<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1145429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Terra Centre
P.O. Box 6000 51102-6000
600 Fourth Street (Zip Code)
Sioux City, Iowa
(Address of principal executive offices)
Registrant's telephone number, including area code: (712) 277-1340
------------------------------
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 [ ]
As of October 31, 1997, the following shares of the registrant's stock
were outstanding:
Common Shares, without par value 74,960,011 shares
<PAGE>
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and short-term investments $ 47,623 $ 100,742 $ 35,410
Accounts receivable, less allowance for
doubtful accounts of $15,889, $11,391 and $12,130 370,519 81,606 329,107
Inventories 344,167 422,938 366,390
Other current assets 68,382 107,008 96,653
- ----------------------------------------------------------------------------------------------------------------
Total current assets 830,691 712,294 827,560
- ----------------------------------------------------------------------------------------------------------------
Equity and other investments 27,139 16,579 22,308
Property, plant and equipment, net 879,279 846,353 792,990
Excess of cost over net assets of acquired businesses 284,171 291,645 296,294
Deferred tax asset 15,138 15,311 ---
Partnership distribution reserve fund --- --- 18,480
Other assets 76,226 87,183 68,285
- ----------------------------------------------------------------------------------------------------------------
Total assets $2,112,644 $1,969,365 $2,025,917
================================================================================================================
LIABILITIES
Debt due within one year $ 160,643 $ 118,937 $ 178,998
Accounts payable 250,753 198,273 223,658
Accrued and other liabilities 145,024 207,927 158,248
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 556,420 525,137 560,904
- ----------------------------------------------------------------------------------------------------------------
Long-term debt 410,553 404,707 405,338
Deferred tax liability -- non-current 176,533 134,523 124,121
Other liabilities 82,487 125,013 169,928
Minority interest 132,906 173,893 176,711
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 1,358,899 1,363,273 1,437,002
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 74,963, 75,010 and 74,764 shares 127,559 127,614 127,534
Paid-in capital 548,667 550,850 549,755
Cumulative translation adjustment (3,012) (1,430) (234)
Retained earnings (deficit) 80,531 (70,942) (88,140)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 753,745 606,092 588,915
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,112,644 $1,969,365 $2,025,917
================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 2
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ ----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $480,600 $456,678 $2,092,524 $1,911,851
Other income, net 15,236 14,860 58,916 40,106
- --------------------------------------------------------------------------------
495,836 471,538 2,151,440 1,951,957
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 381,311 343,105 1,670,479 1,470,402
Selling, general and
administrative expense 75,905 69,903 240,244 224,109
Equity in earnings of
unconsolidated affiliates (2,916) (3,718) (4,916) (4,902)
- --------------------------------------------------------------------------------
454,300 409,290 1,905,807 1,689,609
- --------------------------------------------------------------------------------
Income from operations 41,536 62,248 245,633 262,348
Insurance recovery -
damaged facility 89,000 -- 89,000 --
Interest income 1,827 2,054 4,532 5,781
Interest expense (15,694) (16,123) (44,447) (42,891)
Minority interest (3,901) (9,220) (23,127) (35,017)
- --------------------------------------------------------------------------------
Income before income taxes 112,768 38,959 271,591 190,221
Income tax provision 45,253 15,057 110,370 76,469
- --------------------------------------------------------------------------------
Net income $ 67,515 $ 23,902 $ 161,221 $ 113,752
================================================================================
Net income per share $ 0.91 $ 0.32 $ 2.16 $ 1.45
================================================================================
Weighted average number of
shares outstanding 74,665 75,370 74,756 78,651
================================================================================
Cash dividends declared
per share $ 0.05 $ 0.04 $ 0.13 $ 0.11
================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 3
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 161,221 $ 113,752
Adjustments to reconcile net income to net cash
used in operating activities:
Insurance recovery - damaged facility (89,000) ---
Depreciation and amortization 70,798 57,196
Deferred income taxes 49,619 10,955
Minority interest in earnings 23,127 35,017
Other non-cash items (11,065) (4,206)
Changes in current assets and liabilities,
excluding working capital purchased:
Accounts receivable (269,048) (147,332)
Inventories 109,223 10,643
Other current assets 45,771 7,304
Accounts payable 39,649 17,496
Accrued and other liabilities (70,102) (77,631)
Unreimbursed Port Neal casualty --- (17,660)
Other 8,322 (6,419)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 68,515 (885)
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (40,792) (11,551)
Port Neal plant construction (22,806) (84,996)
Insurance proceeds from plant casualty 5,453 26,675
Purchase of property, plant and equipment (34,281) (39,390)
Other 1,601 570
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (90,825) (108,692)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings 41,668 150,259
Proceeds from issuance of long-term debt 7,867 ---
Principal payments on long-term debt (1,983) (3,510)
Stock (repurchase) issuance, net (21,397) (90,719)
Distribution to minority interests (32,560) (41,206)
Distribution reserve fund 18,480 ---
Redemption of SPUs (6,604) ---
Redemption of preferred stock (24,950) ---
Dividends (9,748) (8,581)
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (29,227) 6,243
- -------------------------------------------------------------------------------------------------------
Foreign exchange effect on cash and short-term investments (1,582) 37
- -------------------------------------------------------------------------------------------------------
Decrease in cash and short-term investments (53,119) (103,297)
Cash and short-term investments at beginning of period 100,742 138,707
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 47,623 $ 35,410
=======================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 4
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Cumulative
Common Paid-In Translation Accumulated
Shares Capital Adjustment Deficit Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $133,970 $631,195 $ (271) $(193,311) $571,583
Exercise of stock options 141 517 --- --- 658
Stock repurchase (6,798) (84,585) --- --- (91,383)
Issuance of Common Shares 219 2,623 --- --- 2,842
Stock incentive plan 2 5 --- --- 7
Translation adjustment --- --- 37 --- 37
Dividends --- --- --- (8,581) (8,581)
Net income --- --- --- 113,752 113,752
- -----------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $127,534 $549,755 $ (234) $ (88,140) $588,915
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Cumulative Retained
Common Paid-In Translation Earnings
Shares Capital Adjustment (Deficit) Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $127,614 $550,850 $(1,430) $(70,942) $606,092
Exercise of stock options 119 963 --- --- 1,082
Stock repurchase (1,673) (20,759) --- --- (22,432)
Issuance of Common Shares 1,499 17,613 --- --- 19,112
Translation adjustment --- --- (1,582) --- (1,582)
Dividends --- --- --- (9,748) (9,748)
Net income --- --- --- 161,221 161,221
- -----------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $127,559 $548,667 $(3,012) $ 80,531 $753,745
=====================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto reflect all adjustments which are, in the opinion of management,
necessary to summarize fairly the financial position of Terra Industries
Inc. and all majority-owned subsidiaries (the "Corporation") and the
results of the Corporation's operations for the periods presented. All of
these adjustments are of a normal recurring nature. Because of the seasonal
nature of the Corporation's operations and effects of weather-related
conditions in several of its marketing areas, results of operations of any
single reporting period should not be considered indicative of results for
a full year. Certain reclassifications have been made to prior periods'
financial statements to conform with current year presentation. These
statements should be read in conjunction with the Corporation's 1996 Annual
Report to Stockholders.
2. Per-share data are based on the weighted average number of Common Shares
outstanding and the dilutive effect of the Corporation's outstanding
restricted shares and stock options. Fully diluted earnings per share is
considered to be the same as primary earnings per share, since the effect
of certain dilutive securities was not significant.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings per
Share." SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. The impact on earnings per share
computed using SFAS 128 is immaterial, in comparison with net income per
share disclosed in the Consolidated Statements of Operations. SFAS 128 is
applicable for fiscal years ending after December 15, 1997.
3. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(in thousands) 1997 1996 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 43,054 $ 39,782 $ 48,891
Finished goods 301,113 383,156 317,499
------------------------------------------------------------------------------------
Total $344,167 $422,938 $366,390
====================================================================================
</TABLE>
4. The Corporation and certain of its subsidiaries are involved in various
legal actions and claims, including environmental matters, arising during
the normal course of business. Although it is not possible to predict with
any certainty the outcome of such matters, it is the opinion of management
that these matters will not have a material adverse effect on the results
of operations, financial position or cash flows of the Corporation.
5. The Corporation entered into a methanol hedging agreement (the "Methanol
Hedging Agreement") whereby, the Corporation agreed to make payments to the
extent that average methanol prices exceed the sum of $0.65 per gallon plus
0.113 times the average spot price index, in cents per MMBtu, for natural
gas during 1997. The amount due, if any, is dependent upon average methanol
and natural gas prices during 1997. The quantity subject to the agreement
is 130 million gallons. The Corporation's methanol production facilities
have a capacity of 320 million gallons of methanol per year.
Approximately $313,000, pursuant to the Methanol Hedging Agreement was
deferred at September 30, 1997 and will be recognized as income over the
remaining term of the agreement. No amounts have been paid or are presently
accrued under the terms of the agreement. The estimated fair value of the
agreement, representing the amount that the Corporation would expect to pay
at September 30, 1997 to liquidate the agreement for its remaining term, is
less than $1 million.
6
<PAGE>
6. On December 13, 1994, the Corporation's Port Neal facility in Iowa was
extensively damaged as a result of an explosion. Insurance was in force to
cover the Corporation's property damage, business interruption and third
party liability claims.
As of September 30, 1997, the Corporation has received $208 million of
insurance payments related to business interruption and property damage
claims. The Corporation presented documentation to the insurance carriers
supporting expenditures in excess of $350 million to rebuild the plant and
to compensate for the property damage and business interruption losses. The
Corporation filed a complaint in April 1997 in federal court against its
property insurance carriers alleging the carriers have failed to act in a
timely manner to handle the claim or to acknowledge their obligations to
pay the amounts owed. The complaint seeks, among other things, monetary
damages in excess of $150 million.
On September 19, 1997, the Corporation reached a settlement with four of
the six insurance carrier defendants. These four carriers have agreed to
pay the Corporation their respective share (32% of the overall insurance
coverage) of a total claim fixed at $321 million for purposes of this
settlement only. With this settlement, the Corporation will receive an
additional $37 million from the four carriers. Legal proceedings continue
against the two remaining carriers.
As a result of the claim settlement with four carriers at $321 million and
written acknowledgement by the remaining carriers of a $210 million claim
value, the Corporation is assured of insurance proceeds totaling at least
$245 million related to business interruption and property damage claims.
Estimated lost profits under the business interruption policy were included
in income in 1996 and 1995. The rebuild of the Port Neal plant required the
recognition of a new cost basis for the facility. As a result of the
partial settlement, the Corporation recorded a substantial gain in
September 1997 representing the difference between the property insurance
settlement received to date on the Port Neal plant and the carrying value
of the facility at the time of the explosion less uninsured expenses. The
Corporation has capitalized $242 million to date related to the rebuild of
the Port Neal manufacturing facility.
In September 1995, the Corporation transferred the Port Neal facility to
Port Neal Holdings Corp. ("PNH"). PNH was structured to finance and
complete the reconstruction of the Port Neal facility through its wholly
owned subsidiary, Port Neal Corporation ("PNC"). PNH issued to unrelated
third parties $25 million of non-convertible preferred stock. The preferred
stock represented 25% of the voting rights of PNH and accrued dividends
commensurate with market interest rates. PNH redeemed the preferred stock
on June 30, 1997.
7. The Corporation's natural gas procurement policy is to effectively fix
or cap the price of approximately 40% to 80% of its natural gas
requirements for a one-year period and up to 50% of its natural gas
requirements for the subsequent two-year period through supply contracts,
financial derivatives and other forward pricing techniques. These contracts
reference physical natural gas prices or appropriate NYMEX futures contract
prices. Contract physical prices are frequently based on the Henry Hub
Louisiana price, but natural gas supplies for the Corporation's six
production facilities are physically purchased for each plant location
which often creates a location basis differential between the contract
price and the physical price of natural gas. Accordingly, the use of
financial derivatives may not exactly offset the change in the price of
physical gas. The contracts are traded in months forward and settlement
dates are scheduled to coincide with gas purchases during that future
period.
The Corporation has entered into firm contracts to minimize the risk of
interruption or curtailment of natural gas supplies. Additionally, the
Corporation has entered into forward pricing positions for a substantial
portion of its natural gas requirements for the remainder of 1997, 1998 and
1999, consistent with its policy. As a result of its policies, the
Corporation has reduced the potential adverse financial impact of natural
gas price increases during the forward pricing period, but conversely, if
natural gas prices were to fall, the
7
<PAGE>
Corporation will incur higher costs. Unrealized gains from forward pricing
positions totaled $71.4 million and $22.7 million as of September 30, 1997
and 1996, respectively. The amount recognized by the Corporation will be
dependent on prices in effect at the time of settlement.
For the first nine months of 1997 and 1996, natural gas hedging activities
produced cost savings of approximately $34.5 million and $55.5 million,
respectively, compared with spot prices.
8. The Corporation has revolving credit facilities of up to $355 million for
domestic working capital needs and other corporate purposes. Under the
credit facility, there was $158.0 million classified as short-term
borrowings and $7.0 million classified as long-term debt at September 30,
1997. Interest on borrowings under this line is charged at current market
rates.
9. In August 1996, the Corporation, through Terra Funding Corporation ("TFC"),
a beneficially owned subsidiary of the Corporation and a limited purpose
corporation, entered into an agreement with a large financial institution
to sell an undivided interest in its accounts receivable. Under the
agreement, which expires August 1999, the Corporation may sell without
recourse an undivided interest in a designated pool of its accounts
receivable and receive up to $150 million in proceeds. Undivided interests
in new receivables may be sold as amounts are collected on previously sold
interests. As of September 30, 1997, the proceeds of the uncollected
balance of accounts receivable sold totaled $141 million. TFC is a separate
legal entity whose creditors have received security interests in its
assets.
10. Pursuant to the provisions of the Terra Nitrogen Company, L.P. (TNCLP)
Agreement of Limited Partnership, the holders of all Senior Preference
Units (SPUs) had the right, through March 31, 1997, to convert their SPUs
into Common Units on a one-for-one basis. As of March 31, 1997,
approximately 13.3 million of the 13.6 million previously issued and
outstanding SPUs converted to Common Units. The Common Units began trading
on the New York Stock Exchange on April 1, 1997 under the symbol TNH. The
307,202 SPUs which did not convert to Common Units were redeemed by TNCLP
on May 27, 1997 for $22.105 per unit, which included a $0.605 distribution
per unit for the first quarter of 1997.
On May 27, 1997, TNCLP paid a cash distribution for the quarter ended March
31, 1997 of $1.02 per Common Unit to holders of record as of May 5, 1997.
The cash distribution for the first quarter included $18.5 million from the
elimination of the reserve amount required to support four quarters of
minimum quarterly distributions on the SPUs. Due to the redemption of the
SPUs on May 27, 1997, this reserve amount was no longer required to be
maintained.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 1996
Consolidated Results
The Corporation reported net income of $67.5 million, or $0.91 per share, on
revenues of $495.8 million for the third quarter of 1997 compared with net
income of $23.9 million, or $0.32 per share, on revenues of $471.5 million in
the third quarter of 1996. The 1997 third quarter results reflect a gain of
$0.71 per share for the partial settlement of insurance claims related to the
rebuild of the Port Neal plant (see Note 6 to the Consolidated Financial
Statements).
The Corporation classifies its operations into three business segments:
Distribution, Nitrogen Products and Methanol. The Distribution segment includes
sales of products purchased from manufacturers, including the Corporation, and
resold by the Corporation. Distribution revenues are derived primarily from
grower and dealer customers through sales of crop protection products,
fertilizers, seed and services. The Nitrogen Products segment represents only
those operations directly related to the wholesale sales of nitrogen products
produced at the Corporation's ammonia manufacturing and upgrading facilities.
The Methanol segment represents wholesale sales of methanol produced at the
Corporation's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the three month
periods ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
REVENUES:
Distribution $337,747 $306,705
Nitrogen Products 134,950 146,721
Methanol 48,763 35,634
Other-net of intercompany eliminations (25,624) (17,522)
- -----------------------------------------------------------------
$495,836 $471,538
=================================================================
OPERATING INCOME:
Distribution $ (2,883) $ 6,233
Nitrogen Products 26,745 49,980
Methanol 18,914 6,765
Other expense-net (1,240) (730)
- -----------------------------------------------------------------
$41,536 $ 62,248
=================================================================
</TABLE>
9
<PAGE>
Distribution
Revenues from the Distribution segment for the three month periods ended
September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Distribution Revenues
- ----------------------------------------------------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Resale fertilizer $ 43,224 $ 39,369
Crop protection products 241,699 229,548
Seed 7,620 8,401
Other 45,204 29,387
- ----------------------------------------------------------------
$337,747 $306,705
================================================================
</TABLE>
Distribution revenues for the 1997 third quarter totaled $337.8 million, an
increase of $31.0 million or 10.1% compared with the third quarter of 1996. The
expansion of the Distribution network from 394 locations in 1996 to 427
locations in 1997 contributed the majority of the revenue increase for the
quarter.
The Distribution segment reported an operating loss of $2.9 million for the
third quarter of 1997 compared with operating income of $6.2 million in 1996.
Higher volumes for crop protection products were more than offset by lower
margins to cause a decrease in gross profit for the 1997 quarter compared with
1996. Selling, general and administrative expenses increased by $6.6 million
for the 1997 third quarter in comparison with the 1996 quarter. The growth of
the distribution network increased expenses by $6.8 million for the 1997 third
quarter. Compensation and equipment expenses at existing locations also
increased but were substantially offset by a $5.3 million decrease to employee
benefits expense related to a reduction in retiree medical benefits.
Nitrogen
Volumes and prices for the three month periods ended September 30, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
Volumes and Prices
- ----------------------------------------------------------------------------------------------------------
(excludes the Distribution segment) 1997 1996
- ----------------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 289 $181 294 $168
Nitrogen solutions 793 76 817 87
Urea 146 128 127 162
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Revenue for the Nitrogen Products segment was $135.0 million for the 1997 third
quarter compared with $146.7 million for the 1996 third quarter. The revenue
decline was due to lower nitrogen solutions prices and urea prices offset by
higher ammonia prices and higher urea sales volumes. Nitrogen solutions prices
decreased in comparison to 1996 due to an unusually wet 1996 season which pushed
sales into the third quarter and higher 1997 inventories as a result of reduced
dealer demand and increased imports. Lower worldwide demand for urea during
1997, especially from China, caused urea prices to fall from prior year levels.
Ammonia prices increased from the prior year quarter as a result of tight market
conditions during 1997 due to industry plant problems and increased upgrading of
ammonia to nitrogen solutions and urea. Sales volumes for urea increased 15% in
the 1997 quarter compared with the same period in 1996 as a result of a
maintenance turnaround at the Blytheville plant in 1996.
10
<PAGE>
Nitrogen Products operating income for the 1997 third quarter was $26.7 million
compared with $50.0 million for the 1996 third quarter. The decrease in
operating income was a result of price declines as discussed above and a 20%
increase in natural gas costs during the 1997 third quarter compared with the
1996 third quarter.
Methanol
Methanol revenues increased $13.1 million, or 37% during the quarter ended
September 30, 1997 compared with the 1996 third quarter due to higher methanol
prices, reflecting tight market conditions caused by planned and unplanned
industry production outages and increased worldwide demand. Methanol sales
prices averaged $0.58 per gallon during the 1997 quarter compared with $0.45
during the 1996 quarter. Sales volumes in 1997 increased 7% to 84.8 million
gallons compared with the 1996 third quarter.
Methanol operating income was $18.9 million for the third quarter of 1997
compared with $6.8 million for the third quarter of 1996. The operating income
increase was primarily due to the increase in methanol sales prices. Natural gas
costs were essentially unchanged in comparison with the prior-year period.
Other Operating Expense - Net
Other operating expense was $1.2 million in the 1997 third quarter compared with
$0.7 million in the comparable 1996 period. Other expense includes expenses not
directly related to individual business segments, including certain insurance
coverages, corporate finance fees and other costs.
Interest Expense - Net
Interest expense, net of interest income, totaled $13.9 million in the 1997
third quarter compared with $14.1 million in 1996.
Minority Interest
Minority interest, representing primarily third party unitholder interest in the
earnings of Terra Nitrogen Company, L.P. (TNCLP), was $3.9 million for the third
quarter of 1997 compared with $9.2 million in 1996. Minority interest declined
primarily due to lower earnings from TNCLP operations.
Income Taxes
Income taxes for the third quarter of 1997 were recorded at an effective tax
rate of 40.1%, compared with an effective tax rate of 38.6% for the third
quarter of 1996.
11
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1996
Consolidated Results
The Corporation reported net income of $161.2 million, or $2.16 per share, on
revenues of $2.15 billion for the first nine months of 1997 compared with net
income of $113.8 million, or $1.45 per share, on revenues of $1.95 billion in
the first nine months of 1996. The Corporation recorded a gain of $0.71 per
share in 1997 to reflect the partial settlement of insurance claims related to
the Port Neal plant rebuild (see Note 6 to the Consolidated Financial
Statements).
Total revenues and operating income (loss) by segment for the nine month periods
ended September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Distribution $1,578,747 $1,411,351
Nitrogen Products 486,561 490,558
Methanol 132,635 94,194
Other - net of intercompany eliminations (46,503) (44,146)
- --------------------------------------------------------------------------------
$2,151,440 $1,951,957
================================================================================
OPERATING INCOME:
Distribution $ 58,606 $ 50,932
Nitrogen Products 141,814 200,043
Methanol 47,337 12,409
Other expense - net (2,124) (1,036)
- --------------------------------------------------------------------------------
$ 245,633 $ 262,348
================================================================================
</TABLE>
Distribution
Revenues from the Distribution segment for the nine month periods ended
September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Distribution Revenues
- ---------------------------------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Resale fertilizer $ 357,562 $ 313,195
Crop protection products 1,001,447 925,978
Seed 96,023 80,585
Other 123,715 91,593
- ---------------------------------------------------------
$1,578,747 $1,411,351
=========================================================
</TABLE>
Distribution revenues for the first nine months of 1997 amounted to $1.58
billion compared with $1.41 billion for the comparable 1996 period. New
distribution locations generated $93.6 million of revenues in the year-to-date
1997 period and existing locations generated $73.8 million of additional
revenues compared with 1996. Higher volumes contributed to the increase in
revenue for all product lines due to new locations and increased planted acres.
Operating income for the first nine months of 1997 for the Distribution segment
was $58.6 million compared with $50.9 million for the comparable 1996 period.
The growth of the distribution network contributed $4.2 million to
12
<PAGE>
the operating income increase while existing locations generated an increase of
$3.5 million. Gross profits for fertilizer and crop protection products
increased $7.8 million and $12.3 million respectively. Grain and feed gross
profit and custom application income provided an increase to operating income of
$8.6 million. Selling, general and administrative expenses increased $25.6
million for the nine months ended September 30, 1997 in comparison with the
similar nine months in 1996. Additional equipment and employees to meet the
demands of the 1997 season contributed to the increases in depreciation,
operating, maintenance and compensation expenses. Offsetting these increases was
a decrease to bad debt expense of $3.3 million and a decrease to employee
benefits expense of $5.3 million related to a reduction in retiree medical
benefits.
Nitrogen
Volumes and prices for the nine month periods ended September 30, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
Volumes and Prices
- --------------------------------------------------------------------------------
(excludes the Distribution segment) 1997 1996
- --------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 964 $192 940 $183
Nitrogen solutions 2,327 88 2,281 97
Urea 498 157 409 179
- --------------------------------------------------------------------------------
</TABLE>
Nitrogen Products revenues totaled $486.6 million for the first nine months of
1997 compared with $490.6 million for the first nine months of 1996. The $4.0
million decline in revenues was caused by lower sales prices for nitrogen
solutions and urea offset by higher sales prices for ammonia and higher sales
volumes for urea. Lower worldwide demand for urea during 1997, especially in
China, has caused urea prices to fall from prior year levels. Weather
conditions during the 1997 planting season were more favorable for ammonia
application which kept ammonia prices relatively strong while nitrogen solutions
prices declined. In contrast, 1996 weather conditions forced a late planting
season and favored nitrogen solutions applications resulting in higher prices
than for the current year. Higher 1997 sales volumes were due in part to
increased corn acres, which require more nitrogen than most other crops. Urea
sales volumes in 1997 benefited from expansion and efficiency improvement
projects at the Courtright and Blytheville plants. Additionally, nitrogen
solutions sales volumes were higher in 1997 reflecting the impact of production
from the Port Neal plant which began production of nitrogen solutions in May
1996.
Operating income for the Nitrogen Products segment was $141.8 million and $200.0
million from the first nine months of 1997 and 1996, respectively. Lower sales
prices, as discussed above and 38% higher natural gas costs combined to reduce
margins for the 1997 period in comparison with 1996. In addition, depreciation
expense increased $8.5 million during the 1997 nine months compared with 1996
due to the rebuilt Port Neal plant's higher depreciation base. The 1996 nine
months included severance costs of $4.2 million at the Courtright manufacturing
plant.
Methanol
Revenues for the Methanol segment amounted to $132.6 million and $94.2 million
for the nine months ended September 30, 1997 and 1996, respectively. Average
methanol sales prices were $0.58 per gallon for the first nine months of 1997
and $0.41 per gallon for 1996 which substantially accounted for the increase in
revenues. The higher methanol prices reflect the tight methanol market
conditions caused by industry wide planned and unplanned production outages,
delayed startup of new foreign plants and increased worldwide demand. Sales
volumes declined 1% in the first nine months of 1997 to 228.7 million gallons
compared with 1996.
13
<PAGE>
Methanol operating income increased $34.9 million in the first nine months of
1997 compared with 1996. The increase is due to higher methanol sales prices
which more than offset a 15% increase in natural gas costs.
Other Operating Expense - Net
Other operating expense was $2.1 million in the first nine months of 1997
compared with $1.0 million in 1996. Other expense includes expenses not directly
related to individual business segments, including certain insurance coverages,
corporate finance fees and other costs.
Interest Expense - Net
Net interest expense was $39.9 million in the first nine months of 1997 compared
with $37.1 million in 1996. Interest expense increased as a result of
additional borrowings used to fund operations.
Minority Interest
Minority interest, representing primarily third party unitholder interest in the
earnings of Terra Nitrogen Company, L.P. (TNCLP), was $23.1 million for the
first nine months 1997 compared with $35.0 million in 1996. Minority interest
declined primarily due to lower earnings from TNCLP operations.
Income Taxes
Income tax expense was recorded at an effective rate of 40.6% for the first nine
months of 1997 compared with 40.2% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Corporation's primary uses of funds will be to fund its working capital
requirements, make payments on its indebtedness and other obligations, make
quarterly distributions to minority interests, disburse quarterly dividends on
common stock and make capital expenditures and acquisitions. The principal
sources of funds will be cash flow from operations and borrowings under
available bank facilities. The Corporation believes that cash from operations
and available financing sources will be sufficient to meet anticipated cash
requirements.
Cash provided by operations in the first nine months of 1997 was $68.5 million.
Working capital balances increased $144.5 million for the first nine months of
1997 due to the seasonal nature of the Corporation's operations. The
Corporation has available a $355 million revolving credit facility for domestic
working capital needs. As of September 30, 1997, $165.0 million was outstanding
under this facility.
Cash used for investing activities was $90.8 million in the first nine months of
1997, $34.3 million funded investments in plant and equipment. Cash used for
acquisitions ($40.8 million) represents amounts paid to acquire new locations
for the Corporation's distribution network. The rebuild of the Port Neal
manufacturing plant was substantially complete in 1996. The Corporation began
construction in the third quarter of 1996 on a $23 million nitric acid plant at
Port Neal with the facility expected to be fully operational by the end of 1997.
Expenditures in 1997 for the nitric acid plant totalled $18.0 million. The
Corporation expects 1997 capital expenditures, exclusive of expenditures related
to the Port Neal nitric acid plant and the acquisition of retail distribution
locations, to approximate $55 million consisting of the expansion of existing
service centers, routine replacement of equipment, and efficiency improvements
at manufacturing facilities. In October 1997, the Corporation announced plans
to begin construction of a $57 million capital project to add an ammonia
production loop to the methanol plant in Beaumont, Texas. The new facility will
produce 255,000 tons per year of ammonia without reducing methanol capacity.
The project is expected to be operational by the fourth quarter of 1999.
14
<PAGE>
On April 30, 1996, the Board of Directors of the Corporation authorized the
repurchase of up to 8.5 million Common Shares on the open market and through
privately negotiated transactions over the ensuing fifteen months. The share
repurchase was completed in May 1997 for a total cost of $114.2 million.
During the first nine months of 1997, the Corporation distributed $4.90 per
unit, or $31.5 million, to minority Unitholders, paid a dividend rate of 8.42%,
or $1.1 million, to minority preferred stock shareholders, and paid a dividend
of $0.13 per Common Share which totaled $9.7 million. The cash distribution to
minority Unitholders for the first quarter included $18.5 million from the
elimination of the reserve amount required to support four quarters of minimum
quarterly distributions on the SPUs. Due to the redemption of the SPUs on May
27, 1997, this reserve amount was no longer required to be maintained.
Pursuant to the provisions of the Terra Nitrogen Company, L.P. (TNCLP) Agreement
of Limited Partnership, the holders of all Senior Preference Units (SPUs) had
the right, through March 31, 1997, to convert their SPUs into Common Units on a
one-for-one basis. As of March 31, 1997, approximately 13.3 million of the 13.6
million previously issued and outstanding SPUs converted to Common Units. The
307,202 SPUs which did not convert to Common Units were redeemed by TNCLP on May
27, 1997 for $22.105 per unit, which included a $0.605 distribution per unit for
the first quarter of 1997.
On October 1, 1997, the Corporation declared the payment of a regular quarterly
dividend of $0.05 per share, payable on December 12, 1997, to shareholders of
record on November 28, 1997. On October 21, 1997, TNCLP announced a cash
distribution for the quarter ended September 30, 1997 of $0.29 per common unit,
payable November 28, 1997, to unitholders of record as of November 3, 1997.
Port Neal Holdings Corp. redeemed its $25.0 million non-convertible, preferred
stock on June 30, 1997.
Cash balances at September 30, 1997 were $47.6 million of which $5.4 million is
used to collateralize letters of credit supporting recorded liabilities.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) 128, "Earnings Per Share."
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. The impact on earnings per share
computed using SFAS 128 is immaterial, in comparison with net income per share
disclosed in the Consolidated Statements of Operations. The Corporation will
compute and disclose earnings per share in accordance with SFAS 128 in its
annual 1997 financial statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
---------------------------------------------------------------
REFORM ACT OF 1995
------------------
Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the following: general
economic conditions within the agricultural industry, competitive factors and
pricing pressures, changes in product mix, changes in the seasonality of demand
patterns, changes in weather conditions, changes in agricultural regulations,
and other risks detailed in the Corporation's Securities and Exchange Commission
filings, in particular the "Factors that Affect Operating Results" section of
its most recent Form 10-K.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule [EDGAR filing only]
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 19, 1997 reporting the
Corporation's settlement of a lawsuit with four of six insurance
carrier defendants.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: November 13, 1997 /s/ Francis G. Meyer
---------------------------------
Francis G. Meyer
Senior Vice President and Chief Financial
Officer and a duly authorized signatory
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the consolidated statement of financial position of Terra Industries Inc. as of
September 30, 1997 and the related consolidated statement of income for the nine
months then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,481
<SECURITIES> 12,142
<RECEIVABLES> 386,408
<ALLOWANCES> (15,889)
<INVENTORY> 344,167
<CURRENT-ASSETS> 830,691
<PP&E> 1,132,220
<DEPRECIATION> (252,941)
<TOTAL-ASSETS> 2,112,644
<CURRENT-LIABILITIES> 556,420
<BONDS> 410,553
0
0
<COMMON> 127,559
<OTHER-SE> 626,186
<TOTAL-LIABILITY-AND-EQUITY> 2,112,644
<SALES> 2,092,524
<TOTAL-REVENUES> 2,151,440
<CGS> 1,670,479
<TOTAL-COSTS> 1,670,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,697
<INTEREST-EXPENSE> 44,447
<INCOME-PRETAX> 271,591
<INCOME-TAX> 110,370
<INCOME-CONTINUING> 161,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,221
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 0
</TABLE>
