented. Our
competitors consist of many small local manufacturers, several regional
manufacturers and a limited number of national manufacturers. The available
market for commercial feed may become smaller and competition may increase as
meat processors and livestock producers become larger and integrate their
business by acquiring or constructing their own feed production facilities. In
addition, purchasers of commercial feed tend to select products based on price
and performance and some of our feed products are purchased from other third
parties. As a result of these factors, the barriers to entry in the feed
industry are low. Distribution for lifestyle feed is also consolidating as major
national chain retailers enter this market. We believe we distinguish ourselves
from our competitors through our high-performance, value- added products, which
we research, develop and distribute on a national basis. Our brands, Purina,
Chow and the "Checkerboard" Nine Square logo, provide us with a competitive
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advantage, as they are well-recognized, national brands for lifestyle animal
feed. We also compete on the basis of service by providing training programs,
using animal nutritionists with advanced technical qualifications to consult
with local member cooperatives, independent dealers and livestock producers and
by developing and manufacturing customized products to meet customer needs.
Governance. We operate our feed business through our Land O'Lakes Farmland
Feed joint venture. Prior to the Purina Mills acquisition in October, 2001 we
owned 73.7% of the joint venture. After the Purina Mills acquisition, we
contributed all of the equity interest in Purina Mills to Land O'Lakes Farmland
Feed. As a result, our ownership of Land O'Lakes Farmland Feed increased to
92.0%. We manage Land O'Lakes Farmland Feed's day-to-day operations, and it is
governed by a five member board of managers. We have the right to appoint three
members to the board and Farmland Industries has the right to appoint two
members to the board. According to the terms of the Land O'Lakes Farmland Feed
operating agreement, actions of the board of managers require a majority vote.
Certain items require unanimous approval of the board of managers, including (1)
materially changing the scope of the business of the joint venture; (2) electing
to dissolve the joint venture; (3) selling all or substantially all of its
assets or significant assets; (4) requiring additional capital contributions;
(5) authorizing cash distributions of earnings; (6) changing income tax
elections or changing accounting practices to the extent they have a material
impact on Farmland Industries; (7) reducing the number of meetings of the
members committee to less than four per calendar year; (8) amending the
management services agreement with Land O'Lakes; and (9) adopting annual budgets
and business plans or any material amendments thereto.
Pursuant to the Land O'Lakes Farmland Feed operating agreement, we have a
one-time option to purchase Farmland Industries' interest in the joint venture
at a price to be determined by negotiation or appraisal. The option period runs
from September 1, 2003 to September 1, 2005. Farmland Industries may reject our
request to exercise our option; however, if Farmland Industries rejects our
request, the voting rights on the board will be allocated based upon Land
O'Lakes and Farmland Industries financial interests in Land O'Lakes Farmland
Feed, and the number of actions requiring unanimous consent of the board will be
limited to items (2),(4),(5),(6) and (8) above as well as any action that
affects one member or the other or any distribution which is not proportionate
to a member's ownership interest.
SEED
Overview. We sell seed for a variety of crops, including alfalfa,
soybeans, corn and forage and turf grasses, under our CROPLAN GENETICS brand. We
also distribute certain crop seed products under third-party brands, including
Northrop King, Asgrow and Dekalb, and under private labels. We distribute our
seed products through our network of local member cooperatives, to other seed
companies, to retail distribution outlets and under private labels. We have
strategic relationships with Syngenta and Monsanto, two crop seed producers in
the United States, to which we provide distribution and research and development
services.
Products. We develop, produce and distribute seed products including seed
for alfalfa, soybeans, corn and forage and turf grasses. We also market and
distribute seed products produced by other crop seed companies, including seed
for corn, soybeans, sunflowers, canola, sorghum and sugarbeets. Seed products
are often genetically engineered through selective breeding or gene splicing to
produce crops with specific traits. These traits include resistance to
herbicides and pesticides and enhanced tolerance to adverse environmental
conditions. As a result of our relationships with certain life science
companies, we believe we have access to one of the most diverse genetic
databases of any seed company in the industry. We also license some of our
proprietary alfalfa seed traits to other seed companies for use in their seed
products.
Sales, Marketing and Advertising. We have a sales force of approximately
150 employees who promote the sale of our seed products throughout the country,
particularly in the Midwest. Our sales and marketing strategy is built upon the
relationships we have established with our local member cooperatives and our
ability to purchase and distribute quality seed products at a low cost. We
market our crop seed products under our brand name CROPLAN GENETICS. We also
distribute certain crop seed products under third-party brands, including
Northrop King, Asgrow and DeKalb, and under private labels. We engage in a
limited amount of advertising, primarily utilizing marketing brochures and field
signs. We are a leader in online customer
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communications and order processing. We also participate in the Total Farm
Solutions program with our affiliate, Agriliance. Through this program, trained
agronomists are placed at local cooperatives to provide advisory services
regarding crop seed and agronomy products. We do not have any long-term
commitments associated with this program.
Distribution. We distribute our seed products through our network of local
member cooperatives, to other seed companies and to retail distribution outlets.
We have strategic relationships with Syngenta and Monsanto, two leading crop
seed producers in the United States, to which we provide distribution and
research and development services. We also sell our proprietary products under
private labels to other seed companies for sale through their distribution
channels. Additionally, several of our product lines (particularly turf grasses)
are sold to farm supply retailers and home and garden centers. We use
third-party trucking companies for the nationwide distribution of our seed
products.
Supply and Production. Our alfalfa, soybeans, corn and forage and turf
grass seed are produced to our specifications and under our supervision on farms
owned by us and by geographically diverse third-party producers. We maintain a
significant inventory of corn and alfalfa seed products in order to mitigate
negative effects caused by weather or pests. Our alfalfa and corn seed products
can be stored for up to four years after harvesting. Our crop seed segment has
foreign operations in Argentina and Canada.
Customers. We sell our seed products to over 6,500 customers, none of
which represented more than 3% of our crop seed net sales in 2003. Our customers
consist primarily of our local member cooperatives and other seed companies
across the United States and internationally. Our customer base also includes
retail distribution outlets.
Research and Development. We focus our research efforts on crop seed
products for which we have a significant market position, particularly alfalfa
seed. We also work with other seed companies to jointly develop beneficial crop
seed traits. In 2003, we spent $5.4 million on crop seed research and
development. As of December 31, 2003, we employed 19 individuals in research and
development capacities and had four research and development facilities.
Competition. Our competitors include Pioneer, Monsanto and Syngenta as
well as many small niche seed companies. We differentiate our seed business by
supplying a branded, technologically advanced, high quality product, and by
providing farmers with access to agronomists through our joint Total Farm
Solutions program with Agriliance. These services are increasingly important as
the seed industry becomes more dependent upon biotechnology and crop production
becomes more sophisticated. Due to the added cost involved, our competitors,
with the exception of Pioneer, generally do not provide such services. We can
provide these services at a relatively low cost because we often share the costs
of an agronomist with Agriliance or with a local cooperative.
SWINE
We market 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 for sale to our local member cooperatives. Under the
farrow-to-finish program, we raise market hogs for sale to pork processors. The
cost plus program provides minimum price floors to producers for market hogs.
The price floor fluctuates based on the cost of corn and soybean meal. There are
60,000 hogs remaining in the cost plus program. The majority of the remaining
contracts will expire in 2004 and the last cost plus contracts will expire in
August 2005. We are not entering into new cost plus contracts.
We own approximately 64,000 sows producing approximately 623,000 feeder
pigs and 568,000 market hogs annually at facilities we own or lease and at
facilities owned by approximately 128 contract producers. The dramatic
volatility in the live hog market in the past several years, where selling
prices were well below cost, resulted in our swine operations generating losses
primarily in connection with our cost plus and our farrow-to-finish programs. In
2003, however, the average price per hundred weight for market hogs was $40.59
compared to $35.86 in 2002.
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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.
We operate this portion of our 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 a discussion of our swine
accounting and results see "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operation."
AGRONOMY
Our agronomy segment consists solely of joint ventures and investments that
are not consolidated in our financial results. The two most significant of these
are Agriliance and CF Industries. As a result, our agronomy segment has no net
sales, but we allocate overhead to selling and administrative expense and may
recognize patronage as a reduction in cost of sales. Additional information
regarding Agriliance is provided below under the caption in "Item 1.
Business -- Joint Ventures and Investments -- Agriliance LLC". For a discussion
of our agronomy accounting and results see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation."
LAYERS
Our layers segment consists solely of our MoArk, LLC ("MoArk") joint
venture, which was consolidated in our financial statements beginning July, 1
2003. Additional information regarding MoArk is provided in "Item 1.
Business -- Joint Ventures and Investments -- MoArk LLC". For a discussion of
our layers segment accounting and results see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation."
OTHER
We also operate various other wholly-owned businesses such as LOL Finance
Co., which provides financing to farmers and livestock producers.
JOINT VENTURES AND INVESTMENTS
Other than Cheese and Protein International LLC ("CPI") and MoArk, each of
which is a consolidated subsidiary, the joint ventures and investments described
below are unconsolidated.
AGRILIANCE LLC
Agriliance, a 50/50 joint venture with United Country Brands (owned by CHS,
Inc. and Farmland Industries, Inc.) was formed for the purposes of distributing
and manufacturing agronomy products. Prior to the contribution of our agronomy
assets to Agriliance in July 2000, the financial results of these assets were
consolidated for financial reporting purposes.
Products. Agriliance markets and sells two primary product lines: crop
nutrients (including fertilizers and micronutrients) and crop protection
products (including herbicides, pesticides, fungicides and adjuvants). For
Agriliance's fiscal year ended August 31, 2003, approximately 89% of these
products were manufactured by third-party suppliers and marketed under the
suppliers' brand names. The remaining 11% was either manufactured by Agriliance
or by a third-party supplier and marketed under the brand names
AgriSolutions(for herbicides, pesticides and related products) and Origin (for
micronutrients).
Sales and Marketing. Agriliance has an internal sales force of
approximately 140 employees. Agriliance's sales and marketing efforts serve the
entire United States and focus on areas in the Midwest, the Southeast, and the
eastern Corn Belt. Agriliance's strategy is built upon strong relationships with
local cooperatives and Agriliance's ability to purchase and distribute quality
agronomy products at a low cost.
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Agriliance engages in a limited amount of advertising in trade journals and
produces marketing brochures and advertisements utilized by local cooperatives.
In addition, Agriliance assists local member cooperatives and independent
farmers by identifying, recruiting and training agronomists who provide advice
relating to agronomy products. In the Midwest, Agriliance has implemented the
Total Farm Solutions program, an effort to utilize the expertise of the
agronomists to bundle Agriliance products with our seed products.
Production, Source of Supply and Raw Materials. Agriliance operates
primarily as a wholesale distributor of products purchased from other
manufacturers. Agriliance's primary suppliers of crop protection products are
Syngenta, Monsanto, BASF, Dow Chemical, DuPont and Bayer. Agriliance enters into
annual distribution agreements with these manufacturers. However, Agriliance
manufactures approximately 9% of its proprietary crop protection products.
Agriliance's production facilities are located in Iowa, Arkansas and Missouri.
Agriliance procures approximately 32% of its fertilizer needs from CF
Industries, of which we are a member. Agriliance sources its remaining
fertilizer supply needs from a variety of suppliers including PCS, IMC, Terra
Nitrogen, Koch and Agrium. Agriliance also produces micronutrient products. In
2003, approximately 45% of Agriliance's agronomy products were sourced from
three suppliers.
Customers and Distribution. Agriliance's customer base consists primarily
of farmers, many of whom are members of our cooperative. Agriliance distributes
its products through our local member cooperatives and also through retail
agronomy centers owned by Agriliance. Agriliance stores inventory at a number of
strategically positioned locations, including leased warehouses and storage
space at local cooperatives. Agriliance serves most of the key agricultural
areas of the United States, with its customers and distribution concentrated in
the Midwest.
Competition. Agriliance's primary competitors are national crop nutrient
distributors, such as Cargill, IMC, PCS, Agrium and Royster Clark, and national
crop protection product distributors, such as Helena and Wilbur-Ellis, as well
as smaller regional brokers and distributors. The wholesale agronomy industry is
consolidating as distributors attempt to expand their distribution capabilities
and efficiencies. Wholesale agronomy customers tend to purchase products based
upon a distributor's ability to provide ready access to product at critical
times prior to and during the growing season. In addition, certain customers
purchase on the basis of price. We believe Agriliance distinguishes itself from
its competitors as a result of its distribution network, which enables it to
efficiently distribute product to customers. In addition, Agriliance provides
access to trained agronomists who give advice to farmers on both agronomy and
crop seed products to optimize their crop production.
Governance. Agriliance is managed by a four member board of managers. We
and United Country Brands, each with 50% ownership positions, have the right to
appoint two of the managers. Certain actions require the unanimous approval of
the board, including (1) adopting or amending the annual business plan; (2)
distributing products produced by Agriliance to anyone other than the members or
patrons of Agriliance's members; (3) approving capital expenditures related to
the expansion of Agriliance's production capabilities, purchasing additional
inventory or changing the types of products produced by Agriliance; (4)
incurring indebtedness other than in the ordinary course of business; (5)
appointing, replacing, or discharging an executive officer; (6) making
distributions to members; and (7) changing income tax or special accounting
elections. Pursuant to the terms of Agriliance's operating agreement, Land
O'Lakes, CHS, Inc. and Farmland Industries have each agreed to refrain from
directly or indirectly engaging in the wholesale marketing of fertilizer and
agricultural chemicals in North America, except through Agriliance, for so long
as they, or an entity in which they are a material owner, remain a member of
Agriliance, and for a period of four years following termination of their
membership.
CHEESE AND PROTEIN INTERNATIONAL LLC
Cheese and Protein International LLC ("CPI"), our 96.1% owned consolidated
joint venture with a subsidiary of Mitsui & Co. (USA), consists of a mozzarella
cheese and whey plant in Tulare, California. Commercial production commenced in
May 2002. We are party to a marketing agreement with Mitsui and CPI which gives
us the right to distribute the products produced by the venture in North America
and Central America and gives Mitsui the right to distribute the whey outside of
North America and Central America.
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The purchase price for all products will be based upon the market prices for
such product. We have also contracted with CPI to provide no less than 70% of
their milk requirements at prices based upon market prices for milk. In
addition, we have agreed to purchase no less than 70% of CPI's estimated
production of mozzarella cheese, based upon market prices. This venture is
governed by an eight member committee. We have the right to appoint seven
members to the committee. The remaining member is appointed by our joint venture
partner. On November 25, 2002, Mitsui provided notice of its intent to exercise
a put option which, if exercised, would have required us to purchase its then
30% equity interest in CPI. Before the exercise date, however, Mitsui elected to
maintain a 5% ownership stake and we purchased the remaining 25%. In June 2003,
we entered into 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 December 31, 2003 was
approximately 3.9% due to our additional cash contributions to CPI. Under the
current agreement, Mitsui has the option to either contribute additional equity
for the Phase II installation 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 notice of exercise. The put
option 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. However, if we acquire Mitsui's remaining equity interest,
and if we do not replace Mitsui with another partner, CPI would become a
restricted subsidiary under the senior bank facilities. As a restricted
subsidiary under the senior bank facilities, CPI's on-balance sheet debt and
income or loss would be included in the covenant calculations for our senior
bank facilities. Further, as a restricted subsidiary, CPI would be required to
guarantee our senior bank facilities, the 8 3/4% senior unsecured notes and the
9% senior secured notes. However, for as long as CPI remains non-wholly owned,
it will continue to be unrestricted for purposes of the senior bank facilities,
and will not be required to guarantee the senior bank facilities, the senior
unsecured notes or the senior secured notes.
MOARK LLC
In January 2000, we formed MoArk LLC, a joint venture of which we currently
own 57.5% with Osborne Investments, LLC, to produce and market eggs and egg
products. We increased our ownership percentage from 50% to 57.5% in February
2003 in exchange for a payment of $7.8 million to Osborne, but maintained our
50% voting rights. We have the right to purchase from Osborne (and Osborne has
the right to cause us to buy from them) its interest in MoArk for a minimum
purchase price of $42.2 million (adjusted for tax benefits received by Osborne
and purchase price already paid) or a greater amount based upon MoArk's
performance over time. These rights are exercisable in 2007. Although Osborne
has a 42.5% interest in MoArk, since October 1, 2001 we have been allocated 100%
of the income or loss of MoArk (other than on capital transactions involving
realized gain or loss on intangible assets, which are allocated 50/50). In
accordance with the provisions of Financial Accounting Standards Board
Interpretation 46, effective July 1, 2003, we began consolidating MoArk into our
financial statements. In addition to consolidating MoArk, we presumed for
accounting purposes that we will acquire the remaining 42.5% of MoArk from
Osborne 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%. As a result, we do not record a
minority interest in MoArk in our financial statements. Additionally, MoArk is
obligated to make four guaranteed payments to Osborne in 2004, 2005, 2006 and
2007, each in the amount of $1,445,000.
Products. 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. MoArk markets and processes eggs from approximately 26 million
layers (hens) which produce approximately 520 million dozen eggs annually.
Approximately 50% of the eggs and egg products marketed are produced by layers
owned by MoArk. The remaining 50% are purchased on the spot market or from
third-party producers. Shell eggs represent approximately 78% of eggs MoArk
sells annually, and the balance are broken for use in egg products such as
refrigerated liquid, frozen, dried and extended shelf life liquid. MoArk
recently launched a high quality, all
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natural shell egg product marketed under the LAND O LAKES brand name in a
Northeast market. Through MoArk's acquisition of Cutler Egg Products in April
2001, MoArk acquired a patented process that extends the shelf life of a
refrigerated liquid egg product utilizing an ultra-pasteurization process.
Customers and Distribution. MoArk has approximately 950 retail grocery,
industrial, foodservice and institutional customers. While supply contracts
exist with a number of the larger retail organizations, the terms are typically
market based, annual contracts and allow early cancellation by either party.
MoArk primarily delivers directly to its customer (store to door delivery).
Alternatively, some customers pick up product at one of MoArk's facilities.
Sales and Marketing. MoArk's internal sales force maintains direct
relationships with customers. MoArk also uses food brokers to maintain select
accounts and for niche and "spot" activity in situations where MoArk cannot
effectively support the customer or needs to locate a customer or customers for
excess products. With the exception of the advertising activity associated with
the launch of the LAND O LAKES brand eggs, amounts spent for advertising are
insignificant.
Competition. MoArk competes with other egg processors, including Cal-Maine
Foods, Rose Acre Farms, Inc. and Michael Foods. MoArk competes with these
companies based upon its low cost production system, its high margin regional
markets and its diversified product line.
Governance. We are entitled to appoint three managers to the board of
managers of MoArk, and Osborne has the right to appoint the remaining three
managers until its governance interest has been transferred to us. According to
the terms of MoArk's operating agreement, two managers elected by us and two
managers elected by Osborne constitute a quorum. Actions of the board of
managers require a unanimous vote of a quorum of the board of managers. MoArk is
required to maintain at all times a net worth in excess of $40.0 million. If
MoArk's net worth were to decline below $40.0 million, we would be required to
contribute the necessary funds in order to maintain the $40.0 million net worth.
As of December 31, 2003, MoArk's net worth was approximately $116.6 million. In
the event we decide to sell or transfer any or part of our economic and
governance interest in MoArk, including our right to cause the transfer of the
governance interest owned by Osborne, we must first offer to sell or transfer to
Osborne all of the rights and interests to be sold or transferred at a similar
price and under similar material terms and conditions.
ADVANCED FOOD PRODUCTS, LLC
We own a 35% interest in Advanced Food Products, a joint venture which
manufactures and markets a variety of custom and noncustom aseptic products.
Aseptic products are manufactured to have extended shelf life through
specialized production and packaging processes, enabling food to be stored
without refrigeration until opened. We formed Advanced Food Products in 2001,
with a subsidiary of Bongrain, S.A., a French food company, for the purpose of
manufacturing and marketing aseptically packaged cheese sauces, snack dips,
snack puddings, and ready to drink dietary beverages. The venture is governed by
a six member board of managers, and we have the right to appoint two members.
Bongrain manages the day-to-day operations of the venture.
CF INDUSTRIES, INC.
CF Industries is one of North America's largest interregional cooperatives,
and is owned by eight cooperatives. CF Industries manufactures fertilizer
products, which are distributed by its members or their affiliates. CF
Industries has manufacturing facilities in Louisiana, Florida and Alberta,
Canada. For the year ended December 31, 2003, CF Industries generated $1,287.3
million in net sales. As of December 31, 2003, our equity interest in CF
Industries, which represents allocated but unpaid patronage, had a book value of
approximately $250 million. For the year ended December 31, 2003, our percentage
of ownership of allocated equity of CF Industries was 38%. Each of the members
has the right to elect one director to the board of directors. The day-to-day
operations of the cooperative are managed by the officers of CF Industries who
are elected by its board of directors.
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COBANK
CoBank is a cooperative lender of which we are a member. Our equity
interest in CoBank and the amount of patronage we receive is dependent upon our
outstanding borrowings from CoBank. As of December 31, 2003, our investment in
CoBank had a book value of $18.6 million.
AG PROCESSING INC.
Ag Processing Inc is a cooperative that produces soybean meal and soybean
oil. As a member of Ag Processing Inc, we are entitled to patronage based upon
our purchases of these products. We use soybean meal as an ingredient in our
feed products. Soybean oil is an ingredient used to produce our dairy spread
products.
DESCRIPTION OF THE COOPERATIVE
Land O'Lakes is incorporated in Minnesota as a cooperative corporation.
Cooperatives resemble traditional corporations in most respects, but with two
primary distinctions. First, a cooperative's common shareholders, its "members",
supply the cooperative with raw materials, and/or purchase its goods and
services. Second, to the extent a cooperative allocates its earnings from member
business to its members and meets certain other requirements, it is allowed to
deduct this "patronage income," known as "qualified" patronage income, from its
taxable income. Patronage income is allocated in accordance with the amount of
business each member conducts with the cooperative.
Cooperatives typically derive a majority of their business from members,
although they are allowed by the Internal Revenue Code to conduct non-member
business. Earnings from non-member business are retained as permanent equity by
the cooperative and taxed as corporate income in the same manner as a typical
corporation. Earnings from member business are either allocated to patronage
income or retained as permanent equity (in which case it is taxed as corporate
income) or some combination thereof.
In order to obtain favorable tax treatment on allocated patronage income,
the Internal Revenue Code requires that at least 20% of each member's annual
allocated patronage income be distributed in cash. The portion of patronage
income that is not distributed in cash is retained by the cooperative, allocated
to member equities and distributed to the member at a later time as a
"revolvement" of equity. The cooperative's members must recognize the amount of
allocated patronage income (whether distributed to members or retained by the
cooperative) in the computation of their individual taxable income.
At their discretion, cooperatives are also allowed to designate patronage
income as "nonqualified" patronage income and allocate it to member equities.
Unlike qualified patronage income, the cooperative pays taxes on this
nonqualified patronage income as if it was derived from non-member business. The
cooperative's members do not include undistributed nonqualified patronage income
in their current taxable income. However, the cooperative may revolve the equity
representing the nonqualified patronage income to members at some later date,
and is allowed to deduct those amounts from its taxable income at that time.
When nonqualified patronage income is revolved to the cooperative's members, the
revolvement must be included in the members' taxable income.
OUR STRUCTURE AND MEMBERSHIP
We have both voting and nonvoting members, with differing membership
requirements for cooperative and individual members. We also separate our
members into two categories: "dairy members" supply our dairy foods segment with
dairy products, primarily milk, cream, cheese and butter, and "ag members"
purchase agricultural products, primarily agronomy products, feed and seed from
our other operations or joint ventures. We further divide our dairy and ag
members by region. There are eight dairy regions and five ag regions.
All of our members must acquire stock and comply with uniform conditions
prescribed by our board of directors and by-laws. The board of directors may
terminate a membership if it determines that the member has failed to adequately
patronize us or has become our competitor.
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A cooperative voting member (a "Class A" member) must be an association of
producers of agricultural products operating on a cooperative basis engaged in
either the processing, handling, or marketing of its members' products or the
purchasing, producing, or distributing of farm supplies or services. Class A
members are entitled to a number of votes based on the amount of business done
with the Company. Class A members tend to be ag members, although a Class A
member may be both an ag and dairy member if they both supply us with dairy
products and purchase agricultural products from us or our joint ventures.
An individual voting member (a "Class B" member) is an individual,
partnership, corporation or other entity other than a cooperative engaged in the
production of agricultural commodities. Class B members are entitled to one
vote. Class B members tend to be dairy members. Class B members may be both an
ag and dairy member if they both provide us with dairy products and purchase
agricultural products from us or our joint ventures.
Our nonvoting cooperative members ("Class C" members) are associations
operating on a cooperative basis but whose members are not necessarily engaged
in the production or marketing of agricultural products. Such members are not
given the right to vote, because doing so may jeopardize our antitrust exemption
under the Capper-Volstead Act (the exemption requires all our voting members be
engaged in the production or marketing of agricultural products). Class C
members also include cooperatives which are in direct competition with us.
Nonvoting individual members ("Class D" members) generally do a low volume of
business with us and are not interested in our governance.
GOVERNANCE
Our board is made up of 24 directors. Our dairy members nominate 12
directors from among the dairy members and our ag members nominate 12 directors
from among the ag members. The nomination of directors is conducted within each
group by region. The number of directors nominated from each region is based on
the total amount of business conducted with the cooperative by that region's
members. Directors are elected to four year terms at our annual meeting by
voting members in a manner similar to a typical corporation. Our by-laws require
that, at least every five years, we evaluate both the boundaries of our regions
and the number of directors from each region, so that the number of directors
reflects the proportion of patronage income from each region.
The board may also choose to elect up to three non-voting advisory members.
Currently, we have one such member. The board governs our affairs in the same
manner as the boards of typical corporations that are not organized as
cooperatives.
EARNINGS
As described above, we divide our earnings between member and non-member
business and then allocate member earnings to dairy foods operations or
agricultural operations (primarily our feed, seed and agronomy segments). For
our dairy foods operations, the amount of member business is based on the amount
of dairy products supplied to us by our dairy members. In 2003, 70.6% of our
dairy input requirements came from our dairy members. For our agricultural
operations, the amount of member business is based on the dollar-amount of
products sold to our agricultural members. In 2003, 34.7% of our agricultural
product net sales, and 36.0% of our agricultural operating income, was derived
from sales to agricultural members.
PATRONAGE INCOME AND EQUITY
To acquire and maintain adequate capital to finance our business, our
by-laws allow us to retain up to 15% of our earnings from member business as
additions to permanent equity. We currently retain 10% and allocate the
remainder of our earnings from member business to patronage income.
We have two plans through which we revolve patronage income to our members:
the Equity Target Program for our dairy foods operations and the Revolvement
Program for our agriculture businesses.
The Equity Target Program provides a mechanism for determining the capital
requirements of our dairy foods operations and each dairy member's share of
those requirements. The board of directors has established
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an equity target investment of $2.75 per hundred pounds of milk (or milk
equivalent) delivered per year by that member to us. We distribute 20% of
allocated patronage income to a dairy member annually until the investment
target is reached by that member. The remaining 80% of allocated patronage
income is retained and allocated to member equities and revolved in the twelve
years after the member becomes inactive. When the member's equity investment
reaches the target, and for as long as the member's equity target investment is
maintained, we distribute 100% of the member's future allocated patronage
income. The equity target as well as the revolvement period may be changed at
the discretion of the board.
In 2002, we did not allocate any of our earnings to dairy members. For
2003, we allocated $9.4 million of our earnings to our dairy members, with $2.4
million of this amount to be paid in cash in 2004. We also revolved $16.9
million of equities to dairy members in 2003.
In the Revolvement Program for our agricultural businesses, we currently
distribute 30% of allocated patronage income in cash and retain and allocate the
remaining 70% to member equity. This equity is currently revolved 12 1/2 years
later. Both the amount distributed in cash and the revolvement period are
subject to change by our board. For 2002, we allocated $97.9 million of our
member earnings to our agricultural members. Of this amount, $4.2 million was
paid in cash in 2003, $9.7 million was designated and issued as qualified
patronage equities, and $84.0 million was designated and issued as nonqualified
patronage equities in connection with legal settlement proceeds. We paid income
tax on the amount designated as nonqualified patronage, however, we will be able
to deduct these earnings from our taxable income if we choose to revolve the
earnings to our members in the future. Revolvement of the equity representing
this nonqualified patronage income is also subject to board approval. In 2003,
2002 and 2001 our board suspended revolvement of agriculture member equities. In
2003, we allocated $30.7 million of our member earnings to our agricultural
members, with $9.2 million of this to be paid in cash in 2004.
Our estate redemption policy provides that we will redeem equity holdings
of deceased natural persons upon the demise of the owner. The Company's age
retirement policy provides that we will redeem in full equity holdings of dairy
members who are natural persons when the member reaches age 75 or older and
becomes inactive. Subject to various requirements, we may redeem the equity
holdings of members in bankruptcy or liquidation. All proposed equity
redemptions must be presented to, and are subject to the approval of, our board
of directors before payment. In connection with these programs, we redeemed $3.3
million in 2003.
EMPLOYEES
At March 1, 2004, we had approximately 8,000 employees, approximately 26%
of whom were represented by unions having national affiliations. Our contracts
with these unions expire at various times throughout the next several years,
with the last contract expiring on January 1, 2005. We consider our relationship
with employees to be generally satisfactory. We have had no labor strikes or
work stoppages within the last five years.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
We rely on patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our intellectual
property. We believe that in addition to certain patented processes, the
formulas and production methods of our dairy foods products are trade secrets.
We also have patented formulations and processes for our milk replacer products
and deem our feed product formulations to be proprietary.
We own a number of registered and unregistered trademarks used in
connection with the marketing and sale of our food products as well as our feed
and seed products including LAND O LAKES, the Indian Maiden logo, Alpine Lace,
New Yorker, Extra Melt, CROPLAN GENETICS, Maxi Care, Amplifier Max, Cow's
Matchand Omolene. Land O'Lakes Farmland Feed licenses certain trademarks from
Land O'Lakes, including LAND O LAKES, the Indian Maiden logo, Maxi Care, Cow's
Matchand Amplifier Max, for use in connection with its animal feed and milk
replacer products. We license the trademarks Purina, Chow and the "Checkerboard"
Nine Square logo from Nestle Purina PetCare Company under a perpetual,
royalty-free
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license. This license only gives us the right to use these trademarks for
particular products that we currently market with these trademarks. We do not
have the right to use these trademarks outside of the United States, or in
conjunction with any products designed primarily for use with cats, dogs or
humans. We do not have the right to assign any of these trademarks without the
written consent of Nestle Purina PetCare Company. These trademarks are important
to us and Land O'Lakes Farmland Feed because brand name recognition is a key
factor to Land O'Lakes Farmland Feed's success in marketing and selling its
products. The registrations of these trademarks in the United States and foreign
countries are effective for varying periods of time, and may be renewed
periodically, provided that we, as the registered owner, or our licensees, where
applicable, comply with all pertinent renewal requirements including, where
necessary, the continued use of the trademarks in connection with similar goods.
In 2002, we expanded our licensing agreement with Dean Foods. Under the
expanded agreement, Dean Foods is granted exclusive rights to use the LAND O
LAKES brand and the Indian Maiden logo in connection with the manufacturing,
marketing, promotion, distribution and sale of certain products, including, but
not limited to, basic dairy products (milk, yogurt, cottage cheese, ice cream,
eggnog, juices and dips), creams, small bottle milk, infant formula products and
soy beverage products. Dean Foods is also granted the right to use the Company's
patented Grip 'n Go bottle and the Company's formula to fat-free half & half.
With respect to the basic dairy products and the small bottle milk, the license
is granted on a royalty-free basis. With respect to the remaining products
covered by the license agreement, Dean Foods pays a sales-based royalty, subject
to a guaranteed minimum annual royalty payment. In addition, the license
agreement is terminable by either party in the event that certain minimum
thresholds are not met on an annual basis.
We have patented formulations and processes for our milk replacer products.
Our two principal milk replacer patents expire in April 2015 and April 2020.
We have also entered into other license agreements with other affiliated
and unaffiliated companies, such as MoArk, which permit these companies to
utilize our trademarks in connection with the marketing and sale of certain
products.
ENVIRONMENTAL MATTERS
We are subject to various Federal, state, local, and foreign environmental
laws and regulations, including those governing discharges of pollutants into
the air or water and the use, storage and disposal of hazardous materials or
wastes. Violations of these laws and regulations, or of the permits required for
our operations, may lead to civil and criminal fines and penalties or other
sanctions. For example, we are currently exceeding certain wastewater discharge
limitations at one of our new facilities in California and, as a result, have
paid repeated penalties or surcharges, to the City of Tulare. Approximately $1.0
million has been paid to the City of Tulare since the first notice of violation
was received in March 2003, typically in surcharge amounts of $30,000 to $40,000
per month. We estimate that we will have expenditures of $400,000 to $800,000
relating to engineering controls needed to achieve compliance with the
applicable limits, and we will incur an additional $180,000 in surcharges before
this issue is corrected.
Environmental laws and regulations may also impose liability for the
cleanup of environmental contamination. We generate large volumes of waste
water, we use regulated substances in operating our manufacturing equipment, and
we use and store other chemicals on site (including acids, caustics, fuels, oils
and refrigeration chemicals). Agriliance stores petroleum products and other
chemicals on-site (including fertilizers, pesticides and herbicides). Spills or
releases resulting in significant contamination, or changes in environmental
regulations governing the handling or disposal of these materials, could result
in us incurring significant costs that could have an impact on our business,
financial condition or results of operations.
Many of our current and former facilities have been in operation for many
years, and over time, we and other operators of those facilities have generated,
used, stored, or disposed of substances or wastes that are or might be deemed
hazardous under applicable environmental laws, including chemicals and fuel
stored in underground and above-ground tanks, animal wastes and large volumes of
wastewater discharges. As a result, the soil and groundwater at or under certain
of our current and former facilities (and/or in the vicinity of such
16
facilities) is or may be contaminated, and we may be required in the future to
make significant expenditures to investigate, control and remediate such
contamination.
We are also potentially responsible for environmental conditions at a
number of former facilities and at waste disposal facilities operated by third
parties. We have been identified as a Potentially Responsible Party ("PRP")
under the federal Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA" or "Superfund") or similar state laws and have
unresolved liability with respect to the past disposal of hazardous substances
at several such sites. CERCLA imposes strict, joint and several liability on
certain statutory classes of persons, meaning that one party may be held
responsible for the entire cost of investigating and remediating contaminated
properties, regardless of fault or the legality of the original disposal. These
persons include the present and former owners or operators of a contaminated
property, and companies that generated, disposed of, or arranged for the
disposal of hazardous substances found at the property. We have contested our
liability at one Superfund site, as to which we have declined to pay past
response costs associated with ongoing site study, and we have received a notice
of potential liability regarding two other waste disposal sites under
investigation by the EPA, as to which we are disputing our responsibility.
We have, on average, paid less than $500,000 in each of the last five years
for investigation and remediation of environmental matters, including Superfund
and related matters. Expenditures for such activities could rise materially if
substantial additional contamination is discovered at any of our current or
former facilities or if other PRPs fail or refuse to participate in cost sharing
at any Superfund site, or similar disposal site, at which we are implicated.
REGULATORY MATTERS
We are subject to Federal, state and local laws and regulations relating to
the manufacturing, labeling, packaging, health and safety, sanitation, quality
control, fair trade practices, and other aspects of our business. In addition,
zoning, construction and operating permits are required from governmental
agencies which focus on issues such as land use, environmental protection, waste
management, and the movement of animals across state lines. These laws and
regulations may, in certain instances, affect our ability to develop and market
new products and to utilize technological innovations in our business. In
addition, changes in these rules might increase the cost of operating our
facilities or conducting our business which would adversely affect our finances.
Our dairy business is affected by Federal price support programs and
federal and state pooling and pricing programs. Since 1949, the Federal
government has maintained price supports for cheese, butter and nonfat dry milk.
The government stands as a ready purchaser of these products at their price
support levels. Historically, when the product price reached 110% of its price
support level, the government would sell its inventory into the market,
effectively limiting the price of these products. Because prices for these
products have generally been higher than their support level for a number of
years, the government currently has minimal inventories of cheese and butter. As
a result, these commodity prices have been able to be greater than 110% of their
price support levels for several years. The Farm Security and Rural Investment
Act of 2002 extends the dairy price support program through December 31, 2007.
Federal and certain similar state regulations attempt to ensure that the
supply of raw milk flows in priority to fluid milk and soft cream producers
before producers of hard products such as cheese and butter. This is
accomplished in two ways. First, the Federal market order system sets minimum
prices for raw milk. The minimum price of raw milk for use in fluid milk and
soft cream production is set as a premium to the minimum price of raw milk used
to produce hard products. The minimum price of raw milk used to produce hard
products is, in turn, set based upon USDA survey data which includes market
pricing of butter and cheese. Second, the Federal market order system
establishes a pooling program under which participants are required to send at
least some of their raw milk to fluid milk producers. The specific amount varies
based on region, but is at least 10% of the raw milk a participant handles.
Certain areas in the country, such as California, have adopted systems which
supersede the Federal market order system but are similar to it. In addition,
because the Federal market order system is not intended as an exclusive
regulation of the price of raw milk, certain states have, and others could,
adopt regulations which could increase the price we pay for
17
raw milk, which could have an adverse effect on our financial results. We also
pay a premium above the market order price based on competitive conditions in
different regions.
Producers of dairy products which are participants in the Federal market
order system pay into regional "pools" for the milk they use based on the amount
of each class of dairy product produced and the price of those products. As
described above, only producers of dairy products who send the required minimum
amount of raw milk to fluid milk producers may participate in the pool. The
amounts paid into the pool for raw milk used to make fluid milk and soft creams
are set at a premium to the amounts paid into the pool for raw milk used to make
cheese or butter. The pool then returns to each dairy product producer for raw
milk it handled the weighted average price for all raw milk (including that used
for fluid milk and soft creams, whose producers must pay into the pool) sold in
that region. The dairy product producer pays at least this pool price to the
dairy farmer for milk received. This pooling system provides an incentive for
hard product producers to participate in the pool (and therefore supply the
required minimum for fluid milk production), because the average price for raw
milk received by these producers from the pool is more than the average price
they pay into the pool.
As a cooperative, we are exempt from the requirement that we pay pool
prices to our members for raw milk supplied to us. However, as a practical
matter, we must pay a competitive price to our members in order to ensure
adequate supply of raw milk for our production needs, and therefore our
operations are affected by these regulations.
If we did not participate in the pool, we would not receive the advantage
of the average pool payment and we would not be able to pay our milk producers
as much as participating processors without incurring higher costs for our raw
milk. To maintain our participation in the Federal market order program and
avoid this competitive disadvantage, we must procure at least 110% of our raw
milk requirements to meet our production needs. If we are unable to procure at
least 110% of our requirements, we would have lower production which could have
a material adverse affect on our results of operations. In addition, if the pool
was eliminated we would be subject to additional market forces when procuring
raw milk, which could result in increased milk costs and decreased supply, which
could materially affect our business.
As a manufacturer and distributor of food and animal feed products, we are
subject to the Federal Food, Drug and Cosmetic Act and regulations issued
thereunder by the Food and Drug Administration ("FDA"). This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging, and safety of food. The FDA regulates manufacturing practices for
foods through its good manufacturing practices regulations, specifies the
standards of identity for certain foods and animal feed and prescribes the
format and content of certain information required to appear on food and animal
feed product labels. In addition, the FDA enforces the Public Health Service Act
and regulations issued thereunder, which authorize regulatory activity necessary
to prevent the introduction, transmission or spread of communicable diseases. We
and our products are also subject to state and local regulation through
mechanisms such as the licensing of dairy manufacturing facilities, enforcement
by state and local health agencies of state standards for food products,
inspection of facilities and regulation of trade practices. Modification of
these Federal, state and local laws and regulations could increase our costs of
sales or prevent us from marketing foods in the way we currently do and could
have a material adverse effect on our business prospects, results of operations
and financial condition.
Pasteurization of milk and milk products is also subject to inspection by
the United States Department of Agriculture. We and our products are also
subject to state and local regulation through mechanisms such as the licensing
of dairy manufacturing facilities, enforcement by state and local health
agencies of state standards for food products, inspection of facilities, and
regulation of trade practices in connection with the sale of food products.
Modification of these Federal, state and local laws and regulations could
increase our costs of sales or prevent us from marketing foods in the way we
currently do and could have a material adverse effect on our business prospects,
results of operations and financial condition.
Land O'Lakes Farmland Feed distributes animal feed products through a
network of independent dealers. Various states in which these dealers are
located have enacted dealer protection laws which could have the effect of
limiting our rights to terminate dealers. In addition, failure to comply with
such laws could result in
18
awards of damages or statutory sanctions. As a result, it may be difficult to
modify the way we distribute our feed products, which may put us at a
competitive disadvantage.
Several states have enacted "corporate farming laws" that restrict the
ability of corporations to engage in farming activities. Minnesota, North
Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Missouri, Iowa and Wisconsin,
states in which we conduct business, have corporate farming laws. We believe
that our operations currently comply with the corporate farming laws in these
states and their exemptions, but these laws could change in the future and
additional states could enact corporate farming laws that regulate our
businesses. Even with the exemptions, these corporate farming laws restrict our
ability to expand or alter our operations in these states.
ITEM 2. PROPERTIES.
We own the land underlying our corporate headquarters in Arden Hills,
Minnesota and lease the buildings. Our corporate headquarters, consisting of a
main office building and a research and development facility, has an aggregate
of approximately 275,000 gross square feet. In addition, we own offices,
manufacturing plants, storage warehouses and facilities for use in our various
business segments. Thirty-two of our owned properties are mortgaged to secure
our indebtedness. The following table provides summary information about our
principal facilities:
TOTAL NUMBER TOTAL NUMBER
OF FACILITIES OF FACILITIES
BUSINESS SEGMENT OWNED LEASED REGIONAL LOCATION OF FACILITIES
- ---------------- ------------- ------------- -------------------------------
Dairy Foods.................... 13(1) 10 Midwest(2) -- 14
West(3) -- 4
East(4) -- 2
South(5) -- 3
Animal Feed.................... 95(6) 59 Midwest -- 85
West -- 38
East -- 9
South -- 22
Crop Seed...................... 16(7) 10 Midwest -- 15
West -- 10
East -- 1
Swine.......................... 6 1 Midwest -- 7
Agronomy....................... 5 0 Midwest -- 5
Layers......................... 22 61 Midwest -- 20
West -- 47
East -- 13
South -- 3
- ---------------
(1) Includes a closed facility and a facility utilized for feed manufacturing
which is accounted for in the dairy foods segment.
(2) The Midwest region includes the states of Ohio, Michigan, Indiana, Illinois,
Wisconsin, Minnesota, Iowa, Missouri, Oklahoma, Kansas, Nebraska, South
Dakota and North Dakota and Ontario, Canada.
(3) The West region includes the states of Montana, Wyoming, Colorado, Texas,
New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada, California,
Alaska and Hawaii.
(4) The East region includes the states of Maine, New Hampshire, Vermont, New
York, Massachusetts, Rhode Island, Connecticut, Pennsylvania, New Jersey,
Delaware and Maryland.
(5) The South region includes the states of West Virginia, Virginia, North
Carolina, Kentucky, Tennessee, South Carolina, Georgia, Florida, Alabama,
Mississippi, Louisiana and Arkansas.
(6) Includes 15 closed facilities and one research and development facility.
(7) Includes 2 closed facilities.
19
We do not believe that we will have difficulty in renewing the leases we
currently have or in finding alternative space in the event those leases are not
renewed. We consider our properties suitable and adequate for the conduct of our
business.
ITEM 3. 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. On February 24, 2004, Cache La Poudre Feeds, LLC
("Cache") filed a lawsuit in the United States District Court for the District
of Colorado against the Company, Land O'Lakes Farmland Feed LLC and certain
named individuals thereof claiming trademark infringement with respect to
certain animal feed sales under the Profile trade name. Cache seeks damages of
at least $132.8 million, which, it claims, is the amount the named entities
generated in gains, profits and advantages from using the Profile trade name. In
response to Cache's complaint, the Company denied any wrongdoing and pursued
certain counterclaims against Cache relating to, among other things, trademark
infringement, and other claims against Cache for, among other things, defamation
and libel. In addition, the Company believes that Cache's calculation of the
Company's gains, profits and advantages allegedly generated from the use of the
Profile trade name were grossly overstated. The Company believes that sales
revenue generated from the sale of products carrying the Profile trade name are
immaterial. Although the amount of any loss that may result from this matter
cannot be ascertained with certainty, we do not currently believe that it will
result in a loss material to our consolidated financial condition, future
results of operations or cash flow.
In 2003, several 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 any loss that may result
from these matters cannot be ascertained with certainty, we do not currently
believe that, in the aggregate, they will result in losses 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 proceeds of
approximately $119.5 million in 2003. In February 2004, we received an
additional $4.5 million of proceeds. When combined with the settlement proceeds
received from similar claims settled since the commencement of these actions, we
have received cumulatively approximately $188 million from the settling
defendants. These claims that have been settled represent the vast majority of
our vitamin and methionine purchases.
In a letter dated January 18, 2001, we were identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible party for
clean-up costs in connection with hazardous substances and wastes 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 at the site and also demanded that we reimburse the EPA
approximately $8.9 million for remediation expenses already incurred at the
site. In March 2001, we responded to the EPA denying any responsibility. No
further communication has been received from the EPA.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public market for the common equity of Land
O'Lakes. In view of the following, it is unlikely in the foreseeable future that
a public market for these securities will develop:
(1) the common stock interests are nondividend bearing;
(2) the right of any holder of common stock to receive patronage
income depends on the quantity and value of the business the member
conducts with us (See "Item 1. Business -- Description of the
Cooperative -- Patronage Income and Equity");
(3) the class of common stock issued to a member depends on whether
the member is a cooperative or individual member and whether the member is
a "dairy member" or "ag member" (See "Item 1. Business -- Description of
the Cooperative -- Our Structure and Membership");
(4) we may redeem holdings of members under certain circumstances upon
the approval of our board of directors (See "Item 1.
Business -- Description of the Cooperative -- Patronage Income and
Equity"); and
(5) our board of directors may terminate a membership if it determines
that the member has failed to adequately patronize us or has become our
competitor (See "Item 1. Business -- Description of the Cooperative -- Our
Structure and Membership").
As of December 31, 2003, there are approximately 1,094 holders of Class A
common stock, 4,914 holders of Class B common stock, 190 holders of Class C
common stock and 1,142 holders of Class D common stock.
On December 23, 2003, we issued $175.0 million of 9% Senior Secured Notes
due December 15, 2010 (the Senior Notes). We sold the Senior Notes for cash to
an initial purchaser in a transaction exempt from registration pursuant to
Section 4(2) of the Securities Act. Subsequently, the initial purchaser sold the
Senior Notes to qualified institutional buyers (as defined in the rules
promulgated under the Securities Act) in transactions exempt from registration
pursuant to Rule 144A and Regulation S of the Securities Act.
21
ITEM 6. SELECTED FINANCIAL DATA.
The historical consolidated financial information presented below has been
derived from the Land O'Lakes consolidated financial statements for the periods
indicated. They should be read together with the audited consolidated financial
statements of Land O'Lakes and the related notes included elsewhere in the
Annual Report on Form 10-K. You should read the selected consolidated historical
financial information along with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements included in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999(4)
-------- -------- -------- -------- --------
($ IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $6,320.5 $5,846.8 $5,864.8 $5,672.8 $5,615.8
Cost of sales.............................. 5,735.3 5,350.4 5,378.6 5,146.1 5,100.4
-------- -------- -------- -------- --------
Gross profit............................... 585.2 496.4 486.2 526.7 515.4
Selling, general and administrative........ 468.3 470.6 382.3 391.7 507.7
Restructuring and impairment charges(1).... 7.5 31.4 3.7 54.2 3.9
-------- -------- -------- -------- --------
Earnings (loss) from operations.......... 109.4 (5.6) 100.2 80.8 3.8
Interest expense, net...................... 82.9 78.7 55.7 52.4 44.7
Gain on legal settlements(2)............... (22.8) (155.5) (3.0) -- --
Other (income) expense, net(3)............. (1.6) (8.2) 23.1 (95.8) (55.0)
Equity in (earnings) loss of affiliated
companies................................ (57.1) (22.7) (48.6) 35.6 (7.3)
Minority interest in earnings (loss) of
subsidiaries............................. 6.4 5.4 6.9 (1.4) (0.1)
-------- -------- -------- -------- --------
Earnings before income taxes............. 101.6 96.7 66.1 90.0 21.5
Income tax expense (benefit)............... 18.1 (2.2) (5.4) (12.9) 0.1
-------- -------- -------- -------- --------
Net earnings............................. $ 83.5 $ 98.9 $ 71.5 $ 102.9 $ 21.4
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amortization.............. $ 120.8 $ 106.8 $ 97.3 $ 83.6 $ 81.7
Capital expenditures....................... 74.1 87.4 83.9 104.3 109.3
Cash patronage paid to members(5).......... 4.2 20.2 30.7 10.6 20.0
Equity revolvement paid to members(6)...... 20.2 17.7 16.2 43.6 28.7
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments............ $ 110.3 $ 64.3 $ 130.2 $ 4.0 $ 197.8
Restricted cash(7)......................... 20.1 -- -- -- --
Working capital(8)......................... 427.6 395.0 328.8 476.9 464.8
Property, plant and equipment, net......... 624.6 579.9 675.3 467.8 461.8
Property under capital leases, net......... 109.1 105.7 -- -- --
Total assets............................... 3,398.2 3,246.3 3,091.4 2,473.3 2,700.1
Total debt(9).............................. 963.2 959.0 1,010.3 628.8 783.9
Capital securities of trust subsidiary..... 190.7 190.7 190.7 190.7 200.0
Obligations under capital leases........... 110.0 108.3 -- -- --
Minority interests......................... 62.7 53.7 59.8 55.1 14.9
Total equities............................. 896.7 911.5 836.5 805.0 768.8
See accompanying Notes to Selected Financial Data.
22
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
SELECTED SEGMENT FINANCIAL INFORMATION
DAIRY FOODS
Net sales.................................. $2,969.4 $2,903.1 $3,469.3 $3,098.2 $3,291.1
Earnings (loss) from operations............ 28.3 (16.4) 64.8 27.1 (15.2)
Depreciation and amortization.............. 43.0 36.8 42.5 42.8 47.4
Capital expenditures....................... 28.2 32.3 37.7 60.3 63.3
ANIMAL FEED(10)(11)(12)
Net sales.................................. 2,467.2 2,444.7 1,864.0 1,182.2 931.2
Earnings from operations................... 56.1 41.7 39.0 23.0 21.4
Depreciation and amortization.............. 44.9 46.6 31.7 18.6 14.7
Capital expenditures....................... 24.0 26.0 24.9 21.5 17.4
CROP SEED
Net sales.................................. 479.3 406.9 413.6 365.5 190.8
Earnings from operations................... 15.0 8.7 10.3 12.7 5.7
Depreciation and amortization.............. 2.2 3.0 5.0 5.6 2.7
Capital expenditures....................... 0.5 0.6 2.7 3.5 4.8
SWINE(12)
Net sales.................................. 91.2 83.2 109.9 102.0 82.7
(Loss) earnings from operations............ (3.8) (16.0) 6.0 0.3 (20.4)
Depreciation and amortization.............. 3.5 3.8 5.6 6.2 7.9
Capital expenditures....................... 5.1 3.1 7.3 9.6 14.0
AGRONOMY(13)
Net sales.................................. -- -- -- 857.0 1,023.3
(Loss) earnings from operations............ (14.0) (18.9) (16.5) 22.4 14.2
Depreciation and amortization.............. 6.1 6.1 6.3 4.6 3.4
Capital expenditures....................... -- -- -- -- --
LAYERS(14)
Net sales.................................. 317.8 -- -- -- --
Earnings (loss) from operations............ 28.5 (2.1) (0.3) -- --
Depreciation and amortization.............. 6.3 0.9 0.3 -- --
Capital expenditures....................... 3.8 -- -- -- --
OTHER/ELIMINATIONS
Net sales.................................. (4.4) 9.0 8.1 67.9 96.7
Loss from operations....................... (0.7) (2.6) (3.1) (4.7) (1.9)
Depreciation and amortization.............. 14.8 9.6 5.9 5.8 5.6
Capital expenditures....................... 12.5 25.4 11.3 9.4 9.8
See accompanying Notes to Selected Financial Data.
23
NOTES TO SELECTED FINANCIAL DATA
(1) The following table summarizes restructuring and impairment charges
(reversals):
YEARS ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001 2000 1999
---- ----- ----- ----- ----
Restructuring charges (reversals).............. $3.5 $13.2 $(4.1) $ 9.7 $ --
Impairment of assets........................... 4.0 18.2 7.8 44.5 3.9
---- ----- ----- ----- ----
Total........................................ $7.5 $31.4 $ 3.7 $54.2 $3.9
==== ===== ===== ===== ====
The restructuring charges of $3.5 million, $13.2 million, reversal of
($4.1) million and charge of $9.7 million for the years ended December 31,
2003, 2002, 2001 and 2000, respectively, primarily resulted from Land
O'Lakes Farmland Feed initiatives to consolidate facilities and reduce
personnel and the closing of manufacturing facilities in the dairy foods
segment.
The impairment charge of $4.0 million in 2003 related to the write-down of
various assets to their estimated fair value and goodwill impairments. The
impairment charge of $18.2 million in 2002 related to the write-down of
certain impaired plant assets in the dairy foods and animal feed segments
to their estimated fair value. The impairment charge of $7.8 million in
2001 related to write-downs of a feed operation in Mexico and certain swine
assets to their estimated fair value. The impairment charge of $44.5
million in 2000 resulted primarily from a write-down of goodwill related to
a previous acquisition in our dairy foods segment. The impairment charge of
$3.9 million in 1999 was related to under-utilization of the Land O'Lakes
cheese production assets in Poland.
(2) We recognized gains on legal settlements from product suppliers against
whom we alleged certain price-fixing claims of $22.8 million, $155.5
million and $3.0 million for the years ended December 31, 2003, 2002 and
2001, respectively.
(3) The following table summarizes other (income) expense, net:
YEARS ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001 2000 1999
----- ----- ----- ------ ------
(Gain) loss on sale of investments......... $(0.9) $ 0.9 $(0.3) $ (2.4) $ (0.8)
Gain on divestitures of businesses......... (0.7) (4.9) -- (89.0) (54.2)
Gain on sale of intangibles................ (0.5) (4.2) -- -- --
Loss (gain) on extinguishment of debt...... 0.5 -- 23.4 (4.4) --
----- ----- ----- ------ ------
Total.................................... $(1.6) $(8.2) $23.1 $(95.8) $(55.0)
===== ===== ===== ====== ======
(4) Period results include an inventory write-down of $62.1 million for cheese
and butter due to lower of cost or market adjustments.
(5) Reflects the portion of earnings allocated to members for the prior fiscal
year distributed in cash in the current fiscal year.
YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001 2000 1999
---- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
20% required for tax deduction................ $2.8 $14.1 $28.5 $ 7.0 $15.0
Discretionary................................. 1.4 6.1 2.2 3.6 5.0
---- ----- ----- ----- -----
Total....................................... $4.2 $20.2 $30.7 $10.6 $20.0
==== ===== ===== ===== =====
(6) Reflects the distribution of earnings previously allocated to members and
not paid out as cash patronage. Includes the distribution of a portion of
the equity issued in connection with the acquisition of
24
Dairyman's Cooperative Creamery Association and acquisition of certain
assets of Countrymark Cooperative.
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001 2000 1999
----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
Revolvement
Dairy Foods............................ $18.0 $15.2 $14.0 $13.8 $15.6
Ag Services............................ 2.2(a) 2.5(a) 2.2(a) 29.8 13.1
----- ----- ----- ----- -----
Total............................... $20.2 $17.7 $16.2 $43.6 $28.7
===== ===== ===== ===== =====
- ---------------
(a) Included equity revolvements to deceased members of local cooperatives.
(7) Cash held in a restricted account required to support the CPI property and
equipment lease.
(8) Working capital is defined as current assets (less cash and short-term
investments and restricted cash) minus current liabilities (less notes and
short-term obligations, and current maturities of long-term debt and
obligations under capital leases).
(9) Total debt excludes the 7.45% Capital Securities due on March 15, 2028, of
our trust subsidiary.
(10) On October 1, 2000, we combined our feed assets with those of Farmland
Industries to form Land O'Lakes Farmland Feed. We consolidate the operating
activities of Land O'Lakes Farmland Feed.
(11) In October 2001, we acquired Purina Mills, Inc. and since then we have
consolidated its operating activities in the feed segment.
(12) 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 is reported in our animal feed segment
results for the years ended December 31, 2003, 2002 and 2001.
(13) On July 28, 2000, we contributed all of our revenue generating agronomy
assets to Agriliance, a joint venture with United Country Brands and paid
$57 million in cash, in exchange for a 50% interest in Agriliance.
Beginning July 29, 2000, our share of earnings or losses in Agriliance was
reported under the equity method of accounting.
(14) Through June 30, 2003, our layers business, MoArk, was unconsolidated and
accounted for under the equity method. Effective July 1, 2003, MoArk was
consolidated in our financial statements. Financial statements for periods
prior to July 1, 2003 have not been restated.
25
ITEM 7. 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 Annual Report on Form 10-K. This
discussion contains forward-looking statements based on current expectations,
assumptions, estimates and projections of our management. These forward-looking
statements involve risks and uncertainties. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, as more fully described in the "Risk Factors" section
and elsewhere in this Annual Report on Form 10-K. We undertake no obligation to
update publicly any forward-looking statements.
OVERVIEW
GENERAL
Segments
We operate our business predominantly in the United States in six segments:
dairy foods, feed, seed, swine, agronomy and layers. We have limited
international operations.
- Our dairy foods segment produces, markets and sells butter, spreads,
cheese and other dairy products.
- We operate our feed segment principally through Land O'Lakes Farmland
Feed LLC, our 92% owned joint venture with Farmland Industries, Inc.
("Farmland Industries"). Our feed segment develops, produces, markets and
distributes animal feeds such as ingredient feed, formula feed, milk
replacers, vitamins and additives to both commercial and lifestyle
customers. The results of the feed business are consolidated in our
financial statements and the minority interest is eliminated. As a result
of the Purina Mills acquisition in October 2001, feed results now include
Purina Mills swine marketing activities since Purina Mills historically
reported results of its swine business together with its feed business.
- Our seed segment sells seed for a variety of crops, including alfalfa,
corn, soybeans and forage and turf grasses.
- Our swine segment produces and markets both young feeder pigs and mature
market hogs.
- Our agronomy segment consists primarily of our 50% ownership in
Agriliance, LLC, which is accounted for under the equity method and our
38% interest in CF Industries, Inc. which is accounted for on a cost
basis. Agriliance markets and sells two primary products lines: crop
protection (including herbicides and pesticides) and crop nutrients
(including fertilizer and micronutrients). CF Industries is an
inter-regional crop nutrient manufacturing cooperative.
- Our layers segment consists of our joint venture in MoArk, LLC, which was
consolidated as of July 1, 2003. MoArk produces and markets shell eggs
and egg products that are sold to retail and wholesale customers for
consumer and industrial use throughout the United States.
- We also derive a portion of revenues and income from other related
businesses, which are insignificant to our overall results.
We allocate corporate administrative expense to all six of our business
segments using the following two methodologies: direct usage for services for
which we are able to track usage, such as payroll and legal, and invested
capital for all other expenses. A majority of these costs is allocated based on
direct usage. We allocate these costs to all segments, including segments
composed solely of investments and joint ventures.
Unconsolidated Businesses
We have investments in certain entities that are not consolidated in our
financial statements. In 2003, income from our unconsolidated businesses
amounted to $57.1 million, compared to income of $22.7 million in 2002 and $48.6
million in 2001. Our investment in unconsolidated businesses as of December 31,
2003 was $506.6 million, compared to $545.6 million as of December 31, 2002 and
$568.1 million as of December 31,
26
2001. Cash flow from our investment in unconsolidated businesses in 2003 was
$39.9 million, compared to $30.4 million in 2002 and $6.0 million in 2001.
Agriliance and CF Industries constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy segment results. Our investment in, and earnings from, Agriliance and
CF Industries were as follows as of and for the years ended:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
(IN MILLIONS)
AGRILIANCE:
Investment.................................... $ 92.1 $ 91.6 $ 84.0
Equity in earnings............................ 33.9 25.1 34.2
CF INDUSTRIES:
Investment.................................... $249.5 $249.5 $248.5
Patronage income.............................. -- -- --
In 2003, 2002 and 2001, we received cash distributions of $25.8 million,
$17.5 million and $0.0 million, respectively, from Agriliance. We did not
receive any cash distributions from CF Industries during these periods.
Land O'Lakes, CHS, Inc. ("CHS") and Farmland Industries contributed
substantially all of their agronomy marketing assets to Agriliance in July 2000.
The agronomy marketing operations of Land O'Lakes, CHS and Farmland Industries
were previously managed through various operating entities. Land O'Lakes has a
50 percent equity ownership in Agriliance. The other 50 percent ownership
interest in Agriliance is owned by United Country Brands (jointly owned by CHS
and Farmland Industries). Land O'Lakes provides certain support services to
Agriliance at competitive market prices. Agriliance was billed $9.2 million in
2003, $8.3 million in 2002 and $7.1 million in 2001 for the support services. In
addition, Land O'Lakes purchases insignificant amounts of product from
Agriliance. The fiscal year of Agriliance ends on August 31. Unless otherwise
indicated, references to the annual results of Agriliance in this Annual Report
on Form 10-K are presented on a calendar year basis to conform to Land O'Lakes'
presentation. Agriliance funds its operations from operating cash flows, an
initial working capital contribution on formation and borrowings from
unaffiliated third parties. As of December 31, 2003, Agriliance had entered into
syndicated secured and revolving credit arrangements in an aggregate amount of
$285 million and into a $200 million receivables securitization with CoBank. On
December 4, 2003, Agriliance restructured its credit arrangements to include a
$225 million three-year revolving syndicated credit facility, a three year $200
million receivables securitization with CoBank and sold $100 million of senior
secured notes in a private placement. Neither Land O'Lakes nor any of the
restricted subsidiaries guarantee these obligations. Land O'Lakes does not have
an obligation to contribute additional capital to finance Agriliance's
operations. Agriliance's performance reflects the seasonal nature of its
business. Most of its annual sales and earnings, which are principally derived
from the distribution of crop nutrients and crop protection products
manufactured by others, including CF Industries, occur in the second quarter of
each calendar year, with off-season losses in the first, third and fourth
quarter.
For the year ended December 31, 2003 net earnings for Agriliance were $68.1
million, up $18.9 million versus 2002. This increase is the result of a $15.7
million increase in earnings from Agro Distribution, LLC, Agriliance's Southern
retail business. A $5.9 million increase in the wholesale crop nutrients
business also contributed to the improved earnings performance. The increased
earnings f