FORM 10-Q/A
Amendment No. 1
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
May 31, 1995 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>
May 31 August 31
1995 1994
------------ ------------
(Amounts in Thousands)
<S> ..................................<C> <C>
Current Assets:
Cash and cash equivalents ................$ 0 $ 44,084
Accounts receivable ...................... 428,516 394,906
Inventories (Note 2) ..................... 673,052 538,314
Prepaid expenses ......................... 17,234 15,159
Other current assets ..................... 70,397 103,980
------------ -----------
Total Current Assets.........................$ 1,189,199 $ 1,096,443
------------ -----------
Investments and Long-Term Receivables.......$ 178,145 $ 189,601
------------ -----------
Property, Plant and Equipment:
Property, plant and equipment, at cost ...$ 1,312,640 $ 1,202,159
Less accumulated depreciation
and amortization ....................... 737,049 700,869
------------ -----------
Net Property, Plant and Equipment............$ 575,591 $ 501,290
------------- -----------
Other Assets.................................$ 135,569 $ 139,297
------------ -----------
Total Assets.................................$ 2,078,504 $ 1,926,631
============ ===========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
<TABLE>
<CAPTION>
May 31 August 31
1995 1994
---------------- ----------------
(Amounts in Thousands)
<S> <C> <C>
Current Liabilities:
Accounts and notes payable .......................$ 516,964 $ 548,476
Current maturities of long-term debt ............. 41,719 27,840
Customers' advances on product purchases ......... 61,597 24,438
Other current liabilities ........................ 236,372 204,985
-------------- --------------
Total Current Liabilities.............................$ 856,652 $ 805,739
-------------- --------------
Long-Term Debt (excluding current
maturities)........................................$ 481,547 $ 517,806
-------------- --------------
Deferred Income Taxes (Note 1)........................$ 12,487 $ 6,340
-------------- --------------
Minority Owners' Equity in Subsidiaries...............$ 14,048 $ 11,733
-------------- --------------
Net Income (Note 1)...................................$ 129,043 $ -0-
-------------- ---------------
Capital Shares and Equities:
Common shares, $25 par value - Authorized
50,000,000 shares ............................$ 398,619 $ 363,562
Other equities ................................... 186,108 221,451
-------------- --------------
Total Capital Shares and Equities.....................$ 584,727 $ 585,013
-------------- --------------
Total Liabilities and Equities........................$ 2,078,504 $ 1,926,631
=============== ==============
</TABLE>
[FN]
See accompanying Notes to Condensed Consolidated Financial Statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
May 31
May 31 1994
1995 Restated
------------ ------------
(Amounts in Thousands)
<S> <C> <C>
Sales.. .. ..................................$ 5,325,044 $ 4 ,981,747
Cost of sales................................ 4,930,754 4,700,939
--------------- --------
Gross income.................................$ 394,290 $ 80,808
------------- ------------
Selling, general & administrative expenses...$ 238,539 $ 218,372
------------- -------------
Other income (deductions):
Interest expense .........................$ (39,431) $ (38,310)
Other, net ............................... 14,249 10,037
------------ ------------
Total other income (deductions)..............$ (25,182) $ (8,273)
------------- -------------
Income before income taxes and equity in net income
of investees and minority owners' interest in
net (income) loss of subsidiaries ........$ 130,569 $ 34,163
Income tax (expense) (Note 1)................ (21,439) (2,255)
-------------- -------------
Income before equity in net income of investees
and minority owners' interest in
net (income) loss of subsidiaries ........$ 109,130 $ 31,908
Equity in net income of investees (Note 4)... 22,410 6,242
Minority owners' interest in net (income)
loss of subsidiaries ..................... (2,497) 5,158
------------- ------------
Net income (Note 1)..........................$ 129,043 $ 43,308
============= ============
<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
May 31
May 31 1994
1995 Restated
------------ ------------
(Amounts in Thousands)
<S> <C> <C>
Sales.. .. ..................................$ 2,017,385 $ 1,980,844
Cost of sales................................ 1,861,428 1,859,360
--------------- ---------------
Gross income.................................$ 155,957 $ 121,484
------------- -------------
Selling, general & administrative expenses...$ 86,512 $ 83,146
------------ ------------
Other income (deductions):
Interest expense .........................$ (12,298) $ (11,199)
Other, net ............................... 4,172 3,377
------------ ------------
Total other income (deductions)..............$ (8,126) $ (7,822)
------------- -------------
Income before income taxes and equity in net income
of investees and minority owners' interest in
net (income) loss of subsidiaries ........$ 61,319 $ 30,516
Income tax (expense) (Note 1)............... (10,733) (2,014)
-------------- -------------
Income before equity in net income of investees
and minority owners' interest in
net (income) loss of subsidiaries ........$ 50,586 $ 28,502
Equity in net income of investees (note 4)... 13,335 5,941
Minority owners' interest in net (income)
loss of subsidiaries ..................... (3,039) 1,932
------------- ------------
Net income (note 1)..........................$ 60,882 $ 36,375
============ ============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
May 31
May 31 1994
1995 Restated
---------- ----------
(Amounts in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .....................................$ 129,043 $ 43,308
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............... 49,437 49,591
Equity in net income of investees ........... (22,410) (6,242)
Other, net .................................. 7,346 (3,734)
Changes in assets and liabilities:
Accounts receivable ...................... (15,031) (54,617)
Inventories .............................. (121,440) 23,380
Other current assets ..................... 12,046 (39,007)
Accounts payable ......................... (29,039) 54,916
Advances on product purchases ............ 37,159 5,448
Other current liabilities ................ 39,890 48,420
----------- -----------
Net cash provided by operating activities...........$ 87,001 $ 121,463
----------- ------------
Cash flows from investing activities:
Capital expenditures ............................$ (86,527) $ (47,782)
Proceeds from disposal of investments
and notes receivable ........................ 37,626 27,056
Acquisition of investments and notes receivable . (18,968) (14,935)
Acquisition of businesses ...................... (2,200) (33,251)
Proceeds from sale of fixed assets .............. 2,321 14,399
Other ......................................... 295 -0-
--------- ----------
Net cash used in investing activities...............$ (67,453) $ (54,513)
------------- -------------
Cash flows from financing activities:
Net decrease of demand loan certificates ........$ (7,137) $ (1,484)
Proceeds from bank loans and notes payable ...... 370,686 1,183,819
Payments on bank loans and notes payable ........ (460,762) (1,287,651)
Proceeds from issuance of subordinated
debt certificates ............................. 34,461 43,868
Payments for redemption of subordinated
debt certificates ............................. (18,632) (29,026)
Increase of checks and drafts outstanding ....... 56,306 -0-
Payments for redemption of equities ............. (12,335) (158)
Payments of patronage refunds and dividends ..... (26,308) -0-
Other ......................................... 89 2.309
--------- -------------
Net cash used in financing activities...............$ (63,632) $ (88,323)
------------- -------------
Net decrease in cash and cash equivalents...........$ (44,084) $ (21,373)
Cash and cash equivalents at beginning of period.... 44,084 28,373
----------- -----------
Cash and cash equivalents at end of period..........$ -0- $ 7,000
========== ==========
<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
Unless the context requires otherwise, (i) "Farmland" or the "Company"
herein refers to Farmland Industries, Inc. and its consolidated
subsidiaries, and (ii) all references herein to
"year" or "years" are to fiscal years ended August 31.
The information
included in these Condensed Consolidated Financial Statements of Farmland
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.
In accordance with the bylaws of Farmland and
its cooperative subsidiaries, the member-sourced portion of income is determined
annually and distributed to members of Farmland as patronage refunds. The
member-sourced portion of such income is determined on the basis of the quantity
or value of business done by Farmland during the year with or for patrons
entitled to receive patronage refunds. As this determination is made only after
the end of the fiscal year, and since the appropriation of earned surplus is
dependent on the determination of the amount of patronage refunds, and in view
of the fact that the portion of the annual patronage refund to be paid in cash
and Farmland equity (common stock, associate member common stock or capital
credits) is determined (by the Farmland Board of Directors at its discretion)
after the amount of the annual patronage refund has been determined, Farmland
makes no provision for patronage refunds in its interim financial statements.
Therefore, the amount of net income has been reflected as a separate item in the
accompanying May 31, 1995 condensed consolidated balance sheet.
As patronage refunds are an integral part of the computation of income taxes,
the Company historically has not provided for income taxes in its interim period
financial statements. However, in accordance with generally accepted accounting
principles, the Company commenced (effective with the 1995 fiscal year)
including a provision for estimated income taxes in its interim financial
statements. For the nine months and three months ended May 31, 1995, the
Company estimated an effective tax rate based on historic effective rates. The
actual effective rate for 1995 may be subject to revision. Based on the
effective tax rate for the 1994 fiscal year, the Condensed Consolidated
Financial Statements for the nine months and three months ended May 31, 1994
have been restated to include an interim income tax expense of $379,000 and
$1,119,000, respectively.
(2) INVENTORIES
Major components of inventories at May 31, 1995, and August 31, 1994, are as
follows:
<TABLE>
<CAPTION>
May 31 August 31
1995 1994
-------- --------
(Amounts in Thousands)
<S> <C> <C>
Finished and in-process products ........$ 362,923 $ 286,381
Materials ............................... 62,498 51,428
Supplies ................................ 44,988 39,885
Beef .................................... 36,194 24,267
Grain ................................... 166,449 136,353
----------- -----------
$ 673,052 $ 538,314
=========== ===========
</TABLE>
Grain inventories are valued at market adjusted for the net unrealized
gains or losses on open grain contracts. Crude oil, refined petroleum
products, cattle and beef by-products are valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories are valued at the lower
of first-in, first-out (FIFO) cost or market. Supplies are valued at cost.
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 May 31, 1995, the carrying value of petroleum inventories stated
under the LIFO method was $113,345,000. This exceeded the market value of
such inventory by $1,936,000. 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 May 31, 1995 would have been
lower by $3,276,000.
The carrying value of beef inventories stated under the LIFO method was
$28,612,000 at May 31, 1995. The LIFO method of accounting for beef
inventories had no effect on the carrying value of inventories or on the
income reported for the nine months and three months ended May 31, 1995
because market value of these inventories was lower than LIFO or FIFO cost.
(3) CONTINGENCIES
In July 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.
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 $70,800,000.
The asserted deficiencies relate primarily to the Company's tax
treatment of the $237,200,000 gain resulting
from its sale of the stock of Terra and the IRS's contention that Farmland
incorrectly treated the Terra sale gain as income against which certain
patronage-sourced operating losses could be offset. The statutory
notice further asserts that Farmland incorrectly characterized for tax
purposes gains aggregating approximately $14,600,000, and a loss of
approximately $2,300,000, from dispositions of certain other assets and that
Farmland was not entitled to a claimed intercorporate dividends-received
deduction with respect to a $24,800,000 distribution received in 1983 from
Terra.
On June 11, 1993, Farmland filed a petition in the United States Tax Court
contesting the asserted deficiencies in their entirety. The case was tried
on June 13-15, 1995. Prior to trial, the IRS withdrew its challenge to
Farmland's claimed intercorporate dividends-received deduction and several
other minor issues were resolved. The parties will submit post-trial briefs
to the court in September and November 1995.
If the United States Tax Court decides in favor of the IRS on all
unresolved issues raised in the statutory notice, Farmland would have
additional federal and state income tax liabilities aggregating approximately
$85,800,000 plus accumulating statutory interest thereon (approximately $173,
400,000, before tax benefits of the interest deduction, through June 30,
1995), or $259,200,000 in the aggregate at June 30, 1995. In addition, such
a decision 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. Finally, the additional federal and state income
taxes and accrued interest thereon, which would be owed based on an adverse
decision, would become immediately due and payable unless the Company appealed
the decision and posted the requisite bond to stay assessment and collection.
The liability resulting from an adverse decision would be charged to
current operations and would have a material adverse effect on the Company and
may affect its ability to pay, when due, principal and interest on the
Company's indebtedness. In order to pay any such tax claim, the Company would
have to consider new financing arrangements, including the incurrence of
indebtedness and the sale of assets. Moreover, the Company would be required
to renegotiate the Credit Agreement with its bank lenders, as well as other
existing financing agreements with certain other parties, not only to permit
such new financing arrangements, but also to cure events of default under the
Credit Agreement and certain of such other existing agreements and to maintain
compliance with various requirements of the Credit Agreement and such other
existing financing agreements, including working capital and funded indebtedness
provisions, in order to avoid default thereunder. No assurance can be given
that such financing arrangements or such renegotiation would be successfully
concluded.
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.
In the opinion of Bryan Cave, Farmland's special tax counsel, it is more
likely than not that the courts will ultimately conclude that Farmland's
treatment of the Terra sale gain was substantially, if not entirely, correct.
Such counsel has further advised, however, none of the issues involved in this
dispute is free from doubt, and there can be no assurance that the courts will
ultimately rule in favor of Farmland on any of these issues.
The Company has been designated by the Environmental Protection Agency
as a potentially responsible party ("PRP") under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), at
various sites.
The Company currently is aware of probable obligations for environmental
matters at 20 properties. As of May 31, 1995, the Company has made an
environmental accrual of $8,439,000. The Company periodically reviews and,
as appropriate, revises its environmental accruals. Based on current
information and regulatory requirements, the Company believes that the accruals
established for environmental expenditures are adequate.
The Company's actual final costs of addressing certain environmental
matters are not quantifiable, and therefore have not been accrued, because
such matters are in preliminary stages and the timing, extent and costs of
various actions which governmental authorities may require are currently
unknown. Management also is aware of other environmental matters for which
there is a reasonable possibility that the Company will incur costs to
resolve. It is possible that the costs of resolution of the matters described
in this paragraph may exceed the liabilities which, in the opinion of
management, are probable and which costs are reasonably estimable at May 31,
1995. In the opinion of management, it is reasonably possible
for such costs to be approximately an additional $24,000,000.
The Company is currently involved in three administrative proceedings
brought by Region VII of the Environmental Protection Agency ("EPA") with
respect to alleged violations under the Clean Air Act, the Emergency Planning
and Community Right-to-Know Act and RCRA at the Coffeyville refinery. The
Company is currently negotiating with the EPA concerning these matters and
believes that such negotiations may result in compromise settlements,
including the possible implementation of a Supplemental Environmental Project
in connection with the Clean Air Act proceeding. Absent such settlements, the
Company may contest the EPA's allegations. Accordingly, no provision has been
made in the Company's financial statements for these proposed penalties.
Specifically, the three administrative proceedings are described as
follows:
(1) The Company is a party to an administrative enforcement action brought
by Region VII of the EPA which alleges violations of the Emergency
Planning and Community Right-to-Know Act and the release reporting
requirements of CERCLA at its Coffeyville, Kansas refinery. This
proceeding involves alleged violations of release reporting requirements
and seeks a civil penalty in the amount of $350,000.
(2) The Company is a party to an administrative enforcement action brought
by Region VII of the EPA which alleges violations of RCRA at its
Coffeyville, Kansas refinery. In this proceeding, the EPA has proposed
a civil penalty in the amount of approximately $1.4 million.
(3) The Company has been informed by the U.S. Department of Justice of its
intent to bring an enforcement action alleging certain violations of the
Clean Air Act at its Coffeyville, Kansas refinery. The U.S. Department
of Justice has informed the Company that it will seek a civil penalty of
at least $1.6 million.
See "Business Matters Invovling the Environment" contained in the Company's
Annual Report on Form 10-K, as amended by form 10-K/A (Amendment No. 1), for
the year ended August 31, 1994.
(4) SUMMARIZED FINANCIAL INFORMATION OF INVESTEES ACCOUNTED FOR
BY THE EQUITY METHOD
Summarized financial information of investees accounted for by the equity
method for nine months ended May 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
May 31 May 31
1995 1994
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
Net sales ...............................$ 888,028 $ 585,263
============ ============
Net Income .............................$ 44,512 $ 14,053
=========== ===========
Farmland's equity in net income ........$ 22,410 $ 6,242
=========== ===========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has historically maintained two primary sources for debt
capital: a substantially continuous public offering of its debt securities
(the ''continuous debt program'') and bank lines of credit.
The Company's debt securities issued under the continuous debt program
generally are offered on a best-efforts basis through the Company's wholly
owned broker-dealer subsidiary, Farmland Securities Company, and through
American Heartland Investments, Inc. (which is not affiliated with Farmland),
and also may be offered by selected unaffiliated broker-dealers. The types
of securities offered in the continuous debt program include certificates
payable on demand and five- and ten-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 the continuous debt program 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 nine months ended May 31, 1995, the
outstanding balance of demand loan and subordinated debt certificates
increased $8.7 million.
Farmland has a $650.0 million Credit Agreement. The Credit Agreement
provides short-term credit of up to $450.0 million to finance seasonal
operations and inventory, and revolving term credit of up to $200.0 million.
At May 31, 1995, short-term borrowings under the Credit Agreement were
$183.4 million, revolving term borrowings were $50.0 million and $37.9 million
was being utilized to support letters of credit issued on behalf of Farmland
by participating banks.
Farmland pays commitment fees under the Credit Agreement of 1/10 of 1%
annually on the unused portion of the short-term commitment and 1/4 of 1%
annually on the unused portion of the revolving term commitment. In addition,
Farmland must maintain consolidated working capital of not less than $150.0
million, consolidated net worth of not less than $475.0 million and funded
indebtedness and senior funded indebtedness of not more than 52% and 43% of
Combined Total Capitalization (as defined in the Credit Agreement),
respectively. All computations are based on consolidated financial data
adjusted to exclude nonrecourse subsidiaries (as defined in the Credit
Agreement). At May 31, 1995, Farmland was in compliance with all covenants
under the Credit Agreement. The Credit Agreement expires in May 1997.
The Company maintains other borrowing arrangements with banks and
financial institutions. Under such agreements, at May 31, 1995,
$47.2 million was borrowed and letters of credit issued by banks amounted to
$37.9 million. Financial covenants of these arrangements generally are not
more restrictive than under the Credit Agreement.
In the opinion of management, these arrangements for debt capital are
adequate for the Company's present operating and capital plans. However,
alternative financing arrangements are continuously evaluated.
NBPC, 68%-owned by Farmland, maintains borrowing agreements with a group
of banks which provide financing support for its beef packing operations.
Such borrowings under this facility are nonrecourse to Farmland or Farmland's
other affiliates. At May 31, 1995, $90.0 million was available under this
facility of which $65.7 million was borrowed and $1.3 million was utilized to
support letters of credit. In addition, NBPC has incurred certain long-term
borrowings from Farmland. NBPC has pledged certain assets to Farmland and
such group of banks to support its borrowings.
Tradigrain, which is comprised of seven international grain trading
subsidiaries of Farmland, 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 Farmland or Farmland's other affiliates
Leveraged leasing has been utilized to finance railcars and a substantial
portion of the Company's fertilizer production equipment. Under the most
restrictive covenants of its leases, the Company has agreed to maintain working
capital of at least $75.0 million, Consolidated Funded Debt of not greater
than 65% of Consolidated Capitalization and Senior Funded Debt of not greater
than 50% of Consolidated Capitalization (all as defined in the most
restrictive lease).
As a cooperative, Farmland's member-sourced net earnings (i.e., income
from business done with or for members) are distributed to its voting members,
associate members and patrons in the form of common equity, capital credits or
cash. For this purpose, net income or loss was determined in accordance
with the requirements of federal income tax law up to 1994 and is determined
in accordance with generally accepted accounting principles in 1995 and
after. Other income is treated as "nonmember-sourced income".
Nonmember-sourced income is subject to income tax and after-tax earnings are
transferred to earned surplus. Under Farmland's bylaws, the member-sourced
income is distributed to members as patronage refunds unless the earned
surplus account, at the end of that year, is lower than 30% of the sum of the
prior year-end balance of outstanding common stock, associate member stock,
capital credits, nonmember capital and patronage refunds for reinvestment.
In such cases, member-sourced income is reduced by the lesser of 15% or an
amount required to increase the earned surplus account to the required
30%. The amount by which the member-sourced income is so reduced is treated
as nonmember-sourced income. The member-sourced income remaining is
distributed to members as patronage refunds. For the years 1992, 1993 and
1994, the earned surplus account exceeded the required amount by $49.5 million,
$3.8 million and $2.3 million, respectively.
Generally, a portion of the patronage refund is distributed in cash and
the balance (the "invested portion") is distributed in common stock, associate
member common stock or capital credits (depending on the membership status of
the recipient), or the Board of Directors may determine to distribute the
invested portion in any other form or forms of equities. The invested portion
of the patronage refund is determined annually by the Board of Directors,
but the invested portion of the patronage refund is not deductible for federal
income tax purposes when it is issued unless at least 20% of the amount of the
patronage refund is paid in cash. The invested portion of the patronage
refund is a source of funds from operations which is retained for use in
the business and increases Farmland's equity base. Common stock and associate
member common stock representing the invested portion of patronage refunds may
be redeemed by cash payments from Farmland to holders thereof who participate
in Farmland's base capital plan. Capital credits and other equities of
Farmland and Farmland Foods, Inc., a 99% owned subsidiary ("Foods"), may be
redeemed under other equity redemption plans. The base capital plan and other
equity redemption plans are described in the Form 10-K under "Business Equity
Redemption Plans" .
Major uses of cash during the nine months ended May 31, 1995 include net
payments of $90.1 million to decrease the balance of bank loans and other
notes outstanding, $26.3 million for patronage refunds and dividends
distributed from earnings of the 1994 fiscal year, $86.5 million for capital
expenditures, $12.3 million for the redemption of equities under the Farmland
base capital plan and special redemption plan and $19.0 million for acquisition
of investments and notes receivable. Major sources of cash in
the same period included $87.0 million from operations, $56.3 million from
an increase in the balance of checks and drafts outstanding and $37.6 million
from the disposition of investments and notes receivable.
The IRS 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
GENERAL
The Company conducts business primarily in two operating areas: inputs
and outputs. 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.
The Company's farm supply operations consist of three principal product
divisionsCpetroleum, crop production and feed. Principal products of the
petroleum division are refined fuels, propane, by-products of petroleum
refining and a complete line of car, truck and tractor tires, batteries and
accessories. Principal products of the crop production division are
nitrogen, phosphate and potash fertilizers, and, through the Company's
ownership in the Wilfarm joint venture, a complete line of insecticides,
herbicides and mixed chemicals. Principal products of the feed division
include swine, dairy, pet, beef, poultry, mineral and
specialty feeds, feed ingredients and supplements, animal health products and
livestock services. The Company's three farm supply divisions produce and
distribute products principally at wholesale. Over 50% of the
Company's farm supply products sold in 1994 were produced in plants owned
by the Company or operated by the Company under long-term lease arrangements.
Approximately 65% of the Company's sales of farm supply products sold in 1994
were to farm cooperative associations which are members of Farmland.
These farm cooperatives distribute products primarily to farmers and ranchers
in states which comprise the corn belt and the wheat belt and who utilize
the products in the production of farm crops and livestock.
On the output side, the Company's processing and marketing operations
include the storage and marketing of grain, the processing of pork and beef,
and the marketing of fresh pork, processed pork and fresh beef. In 1994,
approximately 61% of the hogs processed and 46% of the grain marketed were
supplied to the Company by its members. Substantially all of the Company's
pork and beef products sold in 1994 were processed in plants owned by the
Company.
A substantial portion of the Company's farm supply, pork and beef 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, margins and net income 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 U.S. imports and exports. In addition,
various federal and state regulations to protect the environment encourage
farmers to reduce the amount of fertilizer and other chemical applications.
Global variables which affect supply, demand and price of crude oil,
refined fuels, natural gas and other commodities may impact the Company's
operations. Historically, changes in the costs of raw materials used in
the manufacture of the Company's finished products have not necessarily
resulted in corresponding changes in the prices at which such products have
been sold by the Company. Management cannot determine the extent to which
these factors may impact future operations of the Company. 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.
Operating results for any quarter are not necessarily indicative of the
results expected for the full year. The principal businesses of the Company
are highly seasonal. Historically, the majority of sales of farm supply
products occur in the spring. Revenues in the beef business and in grain
marketing historically have been concentrated in the summer and summer is the
lowest sales period for pork products. In view of the seasonality of the
Company's businesses, it must be emphasized that the results for the nine
months and three months ended May 31, 1995 should not be annualized to project
a full year's results.
NINE MONTHS ENDED MAY 31, 1995 COMPARED WITH NINE MONTHS ENDED MAY 31, 1994
SALES
Sales for the nine months ended May 31, 1995 increased 6.9% compared with
the corresponding period of the prior year. The increase includes $373.4
million higher sales of agricultural output products (grain and food), offset
by $23.0 million lower sales of farm production input products (crop
production products, petroleum and feed) and $7.1 million lower sales of
other products and services.
Sales of agricultural output products increased due to higher grain
prices and volume, higher beef volume and as a result of an acquisition on
March 31, 1995 by NBPC (68%-owned by Farmland) of the assets of Hyplains Beef,
LLC.
Sales of agricultural input products decreased due to lower sales in the
feed and crop production business segments, partly offset by increased sales
in the petroleum business segment. Sales of the feed business segment
decreased because volume and prices of formula feed and feed ingredients
decreased. Sales of the crop production business segment reflect a net
decrease due to placing the Company's crop protection operations in a 50%-
owned joint venture on January 1, 1995. Subsequent to the formation of this
joint venture, sales of these products have not been included in the Company's
financial statements. The effect of decreased sales of crop protection
products was mostly offset by an $85.6 million increase in sales of crop
nutrients. This increase resulted from higher prices, partly offset by a
slight decrease in volume which reflected the wet spring season and delayed
planting activities. Sales of petroleum products increased primarily
because of higher gasoline volume and prices. This effect was partly offset
by lower distillate and propane unit sales and by lower prices of all other
refined products and propane.
NET INCOME
Net income for the nine months ended May 31, 1995 increased $85.7 million
compared with the corresponding period of the prior year. The increase
included increases in operating profits in crop production, food processing
and marketing and grain marketing of $70.6 million, $45.0 million and $31.5
million, respectively. In addition, the net results of joint ventures engaged
in crop production and beef operations increased $11.5 million and $4.2
million, respectively. The effect of these increases on net income was
reduced by an operating loss in the petroleum business segment of $9.7 million
in the nine months ended May 31, 1995 compared with an operating profit of
$24.4 million in the corresponding period of the prior year and a $5.9 million
decrease in operating profit in the feed business. In addition, general
corporate expenses increased $9.2 million, income taxes increased $19.2 million
and the deduction for minority owners interest increased $7.7 million which was
principally a result of increased income of the beef business.
Operating profit of the Company's crop production business increased
pimarily as a result of increased prices, partly offset by a slight decrease
in unit sales. In addition, net income from joint ventures engaged in
fertilizer operations increased because of higher volume and prices.
Operating profit of the food processing and marketing business increased
because live hog and cattle costs decreased without a corresponding decline
in wholesale prices. In addition, the number of hogs and cattle processed
increased. Operating results in the grain marketing business increased due to
higher volume and more favorable unit margins on all types of grains handled.
The petroleum business segment had an operating loss for the nine months ended
May 31, 1995, as the revenues received from selling refined products were
below the costs of purchasing and refining crude oil.
SG&A increased $20.2 in the nine months ended May 31, 1995 compared with
the corresponding period of the prior year. Approximately $11.0 million of
the increase was directly connected to business segments (primarily the grain
and pork businesses) and has been included in the determination of the
operating profit of business segments. General corporate expenses, not
identified to business segments, increased reflecting higher cost of variable
compensation plans and employee pension expenses.
The estimated effective tax rate for the nine months ended May 31, 1995
was based on historical effective rates. The actual effective tax rate may be
subject to subsequent revision. The effective tax rate for fiscal year 1994
has been used to provide income taxes for the nine months ended May 31, 1994.
THREE MONTHS ENDED MAY 31, 1995 COMPARED WITH THREE MONTHS ENDED MAY 31, 1994
The changes in sales and net income for the three months ended May 31,
1995, compared to the corresponding period of the prior year are primarily as
discussed in the nine months comparison.
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 112, ''Employer's Accounting
for Postemployment Benefits'' (''Statement 112''), which was issued by
FASB in November 1992. Statement 112 establishes standards of accounting and
reporting for the estimated cost of benefits provided to former or inactive
employees. The effect of the Company's implementation of Statement 112 at
September 1, 1994 was insignificant.
In the first quarter of 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, ''Accounting for Certain
Investments in Debt and Equity Securities'' (''Statement 115''), which was
issued by the Financial Accounting Standards Board (''FASB'') in May 1993.
Statement 115 expands the use of fair value accounting and the reporting for
investments in equity securities that have readily determinable fair values
and for all investments in debt securities. The effect of the Company's
implementation of Statement 115 at September 1, 1994 was insignificant.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibit listed below is filed as part of Form 10-Q/A or the quarter
ended May 31, 1995.
None
(b) No reports on Form 8-K were filed during the quarter ended May 31, 1995.
.
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: September 18, 1995
