PROSPECTUS SUPPLEMENT DATED JULY 15, 1996 TO
PROSPECTUS DATED DECEMBER 29, 1995
FARMLAND INDUSTRIES, INC.
Demand Loan Certificates
Subordinated Capital Investment Certificates
Ten Year
Five Year
Subordinated Monthly Income Capital Investment Certificates
Ten Year
Five Year
This Prospectus Supplement to the Prospectus dated December 29, 1995 (the
Prospectus) supplements certain information contained in, and describes certain
modifications to, the Prospectus. The Prospectus is hereby amended by the terms
of this Prospectus Supplement and the matters addressed herein supersede any
contrary statements that may be contained in the Prospectus. Defined terms used
herein and not otherwise defined shall have the meanings assigned to them in the
Prospectus.
This Prospectus Supplement contains the Condensed Consolidated Financial
Statements of Farmland Industries, Inc. for the nine months and three months
ended May 31, 1996. This Prospectus Supplement also contains Management's
Discussion and Analysis of Financial Condition and Results of Operations
relating to the nine months and three months ended May 31, 1996.
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.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31 May 31
1995 1996
(Amounts in Thousands)
<S> <C> <C>
Current Assets:
Accounts receivable - trade..............................................$ 446,232 $ 607,274
Inventories (Note 2)..................................................... 772,528 818,159
Other current assets..................................................... 60,883 84,871
Total Current Assets....................................................$ 1,279,643 $ 1,510,304
Investments and Long-Term Receivables.....................................$ 185,687 $ 205,471
Property, Plant and Equipment:
Property, plant and equipment, at cost...................................$ 1,334,849 $ 1,461,598
Less accumulated depreciation and amortization.......................... 742,704 780,906
Net Property, Plant and Equipment........................................$ 592,145 $ 680,692
Other Assets..............................................................$ 128,468 $ 157,950
Total Assets..............................................................$ 2,185,943 $ 2,554,417
<FN>
<See accompanying Notes to Condensed Consolidated Financial Statements.>
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
<TABLE>
<CAPTION>
August 31 May 31
1995 1996
(Amounts in Thousands)
<S> <C>
<C>
Current Liabilities:
Checks and drafts outstanding...........................................$ 37,088 $ 17,920
Accounts and notes payable.............................................. 633,249 885,360
Customers' advances on product purchases................................ 13,862 35,786
Other current liabilities............................................... 275,931 250,972
Total Current Liabilities..............................................$ 960,130 $ 1,190,038
Long-Term Liabilities:
Long-term debt (excluding current maturities)...........................$ 461,436 $ 482,772
Other long-term liabilities............................................. 44,597 40,528
Total Long-Term Liabilities............................................$ 506,033 $ 523,300
Deferred Income Taxes.....................................................$ 12,501 $ 26,959
Minority Owners' Equity in Subsidiaries...................................$ 19,992 $ 13,175
Net Income (Note 1).......................................................$ -0- $ 113,952
Capital Shares and Equities:
Common shares, $25 par value - Authorized 50,000,000 shares............$ 385,409 $ 434,386
Other equities.......................................................... 301,878 252,607
Total Capital Shares and Equities......................................$ 687,287 $ 686,993
Contingent Liabilities and Commitments (Note 3)
Total Liabilities and Equities............................................$ 2,185,943 $ 2,554,417
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
May 31 May 31
1995 1996
(Amounts in Thousands)
<S> <C> <C>
Sales.............................................................$ 5,325,044 $ 7,025,162
Cost of sales..................................................... 4,930,754 6,613,048
Gross income ..................................................$ 394,290 $ 412,114
Selling, general & administrative expenses........................$ 238,539 $ 273,987
Other income (deductions):
Interest expense...............................................$ (39,431) $ (44,731)
Other, net .................................................. 14,249 13,993
Total other income (deductions)...................................$ (25,182) $ (30,738)
Income before income taxes, equity in net income of investees
and minority owners' interest in net income of subsidiaries......$ 130,569 $ 107,389
Provision for income taxes........................................ (21,439) (23,637)
Income before equity in net income of investees and minority
owners' interest in net income of subsidiaries...................$ 109,130 $ 83,752
Equity in net income of investees (Note 4)........................ 22,410 34,159
Minority owners' interest in net income of subsidiaries........... (2,497) (3,959)
Net income........................................................$ 129,043 $ 113,952
<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
1995 1996
Amounts in Thousands)
<S> <C> <C>
Sales..............................................................$ 2,017,385 $ 2,669,084
Cost of sales...................................................... 1,861,428 2,510,081
Gross income.......................................................$ 155,957 $ 159,003
Selling, general & administrative expenses.........................$ 86,512 $ 101,527
Other income (deductions):
Interest expense................................................$ (12,298) $ (15,137)
Other, net ................................................... 4,172 6,269
Total other income (deductions)....................................$ (8,126) $ (8,868)
Income before income taxes, equity in net
income of investees and minority owners'
interest in net income of subsidiaries............................$ 61,319 $ 48,608
Provision for income taxes......................................... (10,733) (10,870)
Income before equity in net income of investees and minority
owners' interest in net income of subsidiaries....................$ 50,586 $ 37,738
Equity in net income of investees ................................. 13,335 13,890
Minority owners' interest in net income of
subsidiaries...................................................... (3,039) (2,813)
Net income.........................................................$ 60,882 $ 48,815
<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
1995 1996
(Amounts in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................$ 129,043 $ 113,952
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................. 49,437 55,868
Equity in net income of investees......................................... (22,410) (34,159)
Other, net ............................................................. 7,346 14,329
Changes in operating assets and liabilities, net of acquisition of businesses:
Accounts receivable..................................................... 13,789 (156,578)
Inventories............................................................. (150,260) (38,785)
Other current assets.................................................... 12,046 (25,746)
Accounts payable........................................................ (29,039) 101,897
Customers' advances on product purchases............................ 37,159 21,924
Other current liabilities............................................... 39,890 48,249
Cash flows from operating activities.........................................$ 87,001 $ 100,951
Cash flows from investing activities:
Capital expenditures......................................................$ (86,527) $ (143,738)
Proceeds from disposal of investments and notes receivable............... 37,626 22,806
Acquisition of investments and notes receivable........................... (18,968) (14,347)
Acquisition of businesses ................................................ (2,200) (32,438)
Distributions from investees.............................................. 295 14,644
Other..................................................................... 2,321 (3,934)
Net cash used in investing activities........................................$ (67,453) $ (157,007)
Cash flows from financing activities:
Net increase (decrease) of demand loan certificates......................$ (7,137) 12,940
Proceeds from bank loans and notes payable............................... 370,686 459,201
Payments on bank loans and notes payable................................. (460,762) (343,529)
Proceeds from issuance of subordinated debt certificates................. 34,461 43,421
Payments for redemption of subordinated debt certificates................ (18,632) (30,744)
Increase (decrease) of checks and drafts outstanding..................... 56,306 (19,168)
Payments for redemption of equities...................................... (12,335) (27,436)
Payments of patronage refunds and dividends.............................. (26,308) (32,745)
Other.................................................................... 89 (5,884)
Net cash provided by (used in) financing activities..........................$ (63,632) $ 56,056
Net decrease in cash and cash equivalents....................................$ (44,084) $ -0-
Cash and cash equivalents at beginning of period............................. 44,084 -0-
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,
(ii) all references herein to "year" or "years" are to fiscal years ended August
31 and (iii) all references herein to "membership" are to persons eligible to
receive patronage refunds from Farmland including voting members, associate
members and other patrons with which Farmland has a currently effective
patronage refund agreement.
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 and subject to price volatility. Historically, the majority of
farm supply products are sold in the spring. Sales in the beef business and in
grain marketing historically have been concentrated in the summer. 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, 1996 should not be annualized to project a full
year's results.
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 as patronage refunds to members of Farmland.
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
persons 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, 1996 Condensed Consolidated Balance
Sheet.
(2) INVENTORIES
Major components of inventories at August 31, 1995 and May 31, 1996 are
as follows:
<TABLE>
<CAPTION>
August 31 May 31
1995 1996
(Amounts in Thousands)
<S> <C> <C>
Finished and in-process products............................$ 682,801 $ 706,861
Materials................................................... 39,399 60,023
Supplies.................................................... 50,328 51,275
$ 772,528 $ 818,159
</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, at an interim
period-end, a seasonal market value decline below cost of LIFO inventories 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, 1996, the carrying values of crude oil and refined petroleum
inventories stated under the LIFO method were $92.0 million. If market had been
used to value these products, the carrying values of inventories at May 31, 1996
would have been higher by $5.9 million.
(3) CONTINGENCIES
(A) TAX LITIGATION
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 $237.2 million 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 $70.8
million. The asserted deficiencies relate primarily to the Company's tax
treatment of the $237.2 million gain resulting from its sale of the stock of
Terra and the IRS's contention that Farmland incorrectly treated the Terra sale
gain as patronage income against which certain patronage-sourced operating
losses could be offset. The statutory notice further asserts that, among other
things, Farmland incorrectly characterized for tax purposes gains aggregating
approximately $14.6 million, and a loss of approximately $2.3 million from
dispositions 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. The case was
tried on June 13-15, 1995. The parties submitted post-trial briefs to the court
in September 1995 and reply briefs were submitted to the court in 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 $85.8 million
plus accumulating statutory interest thereon (approximately $201.2 million
before tax benefits of the interest deduction, through May 31, 1996), or
$287.0 million in the aggregate as of May 31, 1996. Such a decision would also
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 $5.0 million plus applicable statutory interest thereon.
The asserted liabilities 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 by the United States
Tax Court would be charged to current earnings and would have a material adverse
effect on the Company. In the event of such an adverse determination of the
Terra tax issue, certain financial covenants of the Company's new Credit
Agreement (the "Agreement"), dated May 15, 1996, become less restrictive. Had
the United States Tax Court decided in favor of the IRS on all unresolved
issues, and had the obligation ($287.0 million) related to such unresolved
issues been due and payable on May 31, 1996, Farmland's borrowing capacity under
the Agreement would have been adequate to finance the liability. However,
Farmland's capacity to finance such an adverse decision with borrowings under
the Agreement will depend on the financial effects of future operating events on
its ability to satisfy the financial covenants in the Agreement.
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 LLP, 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, that 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.
(B) ENVIRONMENTAL MATTERS
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 38 properties. At May 31, 1996, the Company has made an
environmental accrual of $18.9 million. 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 other
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, 1996. In the
opinion of management, it is reasonably possible for such costs to be
approximately an additional $19.7 million.
Under the Resource Conservation Recovery Act of 1976 ("RCRA"), the
Company has five closure and five post-closure plans in place for six locations.
Closure and post-closure plans also are in place for three landfills and two
injection wells as required by state regulations. Operations are being
conducted at these locations and the Company does not plan to terminate such
operations in the foreseeable future. Therefore, the Company has not accrued
these environmental exit costs. The Company accrues these liabilities when
plans for termination of plant operations have been made. Such closure and
post-closure costs are estimated to be $5.2 million at May 31, 1996 (which is in
addition to the $18.9 million accrual and the $19.7 million discussed in the
prior paragraphs).
The Company is currently involved in three administrative proceedings
brought by Region VII of the Environmental Protection Agency (''EPA'') with
respect to alleged violations under the Clean Air Act, the Emergency Planning
and Community Right-to-Know Act and RCRA at the Coffeyville, Kansas refinery.
The Company is currently negotiating with the EPA concerning these matters and
believes that such negotiations may result in compromise settlements, including
the possible implementation of a Supplemental Environmental Project. Absent
such settlement, the Company may contest the EPA's allegations. Management's
estimate of probable civil fines and penalties for these three proceedings has
been included in the environmental accrual discussed above. See "Legal
Proceedings", contained in the Company's Annual Report on Form 10-K for the year
ended August 31, 1995 ("1995 Form 10-K").
(4) SUMMARIZED FINANCIAL INFORMATION OF INVESTEES ACCOUNTED FOR BY THE EQUITY
METHOD
Summarized financial information of investees accounted for by the equity
method for the nine months ended May 31, 1995 and May 31, 1996 is as follows:
<TABLE>
<CAPTION>
May 31 May 31
1995 1996
(Amounts in Thousands)
<S> <C> <C>
Net sales....................................................$ 888,028 $ 866,169
Net income ..................................................$ 44,512 $ 68,440
Farmland's equity in net income .............................$ 22,410 $ 34,159
</TABLE>
The Company's investments accounted for by the equity method consist
principally of 50% equity interests in two phosphate fertilizer manufacturing
ventures (Farmland Hydro, L.P. and SF Phosphates Limited Company) and, through
March 31, 1995, a 50% interest in Hyplains Beef, L.C. ("Hyplains") (such
interest having been contributed by the Company to National Beef Packing
Company, L.P. ("NBPC"), a majority-owned subsidiary, for an additional 10%
ownership interest in NBPC).
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 subordinated debt
certificates. During the nine months ended May 31, 1996, the outstanding
balance of demand loan and subordinated debt certificates increased $25.5
million.
In May 1996, Farmland entered into a five year Credit Agreement (the
"Agreement") with various participating banks. This Agreement provides a $1.1
billion facility, subject to compliance with financial covenants as set forth in
the Agreement, consisting of an annually renewable short-term credit of up to
$650.0 million and a long-term credit of up to $450.0 million.
Farmland pays commitment fees under the Agreement of 1/10 of 1% annually
on the unused portion of the short-term credit and 1/4 of 1% annually on the
unused portion of the long-term credit. In addition, Farmland must comply with
the Agreement's financial covenants regarding working capital, the ratio of
certain debts to average cash flow, and the ratio of equity to total
capitalization, all as defined therein. The Company and the bank participants
annually renew the short-term credit portion of the Agreement. The next renewal
date is in May 1997.
At May 31, 1996, under the Agreement the Company had short-term
borrowings of $385.3 million, long-term borrowings of $80.0 million and $44.4
million was being utilized to support letters of credit issued on behalf of
Farmland by participating banks. As of May 31, 1996, under the short-term
credit the Company had capacity to finance additional working capital of $253.5
million and under the long-term credit the Company had capacity to borrow up to
an additional $291.5 million.
The Company maintains other borrowing arrangements with banks and financial
institutions. Under such agreements at May 31, 1996, $18.0 million was borrowed.
NBPC maintains a $90.0 million borrowing agreement 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 (except to
the extent of $10 million). At May 31, 1996, NBPC had borrowed $52.0 million
and $1.0 million was utilized to support letters of credit. In addition, NBPC
has 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. At May 31, 1996, such short-term
borrowing by Tradigrain totaled $109.2 million. Obligations of Tradigrain under
these loan agreements are nonrecourse to Farmland or Farmland's other
affiliates.
Leveraged leasing has been used to finance railcars and a substantial
portion of the Company's fertilizer production equipment.
In the opinion of management, these arrangements for debt capital are
adequate for the Company's present operating and capital plans. However,
additional financing arrangements are continuously evaluated.
Major uses of cash during the nine months ended May 31, 1996 include:
$176.0 million for capital expenditures and acquisition of pork processing
businesses; $32.7 million for patronage refunds and dividends distributed from
income of the 1995 fiscal year; and $27.4 million for the redemption of equities
under the Farmland base capital plan and for other allocated equity redemptions.
Major sources of cash include: $100.9 million from operations and $128.3 million
in net proceeds from bank loans, subordinated debt and other debt sources.
In 1993, 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
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 and subject to price volatility. Historically, the majority of
farm supply products are sold in the spring. Sales in the beef business and in
grain marketing historically have been concentrated in the summer. 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, 1996 should not be annualized to project a full
year's results.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED MAY 31, 1996 COMPARED TO NINE MONTHS
ENDED MAY 31, 1995
SALES
Sales for the nine months ended May 31, 1996 increased $1.7 billion, or
31.9%, compared with the prior period principally owing to increased sales of
agricultural output products ($1.4 billion) and farm production input products
($285 million).
Sales of the food processing and marketing business increased $372 million,
or 19.1%, vis-a-vis the prior period. Pork sales increased $129 million
principally owing to higher unit prices partially offset by lower unit sales.
Beef sales increased $244 million owing principally to the March 31, 1995 NBPC
acquisition of the Hyplains beef plant.
Grain sales increased $1.0 billion, or 76.0%, over the prior period
principally owing to a 37.0% increase in units sold combined with increased
grain prices.
Sales of crop production, feed and petroleum products increased
$109.0 million, or 12.3%, $70 million, or 19.4%, and $105 million, or 16.1%,
respectively, as each of the segments had increased unit sales and prices.
NET INCOME
Net income for the nine months ended May 31, 1996 decreased $15.1 million
compared with the prior period principally owing to: lower operating income in
pork processing and marketing; a net operating loss in grain; and increased
general corporate expenses. The impact of these decreases on net operating
income was partially offset by increased operating income in the Company's crop
production, petroleum and beef processing and marketing businesses .
Operating income of the Company's crop production business, combined with
the Company's equity in net income of crop production investees, increased $24.2
million ($7.6 million and $16.6 million, respectively) over the prior period,
primarily as a result of increased unit sales and higher prices.
Operating income of the food processing and marketing business decreased
$10.9 million from the prior period principally owing to decreased pork margins
partially offset by increased beef margins.
Grain had an operating loss of $9.8 million for the nine months ended May
31, 1996 compared with an operating profit of $5.9 million for the nine months
ended May 31, 1995. The operating loss was principally attributable to drought
conditions in certain major wheat producing regions of the United States which
resulted in both shortages of and significantly higher prices for wheat and feed
grains.
Petroleum had operating income of $0.3 million compared with $9.7 million
operating loss in the prior period. This was principally the result of improved
unit sales and margin improvements that resulted from increased production
capacity at the Company's refinery.
Selling, general and administrative ("SG&A") expenses increased $35.4
million over the prior period principally owing to acquisition of pork and beef
processing plants and to higher sales promotion, variable incentive, and
information system installation expenses.
The estimated effective tax rate, based on the Company's estimate of the
full year's tax rate, increased to 21.3% from 17.0% in the prior period
principally owing to the availability of tax credits in the prior period. The
actual effective tax rate may be subject to subsequent refinement or revision.
The level of operating income in the crop production and food processing
and marketing businesses are, to a significant degree, attributable to the
spread between selling prices and raw material costs (natural gas in the case of
nitrogen-based plant nutrients and live hogs and cattle in the food processing
and marketing business). These price and cost factors are beyond the control of
the Company's management and are volatile. Accordingly, management cannot
determine the direction or magnitude to which these factors will affect the
Company's business. The Company's cash flow and income may be volatile as
conditions affecting agriculture and the costs and markets for the Company's
products change.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MAY 31, 1996 COMPARED TO THREE
MONTHS ENDED MAY 31, 1995
SALES
Sales for the three months ended May 31, 1996 increased $651.7 million, or
32.3%, over the prior period owing principally to increased sales of
agricultural output and petroleum products. Third quarter sales increased
because of the factors discussed in the nine months comparison.
NET INCOME
Net income for the period was $48.8 million compared with $60.9 million in
the prior year principally owing to the grain operating loss as discussed above
in the nine months comparison.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of,"
("Statement 121") was issued by the Financial Accounting Standards Board in
March 1995 and is effective for fiscal years beginning after December 15, 1995
(the Company's 1997 fiscal year). Statement 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management expects that the adoption of Statement 121 will not have a
significant impact on the Company's Consolidated Financial Statements.
