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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2004*
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ________.
Commission file number 333-84486
LAND O'LAKES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0365145
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55112
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(651) 481-2222
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12-b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
April 30, 2004: 1,081 shares of Class A common stock, 4,698 shares of Class B
common stock, 189 shares of Class C common stock, and 1,274 shares of Class D
common stock.
Land O'Lakes, Inc. is a cooperative. Our voting and non-voting common
equity can only be held by our members. No public market for voting and
non-voting common equity of Land O'Lakes, Inc. is established and it is
unlikely, in the foreseeable future, that a public market for our voting and
non-voting common equity will develop.
We maintain a website on the Internet through which additional information
about Land O' Lakes, Inc. is available. Our website address is
www.landolakesinc.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, press releases and earnings releases are
available, free of charge, on our website when they are released publicly or
filed with the SEC.
*Although Land O'Lakes, Inc. is not currently required to file this
Quarterly Report on Form 10-Q pursuant to Section 13 or 15(d), we are filing
voluntarily.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION........................................................................... 3
Item I. Financial Statements............................................................................. 3
LAND O'LAKES, INC.
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003....................... 3
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)..... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)..... 5
Notes to Consolidated Financial Statements (unaudited)................................................... 6
LAND O'LAKES FARMLAND FEED LLC
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003....................... 18
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)..... 19
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)..... 20
Notes to Consolidated Financial Statements (unaudited)................................................... 21
PURINA MILLS, LLC
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003....................... 31
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)..... 32
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)..... 33
Notes to Consolidated Financial Statements (unaudited)................................................... 34
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 37
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 52
Item 4. Controls and Procedures......................................................................... 53
PART II. OTHER INFORMATION.............................................................................. 53
Item 1. Legal Proceedings............................................................................... 53
Item 6. Exhibits and Reports on Form 8-K................................................................ 54
SIGNATURES............................................................................................... 55
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ......................................... $ 21,530 $ 110,274
Restricted cash ......................................................... 20,167 20,118
Receivables, net ........................................................ 603,729 640,146
Inventories ............................................................. 530,140 496,776
Prepaid expenses ........................................................ 46,005 246,373
Other current assets .................................................... 38,102 42,006
------------ ------------
Total current assets ............................................ 1,259,673 1,555,693
Investments ............................................................... 514,084 506,641
Property, plant and equipment, net ........................................ 619,986 624,631
Property under capital lease, net ......................................... 107,464 109,145
Goodwill .................................................................. 370,863 373,083
Other intangibles ......................................................... 102,030 102,938
Other assets .............................................................. 124,647 126,025
------------ ------------
Total assets .................................................... $ 3,098,747 $ 3,398,156
============ ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ........................................ $ 55,529 $ 80,703
Current portion of long-term debt ....................................... 9,378 7,841
Current portion of obligations under capital lease ...................... 10,066 10,399
Accounts payable ........................................................ 568,286 761,663
Accrued expenses ........................................................ 222,241 216,586
Patronage refunds and other member equities payable ..................... 15,480 19,449
------------ ------------
Total current liabilities ....................................... 880,980 1,096,641
Long-term debt ............................................................ 942,907 1,065,382
Obligations under capital lease ........................................... 98,266 99,650
Employee benefits and other liabilities ................................... 181,568 177,088
Minority interests ........................................................ 64,095 62,739
Equities:
Capital stock ........................................................... 2,114 2,125
Member equities ......................................................... 890,891 882,547
Accumulated other comprehensive loss .................................... (65,617) (65,617)
Retained earnings ....................................................... 103,543 77,601
------------ ------------
Total equities .................................................. 930,931 896,656
------------ ------------
Commitments and contingencies
Total liabilities and equities ............................................ $ 3,098,747 $ 3,398,156
============ ============
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ................................................................. $ 2,011,287 $ 1,454,452
Cost of sales ............................................................. 1,810,830 1,328,903
------------ ------------
Gross profit .............................................................. 200,457 125,549
Selling, general and administrative ....................................... 134,900 117,441
Restructuring and impairment charges ...................................... 900 1,092
------------ ------------
Earnings from operations .................................................. 64,657 7,016
Interest expense, net ..................................................... 23,701 19,913
Gain on legal settlements ................................................. (4,524) (8,889)
Other (income) expense, net ............................................... (1,587) (500)
Equity in (earnings) loss of affiliated companies ......................... (17,414) 983
Minority interest in earnings of subsidiaries ............................. 1,400 1,489
------------ ------------
Earnings (loss) before income taxes ....................................... 63,081 (5,980)
Income tax expense (benefit) .............................................. 16,552 (5,609)
------------ ------------
Net earnings (loss) ....................................................... $ 46,529 $ (371)
============ ============
Applied to:
Member equities
Allocated patronage refunds .......................................... $ 21,284 $ 9,794
Deferred equities .................................................... (623) (13,893)
------------ ------------
20,661 (4,099)
Retained earnings ....................................................... 25,868 3,728
------------ ------------
$ 46,529 $ (371)
============ ============
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ..................................................... $ 46,529 $ (371)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................................ 27,560 26,642
Amortization of deferred financing charges ........................... 2,561 913
Bad debt expense ..................................................... 379 691
Proceeds from patronage revolvement received ......................... 1,334 10
Non-cash patronage income ............................................ (412) (209)
Receivable from legal settlement ..................................... -- 96,707
Deferred income tax benefit .......................................... (865) --
Decrease in other assets ............................................. 2,269 1,709
(Decrease) increase in other liabilities ............................. (370) 2,096
Restructuring and impairment charges ................................. 900 1,092
Gain on divestiture of business ...................................... (1,664) --
Equity in (earnings) loss of affiliated companies .................... (17,414) 983
Minority interests ................................................... 1,400 1,489
Other ................................................................ (282) (1,229)
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables .......................................................... 33,854 62,553
Inventories .......................................................... (33,186) (47,777)
Other current assets ................................................. 198,963 92,304
Accounts payable ..................................................... (193,545) (192,201)
Accrued expenses ..................................................... 10,448 (6,537)
------------ ------------
Net cash provided by operating activities ............................... 78,459 38,865
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .............................. (20,574) (16,120)
Payments for investments ................................................ (148) (8,800)
Proceeds from divestiture of business ................................... 7,500 --
Proceeds from sale of investments ....................................... 1,983 3,000
Proceeds from sale of property, plant and equipment ..................... 2,703 1,562
Dividends from investments in affiliated companies ...................... 8,671 1,737
Increase in restricted cash ............................................. (49) --
Other ................................................................... 525 2,581
------------ ------------
Net cash provided (used) by investing activities ........................ 611 (16,040)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt .................................. (25,126) 24,768
Proceeds from issuance of long-term debt ................................ 17,605 425
Principal payments on long-term debt .................................... (137,646) (61,934)
Principal payments on obligations under capital lease ................... (2,524) (2,217)
Payments for redemption of member equities .............................. (16,308) (15,331)
Payments for debt issuance costs ........................................ (3,953) --
Other ................................................................... 138 1,349
------------ ------------
Net cash used by financing activities ................................... (167,814) (52,940)
------------ ------------
Net decrease in cash and short-term investments ......................... (88,744) (30,115)
Cash and short-term investments at beginning of period .................... 110,274 64,327
------------ ------------
Cash and short-term investments at end of period .......................... $ 21,530 $ 34,212
============ ============
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during periods for:
Interest ................................................................ $ 14,800 $ 14,610
Income taxes paid (recovered) ........................................... $ 160 $ (4,198)
See accompanying notes to consolidated financial statements.
5
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes, Inc. (the "Company"), all normal, recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods. The statements are
condensed and therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2003 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In May, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity." The
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
statement was effective for the Company as of January 1, 2004. The adoption of
this standard did not have a material impact on the Company.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for the Company as of December 31, 2003. The Company adopted this
Statement for the year ended December 31, 2003, and has provided the interim
disclosures in Note 10, Pension and Other Postretirement Plans.
On January 12, 2004, the FASB issued FASB Staff Position 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The position
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Act. Regardless of whether a sponsor elects that deferral,
the position requires certain disclosures pending further consideration of the
underlying accounting issues. The Company has chosen to defer accounting for the
benefit until the FASB issues final accounting guidance due to various
uncertainties related to this legislation and the appropriate accounting. The
Company's measures of its accumulated projected benefit obligation and net
periodic postretirement benefit costs as of and for the three months ended March
31, 2004 do not reflect the effect of the Act.
2. MOARK LLC CONSOLIDATION AND PLANNED ACQUISITION OF MINORITY INTEREST
At December 31, 2002, the Company carried its 50% ownership interest in
MoArk under the equity method with an investment balance of $44.7 million.
Osborne Investments, LLC ("Osborne") owned the remaining interest in MoArk. In
the three months ended March 31, 2003, the Company increased its ownership from
50% to 57.5% with an additional investment of $7.8 million. In addition, the
Company has the right to acquire (and Osborne has the right to require the
Company to acquire) the remaining 42.5% of MoArk owned by Osborne by making a
$42.2 million minimum payment in 2007.
In accordance with the provisions of FASB Interpretation No. 46, effective
July 1, 2003, the Company consolidated MoArk into its financial statements.
Although Osborne has a 42.5% ownership interest in MoArk, the Company continues
to be allocated 100% of the income or loss from the operations of MoArk (other
than on capital
6
transactions involving a realized gain or loss on intangible assets, which are
allocated 50/50). In addition to consolidating MoArk, the Company has presumed
for accounting purposes that it will acquire the remaining 42.5% in 2007.
Effective July 1, 2003, the Company recorded this presumed $42.2 million payment
as a long-term liability in the consolidated balance sheet as "employee benefits
and other liabilities" at a present value of $31.6 million using an effective
interest rate of 7%. The present value of this liability is $33.2 million at
March 31, 2004.
3. RESTRICTED CASH
On March 28, 2003, Cheese and Protein International LLC ("CPI"), a
96.5%-owned consolidated subsidiary, amended its lease for property and
equipment relating to its cheese manufacturing and whey processing plant in
Tulare, California. The amendment postponed the measurement of the fixed charge
coverage ratio requirement contained in the lease until March 2005. The
amendment requires Land O'Lakes to maintain a $20 million cash account (which
may be replaced by a letter of credit at the Company's option) to support the
lease. The cash account or letter of credit would only be drawn upon in the
event of a CPI default and would reduce amounts otherwise due under the lease.
The requirement can be lifted pending the achievement of certain financial
targets by CPI.
4. RECEIVABLES
A summary of receivables is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Trade accounts ............................................................ $ 393,567 $ 344,371
Notes and contracts ....................................................... 66,288 63,984
Notes from sale of trade receivables (see Note 5).......................... 86,340 155,191
Other ..................................................................... 75,746 96,152
------------ ------------
621,941 659,698
Less allowance for doubtful accounts ...................................... 18,212 19,552
------------ ------------
Total receivables, net .................................................... $ 603,729 $ 640,146
============ ============
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture, as well as wholesale and retail food industries. Collections of
these receivables may be dependent upon economic returns in these industries.
The Company's credit risks are continually reviewed, and management believes
that adequate provisions have been made for doubtful accounts.
5. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100 million receivables
purchase facility with CoBank, ACB ("CoBank"). In March 2004, the facility was
expanded to $200 million. A wholly-owned, unconsolidated special purpose entity
("SPE") has been established to purchase certain receivables from the Company.
CoBank has been granted an interest in the pool of receivables owned by the SPE.
The transfers of the receivables from the Company to the SPE are structured as
sales and, accordingly, the receivables transferred to the SPE are not reflected
in the consolidated balance sheet. However, the Company retains credit risk
related to the repayment of the notes receivable with the SPE, which, in turn,
is dependent upon the credit risk of the SPE's receivables pool. Accordingly,
the Company has retained reserves for estimated losses. The Company expects no
significant gains or losses from the facility. At March 31, 2004, $120 million
was outstanding under this facility and $20 million was outstanding under this
facility at December 31, 2003. The total accounts receivable sold during the
three months ended March 31, 2004 and 2003 were $710 million and $673 million,
respectively.
6. INVENTORIES
A summary of inventories is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Raw materials ............................................................. $ 154,709 $ 159,511
Work in process ........................................................... 43,613 33,734
Finished goods ............................................................ 331,818 303,531
------------ ------------
Total inventories ......................................................... $ 530,140 $ 496,776
============ ============
7
7. INVESTMENTS
A summary of investments is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
CF Industries, Inc......................................................... $ 249,502 $ 249,502
Agriliance LLC............................................................. 98,790 92,134
Ag Processing Inc.......................................................... 38,162 37,941
Advanced Food Products LLC................................................. 28,642 27,494
CoBank, ACB................................................................ 17,313 18,583
Universal Cooperatives..................................................... 8,224 8,224
Melrose Dairy Proteins, LLC................................................ 7,905 6,623
Agronomy Company of Canada Ltd............................................. 7,515 7,954
Prairie Farms Dairy, Inc................................................... 5,305 5,125
MoArk/Fort Recovery Egg Marketing, LLC..................................... 2,646 2,210
Other -- principally cooperatives and joint ventures....................... 50,080 48,851
------------ ------------
Total investments.......................................................... $ 514,084 $ 506,641
============ ============
During the three months ended March 31, 2004, the Company sold its
investment in a swine joint venture for $2.0 million in cash.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Dairy Foods ............................................................... $ 66,259 $ 66,259
Feed ...................................................................... 150,734 150,922
Seed ...................................................................... 11,896 12,405
Agronomy .................................................................. 62,210 63,733
Layers .................................................................... 79,764 79,764
------------ ------------
Total goodwill ............................................................ $ 370,863 $ 373,083
============ ============
The decrease in goodwill of $2.2 million resulted from amortization
associated with investments in joint ventures and cooperatives of $1.7 million
and an impairment of $0.5 million in the seed segment.
OTHER INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Amortized other intangible assets:
Patents, less accumulated amortization
of $2,922 and $2,622, respectively ................................... $ 13,847 $ 14,147
Trademarks, less accumulated amortization of
$2,134 and $2,044, respectively ...................................... 2,207 2,296
Other intangible assets, less accumulated
amortization of $13,356 and $12,783, respectively..................... 9,351 9,870
------------ ------------
Total amortized other intangible assets ................................... 25,405 26,313
Total non-amortized other intangible assets - trademarks................... 76,625 76,625
------------ ------------
Total other intangible assets ............................................. $ 102,030 $ 102,938
============ ============
Amortization expense for the three months ended March 31, 2004 and 2003
was $1.0 million and $1.1 million, respectively. The estimated amortization
expense related to other intangible assets subject to amortization for the next
five years will approximate $2.5 million annually. The weighted-average life of
the intangible assets subject to amortization is approximately 10 years.
8
9. DEBT OBLIGATIONS
The Company had notes and short-term obligations of $55.5 million at March
31, 2004 and $80.7 million at December 31, 2003. The Company also has a $185
million revolving credit facility due January, 2007, with variable interest
based on LIBOR. There were no borrowings under this facility as of March 31,
2004.
A summary of long-term debt is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Term A Loan - quarterly installments through 2006 (variable rate based on
LIBOR) .................................................................. $ -- $ 92,473
Term B Loan - quarterly installments through 2008 (variable rate based on
LIBOR) .................................................................. 118,373 152,374
Senior unsecured notes - due 2011 (8.75%) ................................. 350,000 350,000
Senior secured notes - due 2010 (9.00%).................................... 175,000 175,000
MoArk LLC debt - due 2004 through 2023 (6.06% weighted average) ........... 80,455 75,785
Industrial development revenue bonds and other secured notes payable - due
2004 through 2016 (1.1% to 5.5%) ........................................ 14,934 14,940
Capital Securities of Trust Subsidiary - due due 2028 (7.45%) ............. 190,700 190,700
Other debt ................................................................ 22,823 21,951
------------ ------------
952,285 1,073,223
Less current portion ...................................................... 9,378 7,841
------------ ------------
Total long-term debt ...................................................... $ 942,907 $ 1,065,382
============ ============
In the three months ended March 31, 2004, the Company amended its
receivables securitization facility which expanded the facility from $100
million to $200 million. The incremental proceeds from the expansion were used
to make prepayments on the term loans. A mandatory $76.0 million payment in full
was made for Term A loan and a $24.0 million partial repayment was made for Term
B loan. Additional prepayments made in the three months ended March 31, 2004
were $16.5 million for Term A loan and $10.0 million for Term B loan. The
weighted average interest rates on short-term borrowings and notes outstanding
at March 31, 2004 and December 31, 2003 were 3.40% and 3.56%, respectively.
Borrowings under the revolving credit facility and the term loans bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins depend on Land O'Lakes leverage ratio in the
case of the revolving credit facility. The margin on the Term B loan is fixed at
350 basis points over LIBOR. Based upon Land O'Lakes leverage ratio as of March
31, 2004, the LIBOR margin for the revolving credit facility is 250 basis
points. Spreads for the Alternative Base Rate are 100 basis points lower than
the applicable LIBOR spreads. LIBOR may be set for one, two, three or six month
periods at the election of Land O'Lakes. As of March 31, 2004, the interest rate
on the Term B loan was 4.59%.
In April and May, 2004, the Company entered into three $50 million
fixed-to-floating interest rate swap agreements, designated as fair value
hedges, in an effort to return to historical exposure levels for floating
interest rate debt. These swaps mirror the terms of the 8.75% notes and
effectively convert $150 million of such notes from a fixed 8.75% rate to an
effective rate of LIBOR plus 385 basis points.
10. PENSION AND OTHER POSTRETIREMENT PLANS
The following tables present the components of net periodic benefit cost
for pension benefits and other postretirement benefits for the three months
ended March 31:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
2004 2003 2004 2003
------------ ------------ ------------ ------------
Service cost ................................ $ 5,250 $ 4,147 $ 250 $ 201
Interest cost ............................... 7,050 6,792 1,050 1,088
Expected return on assets ................... (8,175) (8,202) -- --
Amortization of actuarial loss .............. 1,875 443 650 542
Amortization of prior service cost .......... 200 211 75 67
Amortization of transition obligation ....... -- -- 150 161
------------ ------------ ------------ ------------
Net periodic benefit cost ................... $ 6,200 $ 3,391 $ 2,175 $ 2,059
============ ============ ============ ============
9
The Company expects to contribute approximately $12 million to its defined
benefit pension plans and $7 million to its other postretirement benefits plans
in 2004. During the three months ended March 31, 2004, the Company contributed
$0.6 million to its defined benefit pension plans and $1.6 million to its other
postretirement benefits plans.
11. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the three months ended March 31, 2004, the dairy foods segment
recorded a restructuring charge of $0.4 million for employees' severance related
to the impending closure of a facility in Volga, South Dakota. For the three
months ended March 31, 2003, the dairy foods segment recorded a restructuring
charge of $1.0 million which represented severance costs for 44 employees as a
result of closing an Upper Midwest whey production facility. The balance
remaining to be paid at March 31, 2004 for employee and severance outplacement
costs was $3.2 million.
IMPAIRMENT CHARGES
For the three months ended March 31, 2004, the seed segment recorded a
goodwill impairment charge of $0.5 million. For the three months ended March 31,
2003, the Company recorded impairment charges of $0.1 million in the feed
segment for write downs of certain plant assets to their estimated fair value.
12. GAIN ON LEGAL SETTLEMENTS
During the three months ended March 31, 2004 and 2003, the Company
recognized a gain on legal settlements of $4.5 million and $8.9 million,
respectively. The gains represent cash received from product suppliers against
whom the Company alleged certain price-fixing claims.
13. OTHER (INCOME) EXPENSE, NET
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ -------------
Loss (gain) on sale of investments ........................................ $ 77 $ (500)
Gain on divestiture of business ........................................... (1,664) --
------------ ------------
Total other (income) expense, net ......................................... $ (1,587) $ (500)
============ ============
During the three months ended March 31, 2004, the Company recorded a $0.1
million loss on the sale of an investment in the swine segment. During the three
months ended March 31, 2003, the Company recorded a $0.5 million gain on sale of
an investment in a swine joint venture within the Feed segment.
During the three months ended March 31, 2004, the divestiture of QC, Inc.,
an environmental, dairy and food testing company, resulted in a gain of $1.7
million.
14. SEGMENT INFORMATION
The Company operates in six segments: Dairy Foods, Feed, Seed, Swine,
Agronomy and Layers.
The dairy foods segment produces, markets and sells products such as
butter, spreads, cheese, and other dairy related products. Products are sold
under well-recognized national brand names including LAND O LAKES, the Indian
Maiden logo and Alpine Lace, as well as under regional brand names such as New
Yorker.
The feed segment is largely made up of a 92% ownership position in Land
O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"). Land O'Lakes Farmland
Feed develops, produces, markets and distributes animal feeds such as ingredient
feed, formula feed, milk replacers, vitamins and additives.
The seed segment is a supplier and distributor of crop seed products in
the United States. A variety of crop seed is sold, including alfalfa, soybeans,
corn, forage and turf grasses.
The swine segment has three programs: farrow-to-finish, swine aligned and
cost-plus. The farrow-to-finish program produces and sells market hogs. The
swine aligned program raises feeder pigs which are sold to local member
cooperatives. The cost-plus program provides minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation.
10
The agronomy segment consists primarily of the Company's 50% ownership in
Agriliance LLC ("Agriliance"), which is accounted for under the equity method.
Agriliance markets and sells two primary product lines: crop protection
(including herbicides and pesticides) and crop nutrients (including fertilizers
and micronutrients).
The layers segment consists of the Company's MoArk joint venture, which
was consolidated as of July 1, 2003. MoArk produces and markets shell eggs and
egg products that are sold at retail and wholesale for consumer and industrial
use throughout the United States.
The Company allocates corporate administration expense to all of its
business segments, both directly and indirectly. Corporate staff functions that
are able to determine actual services provided to each segment allocate expense
on a direct and predetermined basis. All other corporate staff functions
allocate expense indirectly based on each segment's percent of total invested
capital. A majority of corporate administration expense is allocated directly.
DAIRY FOODS FEED SEED SWINE
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
Net sales ........................................... $ 899,088 $ 676,979 $ 243,367 $ 22,498
Cost of sales (1) ................................... 840,469 600,900 212,549 22,485
Selling, general and administrative ................. 43,223 62,375 14,343 1,569
Restructuring and impairment charges ................ 400 -- 500 --
Interest expense (income), net ...................... 7,094 7,367 2,060 1,691
Gain on legal settlements ........................... (91) (4,433) -- --
Other (income) expense, net ......................... (1,664) -- -- 77
Equity in (earnings) loss of affiliated companies ... (2,812) (552) -- (32)
Minority interest in earnings of subsidiaries ....... -- 1,400 -- --
----------- ----------- ----------- -----------
Earnings (loss) before income taxes ................. $ 12,469 $ 9,922 $ 13,915 $ (3,292)
=========== =========== =========== ===========
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
Net sales ........................................... $ 636,670 $ 602,466 $ 191,895 $ 21,165
Cost of sales (1) ................................... 608,832 529,929 166,834 22,236
Selling, general and administrative ................. 39,462 58,006 12,870 1,317
Restructuring and impairment charges ................ 1,000 92 -- --
Interest expense (income), net ...................... 6,322 7,752 1,569 1,318
Gain on legal settlements ........................... -- (8,889) -- --
Other (income) expense, net ......................... -- (500) -- --
Equity in loss (earnings) of affiliated companies ... 630 (556) -- 365
Minority interest in earnings of subsidiaries ....... -- 1,489 -- --
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ................. $ (19,576) $ 15,143 $ 10,622 $ (4,071)
=========== =========== =========== ===========
(1) Cost of sales includes unrealized hedging (gains) losses of:
For the three months ended March 31,
2004............................................... $ (8,465) $ (5,483) $ 2,853 $ (5)
For the three months ended March 31,
2003............................................... (428) (1,491) 207 (1,059)
OTHER/
AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
Net sales ........................................... $ -- $ 175,359 $ (6,004) $ 2,011,287
Cost of sales (1) ................................... -- 140,431 (6,004) 1,810,830
Selling, general and administrative ................. 3,791 9,497 102 134,900
Restructuring and impairment charges ................ -- -- -- 900
Interest expense (income), net ...................... 2,342 3,860 (713) 23,701
Gain on legal settlements ........................... -- -- -- (4,524)
Other (income) expense, net ......................... -- -- -- (1,587)
Equity in (earnings) loss of affiliated companies ... (6,217) (7,808) 7 (17,414)
Minority interest in earnings of subsidiaries ....... -- -- -- 1,400
----------- ----------- ----------- -----------
Earnings (loss) before income taxes ................. $ 84 $ 29,379 $ 604 $ 63,081
=========== =========== =========== ===========
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
Net sales ........................................... $ -- $ -- $ 2,256 $ 1,454,452
Cost of sales (1) ................................... -- -- 1,072 1,328,903
Selling, general and administrative ................. 3,326 488 1,972 117,441
Restructuring and impairment charges ................ -- -- -- 1,092
Interest expense (income), net ...................... 2,332 1,231 (611) 19,913
Gain on legal settlements ........................... -- -- -- (8,889)
Other (income) expense, net ......................... -- -- -- (500)
Equity in loss (earnings) of affiliated companies ... 3,147 (2,625) 22 983
Minority interest in earnings of subsidiaries ....... -- -- -- 1,489
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ................. $ (8,805) $ 906 $ (199) $ (5,980)
=========== =========== =========== ===========
(1) Cost of sales includes unrealized hedging (gains) losses of:
For the three months ended March 31,
2004......,,,,,.................................... $ -- $ (2,052) $ -- $ (13,152)
For the three months ended March 31,
2003............................................... -- -- -- (2,771)
15. CONSOLIDATING FINANCIAL INFORMATION
The Company has entered into financing arrangements which are guaranteed
by the Company and certain of its wholly-owned and majority-owned subsidiaries
(the "Guarantor Subsidiaries"). Such guarantees are full, unconditional and
joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for Land O'Lakes, Guarantor Subsidiaries and Land O'Lakes other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
11
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
MARCH 31, 2004
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ....... $ 9,071 $ 5,903 $ -- $ 6,556 $ -- $ 21,530
Restricted cash ....................... 20,167 -- -- -- -- 20,167
Receivables, net ...................... 494,069 67,890 189,782 121,508 (269,520) 603,729
Inventories ........................... 277,192 47,529 144,044 61,375 -- 530,140
Prepaid expenses ...................... 18,582 606 12,391 14,426 -- 46,005
Other current assets .................. 31,291 6,123 -- 688 -- 38,102
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ................ 850,372 128,051 346,217 204,553 (269,520) 1,259,673
Investments ............................. 1,343,938 354 18,943 12,596 (861,747) 514,084
Property, plant and equipment, net ...... 237,508 16,995 219,358 146,125 -- 619,986
Property under capital lease, net ....... -- -- 31 107,433 -- 107,464
Goodwill ................................ 184,786 -- 121,832 64,245 -- 370,863
Other intangibles ....................... 3,596 366 94,644 3,424 -- 102,030
Other assets ............................ 54,547 9,253 25,786 54,427 (19,366) 124,647
----------- ----------- ----------- ----------- ----------- -----------
Total assets ........................ $ 2,674,747 $ 155,019 $ 826,811 $ 592,803 $(1,150,633) $ 3,098,747
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ...... $ 116,783 $ 2,954 $ 183 $ 93,636 $ (158,027) $ 55,529
Current portion of long-term debt ..... 1,512 51,643 -- 7,697 (51,474) 9,378
Current portion of obligations under
capital lease ....................... -- -- -- 10,066 -- 10,066
Accounts payable ...................... 399,566 64,968 108,049 50,944 (55,241) 568,286
Accrued expenses ...................... 161,601 30,815 26,259 18,710 (15,144) 222,241
Patronage refunds and other member
equities payable .................... 15,480 -- -- -- -- 15,480
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities............. 694,942 150,380 134,491 181,053 (279,886) 880,980
Long-term debt .......................... 859,441 9,708 -- 82,758 (9,000) 942,907
Obligations under capital lease ......... -- -- 12 98,254 -- 98,266
Employee benefits and other liabilities . 133,875 -- 29,410 18,283 -- 181,568
Minority interests ...................... 55,558 -- 2,652 5,885 -- 64,095
Equities:
Capital stock ......................... 2,114 1,215 502,444 104,307 (607,966) 2,114
Member equities ....................... 890,891 -- -- -- -- 890,891
Accumulated other comprehensive loss .. (65,617) -- (1,692) -- 1,692 (65,617)
Retained earnings ..................... 103,543 (6,284) 159,494 102,263 (255,473) 103,543
----------- ----------- ----------- ----------- ----------- -----------
Total equities ...................... 930,931 (5,069) 660,246 206,570 (861,747) 930,931
----------- ----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Total liabilities and equities .......... $ 2,674,747 $ 155,019 $ 826,811 $ 592,803 $(1,150,633) $ 3,098,747
=========== =========== =========== =========== =========== ===========
12
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ............................... $ 1,041,596 $ 78,792 $ 646,734 $ 244,165 $ -- $ 2,011,287
Cost of sales ........................... 958,163 68,772 573,536 210,359 -- 1,810,830
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ............................ 83,433 10,020 73,198 33,806 -- 200,457
Selling, general and administrative ..... 59,926 3,784 60,073 11,117 -- 134,900
Restructuring and impairment charges .... 900 -- -- -- -- 900
----------- ----------- ----------- ----------- ----------- -----------
Earnings from operations ................ 22,607 6,236 13,125 22,689 -- 64,657
Interest expense (income), net .......... 21,474 776 (688) 2,139 -- 23,701
Gain on legal settlements ............... (4,235) -- (289) -- -- (4,524)
Other (income) expense, net ............. (1,587) -- -- -- -- (1,587)
Equity in (earnings) loss of
affiliated companies .................. (53,119) -- (542) (7,808) 44,055 (17,414)
Minority interest in earnings of
subsidiaries .......................... 1,222 -- -- 178 -- 1,400
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes ..... 58,852 5,460 14,644 28,180 (44,055) 63,081
Income tax expense ...................... 12,323 58 -- 4,171 -- 16,552
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ..................... $ 46,529 $ 5,402 $ 14,644 $ 24,009 $ (44,055) $ 46,529
=========== =========== =========== =========== =========== ===========
13
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................... $ 46,529 $ 5,402 $ 14,644 $ 24,009 $ (44,055) $ 46,529
Adjustments to reconcile net earnings
(loss) to net cash (used) provided by
operating activities:
Depreciation and amortization ........ 12,471 512 8,915 5,662 -- 27,560
Amortization of deferred financing
costs .............................. 2,425 -- -- 136 -- 2,561
Bad debt expense ..................... 343 -- 36 -- -- 379
Proceeds from patronage revolvement
received ........................... 1,334 -- -- -- -- 1,334
Non-cash patronage income ............ (347) -- (65) -- -- (412)
Deferred income tax expense .......... (865) -- -- -- -- (865)
(Increase) decrease in other assets .. (2,040) 1,110 1,455 1,657 87 2,269
(Decrease) increase in other
liabilities ........................ (581) (1,256) 607 228 632 (370)
Restructuring and impairment charges.. 900 -- -- -- -- 900
Gain on divestiture of business ...... (1,664) -- -- -- -- (1,664)
Equity in (earnings) loss of
affiliated companies ............... (53,119) -- (542) (7,808) 44,055 (17,414)
Minority interests ................... 1,222 -- -- 178 -- 1,400
Other ................................ (75) -- (207) -- -- (282)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables .......................... (73,538) (8,762) 5,917 (29) 110,266 33,854
Inventories .......................... (11,140) (1,548) (12,017) (8,481) -- (33,186)
Other current assets ................. 206,281 (1,358) (1,416) (4,544) -- 198,963
Accounts payable ..................... (171,728) 5,347 (2,189) 12,238 (37,213) (193,545)
Accrued expenses ..................... 30,579 7,075 (12,565) 503 (15,144) 10,448
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by operating
activities ........................... (13,013) 6,522 2,573 23,749 58,628 78,459
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment ............................ (4,479) (5) (2,508) (13,582) -- (20,574)
Payments for investments ............... (8,648) -- -- -- 8,500 (148)
Net proceeds from divestiture of
business ............................. 7,500 -- -- -- -- 7,500
Proceeds from sale of investments ...... 1,983 -- -- -- -- 1,983
Proceeds from sale of property, plant
and equipment ........................ 2,601 -- 102 -- -- 2,703
Dividends from investments in
affiliated companies ................. 8,571 -- 100 -- -- 8,671
Increase in restricted cash ............ (49) -- -- -- -- (49)
Other .................................. 810 -- (285) -- -- 525
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
investing activities ................. 8,289 (5) (2,591) (13,582) 8,500 611
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term
debt ................................. 54,029 27 18 (20,572) (58,628) (25,126)
Proceeds from issuance of long-term
debt ................................. 12,934 -- -- 4,671 -- 17,605
Principal payments on long-term debt ... (132,798) (4,848) -- -- -- (137,646)
Principal payments on obligations
under capital lease .................. -- -- -- (2,524) -- (2,524)
Payments for redemption of member
equities ............................. (16,308) -- -- -- -- (16,308)
Payments for debt issuance costs ....... (3,953) -- -- -- -- (3,953)
Other .................................. 138 -- -- 8,500 (8,500) 138
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities ........................... (85,958) (4,821) 18 (9,925) (67,128) (167,814)
----------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash ........ (90,682) 1,696 -- 242 -- (88,744)
Cash and short-term investments at
beginning of period .................... 99,753 4,207 -- 6,314 -- 110,274
----------- ----------- ----------- ----------- ----------- -----------
Cash and short-term investments at end
of period .............................. $ 9,071 $ 5,903 $ -- $ 6,556 $ -- $ 21,530
=========== =========== =========== =========== =========== ===========
14
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments ....... $ 99,753 $ 4,207 $ -- $ 6,314 $ -- $ 110,274
Restricted cash ....................... 20,118 -- -- -- -- 20,118
Receivables, net ...................... 403,237 82,097 194,002 120,064 (159,254) 640,146
Inventories ........................... 265,874 45,981 132,027 52,894 -- 496,776
Prepaid expenses ...................... 227,495 3,053 10,975 4,850 -- 246,373
Other current assets .................. 33,968 2,318 -- 5,720 -- 42,006
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ............. 1,050,445 137,656 337,004 189,842 (159,254) 1,555,693
Investments ............................. 1,311,131 223 18,587 11,227 (834,527) 506,641
Property, plant and equipment, net ...... 246,803 13,357 228,100 136,371 -- 624,631
Property under capital lease, net ....... -- -- 31 109,114 -- 109,145
Goodwill ................................ 183,665 3,224 121,993 64,201 -- 373,083
Other intangibles ....................... 1,140 3,041 95,241 3,516 -- 102,938
Other assets ............................ 58,321 4,464 26,483 56,036 (19,279) 126,025
----------- ----------- ----------- ----------- ----------- -----------
Total assets ..................... $ 2,851,505 $ 161,965 $ 827,439 $ 570,307 $(1,013,060) $ 3,398,156
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ...... $ 62,802 $ 2,927 $ 165 $ 114,208 $ (99,399) $ 80,703
Current portion of long-term debt ..... 1,786 56,430 -- 6,055 (56,430) 7,841
Current portion of obligations under
capital lease ....................... -- -- -- 10,399 -- 10,399
Accounts payable ...................... 566,170 59,621 110,238 38,706 (13,072) 761,663
Accrued expenses ...................... 135,815 23,740 38,824 18,207 -- 216,586
Patronage refunds and other member
equities payable .................... 19,449 -- -- -- -- 19,449
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities......... 786,022 142,718 149,227 187,575 (168,901) 1,096,641
Long-term debt .......................... 984,884 9,769 -- 79,729 (9,000) 1,065,382
Obligations under capital lease.......... -- -- 14 99,636 -- 99,650
Employee benefits and other liabilities . 129,606 1,256 28,803 18,055 (632) 177,088
Minority interests ...................... 54,337 -- 2,561 5,841 -- 62,739
Equities:
Capital stock ......................... 2,125 1,216 502,506 95,745 (599,467) 2,125
Member equities ....................... 882,547 -- -- -- -- 882,547
Accumulated other comprehensive loss .. (65,617) -- -- -- -- (65,617)
Retained earnings ..................... 77,601 7,006 144,328 83,726 (235,060) 77,601
----------- ----------- ----------- ----------- ----------- -----------
Total equities ................... 896,656 8,222 646,834 179,471 (834,527) 896,656
----------- ----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Total liabilities and equities .......... $ 2,851,505 $ 161,965 $ 827,439 $ 570,307 $(1,013,060) $ 3,398,156
=========== =========== =========== =========== =========== ===========
15
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ............................... $ 777,400 $ 54,938 $ 589,485 $ 32,629 $ -- $ 1,454,452
Cost of sales ........................... 725,571 50,842 518,674 33,816 -- 1,328,903
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ............................ 51,829 4,096 70,811 (1,187) -- 125,549
Selling, general and administrative ..... 51,919 3,161 57,745 4,616 -- 117,441
Restructuring and impairment charges .... 1,000 -- 92 -- -- 1,092
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations ......... (1,090) 935 12,974 (5,803) -- 7,016
Interest expense (income), net .......... 20,699 667 (1,127) (326) -- 19,913
Gain on legal settlements ............... (8,021) -- (868) -- -- (8,889)
Gain on sale of investment .............. -- -- (500) -- -- (500)
Equity in (earnings) loss of affiliated
companies ............................. (10,948) -- (547) -- 12,478 983
Minority interest in earnings (loss)
of subsidiaries ....................... 1,309 -- (4) 184 -- 1,489
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings before income taxes ..... (4,129) 268 16,020 (5,661) (12,478) (5,980)
Income tax (benefit) expense ............ (3,758) 282 162 (2,295) -- (5,609)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) earnings ..................... $ (371) $ (14) $ 15,858 $ (3,366) $ (12,478) $ (371)
=========== =========== =========== =========== =========== ===========
16
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) earnings ................... $ (371) $ (14) $ 15,858 $ (3,366) $ (12,478) $ (371)
Adjustments to reconcile net (loss)
earnings to net cash provided (used)
by operating activities:
Depreciation and amortization ....... 15,670 574 9,870 528 -- 26,642
Amortization of deferred financing
charges ........................... 913 -- -- -- -- 913
Bad debt expense .................... 191 -- 500 -- -- 691
Proceeds from patronage revolvement
received .......................... 10 -- -- -- -- 10
Non-cash patronage income ........... (209) -- -- -- -- (209)
Receivable from legal settlement .... 90,707 -- 6,000 -- -- 96,707
(Increase) decrease in other assets . (8,037) 7,356 (564) (2,024) 4,978 1,709
Increase (decrease) in other
liabilities ....................... 3,516 (165) (1,072) (183) -- 2,096
Restructuring and impairment
charges ........................... 1,000 -- 92 -- -- 1,092
Equity in loss (earnings) of
affiliated companies .............. (10,948) -- (547) -- 12,478 983
Minority interest ................... 1,309 -- (4) 184 -- 1,489
Other ............................... (741) -- (425) (63) -- (1,229)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables ......................... (38,951) 2,791 64,730 (2,685) 36,668 62,553
Inventories ......................... (57,164) 18,600 (8,896) (317) -- (47,777)
Other current assets ................ 91,165 3,102 (1,942) (21) -- 92,304
Accounts payable .................... (13,459) (34,279) (22,585) (5,954) (115,924) (192,201)
Accrued expenses .................... (1,199) (12) (9,663) (888) 5,225 (6,537)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating
activities .......................... 73,402 (2,047) 51,352 (14,789) (69,053) 38,865
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment ........................... (12,509) (122) (3,370) (119) -- (16,120)
Payments for investments .............. (13,797) -- -- (348) 5,345 (8,800)
Proceeds from sale of investments ..... -- -- 3,000 -- -- 3,000
Proceeds from sale of property, plant
and equipment ....................... 1,562 -- -- -- -- 1,562
Dividends from investments in
affiliated companies ................ 1,737 -- -- -- -- 1,737
Other ................................. 41 -- 2,540 -- -- 2,581
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by investing
activities .......................... (22,966) (122) 2,170 (467) 5,345 (16,040)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in short-term
debt ................................ (7,460) 3,494 (604) 13,452 15,886 24,768
Proceeds from issuance of long-term
debt ................................ 424 -- -- 1 -- 425
Payments on principal of long-term
debt ................................ (61,916) (18) (52,593) (632) 53,225 (61,934)
Payments on principal of capital lease
obligation .......................... -- -- -- (2,217) -- (2,217)
Payments for redemption of member
equities ............................ (15,331) -- -- -- -- (15,331)
Other ................................. 51 (28) 765 5,964 (5,403) 1,349
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities .......................... (84,232) 3,448 (52,432) 16,568 63,708 (52,940)
----------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash ....... (33,796) 1,279 1,090 1,312 -- (30,115)
Cash and short-term investments at
beginning of period ................... 58,334 2,584 (1,461) 4,870 -- 64,327
----------- ----------- ----------- ----------- ----------- -----------
Cash and short-term investments at end
of period ............................. $ 24,538 $ 3,863 $ (371) $ 6,182 $ -- $ 34,212
=========== =========== =========== =========== =========== ===========
17
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ......................................... $ -- $ --
Receivables, net ........................................................ 85,530 142,207
Inventories ............................................................. 151,451 138,982
Prepaid expenses and other current assets ............................... 16,886 11,234
Note receivable - Land O'Lakes, Inc. .................................... 116,209 61,961
------------ ------------
Total current assets ............................................ 370,076 354,384
Investments ............................................................... 20,246 19,889
Property, plant and equipment, net ........................................ 226,611 232,232
Goodwill .................................................................. 122,092 122,209
Other intangibles ......................................................... 94,795 95,446
Other assets .............................................................. 25,876 29,149
------------ ------------
Total assets .................................................... $ 859,696 $ 853,309
============ ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ........................................ $ 183 $ 165
Accounts payable ........................................................ 119,339 113,981
Accrued expenses ........................................................ 27,483 41,086
------------ ------------
Total current liabilities ....................................... 147,005 155,232
Employee benefits and other liabilities ................................... 29,980 30,775
Minority interests ........................................................ 6,194 6,059
Equities:
Contributed capital ..................................................... 515,376 515,376
Accumulated other comprehensive loss .................................... (1,692) (1,692)
Retained earnings ....................................................... 162,833 147,559
------------ ------------
Total equities .................................................. 676,517 661,243
------------ ------------
Commitments and contingencies
Total liabilities and equities ............................................ $ 859,696 $ 853,309
============ ============
See accompanying notes to consolidated financial statements.
18
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales ................................................................. $ 675,910 $ 601,100
Cost of sales ............................................................. 600,388 528,846
------------ ------------
Gross profit .............................................................. 75,522 72,254
Selling, general and administrative ....................................... 61,573 56,683
Restructuring and impairment charges ...................................... -- 92
------------ ------------
Earnings from operations .................................................. 13,949 15,479
Interest (income) expense, net ............................................ (661) 854
Gain on legal settlements ................................................. (289) (868)
Gain on sale of investment ................................................ -- (500)
Equity in earnings of affiliated companies ................................ (542) (547)
Minority interest in earnings of subsidiaries ............................. 178 180
------------ ------------
Earnings before income taxes .............................................. 15,263 16,360
Income tax expense ........................................................ 134 162
------------ ------------
Net earnings .............................................................. $ 15,129 $ 16,198
============ ============
See accompanying notes to consolidated financial statements.
19
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................ $ 15,129 $ 16,198
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ........................................ 9,058 10,011
Bad debt expense ..................................................... 36 500
Non-cash patronage income ............................................ (65) --
Receivable from legal settlement ..................................... -- 6,000
Decrease (increase) in other assets .................................. 888 (83)
Decrease in other liabilities ........................................ (560) (1,255)
Restructuring and impairment charges ................................. -- 92
Equity in earnings of affiliated companies ........................... (542) (547)
Minority interest in earnings of subsidiaries ........................ 178 180
Gain on sale of investment ........................................... -- (500)
Other ................................................................ (207) --
Changes in current assets and liabilities, net of acquisitions and
divestitures:
Receivables .......................................................... 56,641 64,953
Inventories .......................................................... (12,469) (8,689)
Other current assets ................................................. (2,960) (1,962)
Accounts payable ..................................................... 5,358 (22,863)
Accrued expenses ..................................................... (13,646) (10,869)
------------ ------------
Net cash provided by operating activities ............................... 56,839 51,166
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .............................. (2,526) (3,426)
Proceeds from sale of investments ....................................... -- 3,000
Proceeds from sale of property, plant and equipment ..................... 102 --
Dividends from affiliated companies ..................................... 100 --
Other ................................................................... (285) 2,540
------------ ------------
Net cash (used) provided by investing activities ........................ (2,609) 2,114
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt .................................. 18 (411)
Proceeds on note receivable to Land O'Lakes, Inc......................... 144,352 118,075
Payments on borrowings from Land O'Lakes, Inc............................ (198,600) (171,300)
------------ ------------
Net cash used by financing activities ................................... (54,230) (53,636)
------------ ------------
Net decrease in cash and short-term investments ......................... -- (356)
Cash and short-term investments at beginning of period .................... -- 356
------------ ------------
Cash and short-term investments at end of period .......................... $ -- $ --
============ ============
See accompanying notes to consolidated financial statements.
20
LAND O'LAKES FARMLAND FEED LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"),
all normal recurring adjustments necessary for a fair statement of the financial
position and results of operations and cash flows for the interim periods. The
statements are condensed and therefore do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to Land O'Lakes Farmland Feed's audited consolidated financial statements
and footnotes for the year ended December 31, 2003 included in Land O'Lakes,
Inc. Annual Report on Form 10-K. The results of operations and cash flows for
interim periods are not necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for Land O'Lakes Farmland Feed as of December 31, 2003. Land O'Lakes
Farmland Feed adopted this Statement for the year ended December 31, 2003, and
has provided the interim disclosures in Note 7, Pension and Other Postretirement
Plans.
2. RECEIVABLES
A summary of receivables is as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------- ------------
Trade accounts............................. $ 33,624 $ 35,983
Notes and contracts........................ 5,430 14,422
Notes from sale of trade receivables (see
Note 3).................................. 55,106 95,957
Other...................................... 1,010 6,052
------------- -----------
95,170 152,414
Less allowance for doubtful accounts....... 9,640 10,207
------------- -----------
Total receivables, net..................... $ 85,530 $ 142,207
============= ===========
3. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes Farmland along with Land O'Lakes, Inc.,
established a $100 million receivables purchase facility with CoBank, ACB
("CoBank"). In March 2004, the facility was expanded to $200 million. A
wholly-owned, unconsolidated special purpose entity ("SPE") was established to
purchase certain receivables from Land O'Lakes Farmland Feed and Land O'Lakes,
Inc. CoBank has been granted an interest in the pool of receivables owned by the
SPE. The transfers of the receivables from Land O'Lakes Farmland Feed to the SPE
are structured as sales and, accordingly, the receivables transferred to the SPE
are not reflected in the consolidated balance sheet. However, Land O'Lakes
Farmland Feed retains credit risk related to the repayment of the notes
receivable with the SPE, which, in turn, is dependent upon the credit risk of
the SPE's receivables pool. Accordingly, Land O'Lakes Farmland Feed has retained
reserves for estimated losses. Land O'Lakes Farmland Feed expects no significant
gains or losses from the facility. At March 31, 2004, $120 million was
outstanding under this facility. The total amount of accounts receivable sold
during the three months ended March 31, 2004 and 2003 were $607 million and $552
million, respectively.
21
4. INVENTORIES
A summary of inventories is as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Raw materials..................... $ 93,761 $ 91,890
Finished goods.................... 57,690 47,092
----------- -----------
Total inventories................. $ 151,451 $ 138,982
=========== ===========
5. INVESTMENTS
Land O'Lakes Farmland Feed's investments are as follows:
MARCH 31, DECEMBER 31,
2004 2003
------------- ------------
New Feeds, LLC........................ $ 3,204 $ 3,145
Agland-Land O'Lakes Feed, LLC......... 2,432 2,432
Pro-Pet, LLC.......................... 2,304 2,219
Northern Country Feeds, LLC........... 1,803 1,780
CalvaAlto Liquid, LLC................. 1,302 1,302
Strauss Feeds, LLC.................... 1,164 1,063
Dakotaland Feeds, LLC................. 982 896
Nutrikowi Farmland, S.A. de C.V....... 876 876
Other................................. 6,179 6,176
----------- -----------
Total investments..................... $ 20,246 $ 19,889
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The change in the carrying amount of goodwill for the three months ended March
31, 2004, is as follows.
Balance as of December 31, 2003....................... $ 122,209
Amortization expense................................ 117
-----------
Balance as of March 31, 2004.......................... $ 122,092
===========
OTHER INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
Amortized other intangible assets
Patents, less accumulated amortization of $2,600 and $2,311, respectively....................... $ 13,823 $ 14,111
Trademarks, less accumulated amortization of $358 and $350, respectively........................ 513 532
Other intangible assets, less accumulated amortization of $7,579 and $7,225, respectively....... 3,834 4,178
----------- ------------
Total amortized other intangible assets........................................................... 18,170 18,821
Total non-amortized other intangible assets-trademarks............................................ 76,625 76,625
----------- ------------
Total other intangible assets..................................................................... $ 94,795 $ 95,446
=========== ============
Amortization expense for the three months ended March 31, 2004 and 2003 was
$0.7 million and $0.6 million, respectively. The estimated amortization expense
related to other intangible assets subject to amortization for the next five
years will approximate $2.2 million annually. The weighted-average life of the
intangible assets subject to amortization is approximately 13 years.
7. PENSION AND OTHER POSTRETIREMENT PLANS
Land O'Lakes Farmland Feed participates in Land O'Lakes, Inc.'s defined
benefit pension plan, which covers substantially all employees, and participates
in Land O'Lakes, Inc.'s plans that provide certain health care benefits for
retired employees. Costs relating to the plans are allocated to Land O'Lakes
Farmland Feed by Land O'Lakes, Inc. Land O'Lakes Farmland Feed's allocated
expenses relating to these plans were $3.7 million and $1.8 million for the
three months ended March 31, 2004 and 2003, respectively.
22
Land O'Lakes Farmland Feed has a discretionary capital accumulation plan
("CAP") for certain of its employees, which is a non-qualified, unfunded,
defined benefit pension plan. The net periodic benefit cost for the three months
ended March 31 for the CAP plan are as follows:
2004 2003
-------- --------
Interest cost....................... $ 425 $ 446
Amortization of actuarial loss...... 25 --
-------- --------
Net periodic benefit cost........... $ 450 $ 446
======== ========
Land O'Lakes Farmland Feed expects to contribute approximately $1.5 million
for benefit payments made by the CAP plan in 2004. During the three months ended
March 31, 2004, Land O'Lakes Farmland Feed contributed $0.4 million for benefit
payments made by the CAP plan.
8. RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended March 31, 2004, Land O'Lakes Farmland Feed did
not record any restructuring and impairment charges. The balance remaining to be
paid at March 31, 2004 for employee severance and outplacement costs was $0.6
million.
For the three months ended March 31, 2003, Land O'Lakes Farmland Feed
recorded impairment charges of $0.1 million from write-downs of certain plant
assets to their estimated fair value.
9. GAIN ON LEGAL SETTLEMENTS
During the three months ended March 31, 2004 and 2003, Land O'Lakes Farmland
Feed recognized gains on legal settlements of $0.3 million and $0.9 million,
respectively. The amounts were received from vitamin product suppliers against
whom Land O'Lakes Farmland Feed alleged certain price-fixing claims.
10. GAIN ON SALE OF INVESTMENT
For the three months ended March 31, 2003, Land O'Lakes Farmland Feed
recorded a gain of $0.5 million on the sale of an investment in a swine joint
venture.
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES OF PARENT DEBT
In December 2003, Land O'Lakes, Inc., which owns 92% of Land O'Lakes
Farmland Feed, issued $175 million of senior secured notes, due 2010. In
November 2001, Land O'Lakes, Inc. issued $350 million of senior unsecured notes,
due 2011. Both of these notes are guaranteed by certain domestic wholly-owned
subsidiaries of Land O'Lakes, Inc., including Land O'Lakes Farmland Feed, and by
each domestic wholly-owned subsidiary of Land O'Lakes Farmland Feed.
The guarantee of the senior secured notes is secured by substantially the
same assets securing Land O'Lakes, Inc. senior credit facilities. The guarantee
of the senior unsecured notes is a general unsecured obligation, ranks equally
in right of payment with all existing and future senior indebtedness of Land
O'Lakes Farmland Feed, is senior in right of payment to all existing and future
subordinated obligations of Land O'Lakes Farmland Feed, and is effectively
subordinated to any secured indebtedness of Land O'Lakes Farmland Feed and its
subsidiaries to the extent of the value of the assets securing such
indebtedness. The maximum potential amount of future payments that Land O'Lakes
Farmland Feed would be required to make is $525 million as of March 31, 2004.
Currently, Land O'Lakes Farmland Feed does not record a liability regarding the
guarantees. Land O'Lakes Farmland Feed has no recourse provision that would
enable it to recover amounts paid under the guarantees from Land O'Lakes, Inc.
or any other parties.
The notes are not guaranteed by certain majority-owned subsidiaries of Land
O'Lakes Farmland Feed (the "Non-Guarantors"). Summarized financial information
of the Non-Guarantors, which is consolidated in the financial statements of Land
O'Lakes Farmland Feed, as of and for the periods indicated, are as follows:
23
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Total assets..... $ 32,886 $ 25,870
Net sales........ 29,176 112,769
Net earnings..... 485 2,110
In November 2001, Land O'Lakes, Inc. entered into term facilities consisting
of a five-year Term Loan A facility and a seven-year Term Loan B facility.
During the three months ended March 31, 2004 Land O'Lakes, Inc. made prepayments
on the facilities. The Term Loan A facility was completely paid off with these
prepayments. The remaining facility is unconditionally guaranteed by certain
domestic wholly-owned subsidiaries of Land O'Lakes, Inc., including Land O'Lakes
Farmland Feed, and by each domestic wholly-owned subsidiary of Land O'Lakes
Farmland Feed. The maximum potential payment related to this guarantee is $118.4
million as of March 31, 2004. Land O'Lakes Farmland Feed does not currently
record a liability related to the guarantee of the term loan, and Land O'Lakes
Farmland Feed has no recourse provisions that would enable it to recover from
Land O'Lakes, Inc. or any other parties.
GUARANTEES OF PRODUCER LOANS
Land O'Lakes Farmland Feed guarantees certain loans to large producers
financed by LOL Finance Co. The loans totaled $14.6 million and $15.1 million at
March 31, 2004 and December 31, 2003, respectively. Reserves for these
guarantees of $1.1 million and $1.2 million at March 31, 2004 and December 31,
2003, respectively, are included in the allowance for doubtful accounts. The
maximum amount guaranteed by Land O'Lakes Farmland Feed is $7.0 million with the
remaining balance guaranteed by Land O'Lakes, Inc. There were no write-offs
related to producer loans for the three months ended March 31, 2004 or the year
ended December 31, 2003. Land O'Lakes Farmland Feed does not currently record a
liability related to the guarantee of the producer loans. Land O'Lakes Farmland
Feed would have recourse against the producer to partially off-set the
liability.
Land O'Lakes Farmland Feed also guarantees certain loans to producers and
dealers financed by third party lenders. The loans totaled $2.2 million at March
31, 2004 and December 31, 2003. Reserves for these guarantees were $0.7 million
at March 31, 2004 and December 31, 2003 and are included in the consolidated
balance sheet. There were insignificant write-offs related to these loans in the
three months ended March 31, 2004 and the year end December 31, 2003. The
maximum potential payment related to these guarantees is $0.8 million. Land
O'Lakes Farmland Feed has no recourse against the producer or dealer to
partially offset the potential liability.
12. CONSOLIDATING FINANCIAL INFORMATION
Land O'Lakes, Inc. has issued $525 million in senior notes which are
guaranteed by certain domestic wholly-owned and majority-owned subsidiaries of
Land O'Lakes, including Land O'Lakes Farmland Feed and Land O'Lakes Farmland
Feed's domestic wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several. Land O'Lakes Farmland
Feed's majority-owned subsidiaries are excluded from the guarantee
("Non-Guarantor Subsidiaries").
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for Land O'Lakes Farmland Feed, Guarantor Subsidiaries and Land
O'Lakes Farmland Feed's Non-Guarantor Subsidiaries. The supplemental financi