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
February 28, 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>
February August 31
1995 1994
(Amounts in Thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . $ -0- $ 44,084
Accounts receivable . . . . . . . . . . 447,043 394,906
Inventories (Note 2) . . . . . . . . . 646,857 538,314
Prepaid expenses . . . . . . . . . . . 26,169 15,159
Other current assets . . . . . . . . . 106,929 103,980
----------- ------------
Total Current Assets . . . . . . . . . . . $ 1,226,998 $ 1,096,443
----------- ------------
Investments and Long-Term Receivables . . $ 182,922 $ 189,601
----------- ------------
Property, Plant and Equipment:
Property, plant and equipment, at cost $ 1,247,679 $ 1,202,159
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 721,000 700,869
----------- ------------
Net Property, Plant and Equipment . . . . . $ 526,679 $ 501,290
----------- ------------
Other Assets . . . . . . . . . . . . . . . $ 135,393 $ 139,297
----------- ------------
Total Assets . . . . . . . . . . . . . . . $ 2,071,992 $ 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>
February 28 August 31
1995 1994
(Amounts in Thousands)
<S> <C> <C>
Current Liabilities:
Accounts and notes payable . . . . . . $ 501,509 $ 548,476
Current maturities of long-term debt . 36,474 27,840
Customers' advances on product purchases 198,576 24,438
Other current liabilities . . . . . . . 190,740 204,985
------------ ------------
Total Current Liabilities . . . . . . . . . $ 927,299 $ 805,739
------------ ------------
Long-Term Debt (excluding current
maturities) . . . . . . . . . . . . . . . $ 468,724 $ 517,806
------------ ------------
Deferred Income Taxes (Note 1) . . . . . . $ 11,944 $ 6,340
------------ ------------
Minority Owners' Equity in Subsidiaries . . $ 11,043 $ 11,733
------------ ------------
Net Income (Note 1) . . . . . . . . . . . . $ 68,161 $ -0-
------------ ------------
Capital Shares and Equities:
Common shares, $25 par value - Authorized
50,000,000 shares . . . . . . . . . $ 399,217 $ 363,562
Other equities . . . . . . . . . . . . 185,604 221,451
------------ ------------
Total Capital Shares and Equities . . . . . $ 584,821 $ 585,013
------------ ------------
Total Liabilities and Equities . . . . . . $ 2,071,992 $ 1,926,631
============ ============
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
February 28
February 28 1994
1995 Restated
(Amounts in Thousands)
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . $ 3,307,659 $ 3,000,903
Cost of sales . . . . . . . . . . . . . . . 3,069,326 2,841,579
------------ ------------
Gross income . . . . . . . . . . . . . . . $ 238,333 $ 159,324
------------ ------------
Selling, general & administrative expenses $ 152,027 $ 135,226
------------ ------------
Other income (deductions):
Interest expense . . . . . . . . . . . $ (27,133) $ (27,111)
Other, net . . . . . . . . . . . . . . 10,077 6,660
------------ ------------
Total other income (deductions) . . . . . . $ (17,056) $ (20,451)
------------ ------------
Income before income taxes, equity in net income
of investees and minority owners' interest in
net loss of subsidiaries . . . . . . . $ 69,250 $ 3,647
Income tax (expense) (Note 1) . . . . . . . (10,706) (241)
------------ ------------
Income before equity in net income of investees
and minority owners' interest in
net loss of subsidiaries . . . . . . . $ 58,544 $ 3,406
Equity in net income of investees (Note 4) 9,075 301
Minority owners' interest in net loss
of subsidiaries . . . . . . . . . . . . 542 3,226
------------ ------------
Net income (Note 1) . . . . . . . . . . . . $ 68,161 $ 6,933
============ ============
<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
February 28
February 28 1994
1995 Restated
(Amounts in Thousands)
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . $ 1,691,492 $ 1,526,911
Cost of sales . . . . . . . . . . . . . . . 1,587,437 1,457,815
------------ ------------
Gross income . . . . . . . . . . . . . . . $ 104,055 $ 69,096
------------ ------------
Selling, general & administrative expenses $ 76,681 $ 69,321
------------ ------------
Other income (deductions):
Interest expense . . . . . . . . . . . $ (13,690) $ (13,978)
Other, net . . . . . . . . . . . . . . 5,435 3,730
------------ ------------
Total other income (deductions) . . . . . . $ (8,255) $ (10,248)
------------ ------------
Income (loss) before income taxes, equity in net income
of investees and minority owners' interest in
net loss of subsidiaries . . . . . . . $ 19,119 $ (10,473)
Income tax (expense) benefit (Note 1) . . . (1,938) 518
------------ ------------
Income (loss) before equity in net income of investees
and minority owners' interest in
net loss of subsidiaries . . . . . . . $ 17,181 $ (9,955)
Equity in net income of investees . . . . 2,705 4,368
Minority owners' interest in net loss
of subsidiaries . . . . . . . . . . . 330 1,785
------------ ------------
Net income (loss) (Note 1) . . . . . . . . $ 20,216 $ (3,802)
============ ============
<FN>
See Accompanying notes to condensed consolidated financial statements.
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
February 28
February 28 1994
1995 Restated
(Amounts in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net Income . . . . . . . . . . . . . . . . . . $ 68,161 $ 6,933
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . 32,637 30,828
Equity in net income of investees . . . . . (9,075) (301)
Other, net . . . . . . . . . . . . . . . . 4,782 (3,698)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . (53,835) 25,270
Inventories . . . . . . . . . . . . . . (108,543) (144,619)
Other current assets . . . . . . . . . . (4,060) (55,843)
Accounts payable . . . . . . . . . . . . (42,501) (6,742)
Advances on product purchases . . . . . 174,138 130,795
Other current liabilities . . . . . . . 68,380 19,772
--------- ---------
Net cash provided by operating activities . . . . . $ 130,084 $ 2,395
--------- ---------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . $ (56,574) $ (35,183)
Proceeds from disposal of investments
and notes receivable . . . . . . . . . . . 27,218 8,789
Acquisition of investments and notes receivable (16,262) (17,936)
Acquisition of businesses . . . . . . . . . . -0- (33,251)
Proceeds from sale of fixed assets . . . . . . 2,023 12,438
Other . . . . . . . . . . . . . . . . . . . . 173 -0-
--------- ---------
Net cash used in investing activities . . . . . . . $ (43,422) $ (65,143)
--------- ---------
Cash flows from financing activities:
Net decrease of demand loan certificates . . . $ (6,994) $ (8,378)
Proceeds from bank loans and notes payable . . 251,374 609,795
Payments on bank loans and notes payable . . . (380,179) (596,852)
Proceeds from issuance of subordinated
debt certificates . . . . . . . . . . . . . 16,157 31,829
Payments for redemption of subordinated
debt certificates . . . . . . . . . . . . . (10,638) (23,835)
Increase of checks and drafts outstanding . . . 38,040 20,585
Payments for redemption of equities . . . . . . (12,198) (46)
Payments of patronage refunds and dividends . . (26,308) -0-
Other . . . . . . . . . . . . . . . . . . . . -0- 1,277
--------- ---------
Net cash provided by (used in) financing activities $(130,746) $ 34,375
--------- ---------
Net decrease in cash and cash equivalents . . . . . $ (44,084) $ (28,373)
Cash and cash equivalents at beginning of period . 44,084 28,373
--------- ---------
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
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 before income taxes 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
February 28, 1995 condensed consolidated balance sheet.
As patronage refunds are an integral part of the computation of income
taxes, the Company had historically not provided for income taxes in 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 six months and three months ended February 28, 1995, the
Company estimated an effective tax rate based on historic effective rates. The
actual effective rate may be subject to revision. Based on the effective tax
rate for the 1994 fiscal year, the Condensed Consolidated Financial Statements
for the six months and three months ended February 28, 1994 have been restated
to include an interim income tax benefit of $740,000 and $1,499,000,
respectively.
(2) INVENTORIES
Major components of inventories at February 28, 1995, and August 31, 1994,
are as follows:
<TABLE>
<CAPTION>
February 28 August 31
1995 1994
(Amounts in Thousands)
<S> <C> <C>
Finished and in-process products . . . $ 347,624 $ 286,381
Materials . . . . . . . . . . . . . . . 41,166 51,428
Supplies . . . . . . . . . . . . . . . 41,317 39,885
Beef . . . . . . . . . . . . . . . . . 25,486 24,267
Grain . . . . . . . . . . . . . . . . . 191,264 136,353
----------- -----------
. . . . . . . . . . . . . . . . . .
$ 646,857 $ 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 February 28, 1995, the carrying value of petroleum inventories
stated under the LIFO method was $93,076,000. This exceeded the market value
of such inventory by $10,053,000. 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, 1995 would have
been lower by $10,002,000.
The carrying value of beef inventories stated under the LIFO method was
$20,434,000 at February 28, 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 six months and three months ended February 28, 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 22 properties. As of February 28, 1995, the Company has made an
environmental accrual of $7,958,000 ($8,439,000 at May 31, 1995). 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
February 31, 1995. In the opinion of management, it is reasonably possible
for such costs to be approximately an additional $28,700,000 (an additional
$24,000,000 at May 31, 1995).
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 six months ended February 28, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
February 28 February 28
1995 1994
(Amounts in Thousands)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . $ 515,424 $ 365,380
========== ==========
Net Income (loss) . . . . . . . . . . . $ 17,957 $ 1,809
========== ==========
Farmland's equity in net income . . . $ 9,075 $ 301
========== ==========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 six months ended February 28, 1995, the
outstanding balance of demand loan and subordinated debt certificates decreased
$1.5 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 February 28, 1995, short-term borrowings under the Credit Agreement were
$140.6 million, revolving term borrowings were $50.0 million and $47.6 million
was being utilized to support letters of credit issued on behalf of Farmland by
participating banks.
As of February 28, 1995, Farmland paid commitment fees under the Credit
Agreement of 1/8 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 February 28, 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 February 28, 1995, $42.8 million was
borrowed and letters of credit issued by banks amounted to $47.6 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.
National Beef Packing Company, L.P. ("NBPC"), 58%-owned by Farmland (such
interest having increased to 68% effective March 1, 1995), maintains borrowing
agreements with a group of banks which provide financing support for
its beef packing operations. Such borrowings are
nonrecourse to Farmland or Farmland's other affiliates. At February 28, 1995,
$82.6 million was available under this facility of which $61.8 million was
borrowed and $9.0 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 six months ended February 28, 1995 include
net payments of $128.8 million to reduce the outstanding balance of bank loans
and other notes payable, $56.6 million for capital expenditures, $26.3 million
for patronage refunds and dividends distributed from income of the 1994 fiscal
year, $16.3 million for acquisition of investments and $12.2 million for the
redemption of equities under the Farmland base capital plan and special
redemption plan. Major sources of cash include $130.1 million from operations,
$38.0 million from an increase in the balance of checks and drafts outstanding
and $27.2 million from the disposition of investments and notes receivables.
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
divisions petroleum, 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 six months
and three months ended February 28, 1995 should not be annualized to project a
full year's results.
SIX MONTHS ENDED FEBRUARY 28, 1995 COMPARED WITH SIX MONTHS ENDED FEBRUARY 28,
1994
SALES
Sales for the six months ended February 28, 1995 increased $306.8 million
or 10.2% compared with the corresponding period of the prior year. The
increase includes $213.5 million higher sales of agricultural output products
(grain and food) and $97.1 million higher sales of farm production input
products (crop production, petroleum and feed).
Sales of agricultural output products increased for the six months ended
February 28, 1995 compared with the corresponding period of the prior year
principally because of higher domestic unit sales of wheat and higher wheat
prices. In addition, sales of pork and beef increased due to higher unit sales
of these products partially offset by lower prices of fresh and processed pork
and beef.
Sales of agricultural input products increased reflecting higher sales of
crop production and petroleum products partially offset by lower sales of feed.
Sales of crop production products increased because prices of nitrogen and
phosphate based plant nutrients increased approximately 22% and 16%,
respectively, and total unit sales of these products increased approximately
13%. Sales of petroleum products increased due to higher production levels at
the Coffeyville refinery partly offset by the effect of the mild winter on
sales of distillate and propane. Feed sales decreased because unit sales and
prices of formula feed and feed ingredients declined reflecting the mild winter
and a decrease of the number of cattle on feed.
NET INCOME
Net income for the six months ended February 28, 1995, increased $61.2
million compared with the corresponding period of the prior year. The increase
reflects higher operating profits in crop production, food processing and
marketing and grain marketing. In addition, the net results of joint ventures
engaged in crop production and beef operations increased. The effect of these
increases on net income was reduced by decreased operating profit in the
petroleum and feed businesses and higher general corporate expenses.
Operating profit of the Company's crop production business increased
primarily as a result of a 22% increase in the average price of nitrogen
products and because unit sales of nitrogen products increased by 15%. Net
income from phosphate operations (conducted through joint ventures) increased
because of a global recovery of phosphate demand and the ensuing increase of
phosphate export volume and worldwide market prices.
Operating profit of the food processing and marketing business increased
due to higher margins on pork and beef, particularly margins on fresh pork
which are attributable to a decline of live hog and cattle costs without a
corresponding decline in selling prices. In addition, unit sales of fresh pork
and processed pork increased approximately 12% and 9%, respectively, and unit
sales of beef increased approximately 20%.
Operating results in grain increased were due to higher volume and more
favorable unit margins on all grains handled.
For the six months ended February 28, 1995, results from petroleum
operations were negative due to lower unit margins on all refined fuels,
particularly the margins on low sulfur diesel fuel, and because distillate and
propane unit sales decreased reflecting the relatively mild winter.
Selling, general and administrative expenses increased in the six months
ended February 28, 1995 compared with the corresponding period of the prior
year. Approximately $7.6 million of the increase is directly connected to
business segments (primarily the output businesses - grain, beef and pork) and
has been included in the determination of the operating profit of business
segments. Corporate general expenses, not identified to business segments,
increased reflecting the higher cost of variable compensation plans and
employee pension expenses.
The estimated effective tax rate for the six months and three months ended
February 28, 1995 is 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 six months and
three months ended February 28, 1994.
THREE MONTHS ENDED FEBRUARY 28, 1995 COMPARED WITH THREE MONTHS ENDED FEBRUARY
28, 1994
The changes in sales and net income for the three months ended February 28,
1995, 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 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 for quarter ended
February 28, 1995.
None
(b) No reports on Form 8-K were filed during the quarter ended February 28,
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 19, 1995
