SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended May 31, 2000
Commission File No. 1-13479
AGRIBRANDS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
MISSOURI 43-1794250
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(State of Incorporation) (I.R.S. Employer Identification No.)
9811 SOUTH FORTY DRIVE, ST. LOUIS MISSOURI 63124
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(Address of principal executive offices) (Zip Code)
(314) 812-0500
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(Registrant's telephone number, including area code)
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, and (2)
has been subject to such filing requirements for the past 90 days.
YES: X NO: _____
Number of shares of Agribrands common stock, $.01 par value, outstanding as of
the close of business on July 6, 2000:
9,813,101
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PART I - FINANCIAL INFORMATION
AGRIBRANDS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is a summary of the key factors management
considers necessary in reviewing Agribrands results of operations, operating
segment results, liquidity and capital resources. Management has also included a
section on key measures and concepts for understanding the business.
Agribrands International, Inc. (the "Company") is a leading international
producer and marketer of formula animal feeds and other agricultural products.
Prior to April 1, 1998, the Company was a wholly-owned subsidiary of Ralston
Purina Company ("Ralston"). On that date, Ralston distributed the common stock
of the Company to its shareholders in a tax-free spin-off (the "Distribution").
The Company is a successor to Ralston's over 100 years of experience in the
animal feeds and agricultural products industry.
The production and sale of animal feed was the primary business of Ralston
when it was established in 1894. From that date until the Distribution, Ralston
built and maintained its industry position by consistently providing
high-quality, research-proven products and customer service. Although this
business originated in the United States, it expanded throughout the world,
entering the Americas (outside of the United States) in 1927, Europe in 1957 and
Asia in 1967. The Company now operates 70 manufacturing plants in 16 countries,
and has more than thirty years' experience operating across four continents. The
primary animal feed business of Agribrands is conducted almost exclusively
outside the United States. In 1986, Ralston sold Purina Mills, Inc., its U.S.
animal feeds and agricultural products business. Purina Mills is unrelated to
Agribrands.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Unless otherwise noted, all references to prices, costs and margins reflect
U.S. Dollar results after translation of foreign currency financial statements
in accordance with Statement of Financial Accounting Standards No. 52 (FAS 52).
Because the Company operates predominantly outside the United States, changes in
foreign exchanges rates in relation to the Dollar can have a material impact on
the Company's reported results.
Net Sales
Consolidated net sales decreased $10.6 million or 3.4% in the third quarter
and $64.7 million or 6.8% in the nine months ended May 31, 2000 as compared to
the same periods last year. Net sales declined in both periods due to lower feed
sales volume and lower average selling prices. Consolidated sales volume
declined 15,200 metric tons or 1.2% in the third quarter and 83,200 tons or 2.2%
in the nine month period as higher volume from the Asia segment largely offset
declines experienced in Europe and the Americas. Average selling prices declined
$6 per ton in the third quarter and $12 per ton in the nine month period
primarily due to lower commodity costs relative to the same periods last year.
This is consistent with the feed industry's practice of adjusting prices to
reflect changes in ingredient costs.
Operating Profit
Operating profit decreased $1.2 million or 7.5% in the third quarter and
$5.6 million or 10.4% in the nine months ended May 31, 2000 as compared to the
same periods last year. For the current quarter, operating profit decreased due
to lower volume and higher operating expenses in the Americas and lower volume
and lower margins in Europe. For the nine month period, operating profit
decreased primarily as a result of both lower volume and lower margins in the
Americas and Europe. The decline in operating profit for both periods was
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mitigated somewhat by better results from the Asia region. Operating profit
excludes provisions for restructuring, gains on sale of property, interest
expense and other income and expense.
Restructuring Activities
Agribrands recorded provisions for restructuring which reduced earnings
before income taxes and net earnings for the current quarter by $1.2 million.
These charges represented primarily severance costs associated with streamlining
Agribrands' operations in Colombia and France. Fifty employees were severed.
Interest Expense and Other Income/Expense
Interest expense totaled $0.8 million and $2.3 million for the third
quarter and nine months ended May 31, 2000, respectively, compared to $1.7
million and $6.9 million for the same periods last year. The decreases in
interest expense for both periods were due to both lower average borrowings and
lower interest rates in the foreign markets where the Company had outstanding
borrowings.
Other income/expense, net changed unfavorably by $4.4 million in the third
quarter and $0.6 million in the nine months ended May 31, 2000 compared to the
same periods last year. The Company recognized a $1.1 million foreign exchange
loss in the third quarter of this year versus a $2.9 million foreign exchange
gain in the third quarter of last year. In this year's third quarter, the
currencies in Brazil, Canada, Colombia and Mexico weakened somewhat versus the
U.S. Dollar resulting in an exchange loss on U.S. Dollar debt carried in those
countries. However, in last year's third quarter, the Brazilian Real and Mexican
Peso strengthened considerably versus the Dollar accounting for nearly all of
the Company's $2.9 million exchange gain. Investment income was $0.4 million
lower in this year's third quarter and $1.1 million lower in the nine months
ended May 31, 2000 mainly as a result of increased holdings of tax-free
securities which have slightly lower nominal returns.
Net Earnings
Net earnings were $9.4 million and $34.3 million for the third quarter and
the nine months ended May 31, 2000, respectively, compared to $13.5 million and
$32.4 million for the same periods last year. Income taxes, which include United
States and foreign taxes, were 32.4% and 33.3% of pre-tax earnings for the third
quarter and the nine months ended May 31, 2000, respectively, compared to 31.8%
and 40.8% for the same periods last year. The effective rate for the current
quarter reflects some unusual items including a $3.8 million reduction in
valuation allowances against foreign tax credit carryforwards and other deferred
tax assets in the United States. This item was mostly offset by an adjustment to
increase the Company's U.S. income tax provision based upon the latest forecast
for the current fiscal year and the tax return recently filed for fiscal 1999.
In addition, the operations in Colombia and France sustained losses in the third
quarter for which no tax benefit could be recognized. Excluding these unusual
items, the Company's effective tax rate for the current quarter was
approximately 37% of pre-tax earnings. The 31.8% effective rate for last year's
third quarter reflects a reduction in valuation allowances against certain
deferred tax assets in France and Mexico and relatively high earnings in
countries with low effective tax rates.
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<TABLE>
<CAPTION>
REVIEW OF SEGMENT RESULTS
(Dollars in millions)
Corporate
Americas Europe Asia and Tradico Consolidated
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<S> <C> <C> <C> <C> <C>
Quarter Ended May 31, 2000:
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Net sales $ 141.0 $ 69.9 $ 89.8 $ 0.5 $ 301.2
Operating profit $ 5.8 $ 2.9 $ 10.0 $ (3.8) $ 14.9
Tons of feed product sold 535,100 339,200 350,400 100 1,224,800
Income over ingredient cost * $ 34.5 $ 21.9 $ 26.0 $ 0.2 $ 82.6
Quarter Ended May 31, 1999:
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Net sales $ 145.2 $ 82.9 $ 83.7 - $ 311.8
Operating profit $ 7.5 $ 4.3 $ 8.0 $ (3.7) $ 16.1
Tons of feed product sold 544,000 377,000 319,000 - 1,240,000
Income over ingredient cost * $ 35.1 $ 28.0 $ 24.0 - $ 87.1
Nine Months Ended May 31, 2000:
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Net sales $ 404.9 $ 220.4 $ 264.2 $ 0.7 $ 890.2
Operating profit $ 17.9 $ 10.4 $ 30.4 $ (10.6) $ 48.1
Tons of feed product sold 1,569,000 1,049,200 1,026,300 300 3,644,800
Income over ingredient cost * $ 102.1 $ 71.9 $ 77.7 $ 0.2 $ 251.9
Nine Months Ended May 31, 1999:
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Net sales $ 432.6 $ 266.3 $ 256.0 - $ 954.9
Operating profit $ 23.3 $ 14.7 $ 25.9 $ (10.2) $ 53.7
Tons of feed product sold 1,626,000 1,145,000 957,000 - 3,728,000
Income over ingredient cost * $ 108.5 $ 89.5 $ 69.5 - $ 267.5
</TABLE>
* The commercial animal feed industry generally prices products on the basis of
aggregate ingredient cost plus a per-unit margin. As ingredient prices
fluctuate, the changes are generally passed on to customers through changes in
the Company's product pricing. Income over ingredient cost (which is equal to
net sales minus the cost of ingredients), rather than sales dollars, is the key
indicator of revenue performance because of the distortions in sales dollars
caused by changes in commodity prices. Management also monitors IOIC per ton to
evaluate trends in pricing and relative product value.
Americas
Net sales in the Americas segment (which excludes the United States)
decreased $4.2 million or 2.9% in the third quarter and $27.7 million or 6.4% in
the nine months ended May 31, 2000 as compared to the same periods last year.
The decreases in net sales were the result of both lower volume and lower
average selling prices. Feed volume declined 8,900 tons or 1.6% in the third
quarter primarily due to the loss of a large customer in Colombia. Average
selling prices for the Americas declined $3 per ton in the third quarter and $8
per ton in the nine month period primarily as a result of lower ingredient costs
in most of the countries that make up the Americas segment. This is consistent
with the feed industry's practice of adjusting prices to reflect changes in
ingredient costs.
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Operating profit in the Americas segment decreased $1.7 million or 22.7% in
the third quarter and $5.4 million or 23.2% in the nine months ended May 31,
2000 as compared to the same periods last year. For the third quarter, income
over ingredient cost (IOIC) declined $0.6 million due to lower volume and lower
margins in Colombia and Venezuela. Higher volume and higher margins in Brazil
helped to mitigate the decline in IOIC for the Americas. The operations in
Brazil increased the size of their sales and marketing department in the current
quarter in hopes of further improvements in IOIC. However, this effort caused
regional operating expenses to increase in the third quarter, contributing to
the overall decline in third quarter operating profit for the Americas. For the
nine month period, operating profit decreased $5.4 million as a $6.4 million
decline in IOIC was only partially offset by lower operating expenses. IOIC
declined $6.4 million largely due to lower volume and lower margins in Colombia.
Operating expenses decreased $1.0 million in the nine months ended May 31, 2000
as last year's first quarter included a $1.8 million charge incurred to settle a
claim by a former joint venture partner in Chile.
Europe
Net sales in the Europe segment decreased $13.0 million or 15.7% in the
third quarter and $45.9 million or 17.2% in the nine months ended May 31, 2000
as compared to the same periods last year. The decrease in net sales in both
periods was due to a combination of lower volume and lower average selling
prices. Feed volume declined by 37,800 tons or 10.0% in the third quarter with
most of the decline occurring in Spain and the remainder occurring in France,
Hungary and Italy. Feed volume declined by 95,800 tons or 8.4% in the nine
months ended May 31, 2000 due in part to the December 1998 sale of an
unprofitable subsidiary of the Company's French operations. Weather conditions
in Spain contributed heavily to the decline in feed volume for the current nine
month period as more cattle and sheep fed on grass this year. Average selling
prices for the Europe segment declined $14 per ton in the third quarter and $23
per ton in the nine month period mainly as a result of both lower ingredient
costs and translation of local currency revenues at weaker foreign currency
exchange rates.
Operating profit in the Europe segment decreased $1.4 million or 32.6% in
the third quarter and $4.3 million or 29.3 % in the nine months ended May 31,
2000 as compared to the same periods last year. IOIC declined $6.1 million in
the third quarter and $17.6 million in the nine month period due to both lower
feed volume and lower margins. IOIC per ton declined $10 per ton in both the
third quarter and the nine month period primarily as a result of translating
relatively stable local currency margins at significantly weaker exchange rates
versus the U.S. Dollar. The declines in IOIC for both periods were mostly offset
by lower operating expenses which resulted from translating local currency costs
at significantly weaker exchange rates. Although local currency costs did not
change significantly in the current year, Dollar-translated operating expenses
decreased by $4.7 million in the third quarter and $13.3 million in the nine
month period.
Asia
Net sales in the Asia segment increased $6.1 million or 7.3% in the third
quarter and $8.2 million or 3.2% in the nine months ended May 31, 2000 as
compared to the same periods last year. Net sales increased in both periods due
to a rise in volume. Feed volume in Asia increased 31,400 tons or 9.8% in the
third quarter and 69,300 tons or 7.2% in the nine month period. The increase in
feed volume for the third quarter was broad-based and reflects favorable hog
prices, particularly in China and the Philippines. Average selling prices for
the Asia segment declined $6 per ton in the third quarter and $10 per ton in the
nine month period primarily due to lower ingredient costs.
Operating profit in the Asia segment increased $2.0 million or 25.0% in
in the third quarter and $4.5 million or 17.4% in the nine months ended May 31,
2000 as compared to the same periods last year. IOIC increased $2.0
million in the third quarter due to the higher feed volume. IOIC increased
$8.2 million in the nine month period mainly due to higher feed volume and
higher margins in Korea. IOIC per ton remained relatively flat in the third
quarter but was up $3 per ton for the current nine month period. The increase
in IOIC for the nine month period was partially offset by higher operating
expenses. Operating expenses increased $3.7 million in the nine months
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ended May 31, 2000 due to an increase in depreciation associated with
recent capital expenditures, expenses incurred for new Korean sales promotional
campaigns and translation of local currency costs at stronger foreign currency
exchange rates versus the U.S. Dollar.
Corporate and Tradico
The corporate and Tradico segment is located primarily in the United
States. This segment contains certain corporate items which are not allocated to
other segments. Tradico, a division within the Company, acquires and resells
ingredients, equipment and feed products primarily to foreign affiliates. In the
third quarter of this fiscal year, Tradico recorded intercompany sales of $32.0
million.
On an operating profit basis, the corporate and Tradico segment recorded
losses of $3.8 million and $10.6 million in the quarter and nine months ended
May 31, 2000, respectively. These losses are related to unallocated corporate
administrative items. Tradico's margins on intercompany sales have been
allocated to the region/segment that purchased the goods.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations were $27.2 million and $93.0 million for the
nine months ended May 31, 2000 and 1999, respectively. The decrease in operating
cash flows between the two periods primarily resulted from changes in working
capital during the respective periods. During the nine months ended May 31,
2000, approximately $20 million of cash was used to fund an increase in
inventories. A portion of the increase in inventories relates to strategic grain
purchases made in Mexico and Asia. In addition, commodity costs were generally
higher at the end of the third quarter of fiscal year 2000 in comparison to the
fourth quarter of fiscal year 1999. During the nine months ended May 31, 1999,
the Company experienced favorable changes in working capital including the
collection of approximately $12 million due from Ralston. In addition,
consolidated inventories declined by around $11 million during last year's nine
month period due to lower volumes in Asia, lower worldwide commodity prices and
strategic grain purchases made by Mexico in August 1998.
Agribrands is continually evaluating new investment opportunities. On May
19, 2000, the Company signed a letter of intent to purchase all of the
outstanding common stock of Metrovet, Inc. from Metro Pacific Corporation for
approximately $2 million. Metrovet, Inc. is an animal health products company
based in the Philippines. On June 12, 2000, Agribrands signed a contract to
purchase a feed mill in Greenville, Mississippi from Farmland Industries for
approximately $1.5 million. Agribrands expects to take ownership of the feed
mill on or around November 1, 2000.
Capital expenditures, primarily to replace or enhance existing production
facilities and equipment, totaled $16.0 million and $21.7 million for the nine
months ended May 31, 2000 and 1999, respectively. The Company has a formal
review procedure for the authorization of capital expenditures. Anticipated
capital expenditures are expected to be funded with existing cash reserves as
well as cash generated from operations.
The Company's working capital requirements for inventories and receivables
are influenced somewhat by seasonality, the availability of raw materials and
changes in commodity costs, and as a result may fluctuate widely. The Company
has generally financed its seasonal and other working capital needs through
short-term borrowings provided by local foreign banks and branches of
multi-national banks. Currently, the Company is borrowing very little from
outside lenders as investment earnings on its U.S. cash balances are generally
less than the cost of external borrowings. Intercompany loans are an important
vehicle for funding cash needs in one location with excess cash balances of
another.
Cash on hand, cash flow from operations and local affiliate borrowings
under various lines of credit are Agribrands' primary sources of liquidity.
Management has a strong focus on cash flow and the effective use of
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excess cash flow. The combined operating, cash and equity position of
Agribrands should continue to provide the capital flexibility necessary to fund
future opportunities as well as to meet existing obligations.
On September 25, 1998, the Company's Board of Directors authorized the
purchase by the Company of up to 2,000,000 shares of Agribrands' common stock in
open market transactions at management's discretion and depending on market
conditions. During the nine months ended May 31, 2000, the Company purchased
566,204 shares of Agribrands' common stock for $23.0 million.
KEY MEASURES AND CONCEPTS FOR UNDERSTANDING THE BUSINESS
Dollar-Responsive Economics of International Feed Operations
Feed is manufactured by processing a combination of grains, proteins,
vitamins, and minerals. Approximately 80% of the Company's total costs is the
cost of these ingredients, most of which are widely traded in Dollar-denominated
global commodity markets. Excluding logistics costs, the Dollar values (and
costs) of ingredients around the world are broadly comparable. Local currency
prices for ingredients, therefore, typically adjust quickly to reflect changes
in quoted dollar prices and changes in the exchange rate between the local
currency and the Dollar. As raw materials inventories are replenished after an
exchange rate change, new local currency ingredient costs are reflected in local
currency feed prices.
The margin added to ingredient costs is less responsive to exchange rate
changes because industry pricing is influenced by local competitors.
Nevertheless, exchange rates between the U.S. Dollar and other currencies
(particularly in countries with systemic high inflation like many of those where
the Company operates) are related closely to differentials between the U.S. and
local inflation and interest rates. As a result, Dollar-translated IOIC levels
of the Company's international operations generally fluctuate closely around
long-term norms, particularly on a consolidated basis.
Dollar-Based Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA)
Management believes the required method of translating foreign currency
financial statements for most of the Company's foreign affiliates (that is using
the local currency as the functional currency) can distort the economic impact
of certain items, specifically costs of goods sold and foreign exchange gains
and losses. Because the Company operates predominantly outside of the U.S.,
these distortions can have a disproportionate effect on reported results. For
this reason, management believes it is important to understand the Company's
operational results computed using the U.S. Dollar as the functional currency.
Dollar-based accounting was required practice prior to the issuance of FAS
52 in 1981 and continues to be required for U.S. affiliates operating in
hyper-inflationary environments. This exception is in recognition of the
possible distortions of local-currency based accounting. "Hyper-inflationary"
accounting is limited under FAS 52 to countries with cumulative inflation
greater than 100% over three years. This fails to cover numerous countries
(including those in which the Company generates the majority of its earnings)
with consistently higher inflation than the U.S., whose currency values remain
unstable (typically devaluing over time versus the Dollar).
When exchange rates fluctuate, earnings results using U.S. Dollar-based
accounting differ from results under local currency based accounting in three
important ways. Under U.S. Dollar-based accounting:
o Cost of goods sold are measured using the exchange rate at the time
inventory was purchased rather than the exchange rate at the time
finished product was sold.
o Foreign exchange gains and losses are computed on assets and
liabilities denominated in currencies other than the Dollar instead of
assets and liabilities denominated in currencies other than local
currency.
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o Depreciation is computed by applying the appropriate factor to the
historical Dollar value of the asset rather than by applying the
appropriate factor to the historical local currency value and
translating the result at the current exchange rate.
Because of its principal focus on cash flows, management uses Dollar-based
EBITDA as a key determinant of awards for corporate management under its annual
incentive plan. The following table provides a reconciliation of pre-tax
earnings to Dollar-based EBITDA for the quarter and nine months ended May 31,
2000 and 1999:
<TABLE>
<CAPTION>
Dollar-based EBITDA
(Dollars in millions)
Quarter Ended Nine Months Ended
May 31, May 31,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Earnings before Income Taxes $ 13.9 $ 19.8 $ 51.4 $ 54.7
Add: Loss/(gain) on sale of property - - - (0.5)
Provisions for restructuring 1.2 - 1.2 -
Depreciation and amortization 6.2 5.9 18.9 17.6
Interest expense 0.8 1.7 2.3 6.9
--------- ---------- --------- --------
EBITDA reported under FAS 52 22.1 27.4 73.8 78.7
Adjustments to report EBITDA on a Dollar basis:
1) Difference in cost of sales for ingredient costs (1.7) (0.7) (2.2) (4.0)
2) Reversal of foreign exchange loss/(gain) reported 1.1 (2.9) 0.1 0.6
under FAS 52
3) Dollar-based foreign exchange gain/(loss) 1.8 2.8 4.8 3.0
--------- ---------- --------- --------
EBITDA reported on a U.S. Dollar basis $ 23.3 $ 26.6 $ 76.5 $ 78.3
========= ========== ========= ========
</TABLE>
Explanation of adjustments to EBITDA:
1) Difference in cost of sales for ingredient costs. Ingredient costs were
lower under FAS 52 in each period due to devaluation of the local
currencies against the Dollar. Under Dollar-based accounting, inventories
are initially recorded and maintained in Dollars. The operations in the
Americas and Europe accounted for all of the adjustments in fiscal 2000.
The operations in the Americas, specifically Brazil and Colombia, generated
the bulk of the adjustment for the nine months ended May 31, 1999.
2) Reversal of foreign exchange gains and losses reported under FAS 52. In
last year's third quarter, the Company reported a $3.6 million foreign
exchange gain under FAS 52. Most of this exchange gain occurred in Brazil
and Mexico, where the Company carried U.S. Dollar denominated debt and the
local currency strengthened considerably versus the Dollar.
3) Dollar-based foreign exchange gains and losses. If Agribrands had used
Dollar-based accounting worldwide, it would have recognized foreign
exchange gains of $1.8 million and $4.8 million in the quarter and nine
months ended May 31, 2000, respectively. Much of these gains occurred in
Europe, where the Company has net liabilities denominated in Euro. During
this fiscal year as the Euro has weakened, these liabilities have decreased
in Dollar terms resulting in a foreign exchange gain. Weakening of the
Colombian Peso and Canadian Dollar contributed to the Dollar-based foreign
exchange gain in the current quarter.
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EUROPEAN ECONOMIC MONETARY UNION (EMU)
On January 1, 1999, eleven of the European Union countries (including four
countries where Agribrands' operations are located) adopted the Euro as their
single currency, and there is now a fixed conversion rate between their existing
currencies ("legacy currencies") and the Euro. Following the introduction of the
Euro, the legacy currencies remain legal tender in the participating countries
during the transition period from January 1, 1999 through January 1, 2002.
Beginning on January 1, 2002, the European Central Bank will issue
Euro-denominated bills and coins for use in cash transactions. On or before July
1, 2002, the participating countries will withdraw all legacy bills and coins
and use the Euro as their legal currency.
The Company's key financial information systems in Europe are equipped to
process both Euro and legacy currency transactions during the transition period
from January 1, 1999 through January 1, 2002; however, they are not ready to
handle the July 1, 2002 withdrawal of all legacy currencies. Management is
currently planning to modify the Company's key financial systems so they can
handle the July 1, 2002 mandatory conversion to the Euro. The Company has not
yet incurred any material costs related to the conversion, and future costs for
replacing computer equipment and reprogramming existing systems are not expected
to be material. The Company plans to complete system modifications and necessary
testing by September 1, 2001.
From a broader business perspective, conversion to the Euro may cause
pricing disparities in different markets to narrow, lowering the Company's
margins. Nevertheless, the Company believes the conversion to the Euro will not
have a material impact on the Company's consolidated financial results.
OUTLOOK
It is difficult to forecast short-term operating results due to the number
of environmental factors that may impact current results. Local agricultural
markets are highly responsive to a number of variables including macro-economic
conditions, weather, and current concerns over food and environmental safety.
Typically, large and small changes in factors like these in locations where the
Company operates will randomly influence consolidated earnings.
Over the past nine months, year-over-year comparisons have been influenced
by a number of environmental factors. In Europe, for example, unusually high
margins in the prior year have been followed with current year margins below
long-term norms. Management believes this effect is primarily the result of
short-term exchange rate variations rather than any fundamental change in the
profit characteristics of the business. Year-over-year results in the Europe
region have been further hurt by depressed results in Hungary.
Performance in the Americas region has declined due primarily to problems
in Brazil and Colombia. Operational issues are being addressed, but the
agricultural sectors in both of these countries remain depressed. Asia region
improvement has partially offset the declines in Europe and the Americas. In
Asia, environmental factors are having the opposite effect as depressed
conditions in the prior two years have given way to much stronger economic
performance. The effect of short-term macro economic conditions has had a larger
impact on results than fundamental changes to our business and industry. The
feed and agricultural industries in Korea are rapidly evolving toward more
efficient structures, which will place pressure on the traditional feed sector,
but current conditions are favorable and recent initiatives to increase volumes
have been successful.
In the near term, year-over-year comparisons in Europe should be
helped by weak earnings in the fourth quarter of fiscal 1999. On the
other hand, increased incidence of shrimp disease (called "white spot"
disease) along the Pacific coast of Mexico has caused premature selling
of farmed shrimp populations and will likely contribute to lower fourth
quarter earnings in the Americas versus the prior year. All things considered,
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consolidated operating profit performance for each of the next two quarters
should still exceed that of the recently completed third quarter.
Pre-tax earnings remain subject to volatility due, in particular, to
foreign exchange gains and losses generated by volatile exchange rates and
changing capital structures within the foreign affiliates. Currently, the
Company's most significant exposures to foreign exchange gains and losses
impacting net earnings are U.S. Dollar liabilities carried in Mexico, Brazil,
Canada, Korea and Colombia. As discussed earlier, management focuses on the
Company's exposure to the change in the dollar value of net monetary asset or
liability positions in currencies other than the U.S. Dollar. These values can
also be volatile as the cost of hedging these exposures often exceeds the likely
benefit. The Company currently has significant net monetary asset or liability
positions in Euros, Philippine Pesos, Chinese Renminbi, Canadian Dollars and
Colombian Pesos.
FORWARD-LOOKING STATEMENTS & BUSINESS RISKS
Certain statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Outlook" and elsewhere in this report
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Any statements that express, or involve discussions as to, expectations,
beliefs, plans, objectives, assumptions or future events or performance (which
may use words or phrases such as "will likely result," "are expected to," "will
continue," "anticipates," "expects," "estimates," "intends," "plans,"
"projects," and "outlook") are not historical facts and may be forward-looking.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, levels of activity, cost
savings, performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, cost savings,
performance or achievements expressed or implied by such forward-looking
statements, and accordingly, such statements should be read in conjunction with
and are qualified in their entirety by reference to, such risks, uncertainties
and other factors, which are described below and elsewhere in this report. Such
factors include, among others, the following: (i) changing conditions or market
trends in the animal feeds and agricultural products industries; (ii) general
economic and business conditions, including a regional recession in any of the
various regions of the world in which Agribrands operates; (iii) the ability of
the Company to implement its business strategy and maintain and enhance its
competitive strengths; (iv) the ability of the Company to recover its raw
material costs in the pricing of its products, (v) political and economic
instability in countries or regions where the Company's business is conducted,
(vi) the level of demand for Agribrands' products,(vii) the ability of the
Company to obtain financing for specific or general corporate purposes; (viii)
actions of competitors and government entities; (ix) availability of key
personnel; (x) industry capacity trends; (xi) changes in the economic or
financial impact of, or failure to comply with, government regulations and (xii)
changes brought about by e-commerce initiatives. As a result of the foregoing
and other factors, no assurance can be given as to future results, levels of
activity and achievements, and neither Agribrands nor any other person assumes
responsibility for the accuracy and completeness of these forward-looking
statements. Any forward-looking statements contained herein speak solely as of
the date as of which such statements are made, and Agribrands undertakes no
obligation to update any forward-looking statements to reflect events or
circumstances after the date on which such statements were made or to reflect
the occurrence of unanticipated events.
The Company, as a supplier of animal feeds and other agricultural products,
is subject to the risks and uncertainties associated with the animal production
industry and the resulting fluctuations in demand for Agribrands' products. The
animal production industry, and consequently the animal feeds industry, in a
particular country can be negatively affected by a number of factors, including
the following: the market price of livestock, poultry and other animals
and their food products; alternative feed sources; changes in consumer demand
for, and consumption of, grain, meat, fish, milk and eggs; outbreaks of
diseases in humans or animals (such as BSE or "mad cow disease," foot and
mouth disease or aviarian virus); real estate values; urban development;
weather conditions; government farm programs; government regulations; tariffs,
restrictive quota and trade policies; production difficulties, including
capacity constraints and supply surpluses; and general economic conditions,
10
<PAGE>
either local, regional or global. In certain markets, the increasing nutritional
efficiency of available feeds has resulted in lower volume demand for feeds.
Profit pressure and overcapacity in various markets have led to consolidation of
both the feed production and animal production industries in those markets.
Larger animal producers have tended to integrate their business by acquiring or
constructing feed production facilities to meet some or all of their feed
requirements, and consequently have relied less on outside suppliers of animal
feeds.
The animal feeds and agricultural products business is expected to remain
highly competitive in the foreseeable future. Future growth opportunities are
expected to depend on the Company's ability to implement its strategies for
competing effectively in new, growing agricultural markets, maintaining
effective cost controls, making strategic acquisitions, effectively managing
customers changing preferences for complete feeds, concentrates or premixes, and
developing and implementing methods for more efficient manufacturing and
distribution operations, including development of e-commerce strategies, while
at the same time maintaining aggressive pricing and promotion of its products.
<TABLE>
<CAPTION>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Dollars in millions except per share data)
Quarter Ended Nine Months Ended
May 31, May 31,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $ 301.2 $ 311.8 $ 890.2 $ 954.9
------- ------- ------- -------
Costs and Expenses
Cost of products sold 252.5 261.9 741.4 796.3
Selling, general and administrative 33.8 33.8 100.7 104.9
Interest 0.8 1.7 2.3 6.9
Provisions for restructuring 1.2 - 1.2 -
Gain on sale of property - - - (0.5)
Other (income)/expense, net (1.0) (5.4) (6.8) (7.4)
------- ------- ------- -------
287.3 292.0 838.8 900.2
------- ------- ------- -------
Earnings before Income Taxes 13.9 19.8 51.4 54.7
Income Taxes 4.5 6.3 17.1 22.3
------- ------- ------- -------
Net Earnings $ 9.4 $ 13.5 $ 34.3 $ 32.4
======= ======= ======= =======
Earnings Per Share
Basic $ .95 $ 1.29 $ 3.37 $ 3.06
======= ======= ======= =======
Diluted $ .92 $ 1.27 $ 3.27 $ 3.02
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
11
<PAGE>
<TABLE>
<CAPTION>
AGRIBRANDS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in millions)
May 31, August 31,
2000 1999
------------ -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 161.4 $ 174.5
Short-term investments 1.8 3.5
Receivables, less allowance for doubtful accounts 78.1 77.0
Inventories 98.2 81.3
Other current assets 5.5 4.6
------------ -----------
Total Current Assets 345.0 340.9
------------ -----------
Investments and Other Assets 55.0 51.3
Property at Cost 348.6 346.3
Accumulated Depreciation (180.6) (172.3)
------------ -----------
168.0 174.0
------------ -----------
Total $ 568.0 $ 566.2
============ ===========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 0.4 $ 2.4
Notes payable 21.0 18.5
Accounts payable and accrued liabilities 120.8 125.1
Income taxes 5.3 8.5
------------ -----------
Total Current Liabilities 147.5 154.5
------------ -----------
Long-Term Debt 11.0 11.5
Deferred Income Taxes and Other Liabilities 27.1 26.9
Shareholders' Equity
Common stock .1 .1
Capital in excess of par 419.5 419.5
Retained earnings 84.4 50.1
Accumulated other comprehensive loss (87.8) (85.6)
Common stock in treasury, at cost (33.8) (10.8)
------------ -----------
Total Shareholders' Equity 382.4 373.3
------------ -----------
Total $ 568.0 $ 566.2
============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
12
<PAGE>
<TABLE>
<CAPTION>
AGRIBRANDS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
Nine Months Ended
May 31,
-------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash Flow from Operations
Net earnings $ 34.3 $ 32.4
Non-cash items included in income
Depreciation and amortization 18.9 17.6
Foreign exchange loss 0.1 0.6
Provision for doubtful accounts 1.4 2.6
Deferred income taxes 2.7 4.1
Gain on sale of property - (0.5)
Changes in operating assets and liabilities used in operations (26.7) 35.8
Other, net (3.5) .4
-------- ---------
Net cash provided by operations 27.2 93.0
-------- ---------
Cash Flow from Investing Activities
Property additions (16.0) (21.7)
Proceeds from the sale of property 0.8 2.7
Proceeds from sale of Korean pet food business 2.0 -
Purchase of key man life insurance (5.0) (5.0)
Other, net 1.5 (1.2)
-------- ---------
Net cash used by investing activities (16.7) (25.2)
-------- ---------
Cash Flow from Financing Activities
Proceeds from issuance of long-term debt - 8.4
Principal payments on long-term debt, including current maturities (2.4) (15.2)
Net increase (decrease) in notes payable 3.0 (19.9)
Treasury stock purchases (23.0) (5.8)
-------- ---------
Net cash used by financing activities (22.4) (32.5)
-------- ---------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.2) (0.4)
-------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (13.1) 34.9
Cash and Cash Equivalents, Beginning of Period 174.5 136.5
-------- ---------
Cash and Cash Equivalents, End of Period $ 161.4 $ 171.4
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
13
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Note 1 - GENERAL INFORMATION. Effective April 1, 1998, Agribrands
International, Inc. (the Company) became an independent, publicly
owned company as a result of the distribution by Ralston Purina
Company (Ralston) of the Company's $.01 par value Common Stock to
holders of Ralston Purina Company Common Stock at a distribution
ratio of one for ten (the Distribution). Prior to the
Distribution, the Company was formed as a wholly-owned subsidiary
of Ralston for the purpose of effecting the Distribution. Ralston
did not retain any ownership interest in the Company.
Note 2 - UNAUDITED FINANCIAL STATEMENTS. The accompanying unaudited
financial statements have been prepared in accordance with
generally accepted accounting principles and applicable SEC
guidelines pertaining to interim financial information. In the
opinion of management, all adjustments, consisting only of normal
recurring adjustments considered necessary for a fair
presentation, have been included. Operating results for any
quarter are not necessarily indicative of the results for any
other quarter or for the full year. These statements should be
read in conjunction with the Company's financial statements and
notes thereto for the year ended August 31, 1999.
Note 3 - COMPREHENSIVE INCOME:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
May 31, May 31,
---------------- -----------------
2000 1999 2000 1999
-------- ------ ------- --------
<S> <C> <C> <C> <C>
Net earnings $ 9.4 $ 13.5 $ 34.3 $ 32.4
Foreign currency translation adjustment (2.4) 0.9 (2.2) 1.5
-------- ------ ------- --------
Comprehensive income $ 7.0 $ 14.4 $ 32.1 $ 33.9
======== ====== ======= ========
</TABLE>
Note 4 - BUSINESS SEGMENT INFORMATION. Sales, operating profit and
total assets are presented below for each of the Company's
reportable segments along with a reconciliation of operating
profit for the reportable segments to total earnings before
income taxes:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
May 31, May 31,
---------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales - External:
Americas $ 141.0 $ 145.2 $ 404.9 $ 432.6
Europe 69.9 82.9 220.4 266.3
Asia 89.8 83.7 264.2 256.0
Corporate and Tradico (U.S.) 0.5 - 0.7 -
------- ------- ------- -------
Total $ 301.2 $ 311.8 $ 890.2 $ 954.9
======= ======= ======= =======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales - Intersegment:
Americas $ - $ - $ - $ -
Europe - - - -
Asia - - - -
Corporate and Tradico (U.S.) 32.0 30.4 86.6 71.4
-------- -------- -------- --------
Total $ 32.0 $ 30.4 $ 86.6 $ 71.4
======== ======== ======== ========
Operating Profit:
Americas $ 5.8 $ 7.5 $ 17.9 $ 23.3
Europe 2.9 4.3 10.4 14.7
Asia 10.0 8.0 30.4 25.9
Corporate and Tradico (U.S.) (3.8) (3.7) (10.6) (10.2)
-------- -------- -------- --------
14.9 16.1 48.1 53.7
Provisions for restructuring (1.2) - (1.2) -
Gain on sale of property - - - 0.5
Interest expense (0.8) (1.7) (2.3) (6.9)
Other income/(expense), net 1.0 5.4 6.8 7.4
-------- -------- -------- --------
Earnings before Income Taxes $ 13.9 $ 19.8 $ 51.4 $ 54.7
======== ======== ======== ========
Depreciation and Amortization:
Americas $ 1.8 $ 1.8 $ 5.5 $ 5.5
Europe 1.7 2.0 5.4 6.1
Asia 2.5 1.9 7.4 5.4
Corporate and Tradico (U.S.) 0.2 0.2 0.6 0.6
-------- -------- -------- --------
Total $ 6.2 $ 5.9 $ 18.9 $ 17.6
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
------------- --------------
<S> <C> <C>
Total Assets:
Americas $ 171.3 $ 169.3
Europe 103.0 116.0
Asia 154.2 144.5
Corporate and Tradico (U.S.) 139.5 136.4
------------- --------------
Total $ 568.0 $ 566.2
============= ==============
</TABLE>
Note 5 - SUPPLEMENTAL BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
----------- ------------
<S> <C> <C>
Receivables:
Gross receivables $ 90.1 $ 88.4
Allowance for doubtful accounts (12.0) (11.4)
----------- -----------
$ 78.1 $ 77.0
=========== ===========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
--------- ----------
<S> <C> <C>
Inventories:
Raw materials and supplies $ 76.2 $ 61.1
Finished products 22.0 20.2
--------- ----------
$ 98.2 $ 81.3
========= ==========
Investments and Other Assets:
Goodwill, net of accumulated amortization of $ 27.6 $ 29.1
$7.9 at May 31 and $6.5 at August 31
Investments in affiliated companies 6.8 6.3
Cash surrender value of key man life insurance 10.0 5.0
Deferred charges and other assets 10.6 10.9
--------- ----------
$ 55.0 $ 51.3
========= ==========
Accounts payable and accrued liabilities:
Trade accounts payable $ 79.9 $ 75.2
Incentive compensation, salaries and vacations 13.7 15.4
Restructuring reserves 0.5 -
Other items 26.7 34.5
--------- ----------
$ 120.8 $ 125.1
========= ==========
</TABLE>
Note 6 - RESTRUCTURING. During the third quarter of fiscal 2000, the
Company recorded pre-tax restructuring expenses of $1.2 million
related to restructuring and centralization activities in
Colombia and France. The restructuring expenses consisted
entirely of cash charges to terminate 50 employees. The following
table summarizes the activity within the restructuring reserves
during the quarter ended May 31, 2000. Substantially all actions
associated with these reserves are expected to be completed by
the end of fiscal 2000.
Reserves at February 29, 2000 $ -
Provision 1.2
Spending (0.7)
--------
Reserves at May 31, 2000 $ 0.5
========
Note 7 - OTHER (INCOME)/EXPENSE, NET:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
May 31, May 31,
----------------- -------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Foreign exchange loss/(gain) $ 1.1 $ (2.9) $ 0.1 $ 0.6
Investment income (2.1) (2.5) (6.9) (8.0)
------- ------- -------- --------
$ (1.0) $ (5.4) $ (6.8) $ (7.4)
======= ======= ======== ========
</TABLE>
16
<PAGE>
Note 8 - COMMON STOCK. There were 9,813,101 and 10,379,305 shares of
common stock outstanding at May 31, 2000 and August 31, 1999,
respectively. During the nine months ended May 31, 2000, the
Company purchased 566,204 shares of Agribrands' common stock for
$23.0 million.
Note 9 - EARNINGS PER SHARE. Basic earnings per share is based on the
average number of common shares outstanding during the period.
Diluted earnings per share is based on the average number of
shares used for the basic earnings per share calculation,
adjusted for the dilutive effect of stock options. The following
table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
May 31, May 31,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $ 9.4 $ 13.5 $ 34.3 $ 32.4
=========== =========== =========== ===========
Denominator:
Weighted average shares outstanding 9,942,416 10,504,726 10,174,498 10,603,807
Assumed conversion of stock options (1) 230,133 147,752 317,505 116,358
----------- ----------- ----------- -----------
Weighted average shares - assuming dilution 10,172,549 10,652,478 10,492,003 10,720,165
=========== =========== =========== ===========
Basic earnings per share (2) $ .95 $ 1.29 $ 3.37 $ 3.06
=========== =========== =========== ===========
Diluted earnings per share (2) $ .92 $ 1.27 $ 3.27 $ 3.02
=========== =========== =========== ===========
</TABLE>
(1) Stock options to purchase 1,110,500 shares of common stock were
outstanding during the quarter and nine months ended May 31, 1999 but
were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average
market price of the common shares.
(2) The sum of quarterly EPS data will not necessarily equal year-to-date
EPS data.
Note 10 - NEW ACCOUNTING STANDARD. The Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," in June 1998. The Company is still evaluating the
effect this statement will have on its financial reporting and
disclosures. Agribrands will adopt FAS 133 on September 1, 2000.
17
<PAGE>
PART II - OTHER INFORMATION
There is no information required to be reported under any items
except those indicated below.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Report:
(10.1) Form of Amendment to Non-Qualified Deferred
Compensation Plan (Filed as Exhibit 10.8 to the
Company's Form 10-K dated August 31, 1999)
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during
the quarter ended May 31, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGRIBRANDS INTERNATIONAL, INC.
--------------------------------------------------
Registrant
By: / s / David R. Wenzel
--------------------------------------------------
David R. Wenzel
Chief Financial Officer
Date: July 6, 2000
19
<PAGE>
EXHIBIT INDEX
-------------
Exhibits
--------
EX-*10.1 Form of Amendment to Non-Qualified Deferred Compensation Plan
(Filed as Exhibit 10.8 to the Company's Form 10-K dated August
31, 1999)
EX-27 Financial data schedule for 3rd Quarter of fiscal 2000
* Denotes a management contract or compensatory plan or arrangement.
(Documents prepared on Edgar and provided electronically)
20
