FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
February 28, 1994 Number 2-67985
FARMLAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Kansas 44-0209330
(State of Incorporation) (I.R.S. Employer Identification No.)
3315 North Oak Trafficway, Kansas City, Missouri
(Address of principal executive offices)
64116
(Zip Code)
816-459-6000
(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 {X} No { }
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28 August 31
1994 1993
(Amounts in Thousands)
<S> <C> <C>
CURRENT ASSETS
Accounts receivable . . . . . . . . . . . . . . . . . . $ 359,102 $ 320,980
Inventories (note 2). . . . . . . . . . . . . . . . . . 678,241 496,690
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 20,688 4,610
Other current assets. . . . . . . . . . . . . . . . . . 119,652 93,120
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . $ 1,177,683 $ 915,400
INVESTMENTS AND LONG-TERM RECEIVABLES (note 4). . . . . . . $ 185,029 $ 183,312
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost. . . . . . . . . $ 1,182,839 $ 1,154,343
Less accumulated depreciation and amortization. . . . . 680,664 649,965
NET PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . $ 502,175 $ 504,378
OTHER ASSETS. $ 128,524 $ 116,891
TOTAL ASSETS. $ 1,993,411 $ 1,719,981
</TABLE>
[FN]
See Accompanying notes to condensed consolidated financial
statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
<TABLE>
<CAPTION>
February 28 August 31
1994 1993
(Amounts in Thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts and notes payable. . . . . . . . . . . . . . . $ 557,431 $ 504,497
Current maturities of long-term debt
(note 3). . . . . . . . . . . . . . . . . . . . . 127,644 31,947
Customers' advances on product purchases. . . . . . . . 142,381 11,586
Other current liabilities . . . . . . . . . . . . . . . 149,162 106,851
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . $ 976,618 $ 654,881
LONG-TERM DEBT (excluding current maturities). . . . . . . . $ 439,096 $ 485,861
DEFERRED INCOME TAXES (note 1) . . . . . . . . . . . . . . . $ 3,402 $ 2,169
MINORITY OWNERS' EQUITY IN SUBSIDIARIES. . . . . . . . . . . $ 15,017 $ 15,363
INCOME BEFORE INCOME TAXES, PATRONAGE
REFUNDS AND APPROPRIATION FOR EARNED
SURPLUS (note 1) . . . . . . . . . . . . . . . . . $ 6,193 $ -0-
CAPITAL SHARES AND EQUITIES
Common shares, $25 par value
- Authorized 50,000,000 shares. . . . . . . . . . $ 378,727 $ 379,996
Other equities. . . . . . . . . . . . . . . . . . . . . 174,358 181,711
TOTAL CAPITAL SHARES AND EQUITIES. . . . . . . . . . . . . . $ 553,085 $ 561,707
TOTAL LIABILITIES AND EQUITIES . . . . . . . . . . . . . . . $ 1,993,411 $ 1,719,981
</TABLE>
[FN]
See Accompanying notes to condensed consolidated financial
statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
February 28 February 28
1994 1993
(Amounts in Thousands)
<S> <C> <C>
Sales $ 3,000,903 $ 1,915,507
Cost of sales 2,841,579 1,797,542
Gross income. $ 159,324 $ 117,965
Selling, general & administrative expenses . . . . . . . . . $ 135,226 $ 122,527
Other income (deductions):
Interest expense. . . . . . . . . . . . . . . . . . . . $ (27,111) $ (16,930)
Operations of joint ventures. . . . . . . . . . . . . . (906) (6,583)
Other, net. . . . . . . . . . . . . . . . . . . . . . . 6,660 3,821
Total other income (deductions). . . . . . . . . . . . . . . $ (21,357) $ (19,692)
Income (loss) before income taxes, minority
owners' interest and patronage refunds. . . . . . . . . $ 2,741 $ (24,254)
Minority owners' interest in net loss of subsidiaries. . . . $ 3,452 $ -0-
Income (loss) before income taxes and
patronage refunds (note 1). . . . . . . . . . . . . . . $ 6,193 $ (24,254)
</TABLE>
[FN]
See Accompanying notes to condensed consolidated financial
statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
February 28 February 28
1994 1993
(Amounts in Thousands)
<S> <C> <C>
Sales $ 1,526,911 $ 960,190
Cost of sales 1,457,815 904,985
Gross income. $ 69,096 $ 55,205
Selling, general & administrative expenses . . . . . . . . . $ 69,321 $ 61,676
Other income (deductions):
Interest expense. . . . . . . . . . . . . . . . . . . . $ (13,978) $ (8,961)
Operations of joint ventures. . . . . . . . . . . . . . 3,161 (4,166)
Other, net. . . . . . . . . . . . . . . . . . . . . . . 3,730 2,612
Total other income (deductions). . . . . . . . . . . . . . . $ (7,087) $ (10,515)
Loss before income taxes, minority
owners' interest and patronage refunds. . . . . . . . . $ (7,312) $ (16,986)
Minority owners' interest in net loss of subsidiaries. . . . $ 2,011 $ -0-
Loss before income taxes and patronage refunds(note 1) . . . $ (5,301) $ (16,986)
</TABLE>
[FN]
See Accompanying notes to condensed consolidated financial
statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
February 28 February 28
1994 1993
(Amounts in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before income taxes
and patronage refunds . . . . . . . . . . . . . . . . . $ 6,193 $ (24,254)
Adjustments to reconcile
income (loss) before income taxes and
patronage refunds to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . 30,828 26,360
Other, net . . . . . . . . . . . . . . . . . . . . (2,999) 293
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . 25,270 (44,745)
Inventories. . . . . . . . . . . . . . . . . . . . (144,619) (188,589)
Other assets . . . . . . . . . . . . . . . . . . . (55,843) (7,588)
Accounts payable . . . . . . . . . . . . . . . . . (6,742) (6,574)
Advances on product purchases. . . . . . . . . . . 130,795 102,707
Accrued interest and other liabilities . . . . . . 8,900 (2,801)
Net cash used in operating activities. . . . . . . . . . . . $ (8,217) $ (145,191)
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to borrowers by finance companies. . . . . . . $ -0- $ (326,065)
Collections from borrowers by finance
companies. . . . . . . . . . . . . . . . . . . . . . -0- 316,170
Proceeds from disposal of investments
and notes receivable . . . . . . . . . . . . . . . 8,789 2,176
Acquisition of investments and
notes receivable . . . . . . . . . . . . . . . . . (17,936) (10,595)
Acquisition of businesses (note 4). . . . . . . . . . . (33,251) -0-
Capital expenditures. . . . . . . . . . . . . . . . . . (35,183) (57,277)
Other 12,438 1,915
Net cash used in investing activities. . . . . . . . . . . . $ (65,143) $ (73,676)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease of demand loan certificates. . . . . . . . $ (8,378) $ (15,122)
Proceeds from bank loans and notes payable. . . . . . . 620,407 596,043
Payments on bank loans and notes payable. . . . . . . . (596,852) (449,298)
Proceeds from issuance of
subordinated debt certificates. . . . . . . . . . 31,829 42,149
Payments for redemption of
subordinated debt certificates . . . . . . . . . . (23,835) (10,533)
Increase of checks and drafts outstanding . . . . . . . 20,585 51,943
Payments for redemption of equities . . . . . . . . . . (46) (13,444)
Payments of patronage refunds and dividends . . . . . . -0- (17,938)
Other 1,277 328
Net cash provided by financing activities. . . . . . . . . . $ 44,987 $ 184,128
Net decrease in cash and cash equivalents. . . . . . . . . . $ (28,373) $ (34,739)
Cash and cash equivalents at
beginning of period. . . . . . . . . . . . . . . . . . 28,373 34,739
Cash and cash equivalents at end of period . . . . . . . . . $ -0- $ -0-
<FN>
See accompanying notes to condensed consolidated financial
statements
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Interim Financial Statements
The information included in these condensed consolidated
financial statements reflects all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management,
are necessary for a fair statement of the results for the interim
periods presented. Certain reclassifications have been made to
the condensed consolidated statements of operations of the prior
year to conform with the current year presentation.
In accordance with the bylaws of Farmland Industries, Inc.
("Farmland") and its cooperative subsidiaries, patronage refunds
are apportioned and distributed or patronage losses are
apportioned at the end of each fiscal year. As this
apportionment is determined only at the end of each fiscal year
and since the provision for income taxes, dividends, and the
resultant amount of net income (loss) transferred to surplus are
dependent upon the determination of the amount of the patronage
refund or patronage loss, Farmland Industries, Inc. and
subsidiaries ("the Company") has historically made no provisions
for income taxes or patronage refunds in its interim financial
statements. Therefore, the amount of interim income before
income taxes and patronage refunds has been reflected as a
separate item in the accompanying February 28, 1994 condensed
consolidated balance sheet.
(2) Inventories
Major components of inventories at February 28, 1994, and
August 31, 1993, are as follows:
<TABLE>
<CAPTION>
February 28 August 31
1994 1993
(Amounts in Thousands)
<S> <C> <C>
Finished and in-process products . . . . $ 381,930 $ 285,947
Grain. . . . . . . . . . . . . . . . . . . . . 166,793 91,990
Beef . . . . . . . . . . . . . . . . . . . . . . 23,191 27,754
Materials. . . . . . . . . . . . . . . . . . . . 47,027 43,857
Supplies . . . . . . . . . . . . . . . . . . . . 40,030 41,388
$ 658,971 $ 490,936
LIFO adjustment. . . . . . . . . . . . . . . . . 19,270 5,754
$ 678,241 $ 496,690
</TABLE>
All inventories, other than grain, supplies and certain beef
and petroleum inventories, are valued at the lower of first-in,
first-out (FIFO) cost or market. The Company follows a policy of
hedging its grain commodity transactions. Grain inventories are
valued at market adjusted for net unrealized gains or losses on
open commodity contracts. Supplies are valued at cost. Crude
oil, refined petroleum products, beef and beef by-products are
valued at the lower of last-in, first-out (LIFO) cost or market.
In applying the lower of cost or market valuation method in the
case of petroleum LIFO inventory, the general practice is
modified to conform to the integral view of interim financial
statements. Accordingly, a seasonal market value decline below
cost of LIFO inventories, at an interim date, which is reasonably
expected to be restored by year-end, is not recognized in interim
results of operations since no loss is expected to be incurred in
the annual period. At February 28, 1994, the carrying value of
petroleum inventories stated under the LIFO method was
$105,578,000. This exceeded the market value of such inventory
by $10,165,000. However, based on historical prices of energy
products and seasonal market price variations, the market value
decline below cost is expected to be a temporary seasonal price
fluctuation.
Had the lower of first-in, first-out (FIFO) cost or market
been used to value these petroleum products, inventories at
February 28, 1994 would have been lower by $19,270,000. The LIFO
valuation method had the effect of increasing income before
income taxes and patronage refunds for the three and six months
ended February 28, 1994 by $9,683,000 and $13,516,000,
respectively, and increasing income before income taxes and
patronage refunds for the three and six months ended February 28,
1993 by $5,615,000 and $8,314,000, respectively.
The carrying value of beef inventories stated under the LIFO
method was $20,712,000 at February 28, 1994. The LIFO method of
accounting for beef inventories had no effect on the carrying
value of inventories or on the income reported for the three and
six months ended February 28, 1994, because market value of these
inventories was lower than LIFO or FIFO cost.
(3) Contingencies
On July 28, 1983, Farmland sold the stock of Terra Resources,
Inc. ("Terra"), a wholly-owned subsidiary engaged in oil and gas
exploration and production operations, and exited its oil and gas
exploration and production activities. The gain from the sale of
Terra amounted to $237,200,000 for tax reporting purposes.
During 1983, and prior to the sale of the Terra stock, Farmland
received certain distributions from Terra totaling $24,800,000.
For tax purposes, Farmland claimed intercorporate
dividends-received deductions for the entire amount of such
distributions.
On March 24, 1993, the Internal Revenue Service ("IRS")
issued a statutory notice to Farmland asserting deficiencies in
federal income taxes (exclusive of statutory interest thereon) in
the aggregate amount of $70,775,000. The asserted deficiencies
relate primarily to the Company's tax treatment of the sale of
the Terra stock and the distributions received from Terra prior
to the sale. The IRS asserts that Farmland incorrectly treated
the Terra sale gain as income against which certain
patronage-sourced operating losses could be offset, and that, as
a nonexempt cooperative, Farmland was not entitled to an
intercorporate dividends-received deduction in respect of the
1983 distribution by Terra. It further asserts that Farmland
incorrectly characterized gains for tax purposes aggregating
approximately $14,600,000, and a loss of approximately
$2,300,000, from the disposition of certain other assets. On
June 11, 1993, Farmland filed a petition in the United States Tax
Court contesting the asserted deficiencies in their entirety. A
trial date has not yet been set.
If the IRS ultimately prevails on all of the adjustments
asserted in the statutory notice, Farmland would have additional
federal and state income tax liabilities aggregating
approximately $85,800,000 plus accumulating statutory interest
thereon (through February 28, 1994, of approximately
$140,000,000). In addition, such adjustments would affect the
computation of Farmland's taxable income for its 1989 tax year
and, as a result, could increase Farmland's federal and state
income taxes for that year by approximately $5,000,000 plus
applicable statutory interest thereon.
No provision has been made in the consolidated financial
statements for federal or state income taxes (or interest
thereon) in respect of the IRS claims described above. Farmland
believes that it has meritorious positions with respect to all of
these claims and will continue to vigorously pursue their
favorable resolution through the pending litigation.
In the opinion of Bryan Cave, Farmland's special tax counsel,
it is more likely than not that the courts will ultimately
conclude that (i) Farmland's treatment of the Terra sale gain was
substantially, if not entirely, correct; and (ii) Farmland
properly claimed a dividends-received deduction in respect of the
1983 distributions which it received from Terra prior to the sale
of the Terra stock. Counsel has further advised, however, that
none of the issues involved in these disputes is free from doubt,
and that there can be no assurance that the courts will
ultimately rule in favor of Farmland on any of these issues.
Should the IRS ultimately prevail on all of its asserted
claims, all claimed federal and state income taxes as well as
accrued interest would become immediately due and payable, and
would be charged to current operations. In such case, the
Company would be required to renegotiate agreements with its
banks to maintain compliance with various requirements of such
agreements, including working capital and funded indebtedness
provisions. However, no assurance can be given that such
renegotiation would be successful. Alternatives could include
other financing arrangements or the possible sale of assets.
National Beef Packing Company L.P. ("NBPC"), a 58%-owned
subsidiary (engaged in beef processing operations) has lines of
credit under an agreement in which two banks participate.
Borrowings covered by this loan agreement are nonrecourse to the
Company. As a result of losses in beef operations, NBPC is not
in compliance with certain covenants of this agreement. At
February 28, 1994, the Company's investments in and advances to
NBPC were $23,374,000.
(4) Acquisition of Businesses
In December 1993, Farmland acquired 100% ownership of seven
international grain trading companies (collectively referred to
as "Tradigrain"), for approximately $31,028,000 in cash.
In October 1993, Farmland acquired all of the assets and
assumed certain liabilities of National Carriers, Inc. in
Liberal, Kansas for approximately $2,223,000 in cash.
The purchase method of accounting has been used to account
for these acquisitions. The results of operations of the
acquired enterprises have been included in the accompanying
consolidated statements of operation from the dates of
acquisition. The pro forma effects of these acquisitions on the
accompanying consolidated financial statements are not
significant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Farmland Industries, Inc. ("Farmland") is a regional farm
supply and marketing cooperative. Farmland and subsidiaries
(the"Company") conducts business primarily in two operating
areas. On the input side of the agricultural industry, the
Company operates as a farm supply cooperative. On the output
side of the agricultural industry, the Company operates as a
processing and marketing cooperative.
Cooperative farm supply operations consists of three product
divisions--petroleum, fertilizer and agricultural chemicals, and
feed. Products of the petroleum division are principally refined
fuels, propane, by-products of petroleum refining and a complete
line of car, truck and tractor tires and accessories. Principal
products of the fertilizer and agricultural chemicals division
are nitrogen, phosphate and potash fertilizers and a complete
line of insecticides, herbicides and mixed chemicals. Feed
division products include swine, beef, poultry, mineral and
specialty feeds, feed ingredients and animal health products.
The Company distributes farm supply products at wholesale. Its
customers are primarily local farm cooperative associations which
are members and owners of Farmland. These local cooperatives
distribute products primarily to farmers and ranchers who utilize
the products in the production of farm crops and livestock.
Cooperative marketing operations include the storage and
marketing of grain, processing pork and beef, and marketing fresh
pork, processed pork, fresh beef and boxed beef. Hogs and grain
are supplied to the Company primarily by members. Cattle are
purchased from producers in the proximity of beef plants at
Liberal and Dodge City, Kansas. The Company has made arrangements
to allow beef producers to become members and supply cattle to
the Company on a patronage basis.
Geographically, the Company's markets are mid-western states
which comprise the corn belt and the wheat belt. A substantial
portion of the Company's supply and marketing products are
produced in facilities owned by the Company or operated by the
Company under long-term lease arrangements. No material part of
the business of any segment of the Company is dependent on a
single customer or a few customers.
The Company's revenues depend to a large extent on conditions
in agriculture and may be volatile due to factors beyond the
Company's control, such as weather, crop failures, federal
agricultural programs, production efficiencies, and direct
imports or exports. In addition, global variables which affect
supply, demand and price of crude oil and refined fuels impact
the Company's petroleum operations. Management cannot determine
the extent to which future operations of the Company may be
impacted by these factors. The Company's cash flow and net
income may continue to be volatile as conditions affecting
agriculture and markets for the Company's products change.
Financial Condition, Liquidity and Capital Resources
The Company maintains two primary sources for debt capital: a
continuous public offering of its debt securities and bank lines
of credit, primarily with the National Bank for Cooperatives
("CoBank").
The Company's debt securities are offered through a
wholly-owned broker/dealer subsidiary on a best-efforts basis.
The types of securities offered include certificates payable on
demand and five-, ten- and twenty-year subordinated debt
certificates. The total amount of such debt outstanding and the
flow of funds to, or from, the Company as a result of this public
offering are influenced by the rate of interest which Farmland
establishes for each type of debt certificate offered and by
options of Farmland to call for redemption certain of its
outstanding debt certificates. During the six months ended
February 28, 1994, the outstanding balance of demand loan and
subordinated debt certificates decreased $400,000.
The Company's credit lines with CoBank provide a source of
long-term and short-term funds and provide support for letters of
credit issued by the bank on behalf of Farmland. Under these
lines, a commodity loan is available to finance grain
inventories, seasonal loans are available for financing
inventories and operations, and term loans are available for
facility additions. At February 28, 1994, the maximum borrowings
available to Farmland under existing lines of credit with CoBank
totaled $510.7 million, of which $243.6 million was borrowed, and
$55.1 million was being utilized for support of letters of credit
issued on behalf of Farmland by CoBank.
CoBank and Rabobank Nederland have been retained by Farmland
as Co-agents to lead a syndication of a $650 million credit
facility offered by the Company to a group of both domestic and
foreign banks. The Co-agents have committed to provide up to
$500 million of the syndication amount. To provide for the time
necessary to complete this transaction, both CoBank and Rabobank
have extended their existing credit agreements until May 16,
1994. The Company expects to have completed the syndication by
that time, and the new credit agreement will replace the existing
CoBank and Rabobank lines of credit and combine other existing
credit facilities under a single credit agreement.
Farmland's loan agreements with CoBank contain provisions
which require the Company to maintain consolidated working
capital of not less than $150 million and to maintain
consolidated net worth of not less than $425 million. In
addition, the agreements require the Company to maintain funded
indebtedness and senior funded indebtedness of not more than 52%
and 43% of capitalization, respectively. All computations are
based on consolidated financial data adjusted to exclude
nonrecourse subsidiaries (any subsidiary for which Farmland is
not directly or indirectly liable for any of such subsidiary's
indebtedness). It is expected that the terms of the new credit
agreement will be substantially the same as those in the existing
CoBank agreement. Computed in accordance with the loan
agreements, at February 28, 1994, working capital was $216.5
million, net worth was $565.0 million and funded indebtedness and
senior funded indebtedness were 46.7% and 23.4% of
capitalization, respectively.
Farmland also has credit facilities with various commercial
banks. At February 28, 1994, Farmland's available credit from
commercial banks under committed and uncommitted arrangements was
$215.0 million and $40.0 million, respectively. At February 28,
1994, borrowings under the committed credit facilities were
$125.0 million. At February 28, 1994, there were no borrowings
under the uncommitted credit facilities. In addition,
$16.9 million was used to support letters of credit issued by
such banks on Farmland's behalf. Financial covenants of these
arrangements are not more restrictive than Farmland's credit
lines with CoBank.
Management considers these arrangements for debt capital to
be adequate for the Company's present operating and capital
plans. However, alternative financing arrangements are
continuously evaluated.
In December 1993, Farmland acquired 100% ownership of seven
international grain brokerage companies (collectively referred to
as "Tradigrain"). Tradigrain has borrowing agreements with
various international banks which provide financing and letters
of credit to support current international grain trading
transactions. Obligations of Tradigrain under these loan
agreements are nonrecourse to the Company. Tradigrain's
operations are expected not to increase or decrease the Company's
liquidity in any material way.
Negotiations to sell a refinery at Coffeyville, Kansas were
terminated during the three months ended February 28, 1994.
Future discussions regarding the disposition of this refinery are
not contemplated at this time.
National Beef Packing Company L.P. ("NBPC"), a 58%-owned
subsidiary (engaged in beef processing operations) has lines of
credit under an agreement in which two banks participate. This
agreement is intended to provide credit for NBPC's operations and
facilities. Borrowings covered by this loan agreement are
nonrecourse to the Company. NBPC is not in compliance with
certain covenants of this agreement. See note 3 of the notes to
the condensed consolidated financial statements.
Leveraged leasing has been utilized to finance railcars, and
a substantial portion of nitrogen fertilizer production
equipment. Under the most restrictive covenants of its leases,
the Company has agreed to maintain working capital of at least
$75 million, consolidated funded indebtedness not greater than
65% of consolidated capitalization, and consolidated senior
funded indebtedness not greater than 50% of consolidated
capitalization.
Major uses of cash during the six months ended February 28,
1994 include $35.2 million for capital expenditures, $33.3
million for acquisition of businesses and $17.9 million for
acquisition of investments. These funds were provided from a
$23.6 million increase in net bank borrowings , a $20.6 million
increase in checks and drafts outstanding and $28.4 million was
provided from the 1993 year end cash balance.
The Internal Revenue Service issued a statutory notice to
Farmland asserting significant deficiencies in federal income
taxes and statutory interest thereon. Farmland filed a petition
in the United States Tax Court contesting the asserted
deficiencies in their entirety. See note 3 of the notes to the
condensed consolidated financial statements.
Results of Operations
Operating results for any quarter are not necessarily
indicative of the results expected for the full year. The
principal businesses of Farmland are highly seasonal. The
majority of sales of farm supply products occurs in the spring
months, revenues in grain marketing historically are concentrated
in the summer months and summer is the lowest sales period for
pork marketing. In view of the seasonality of the Company's
businesses, it must be emphasized that the results for the three
months and six months ended February 28, 1994 should not be
annualized to project a full year's results.
Six Months Ended February 28, 1994 Compared with Six Months Ended
February 28, 1993
Sales
Sales for the six months ended February 28, 1994, increased
$1,085.4 million or 56.7% compared with the corresponding period
of the prior year. The increase includes $944.7 million higher
sales of agricultural output products (grain, pork and beef),
$126.9 million higher sales of farm production input products
(fertilizer and agricultural chemicals, petroleum and feed) and
$13.8 million higher sales of other products and services.
Sales of output products increased mostly because of business
acquisitions. Food marketing sales increased $700.9 million
principally because beef operations, acquired in April 1993, had
sales of $572.1 million in the six months ended February 28, 1994
and sales of pork products increased $128.8 million, primarily
due to the acquisition of a plant at Monmouth, Illinois in
February, 1993. In addition, grain sales increased $243.8
million primarily due to higher unit sales and prices of corn and
milo.
The increase of input products sales was principally caused
by higher fertilizer and feed unit sales and by higher feed
ingredients prices. Fertilizer and feed sales increased
$105.8 million and $36.7 million, respectively. Petroleum sales
decreased $15.6 million.
Sales of petroleum products decreased mostly because of
$8.9 million lower sales of propane, $4.9 million lower sales of
natural gas liquids ("NGL's") and $2.3 million lower sales of
refined fuels. Propane sales decreased principally because grain
drying activities were less extensive in the current year than in
the prior year when weather conditions were extremely wet during
the fall harvest. Sales of NGL's decreased because these
products were consumed in processing activities at the refinery.
During the prior year, production at the refinery was suspended
approximately 40 days for scheduled maintenance and during the
maintenance period the NGL's were sold. Refined fuel sales
decreased because the average selling price was lower than in the
prior year. Unit sales of refined fuels exceeded the prior year
by 12%.
Income Before Income Taxes and Patronage Refunds
Income before income taxes and patronage refunds for the six
months ended February 28,1994 increased $30.4 million compared
with the corresponding period of the prior year. The improvement
is attributable to the agricultural input side of the Company's
business. Petroleum, fertilizer and agricultural chemicals, and
other agricultural input businesses increased operating profits
by $25.1 million, $13.5 million, and $2.3 million, respectively.
In addition, the Company's share of fertilizer joint ventures'
income increased $8.8 million. These increases were partly
offset by decreased results in the grain and food marketing
businesses of $7.8 million and $5.6 million, respectively, and by
$10.2 million higher interest.
Results from petroleum operations increased primarily because
unit margins on diesel fuels with low levels of sulfur (required
by the Environmental Protection Agency for diesel fuel sold after
September 30, 1993) were higher than in the corresponding period
of the prior year. These margins were significantly higher
immediately after the crossover to low level sulfur fuels. In
addition, unit margins on other refined fuels improved because
crude oil costs decreased and because production at the
Coffeyville, Kansas refinery was substantially higher than in the
prior year when production was suspended 40 days for scheduled
maintenance.
Operating profit of the fertilizer and agricultural chemicals
business increased principally because of increased fertilizer
selling prices and 32% higher unit sales. The unit sales
increase was primarily due to more favorable weather conditions.
The grain marketing business had a loss of $7.0 million in
the six months ended February 28, 1994 compared with an operating
profit of $.9 million in the corresponding period of the prior
year. The loss is attributable to low unit margins on grain
sales, higher operating expenses and weather-related grain
spoilage.
The food marketing business had lower operating profit
primarily because of a $5.2 million operating loss in its beef
operations acquired in April, 1993. This loss was primarily due
to the effect of intense competition on margins in beef and to
unusually high cattle prices.
The Company's share of joint ventures' income increased $5.7
million of which $8.8 million was increased income of fertilizer
ventures and $3.2 million was decreased income of a beef venture.
Interest expense increased primarily due to an increase of
the level of borrowed funds.
Three Months Ended February 28, 1994 Compared with the Three
Months Ended February 28, 1993.
The changes in sales and income before income taxes and
patronage refunds for the three months ended February 28, 1994,
compared to the corresponding period of the prior year, are
primarily as discussed in the six months comparison.
Recent Accounting Pronouncements
In the first quarter of fiscal year 1994, the Company adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." Under SFAS 106, the expected costs of
providing such benefits are accrued during the active service
period of the employee rather than accounting for such costs on a
pay-as-you-go (cash) basis. The effect of implementation of
SFAS 106, including amortization (over 20 years) of previously
unrecognized costs related to the service period already rendered
(the transition obligation) was insignificant.
In the first quarter of fiscal year 1994, the Company adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) 109, "Accounting for Income Taxes." Under SFAS 109,
deferred tax assets and liabilities are determined based upon the
tax effect of differences between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
SFAS 109 generally allows recognition of deferred tax assets if
future realization of the tax benefit is more likely than not.
The effect of implementation of SFAS 109 at September 1, 1993 was
insignificant.
Statement of Financial Accounting Standards No. 112,
"Employer's Accounting for Postemployment Benefits", was issued
by the FASB in November 1992 and is effective for fiscal years
beginning after December 15, 1993 (the Company's 1995 fiscal
year). Statement 112 establishes standards of accounting and
reporting for the estimated cost of benefits provided to former
or inactive employees. Management expects that the adoption of
Statement 112 will not have a significant impact on the Company's
consolidated financial statements.
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," was issued by the Financial Accounting Standards
Board ("FASB") in May 1993 and is effective for fiscal years
beginning after December 15, 1993 (the Company's 1995 fiscal
year). Statement 115 expands the use of fair value accounting
and the reporting for certain investments in debt and equity
securities. Management expects the adoption of Statement 115
will not have a significant impact on the Company's consolidated
financial statements.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed below are filed as part of Form 10-Q for
quarter ended February 28, 1994.
None
(b) No reports on Form 8-K were filed during the quarter ended
February 28, 1994.
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 hereunto duly authorized.
FARMLAND INDUSTRIES, INC.
(Registrant)
By: /s/ JOHN F. BERARDI
John F. Berardi
Executive Vice President
and Chief Financial Officer
Date: April 14, 1994
