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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 June 30, 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 July 31, 2004: 1,073 shares of Class A common stock, 4,529 shares of
Class B common stock, 188 shares of Class C common stock, and 1,278 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.
1
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION.......................................................................... 3
Item I. Financial Statements............................................................................ 3
LAND O'LAKES, INC.
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003........................ 3
Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003
(unaudited)............................................................................................ 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)........ 5
Notes to Consolidated Financial Statements (unaudited)................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 44
Item 4. Controls and Procedures......................................................................... 44
PART II. OTHER INFORMATION.............................................................................. 45
Item 1. Legal Proceedings............................................................................... 45
Item 6. Exhibits and Reports on Form 8-K................................................................ 46
SIGNATURES............................................................................................... 47
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments ............................... $ 69,802 $ 110,274
Restricted cash ............................................... 20,213 20,118
Receivables, net .............................................. 401,655 623,587
Inventories ................................................... 560,657 496,826
Prepaid expenses .............................................. 42,660 246,373
Other current assets .......................................... 40,390 42,006
------------ ------------
Total current assets ...................................... 1,135,377 1,539,184
Investments ..................................................... 557,250 506,641
Property, plant and equipment, net .............................. 613,813 624,631
Property under capital lease, net ............................... 104,975 109,145
Goodwill ........................................................ 332,068 373,083
Other intangibles ............................................... 101,134 102,938
Other assets .................................................... 127,452 133,438
------------ ------------
Total assets .............................................. $ 2,972,069 $ 3,389,060
============ ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations .............................. $ 51,642 $ 80,703
Current portion of long-term debt ............................. 8,986 7,841
Current portion of obligations under capital lease ............ 10,318 10,399
Accounts payable .............................................. 523,184 761,694
Accrued expenses .............................................. 223,928 226,476
Patronage refunds and other member equities payable ........... 13,350 19,449
------------ ------------
Total current liabilities ................................. 831,408 1,106,562
Long-term debt .................................................. 934,188 1,065,382
Obligations under capital lease ................................. 95,709 99,650
Employee benefits and other liabilities ......................... 187,072 175,363
Minority interests .............................................. 8,941 62,739
Equities:
Capital stock ................................................. 2,095 2,125
Member equities ............................................... 875,360 866,586
Accumulated other comprehensive loss .......................... (65,617) (65,617)
Retained earnings ............................................. 102,913 76,270
------------ ------------
Total equities ............................................ 914,751 879,364
------------ ------------
Commitments and contingencies
Total liabilities and equities .................................. $ 2,972,069 $ 3,389,060
============ ============
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
($ IN THOUSANDS)
Net sales.................................... $ 2,008,575 $ 1,400,594 $ 4,027,908 $ 2,851,612
Cost of sales................................ 1,898,897 1,275,258 3,719,410 2,600,741
------------ ------------ ------------ ------------
Gross profit................................. 109,678 125,336 308,498 250,871
Selling, general and administration.......... 124,988 107,955 259,888 225,395
Restructuring and impairment charges......... 1,590 1,775 2,490 2,867
------------ ------------ ------------ ------------
(Loss) earnings from operations.............. (16,900) 15,606 46,120 22,609
Interest expense, net........................ 20,336 19,202 44,037 39,116
Gain on legal settlements.................... (23) (10,288) (4,547) (19,177)
Other expense (income), net.................. 66 (196) (1,521) (696)
Equity in earnings of affiliated companies .. (49,112) (51,414) (66,526) (50,431)
Minority interest in (loss) earnings of
subsidiaries............................... (280) 1,427 1,120 2,916
------------ ------------ ------------ ------------
Earnings before income taxes................. 12,113 56,875 73,557 50,881
Income tax (benefit) expense................. (4,630) 11,943 11,688 6,329
------------ ------------ ------------ ------------
Net earnings................................. $ 16,743 $ 44,932 $ 61,869 $ 44,552
============ ============ ============ ============
Applied to:
Member equities
Allocated patronage refunds............. $ 24,241 $ 26,070 $ 44,499 $ 35,864
Deferred equities....................... (7,242) (379) (7,978) (14,282)
------------ ------------ ------------ ------------
16,999 25,691 36,521 21,582
Retained earnings.......................... (256) 19,241 25,348 22,970
------------ ------------ ------------ ------------
$ 16,743 $ 44,932 $ 61,869 $ 44,552
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
2004 2003
------------ ------------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................. $ 61,869 $ 44,552
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ......................... 54,610 54,004
Amortization of deferred financing charges ............ 3,570 1,846
Bad debt expense ...................................... 638 1,760
Proceeds from patronage revolvement received .......... 2,043 1,316
Non-cash patronage income ............................. (1,023) (1,222)
Receivable from legal settlement ...................... -- 96,707
Deferred income tax benefit ........................... 3,772 4,346
(Increase) decrease in other assets ................... (3,881) 8,302
Decrease in other liabilities ......................... (797) (130)
Restructuring and impairment charges .................. 2,490 2,867
(Gain) loss on divestiture of businesses .............. (1,664) 700
Equity in earnings of affiliated companies ............ (66,526) (50,431)
Minority interests .................................... 1,120 2,916
Other ................................................. (1,213) (8,537)
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables ........................................... 216,178 167,126
Inventories ........................................... (63,491) (37,355)
Other current assets .................................. 202,427 150,299
Accounts payable ...................................... (239,177) (299,903)
Accrued expenses ...................................... 5,800 14,191
------------ ------------
Net cash provided by operating activities ................ 176,745 153,354
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............... (41,412) (34,954)
Acquisition of minority interest ......................... (12,150) --
Payments for investments ................................. (170) (9,675)
Proceeds from divestiture of businesses .................. 7,500 465
Proceeds from sale of investments ........................ 2,199 3,000
Proceeds from sale of property, plant and equipment ...... 7,596 8,015
Dividends from investments in affiliated companies ....... 14,452 2,798
Increase in restricted cash .............................. (95) (20,000)
Other .................................................... 392 2,980
------------ ------------
Net cash used by investing activities .................... (21,668) (47,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt ................... (28,977) 14,309
Proceeds from issuance of long-term debt ................. 17,712 1,202
Principal payments on long-term debt ..................... (142,481) (73,052)
Principal payments on obligations under capital lease .... (5,241) (4,435)
Payments for redemption of member equities ............... (32,616) (23,662)
Payments for debt issuance costs ......................... (4,166) --
Other .................................................... 240 808
------------ ------------
Net cash used by financing activities .................... (195,529) (84,830)
------------ ------------
Net (decrease) increase in cash and short-term
investments ............................................ (40,472) 21,153
Cash and short-term investments at beginning of period ..... 110,274 64,327
------------ ------------
Cash and short-term investments at end of period ........... $ 69,802 $ 85,480
============ ============
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during periods for:
Interest............................................. $ 40,024 $ 35,585
Income taxes paid (recovered)........................ $ 6,631 $ (3,743)
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/A. 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 13, Pension and Other Postretirement Plans.
In May 2004, the FASB issued FASB Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (the "Position"). The Position applies to
sponsors of single-employer defined benefit postretirement health care plans
that are impacted by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). In general, the Act introduces a federal
subsidy to sponsors that conclude that prescription drug benefits available
under such plans are actuarially equivalent to the prescription drug benefit now
provided under Medicare pursuant to the Act. The Position is effective for the
Company as of July 1, 2004, and the Company expects that the Act will result in
a modest reduction in postretirement health care costs. The effects of the Act
have not yet been included in the Company's measurement of its accumulated
benefit obligation.
2. FINANCIAL STATEMENT RESTATEMENT
In June 2004, the Company announced that it planned to restate financial
results for certain periods due to accounting errors it identified at its
Carlisle, PA dairy facility and reported in its dairy foods segment. The
consolidated financial statements included in this Form 10-Q for the three and
six month periods ended June 30, 2003 and as of December 31, 2003, have been
restated to reflect adjustments necessary to correct these errors. Such
restatements have been fully set forth in Amendment No. 1 to the Land O'Lakes,
Inc. annual report filed on Form 10-K/A for the year ended December 31, 2003 as
filed with the Securities and Exchange Commission ("Commission") on August 16,
2004 and Amendment No. 2 to the Land O'Lakes, Inc. quarterly report filed on
Form 10-Q/A for the quarterly period ended June 30, 2003 as filed with the
Commission on August 16, 2004.
6
3. 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 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
$33.8 million at June 30, 2004.
4. RESTRICTED CASH
On March 28, 2003, Cheese and Protein International LLC ("CPI"), a
97.0%-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.
5. RECEIVABLES
A summary of receivables is as follows:
JUNE 30, DECEMBER 31,
2004 2003
------------- ------------
Trade accounts............................. $ 107,618 $ 327,913
Notes and contracts........................ 87,015 63,984
Notes from sale of trade receivables (see 119,285 155,191
Note 6)....................................
Other...................................... 105,402 96,051
------------- -----------
419,320 643,139
Less allowance for doubtful accounts....... 17,665 19,552
------------- -----------
Total receivables, net..................... $ 401,655 $ 623,587
============= ===========
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture as well as in 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.
6. 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 June 30, 2004, $200
million was outstanding under this facility and $20 million was
7
outstanding under this facility at December 31, 2003. The total accounts
receivable sold during the three months ended June 30, 2004 and 2003 were $1,825
million and $572 million, respectively. The total accounts receivable sold
during the six months ended June 30, 2004 and 2003 were $2,535 million and
$1,245 million, respectively.
7. INVENTORIES
A summary of inventories is as follows:
JUNE 30, DECEMBER 31,
2004 2003
------------- ------------
Raw materials................ $ 180,661 $ 159,511
Work in proce............. 31,504 33,645
Finished goods............... 348,492 303,670
------------- ------------
Total inventories............ $ 560,657 $ 496,826
============= ============
8. INVESTMENTS
A summary of investments is as follows:
JUNE 30, DECEMBER 31,
2004 2003
------------- ------------
CF Industries, Inc........................... $ 249,502 $ 249,502
Agriliance LLC............................... 141,811 92,134
Ag Processing Inc............................ 38,230 37,941
Advanced Food Products LLC................... 29,352 27,494
CoBank, ACB.................................. 16,705 18,583
Universal Cooperatives....................... 8,224 8,224
Melrose Dairy Proteins, LLC.................. 8,699 6,623
Agronomy Company of Canada Ltd............... 7,883 7,954
Prairie Farms Dairy, Inc..................... 5,653 5,125
MoArk/Fort Recovery Egg Marketing, LLC....... 777 2,210
Other-- principally cooperatives and joint
ventures..................................... 50,414 48,851
------------- -----------
Total investments............................ $ 557,250 $ 506,641
============= ===========
During the six months ended June 30, 2004, the Company sold its investment
in a swine joint venture for $2.0 million in cash and an investment in the feed
segment for $0.2 million in cash.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill is as follows:
JUNE 30, DECEMBER 31,
2004 2003
------------- -----------
Dairy Foods..................... $ 66,259 $ 66,259
Feed............................ 114,450 150,922
Seed............................ 10,907 12,405
Agronomy........................ 60,687 63,733
Layers.......................... 79,765 79,764
------------- ------------
Total goodwill.................. $ 332,068 $ 373,083
============= ============
The decrease in goodwill of $41.0 million resulted from a $36.1 million
reduction related to the acquisition of the minority interest of Land O'Lakes
Farmland Feed LLC, amortization associated with investments in joint ventures
and cooperatives of $3.4 million, and an impairment of $1.5 million in the seed
segment.
8
OTHER INTANGIBLE ASSETS
JUNE 30, DECEMBER 31,
2004 2003
------------- ------------
Amortized other intangible assets:
Patents, less accumulated amortization
of $3,222 and $2,622, respectively......... $ 13,547 $ 14,147
Trademarks, less accumulated amortization of
$2,234 and $2,044, respectively............ 2,106 2,296
Other intangible assets, less accumulated
amortization of $13,903 and $12,783,
respectively............................... 8,856 9,870
------------- ------------
Total amortized other intangible assets......... 24,509 26,313
Total non-amortized other intangible assets -
trademarks................................... 76,625 76,625
------------- ------------
Total other intangible assets................... $ 101,134 $ 102,938
============= ============
Amortization expense for the three months ended June 30, 2004 and 2003 was
$0.9 million and $1.2 million, respectively. Amortization expense for the six
months ended June 30, 2004 and 2003 was $1.9 million and $2.3 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.
10. DEBT OBLIGATIONS
The Company had notes and short-term obligations of $51.6 million at June
30, 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. In July, 2004, the revolving credit facility was expanded by $15
million to $200 million. There were no borrowings under this facility as of June
30, 2004.
A summary of long-term debt is as follows:
JUNE 30, 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
(5.77% weighted average) ....................... 76,224 75,785
Industrial development revenue bonds
and other secured notes payable - due 2004
through 2016 (1.1% to 5.5%) .................... 14,929 14,940
Capital Securities of Trust Subsidiary - due
2028 (7.45%) ................................... 190,700 190,700
Other debt ....................................... 17,948 21,951
----------- -----------
943,174 1,073,223
Less current portion ............................. 8,986 7,841
----------- -----------
Total long-term debt ............................. $ 934,188 $ 1,065,382
=========== ===========
During the six months ended June 30, 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 mandatory prepayments made during the six months ended June
30, 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 June 30, 2004 and December 31, 2003 were 3.52% and 3.56%,
respectively.
Borrowings under the revolving credit facility and the term loan 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 June
30, 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 June 30, 2004, the interest rate
on the Term B loan was 4.73%.
9
Other debt includes a negative $4.0 million mark-to-market valuation for
the 8.75% senior unsecured notes related to the Company's interest rate swap
agreements. These swaps mirror the terms of the 8.75% senior unsecured 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.
11. PURCHASE OF MINORITY INTEREST
In June 2004, the Company completed the purchase of the remaining 8% of
Land O' Lakes Farmland Feed LLC from Farmland Industries, which now gives the
Company 100% ownership of Land O'Lakes Farmland Feed LLC. The Company paid $12.2
million to purchase the minority interest. As a result of this acquisition, a
minority interest of $55 million for this joint venture was eliminated from the
consolidated balance sheet.
12. DERIVATIVE FINANCIAL INSTRUMENTS
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% senior unsecured
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. As the critical terms of
the swaps and the debt are the same, the swap is assumed to be 100 percent
effective and the fair value gains on the swaps are completely offset by the
fair value adjustment to the underlying debt. At June 30, 2004, the notional
amount of the swaps was $150 million in aggregate and the fair value was
negative $4.0 million.
13. 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 June 30:
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
======== ======== ======== ========
The following tables present the components of net periodic benefit cost
for pension benefits and other postretirement benefits for the six months ended
June 30:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service cost ................................... $ 10,500 $ 8,294 $ 500 $ 402
Interest cost .................................. 14,100 13,584 2,100 2,176
Expected return on assets ...................... (16,350) (16,404) -- --
Amortization of actuarial loss ................. 3,750 886 1,300 1,084
Amortization of prior service cost ............. 400 422 150 134
Amortization of transition obligation .......... -- -- 300 322
-------- -------- -------- --------
Net periodic benefit cost ...................... $ 12,400 $ 6,782 $ 4,350 $ 4,118
======== ======== ======== ========
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 June 30, 2004, the Company contributed
$0.6 million to its defined benefit pension plans and $1.3 million to its other
postretirement benefits plans. During the six months ended June 30, 2004, the
Company contributed $1.2 million to its defined benefit pension plans and $2.9
million to its other postretirement benefits plans.
10
14. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the three months ended June 30, 2004, the dairy foods segment recorded
a restructuring charge of $0.4 million for employees' severance related to the
closure of a facility in Volga, South Dakota. For the three months ended June
30, 2003, the Company recorded restructuring charges of $1.5 million. Of this
amount, dairy foods and feed each recorded restructuring charges of $0.6 million
for closures of certain manufacturing facilities and seed recorded a $0.3
million restructuring charge for the closure of a facility. The balance
remaining to be paid at June 30, 2004 for employee and severance outplacement
costs was $2.8 million.
For the six months ended June 30, 2004, the dairy foods segment recorded a
restructuring charge of $0.8 million for employees' severance related to the
closure of a facility in Volga, South Dakota. For the six months ended June 30,
2003, the Company recorded restructuring charges of $2.5 million. Of this
amount, dairy foods recorded a restructuring charge of $1.6 million, feed
recorded a restructuring charge of $0.6 million, and seed recorded a
restructuring charge of $0.3 million for costs related to closing facilities.
IMPAIRMENT CHARGES
For the three months ended June 30, 2004, the seed segment recorded a
goodwill impairment charge of $1.0 million and the feed segment recorded an
impairment of $0.2 million for assets held for sale. For the three months ended
June 30, 2003, the Company recorded impairment charges of $0.3 million in the
seed segment for the impairment of certain assets.
For the six months ended June 30, 2004, the seed segment recorded goodwill
impairment charges of $1.5 million and the feed segment recorded an impairment
of $0.2 million for assets held for sale. For the six months ended June 30,
2003, the Company recorded impairment charges of $0.3 million in the seed
segment and $0.1 million in the feed segment for write-downs of certain plant
assets to their estimated fair values.
15. GAIN ON LEGAL SETTLEMENTS
During the six months ended June 30, 2004 and 2003, the Company recognized
gains on legal settlements of $4.5 million and $19.2 million, respectively, of
which $0.0 million was recognized for the three months ended June 30, 2004, and
$10.3 million was recognized for the three months ended June 30, 2003. These
gains primarily represent cash received from product suppliers against whom the
Company alleged certain price-fixing claims.
16. OTHER (INCOME) EXPENSE, NET
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Loss (gain) on sale of investments........... $ 66 $ (346) $ 143 $ (846)
Gain on sale of intangible................... -- (550) -- (550)
Loss (gain) on divestiture of businesses..... -- 700 (1,664) 700
-------- ------- --------- --------
Total other expense (income), net............ $ 66 $ (196) $ (1,521) $ (696)
======== ======= ======== ========
During the three months ended June 30, 2004, the Company recorded a $0.1
million loss on the sale of an investment in the feed segment. During the three
months ended June 30, 2003, the Company recorded a $0.3 million gain on sale of
an investment in a swine joint venture within the feed segment, a $0.6 million
gain on the sale of a customer list, and $0.7 million loss on divestiture of a
business within the feed segment.
During the six months ended June 30, 2004, the Company recorded a $0.1
million loss on the sale of investments and the divestiture of QC, Inc., an
environmental, dairy and food testing company, which resulted in a gain of $1.7
million. During the six months ended June 30, 2003, the Company recorded a $0.8
million gain on sale of an investment in a swine joint venture within the feed
segment, a $0.6 million gain on the sale of a customer list, and $0.7 million
loss on divestiture of a business within the feed segment.
11
17. 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 comprised of the operations of Land O'Lakes
Farmland Feed LLC ("Land O'Lakes Farmland Feed"), the Company's wholly owned
subsidiary. 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.
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.
12
DAIRY FOODS FEED SEED SWINE
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
JUNE 30, 2004
Net sales ................................. $ 1,035,020 $ 680,490 $ 130,992 $ 23,483
Cost of sales (1) ......................... 1,006,795 630,576 113,785 26,049
Selling, general and administrative ....... 40,646 58,507 12,346 1,192
Restructuring and impairment
charges ................................. 400 210 980 --
Interest expense (income), net ............ 7,633 5,790 659 1,299
Loss (gain) on legal settlements .......... 425 -- -- --
Other expense (income), net ............... -- 66 (1) 1
Equity in (earnings) loss of affiliated
companies ............................... (2,146) (444) -- (587)
Minority interest in earnings
of subsidiaries ......................... -- (280) -- --
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ....... $ (18,733) $ (13,935) $ 3,223 $ (4,471)
=========== =========== =========== ===========
FOR THE THREE MONTHS ENDED
JUNE 30, 2003
Net sales ................................. $ 670,597 $ 593,687 $ 111,097 $ 22,501
Cost of sales (1) ......................... 631,039 526,641 95,435 21,045
Selling, general and administrative ....... 33,121 58,016 9,401 1,282
Restructuring and impairment charges ...... 600 615 560 --
Interest expense (income), net ............ 7,727 6,091 682 1,396
Gain on legal settlements ................. (38) (10,250) -- --
Other (income) expense, net ............... -- (196) -- --
Equity in (earnings) loss of
affiliated companies .................... (1,760) (176) -- (75)
Minority interest in earnings of
subsidiaries ............................ -- 1,427 -- --
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ....... $ (92) $ 11,519 $ 5,019 $ (1,147)
=========== =========== =========== ===========
OTHER/
AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
JUNE 30, 2004
Net sales ................................. $ -- $ 143,288 $ (4,698) $ 2,008,575
Cost of sales (1) ......................... -- 126,390 (4,698) 1,898,897
Selling, general and administrative ....... 3,328 8,707 262 124,988
Restructuring and impairment
charges ................................. -- -- -- 1,590
Interest expense (income), net ............ 2,061 3,629 (735) 20,336
Loss (gain) on legal settlements .......... -- (448) -- (23)
Other expense (income), net ............... -- -- -- 66
Equity in (earnings) loss of affiliated
companies ............................... (43,389) (2,547) 1 (49,112)
Minority interest in earnings
of subsidiaries ......................... -- -- -- (280)
----------- ----------- ----------- ------------
(Loss) earnings before income taxes ....... $ 38,000 $ 7,557 $ 472 $ 12,113
=========== =========== =========== ============
FOR THE THREE MONTHS ENDED
JUNE 30, 2003
Net sales ................................. $ -- $ -- $ 2,712 $ 1,400,594
Cost of sales (1) ......................... -- -- 1,098 1,275,258
Selling, general and administrative ....... 3,357 490 2,288 107,955
Restructuring and impairment charges....... -- -- -- 1,775
Interest expense (income), net ............ 2,410 1,415 (519) 19,202
Gain on legal settlements ................. -- -- -- (10,288)
Other (income) expense, net ............... -- -- -- (196)
Equity in (earnings) loss of
affiliated companies .................... (47,784) (1,628) 9 (51,414)
Minority interest in earnings of
subsidiaries ............................ -- -- -- 1,427
----------- ----------- ----------- ------------
(Loss) earnings before income taxes ....... $ 42,017 $ (277) $ (164) $ 56,875
=========== =========== =========== ============
DAIRY FOODS FEED SEED SWINE
----------- ----------- ----------- -----------
FOR THE SIX MONTHS ENDED
JUNE 30, 2004
Net sales ................................. $ 1,942,154 $ 1,357,469 $ 374,359 $ 45,981
Cost of sales (1) ......................... 1,856,947 1,231,476 326,334 48,534
Selling, general and administrative ....... 83,869 120,882 26,689 2,761
Restructuring and impairment charges ...... 800 210 1,480 --
Interest expense (income), net ............ 14,727 13,157 2,719 2,990
Loss (gain) on legal settlements .......... 334 (4,433) -- --
Other (income) expense, net ............... (1,664) 66 (1) 78
Equity in (earnings) loss of affiliated
companies ............................... (4,958) (996) -- (619)
Minority interest in earnings
of subsidiaries ......................... -- 1,120 -- --
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ....... $ (7,901) $ (4,013) $ 17,138 $ (7,763)
=========== =========== =========== ===========
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net sales ................................. $ 1,303,833 $ 1,196,153 $ 302,992 $ 43,666
Cost of sales (1) ......................... 1,236,451 1,056,570 262,269 43,281
Selling, general and administrative ....... 72,583 116,023 22,271 2,600
Restructuring and impairment charges ...... 1,600 707 560 --
Interest expense (income), net ............ 14,049 13,842 2,251 2,713
Gain on legal settlements ................. (38) (19,139) -- --
Other (income) expense, net ............... -- (696) -- --
Equity in (earnings) loss of
affiliated companies .................... (1,130) (732) -- 290
Minority interest in earnings of
subsidiaries ............................ -- 2,916 -- --
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ....... $ (19,682) $ 26,662 $ 15,641 $ (5,218)
=========== =========== =========== ===========
(1) Cost of sales includes unrealized hedging losses (gains) of:
For the three months ended June 30, 2004 .. $ 5,759 $ 9,718 $ 486 $ 3,859
For the three months ended June 30, 2003 .. (268) (2,062) (512) (361)
For the six months ended June 30, 2004 .... (2,706) 4,235 3,339 3,854
For the six months ended June 30, 2003 .... (696) (3,553) (305) (1,420)
OTHER/
AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2004
Net sales ................................. $ -- $ 318,647 $ (10,702) $ 4,027,908
Cost of sales (1) ......................... -- 266,821 (10,702) 3,719,410
Selling, general and administrative ....... 7,119 18,204 364 259,888
Restructuring and impairment charges ...... -- -- -- 2,490
Interest expense (income), net ............ 4,403 7,489 (1,448) 44,037
Loss (gain) on legal settlements .......... -- (448) -- (4,547)
Other (income) expense, net ............... -- -- -- (1,521)
Equity in (earnings) loss of affiliated
companies ............................... (49,606) (10,355) 8 (66,526)
Minority interest in earnings
of subsidiaries ......................... -- -- -- 1,120
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ....... $ 38,084 $ 36,936 $ 1,076 $ 73,557
=========== =========== =========== ===========
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net sales ................................. $ -- $ -- $ 4,968 $ 2,851,612
Cost of sales (1) ......................... -- -- 2,170 2,600,741
Selling, general and administrative ....... 6,683 978 4,257 225,395
Restructuring and impairment charges ...... -- -- -- 2,867
Interest expense (income), net ............ 4,742 2,646 (1,127) 39,116
Gain on legal settlements ................. -- -- -- (19,177)
Other (income) expense, net ............... -- -- -- (696)
Equity in (earnings) loss of
affiliated companies .................... (44,637) (4,253) 31 (50,431)
Minority interest in earnings of
subsidiaries ............................ -- -- -- 2,916
----------- ----------- ----------- -----------
(Loss) earnings before income taxes ....... $ 33,212 $ 629 $ (363) $ 50,881
=========== =========== =========== ===========
(1) Cost of sales includes unrealized hedging losses (gains) of:
For the three months ended June 30, 2004 .. $ -- $ 1,806 $ -- $ 21,628
For the three months ended June 30, 2003 .. -- -- -- (3,203)
For the six months ended June 30, 2004 .... -- (246) -- 8,476
For the six months ended June 30, 2003 .... -- -- -- (5,974)
13
18. CONSOLIDATING FINANCIAL INFORMATION
The Company has entered into financing arrangements which are guaranteed
by the Company and certain of its wholly-owned subsidiaries (the "Guarantor
Subsidiaries"). Such guarantees are full, unconditional and joint and several.
In June 2004, the Company completed the purchase of the remaining 8% of
Land O'Lakes Farmland Feed LLC from Farmland Industries, which now gives the
Company 100% ownership of Land O'Lakes Farmland Feed LLC. Accordingly, the Land
O'Lakes Farmland Feed LLC financial information, except for its majority-owned
subsidiaries which are excluded from the guarantee, has been combined with the
wholly-owned consolidated guarantors in the following supplemental financial
information.
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.
14
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
JUNE 30, 2004
LAND WHOLLY-
O'LAKES, INC. OWNED
PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and short-term investments .................. $ 47,233 $ 7,470 $ 15,099 $ -- $ 69,802
Restricted cash .................................. 20,213 -- -- -- 20,213
Receivables, net ................................. 293,169 249,798 115,043 (256,355) 401,655
Inventories ...................................... 332,862 172,110 55,685 -- 560,657
Prepaid expenses ................................. 29,739 8,549 4,372 -- 42,660
Other current assets ............................. 20,288 11,102 9,000 -- 40,390
------------- ------------ ------------ ------------ ------------
Total current assets ........................ 743,504 449,029 199,199 (256,355) 1,135,377
Investments ........................................ 1,373,242 19,369 10,366 (845,727) 557,250
Property, plant and equipment, net ................. 227,950 234,756 151,107 -- 613,813
Property under capital lease, net .................. -- -- 104,975 -- 104,975
Goodwill ........................................... 185,711 82,112 64,245 -- 322,068
Other intangibles .................................. 3,401 94,412 3,321 -- 101,134
Other assets ....................................... 57,183 34,495 55,232 (19,458) 127,452
------------- ------------ ------------ ------------ ------------
Total assets ................................ $ 2,590,991 $ 914,173 $ 588,445 $ (1,121,540) $ 2,972,069
============= ============ ============ ============ ============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations ................. $ 123,356 $ 3,281 $ 96,119 $ (171,114) $ 51,642
Current portion of long-term debt ................ 1,773 45,213 6,920 (44,920) 8,986
Current portion of obligations under capital lease -- -- 10,318 -- 10,318
Accounts payable ................................. 394,378 147,295 32,290 (50,779) 523,184
Accrued expenses ................................. 150,110 55,546 18,272 -- 223,928
Patronage refunds and other member equities
payable ........................................ 13,350 -- -- -- 13,350
------------- ------------ ------------ ------------ ------------
Total current liabilities ................... 682,967 251,335 163,919 (266,813) 831,408
Long-term debt ..................................... 853,581 10,093 79,514 (9,000) 934,188
Obligations under capital lease .................... -- -- 95,709 -- 95,709
Employee benefits and other liabilities ............ 139,692 30,339 17,041 -- 187,072
Minority interests ................................. -- 3,004 5,937 -- 8,941
Equities:
Capital stock .................................... 2,095 463,823 120,536 (584,359) 2,095
Member equities .................................. 875,360 -- -- -- 875,360
Accumulated other comprehensive loss ............. (65,617) (1,692) -- 1,692 (65,617)
Retained earnings ................................ 102,913 157,271 105,789 (263,060) 102,913
------------- ------------ ------------ ------------ ------------
Total equities .............................. 914,751 619,402 226,325 (845,727) 914,751
------------- ------------ ------------ ------------ ------------
Commitments and contingencies
Total liabilities and equities ..................... $ 2,590,991 $ 914,173 $ 588,445 $ (1,121,540) $ 2,972,069
============= ============ ============ ============ ============
15
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004
LAND WHOLLY-
O'LAKES, OWNED
INC. PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
Net sales .......................................... $ 1,041,190 $ 727,837 $ 239,548 $ -- $ 2,008,575
Cost of sales ...................................... 1,002,697 676,588 219,612 -- 1,898,897
------------- ------------ ------------ ------------ ------------
Gross profit ....................................... 38,493 51,249 19,936 -- 109,678
Selling, general and administrative ................ 52,966 61,450 10,572 -- 124,988
Restructuring and impairment charges ............... 1,380 210 -- -- 1,590
------------- ------------ ------------ ------------ ------------
Loss (earnings) from operations .................... (15,853) (10,411) 9,364 -- (16,900)
Interest expense (income), net ..................... 18,556 (19) 1,799 -- 20,336
Loss (gain) on legal settlements ................... 425 -- (448) -- (23)
Other expense (income), net ........................ -- 66 -- -- 66
Equity in earnings of affiliated companies ......... (44,364) (314) (2,547) (1,887) (49,112)
Minority interest in (loss) earnings of
subsidiaries ..................................... (763) -- 483 -- (280)
------------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes ................ 10,293 (10,144) 10,077 1,887 12,113
Income tax (benefit) expense ....................... (6,450) 57 1,763 -- (4,630)
------------- ------------ ------------ ------------ ------------
Net earnings (loss) ................................ $ 16,743 $ (10,201) $ 8,314 $ 1,887 $ 16,743
============= ============ ============ ============ ============
16
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
LAND WHOLLY-
O'LAKES, OWNED
INC. PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
Net sales .......................................... $ 2,090,832 $ 1,453,363 $ 483,713 $ -- $ 4,027,908
Cost of sales ...................................... 1,970,543 1,318,896 429,971 -- 3,719,410
------------ ------------ ------------ ------------ ------------
Gross profit ....................................... 120,289 134,467 53,742 -- 308,498
Selling, general and administrative ................ 112,892 125,307 21,689 -- 259,888
Restructuring and impairment charges ............... 2,280 210 -- -- 2,490
------------ ------------ ------------ ------------ ------------
Earnings from operations ........................... 5,117 8,950 32,053 -- 46,120
Interest expense, net .............................. 40,030 69 3,938 -- 44,037
Gain on legal settlements .......................... (3,810) (289) (448) -- (4,547)
Other (income) expense, net ........................ (1,587) 66 -- -- (1,521)
Equity in (earnings) loss of affiliated
companies ........................................ (97,483) (856) (10,355) 42,168 (66,526)
Minority interest in earnings of
subsidiaries ..................................... 459 -- 661 -- 1,120
------------ ------------ ------------ ------------ ------------
Earnings (loss) before income taxes ................ 67,508 9,960 38,257 (42,168) 73,557
Income tax expense ................................. 5,639 115 5,934 -- 11,688
------------ ------------ ------------ ------------ ------------
Net earnings (loss) ................................ $ 61,869 $ 9,845 $ 32,323 $ (42,168) $ 61,869
============ ============ ============ ============ ============
17
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
LAND WHOLLY-
O'LAKES, OWNED
INC. PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .............................. $ 61,869 $ 9,845 $ 32,323 $ (42,168) $ 61,869
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization .................. 25,118 17,997 11,495 -- 54,610
Amortization of deferred financing costs ....... 3,272 -- 298 -- 3,570
Bad debt expense ............................... 638 -- -- -- 638
Proceeds from patronage revolvement
received ..................................... 2,043 -- -- -- 2,043
Non-cash patronage income ...................... (1,023) -- -- -- (1,023)
Deferred income tax expense .................... 3,772 -- -- -- 3,772
(Increase) decrease in other assets ............ (11,821) 6,806 955 179 (3,881)
Increase (decrease) in other liabilities ....... 4,380 (4,795) (1,014) 632 (797)
Restructuring and impairment charges ........... 2,280 210 -- -- 2,490
Gain on divestiture of business ................ (1,664) -- -- -- (1,664)
Equity in (earnings) loss of affiliated
companies .................................... (97,483) (856) (10,355) 42,168 (66,526)
Minority interests ............................. 459 -- 661 -- 1,120
Other .......................................... (1,213) -- -- -- (1,213)
Changes in current assets and liabilities, net
of acquisitions and divestitures:
Receivables .................................... 92,490 22,174 4,413 97,101 216,178
Inventories .................................... (66,598) 5,898 (2,791) -- (63,491)
Other current assets ........................... 212,950 (7,721) (2,802) -- 202,427
Accounts payable ............................... (172,149) (22,905) (6,416) (37,707) (239,177)
Accrued expenses ............................... 11,994 (6,259) 65 -- 5,800
----------- ----------- ------------- ----------- ------------
Net cash provided by operating activities ........ 69,314 20,394 26,832 60,205 176,745
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and equipment ....... (12,224) (7,170) (22,018) -- (41,412)
Acquisition of minority interest ................. (12,150) -- -- -- (12,150)
Payments for investments ......................... (24,670) -- -- 24,500 (170)
Net proceeds from divestiture of businesses ...... 7,500 -- -- -- 7,500
Proceeds from sale of investments ................ 1,983 216 -- -- 2,199
Proceeds from sale of property, plant
and equipment .................................. 6,574 486 536 -- 7,596
Dividends from investments in affiliated
companies ...................................... 13,346 444 11,262 (10,600) 14,452
Increase in restricted cash ...................... (95) -- -- -- (95)
Other ............................................ 392 -- -- -- 392
----------- ----------- ------------- ----------- ------------
Net cash (used) provided by investing
activities ..................................... (19,344) (6,024) (10,220) 13,900 (21,688)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt ........... 60,345 (10,028) (18,089) (60,205) (28,977)
Proceeds from issuance of long-term debt ......... 766 14 16,932 -- 17,712
Principal payments on long-term debt ............. (127,059) (93) (15,329) -- (142,481)
Principal payments on obligations under
capital lease .................................. -- -- (5,241) -- (5,241)
Payments for redemption of member
equities ....................................... (32,616) -- -- -- (32,616)
Payments for debt issuance costs ................. (4,166) -- -- -- (4,166)
Other ............................................ 240 -- 13,900 (13,900) 240
----------- ----------- ------------- ----------- ------------
Net cash used by financing activities ............ (102,490) (11,107) (7,827) (74,105) (195,529)
----------- ----------- ------------- ----------- ------------
Net (decrease) increase in cash .................. (52,520) 3,263 8,785 -- (40,472)
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 ........................................... $ 47,233 $ 7,470 $ 15,099 $ -- $ 69,802
=========== =========== ============= =========== ============
18
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
------------ ------------ ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and short-term investments ...... $ 99,753 $ 4,207 $ -- $ 6,314 $ -- $ 110,274
Restricted cash ...................... 20,118 -- -- -- -- 20,118
Receivables, net ..................... 386,678 82,097 194,002 120,064 (159,254) 623,587
Inventories .......................... 265,924 45,981 132,027 52,894 -- 496,826
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 ............ 1,033,936 137,656 337,004 189,842 (159,254) 1,539,184
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 ........................... 65,734 4,464 26,483 56,036 (19,279) 133,438
------------ ------------ ------------ ------------ ------------ ------------
Total assets .................... $ 2,842,409 $ 161,965 $ 827,439 $ 570,307 $ (1,013,060) $ 3,389,060
============ ============ ============ ============ ============ ============
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 ..................... 566,201 59,621 110,238 38,706 (13,072) 761,694
Accrued expenses ..................... 145,705 23,740 38,824 18,207 -- 226,476
Patronage refunds and other
member equities payable ............ 19,449 -- -- -- -- 19,449
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities ....... 795,943 142,718 149,227 187,575 (168,901) 1,106,562
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 .......................... 127,881 1,256 28,803 18,055 (632) 175,363
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 ...................... 866,586 -- -- -- -- 866,586
Accumulated other comprehensive loss . (65,617) -- -- -- -- (65,617)
Retained earnings .................... 76,270 7,006 144,328 83,726 (235,060) 76,270
------------ ------------ ------------ ------------ ------------ ------------
Total equities .................. 879,364 8,222 646,834 179,471 (834,527) 879,364
------------ ------------ ------------ ------------ ------------ ------------
Commitments and contingencies
Total liabilities and equities ......... $ 2,842,409 $ 161,965 $ 827,439 $ 570,307 $ (1,013,060) $ 3,389,060
============ ============ ============ ============ ============ ============
19
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, OWNED OWNED
INC. PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------ ------------
Net sales............................... $ 741,223 $ 43,764 $ 579,566 $ 36,041 $ -- $ 1,400,594
Cost of sales........................... 675,359 42,484 515,107 42,308 -- 1,275,258
------------ ------------ ------------ ----------- ----------- ------------
Gross profit............................ 65,864 1,280 64,459 (6,267) -- 125,336
Selling, general and administrative..... 50,417 3,288 55,890 (1,640) -- 107,955
Restructuring and impairment charges.... 600 560 615 -- -- 1,775
------------ ------------ ------------ ----------- ----------- ------------
Earnings (loss) from operations......... 14,847 (2,568) 7,954 (4,627) -- 15,606
Interest expense (income), net.......... 17,795 674 (238) 971 -- 19,202
Gain on legal settlements............... (8,154) -- (2,134) -- -- (10,288)
Other (income) expense, net............. 700 -- (346) (550) -- (196)
Equity in (earnings) loss of
affiliated companies.................. (55,702) -- (9) -- 4,297 (51,414)
Minority interest in earnings of
of subsidiaries....................... 868 -- 375 184 -- 1,427
------------ ------------ ------------ ----------- ----------- ------------
Earnings (loss) before income taxes..... 59,340 (3,242) 10,306 (5,232) (4,297) 56,875
Income tax expense (benefit)........... 14,408 (203) (162) (2,100) -- 11,943
------------ ------------ ------------ ----------- ----------- ------------
Net earnings (loss)..................... $ 44,932 $ (3,039) $ 10,468 $ (3,132) $ (4,297) $ 44,932
============ ============ ============ =========== =========== ============
20
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, OWNED OWNED
INC. PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ----------- ------------
Net sales............................... $ 1,515,189 $ 98,702 $ 1,169,051 $ 68,670 $ -- $ 2,851,612
Cost of sales........................... 1,397,510 93,326 1,033,781 76,124 -- 2,600,741
------------ ------------ ------------ ----------- ------------ ------------
Gross profit............................ 117,679 5,376 135,270 (7,454) -- 250,871
Selling, general and administrative..... 104,297 6,449 111,673 2,976 -- 225,395
Restructuring and impairment charges.... 1,600 560 707 -- -- 2,867
------------ ------------ ------------ ----------- ------------ ------------
Earnings (loss) from operations......... 11,782 (1,633) 22,890 (10,430) -- 22,609
Interest expense (income), net.......... 36,533 1,341 597 645 -- 39,116
Gain on legal settlements............... (16,175) -- (3,002) -- -- (19,177)
Other (income) expense, net............. 700 -- (846) (550) -- (696)
Equity in (earnings) loss of
affiliated companies................. (66,650) -- (556) -- 16,775 (50,431)
Minority interest in earnings of
subsidiaries.......................... 2,177 -- 371 368 -- 2,916
------------ ------------ ------------ ----------- ------------ ------------
Earnings (loss) before income taxes..... 55,197 (2,974) 26,326 (10,893) (16,775) 50,881
Income tax expense (benefit)............ 10,645 79 -- (4,395) -- 6,329
------------ ------------ ------------ ----------- ------------ ------------
Net earnings (loss)..................... $ 44,552 $ (3,053) $ 26,326 $ (6,498) $ (16,775) $ 44,552
============ ============ ============ =========== ============ ============
21
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, OWNED OWNED
INC. PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 44,552 $ (3,053) $ 26,326 $ (6,498) $ (16,775) $ 44,552
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization............... 28,749 1,502 19,881 3,872 -- 54,004
Amortization of deferred financing charges.. 1,846 -- -- -- -- 1,846
Bad debt expense............................ 621 -- 1,139 -- -- 1,760
Proceeds from patronage revolvement
received.................................. 1,316 -- -- -- -- 1,316
Non-cash patronage income................... (1,222) -- -- -- -- (1,222)
Receivable from legal settlement............ 90,707 -- 6,000 -- -- 96,707
Deferred income tax expense................. 4,346 -- -- -- -- 4,346
Decrease (increase) in other assets......... 33,665 11,514 (520) (2,566) (33,791) 8,302
Increase (decrease) in other liabilities.... 1,974 (11) (1,810) (283) -- (130)
Restructuring and impairment charges........ 1,600 560 707 -- -- 2,867
Loss on divestiture of business............. 700 -- -- -- -- 700
Equity in (earnings) loss of
affiliated companies...................... (66,650) -- (556) -- 16,775 (50,431)
Minority interest........................... 2,177 -- 371 368 -- 2,916
Other....................................... (9,135) 879 (1,606) 1,325 -- (8,537)
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables................................. 34,062 12,573 66,772 (3,583) 57,302 167,126
Inventories................................. (53,508) 19,052 (1,658) (1,241) -- (37,355)
Other current assets........................ 148,872 724 1,263 (560) -- 150,299
Accounts payable............................ (113,679) (51,709) (39,242) (5,038) (90,235) (299,903)
Accrued expenses............................ 34,810 936 (16,033) (1,455) (4,067) 14,191
---------- ----------- ----------- ------------ ----------- -----------
Net cash provided (used) by operating
activities.................................. 185,803 (7,033) 61,034 (15,659) (70,791) 153,354
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.... (23,517) (499) (9,257) (1,681) -- (34,954)
Payments for investments...................... (9,675) -- -- -- -- (9,675)
Proceeds from divestiture of business......... 465 -- -- -- -- 465
Proceeds from sale of investments............. -- -- 3,000 -- -- 3,000
Proceeds from sale of property, plant
and equipment............................... 3,081 1,069 2,157 1,708 -- 8,015
Dividends from investments in affiliated
companies................................... 2,798 -- -- -- -- 2,798
Increase in restricted cash................... (20,000) -- -- -- -- (20,000)
Other......................................... 440 -- 2,540 -- -- 2,980
---------- ----------- ----------- ------------ ----------- -----------
Net cash (used) provided by investing
activities.................................. (46,408) 570 (1,560) 27 -- (47,371)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in short-term debt........ (26,417) (3,574) 963 11,488 31,849 14,309
Proceeds from issuance of long-term debt...... 1,202 -- -- -- -- 1,202
Payments on principal of long-term debt....... (70,345) (37) (59,588) (2,658) 59,576 (73,052)
Payments on principal of capital lease
obligation.................................. -- -- -- (4,435) -- (4,435)
Payments for redemption of member equities (23,662) -- -- -- -- (23,662)
Other......................................... 808 10,314 (8) 10,328 (20,634) 808
---------- ----------- ----------- ------------ ----------- -----------
Net cash (used) provided by financing
activities.................................. (118,414) 6,703 (58,633) 14,723 70,791 (84,830)
---------- ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and short-
term investment............................. 20,981 240 841 (909) -- 21,153
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........................................ $ 79,315 $ 2,824 $ (620) $ 3,961 $ -- $ 85,480
========== =========== =========== ============ =========== ===========
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussions of financial condition and
results of operations together with the financial statements and the notes to
such statements included elsewhere in this Form 10-Q.
OVERVIEW
GENERAL
We operate our business predominantly in the United States in six
segments: Dairy Foods, Feed, Seed, Swine, Agronomy and Layers. For the three
months ended June 30, 2004, we reported net sales of $2.0 billion and net
earnings of $16.7 million compared to net sales of $1.4 billion and net earnings
of $44.9 million for the three months ended June 30, 2003. For the six months
ended June 30, 2004, we reported net sales of $4.0 billion and net earnings of
$61.9 million compared to net sales of $2.9 billion and net earnings of $44.6
million for the six months ended June 30, 2003. For the three months ended June
30, 2004, volume and margin declines in dairy foods, margin declines in feed and
an unrealized hedging loss of $21.6 million compared to an unrealized hedging
gain of $3.2 million in 2003 were the primary reasons for the net earnings
decline. These declines were partially offset by improved earnings in the layers
segment due primarily to higher market prices. For the six months ended June 30,
2004, volume increases in the dairy foods and seed segments and improved market
prices in the layers segment were the main contributors to the increase.
In April 2004 and June 2004, we announced our intention to reposition our
MoArk layers and swine businesses, respectively, for strategic growth. Several
repositioning alternatives are being considered.
In April and May of 2004, we 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.
In June 2004, we completed the purchase of the remaining 8% of Land
O'Lakes Farmland Feed LLC from Farmland Industries, which now gives us 100%
ownership of Land O'Lakes Farmland Feed LLC. We paid $12.2 million to purchase
the minority interest. As a result, a minority interest of $55 million for this
joint venture was eliminated from our consolidated balance sheet.
In July 2004, we obtained an additional $15 million in commitments to our
revolving credit facility, increasing the total commitments under this facility
to $200 million.
UNCONSOLIDATED BUSINESSES
We have investments in certain entities that are not consolidated in our
financial statements. Equity in earnings from our consolidated businesses were
$49.1 million for the three months ended June 30, 2004 compared to $51.4 million
for the three months ended June 30, 2003. Equity in earnings from our
unconsolidated businesses amounted to $66.5 million compared to equity in
earnings of $50.4 million for the six months ended June 30, 2004 and June 30,
2003, respectively. Our investment in unconsolidated businesses amounted to
$557.3 million at June 30, 2004 and $506.6 million at December 31, 2003. Cash
flow from our equity investments for the six months ended June 30, 2004 was
$14.4 million compared to $2.8 million for the six months ended June 30, 2003.
Agriliance and CF Industries, Inc. constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy segment results. We hold a 50% ownership interest in Agriliance as does
United Country Brands (wholly-owned by CHS Inc.). CF Industries is an
inter-regional cooperative in which we have a 38% ownership interest based on
our member product purchases. Our ownership in Agriliance is accounted for under
the equity method and our interest in CF Industries is accounted for on a cost
basis. Our investments in, and earnings from, Agriliance and CF Industries were
as follows as of and for the six months ended:
23
JUNE 30,
-----------------
2004 2003
------ ------
(IN MILLIONS)
AGRILIANCE:
Investment........... $ 141.8 $ 135.6
Equity in earnings... 49.7 43.9
CF INDUSTRIES:
Investment........... $ 249.5 $ 249.5
Patronage income..... -- --
For the three months ended June 30, 2004, net earnings for Agriliance were
$86.0 million, down $7.7 million versus the three months ended June 30, 2003.
This decrease is primarily the result of a decrease in earnings for the crop
nutrients business. This decrease was from a 0.2 million ton decrease in
wholesale crop nutrient volume resulting from competitive market conditions. The
decrease in tonnage was partially offset by an increase in per-unit margins due
to reduced costs for imported raw materials in 2004.
For the six months ended June 30, 2004, net earnings for Agriliance were
$99.4 million, up $11.2 million versus the same period for 2003. This increase
is the result of a $16.8 million increase in earnings from the crop protection
business. The increased crop protection earnings were primarily due to timing of
vendor rebates. Partially offsetting these increases was a $6.5 million decline
in crop nutrient earnings due to a 0.5 million ton decrease in volume, which
resulted from competitive market conditions. We did not receive cash
distributions from Agriliance during the six months ended June 30, 2004 and June
30, 2003.
Given a recent upturn in markets, CF Industries has currently returned to
a level of profitability. Since CF Industries is a cooperative, we only receive
earnings from our investment when the cooperative allocates and distributes
patronage to us. No patronage was allocated and distributed to us in the six
months ended June 30, 2004, nor has any patronage been allocated during for the
last four years because CF Industries realized losses in those years. We
anticipate that no patronage allocations will occur until these losses have been
recouped.
Our layers segment consists of our joint venture in MoArk, LLC. Through
June 30, 2003, MoArk was unconsolidated and our interest was recorded only as
equity in earnings or loss from affiliated companies using the equity method of
accounting. Effective July 1, 2003, MoArk was consolidated in our financial
statements as required by Financial Accounting Standards Board Interpretation
No. 46 ("FIN 46"), and we did not restate prior periods. Accordingly, the
financial statements for the six months ended June 30, 2004 and the six months
ended June 30, 2003 are not comparable for several categories, including sales
and gross profit in this segment. Sales of $143.3 million and gross profit of
$16.9 million were recorded for the three months ended June 30, 2004 and sales
of $318.6 million and gross profit of $51.8 million were recorded for the six
months ended June 30, 2004 in this segment. There were no sales and gross profit
for the three months and six months ended June 30, 2003 as MoArk was accounted
for under the equity method during these periods.
SEASONALITY
Certain segments of our business are subject to seasonal fluctuations in
demand. In our dairy foods segment, butter sales typically increase in the fall
and winter months due to increased demand during holiday periods. Feed sales
tend to increase in the first and fourth quarter of each year because cattle are
less able to graze during cooler months. Most seed sales occur in the first and
fourth quarters of each year. Agronomy product sales tend to be much higher in
the first and second quarter of each year, as farmers buy crop nutrient and crop
protection products to meet their seasonal needs.
DAIRY AND AGRICULTURAL COMMODITY INPUTS AND OUTPUTS
Many of our products, particularly in our dairy foods, feed, swine and
layers segments, use dairy or agricultural commodities as inputs or constitute
dairy or agricultural commodity outputs. Consequently, our results are affected
by the cost of commodity inputs and the market price of commodity outputs.
Government regulation of the dairy industry and industry practices in animal
feed tend to stabilize margins in those segments but do not protect against
large movements in either input costs or output prices.
24
Dairy Foods. Raw milk is the major commodity input for our dairy foods
segment. Our dairy foods outputs, namely butter, cheese and nonfat dry milk, are
also commodities. The minimum price of raw milk and cream is set monthly by
Federal regulators based on regional prices of dairy foods products produced.
These prices provide the basis for our raw milk and cream input costs. As a
result, those dairy foods products for which the sales price is fixed shortly
after production, such as most bulk cheese, are not usually subject to
significant commodity price risk as the price received for the output usually
varies with the cost of the significant inputs. For the six months ended June
30, 2004, bulk cheese sales represented approximately 8% of the dairy foods
segment's net sales.
We maintain significant inventories of butter and cheese for sale to our
retail and food service customers, which are subject to commodity price risk.
Because production of raw milk and demand for butter varies seasonally, we
inventory significant amounts of butter. Demand for butter is highest during the
fall and winter, when milk supply is lowest. As a result, we produce and store
excess quantities of butter during the spring when milk supply is highest. In
addition, we maintain some inventories of cheese for aging. For the six months
ended June 30, 2004, we experienced a rising dairy price environment. The
financial impact of building inventories in a market with price volatility will
depend on what market trends occur up to and through the fall and winter of
2004. For the six months ended June 30, 2004, net sales of butter and cheese
products to retail and food service customers represented approximately 35% of
the dairy foods segment sales.
Market prices for commodities such as butter and cheese can have a
significant impact on both the cost of products produced and the price for which
products are sold. The per pound market price of butter averaged $2.07 for the
three months ended June 30, 2004, compared to $1.09 for the three months ended
June 30, 2003. The per pound market price of butter averaged $1.91 for the six
months ended June 30, 2004, compared to $1.09 for the six months ended June 30,
2003. The per pound market price for butter on December 31, 2003 was $1.25. In
the past three years, the lowest average monthly market price for butter was
$0.96 in September 2002, and the highest average monthly market price was $2.21
in April 2004. The per pound market price for block cheese averaged $1.98 for
the three months ended June 30, 2004, compared to $1.14 for the three months
ended June 30, 2003. The per pound market price for block cheese averaged $1.74
for the six months ended June 30, 2004, compared to $1.13 for the six months
ended June 30, 2003. In the past three years, the lowest monthly market price
for block cheese was $1.07 in March 2003, and the highest monthly market price
was $2.14 in April 2004. The per pound market price for block cheese on December
31, 2003 was $1.31.
We maintain a sizable dairy manufacturing presence in the Upper Midwest.
This region has seen significant declines in cow numbers and its share of
nationwide dairy manufacturing volume. This decline has put pressure on our
Upper Midwest milk input costs and is one of the factors resulting in losses for
the three months and six months ended June 30, 2004 and 2003. Operating losses
for the three and six months ended June 30, 2004, however, declined compared to
the three and six months ended June 30, 2003 by $0.3 million and $5.5 million,
respectively, due to the closing of the Volga, South Dakota plant in 2004 and
the Perham, Minnesota plant in January of 2003 and improved margins on products
due to a change in product mix. We continue to explore additional initiatives to
improve our Upper Midwest dairy infrastructure in an effort to increase
efficiencies and reduce costs.
Margins on our mozzarella and whey products, primarily in our western
cheese operations, improved for the three and six months ended June 30, 2004
compared to the same period for 2003 due to the effect of higher cheese and whey
market prices. As of June 30, 2004, we completed the phase two expansion of our
new Tulare, California mozzarella manufacturing facility, Cheese & Protein
International LLC ("CPI"), which doubled the plant capacity to approximately 6
million pounds of milk per day. We expect pretax losses at CPI to continue
through 2005 as we ramp up production toward the rated capacity.
Feed. The feed segment follows industry standards for feed pricing. The
feed industry typically prices products based on income over ingredient cost per
ton of feed. This practice tends to mitigate the impact of volatility in
commodity ingredient markets on our animal feed profits. As ingredient costs
fluctuate, the changes are generally passed on to customers through weekly or
monthly changes in prices. Accordingly, net sales are less of an indicator of
performance since large fluctuations can occur from period-to-period due to
volatility in the underlying commodity ingredient prices.
We enter into forward contracts to supply feed, which currently represent
approximately 35% of our feed output. When we enter into these contracts, we
generally enter into forward input supply contracts to lock in our operating
margins.
25
Changes in commodity grain prices have an impact on the mix of products we
sell. When grain prices are relatively high, the demand for complete feed rises
since many livestock producers are also grain growers and will sell their grain
in the market and purchase complete feed as needed. When grain prices are
relatively low, these producers will feed their grain to their livestock and
purchase premixes and supplements to provide complete nutrition to their
anim