<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 June 30, 1998
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 51102-6000
P.O. Box 6000 (Zip Code)
600 Fourth Street
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 July 31, 1998, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 74,897,511 shares
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
----------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Cash and short-term investments $ 85,179 $ 180,062 $ 95,003
Accounts receivable, less allowance for
doubtful accounts of $14,549, $13,154 and $15,875 530,623 111,690 552,319
Inventories 376,954 395,940 380,596
Other current assets 26,980 51,287 31,251
- -----------------------------------------------------------------------------------------------------------------
Total current assets 1,019,736 738,979 1,059,169
- -----------------------------------------------------------------------------------------------------------------
Equity and other investments 26,808 24,485 19,615
Property, plant and equipment, net 1,164,467 1,181,384 874,054
Excess of cost over net assets of acquired businesses 294,398 304,567 282,024
Deferred tax asset 7,286 10,794 15,172
Other assets 104,823 99,745 83,869
- -----------------------------------------------------------------------------------------------------------------
Total assets $2,617,518 $2,359,954 $2,333,903
=================================================================================================================
LIABILITIES
Debt due within one year $ 9,474 $ 9,538 $ 124,512
Accounts payable 440,892 203,554 507,743
Accrued and other liabilities 234,262 223,163 185,645
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 684,628 436,255 817,900
- -----------------------------------------------------------------------------------------------------------------
Long-term debt 496,293 497,030 410,035
Deferred income taxes non-current 193,376 193,456 140,312
Other liabilities 81,977 82,315 131,919
Minority interest 345,478 360,569 144,128
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,801,752 1,569,625 1,644,294
- -----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 74,896, 74,977 and 74,890 shares 127,622 127,581 127,478
Paid-in capital 549,005 548,772 548,050
Accumulated other comprehensive income (8,167) (8,488) (2,683)
Retained earnings 147,306 122,464 16,764
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 815,766 790,329 689,609
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,617,518 $2,359,954 $2,333,903
=================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statments. 2
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $1,227,454 $1,188,241 $1,683,075 $1,611,924
Other income, net 31,795 33,653 41,846 43,680
---------- ---------- ---------- ----------
1,259,249 1,221,894 1,724,921 1,655,604
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 1,045,062 951,116 1,439,744 1,289,168
Selling, general and administrative expense 99,392 96,030 181,220 164,339
Equity in earnings of unconsolidated affiliates (3,235) (3,023) (2,540) (2,000)
---------- ---------- ---------- ----------
1,141,219 1,044,123 1,618,424 1,451,507
---------- ---------- ---------- ----------
Income from operations 118,030 177,771 106,497 204,097
Interest income 2,622 1,995 4,190 2,705
Interest expense (17,107) (15,269) (32,089) (28,753)
Minority interest (10,859) (12,316) (17,160) (19,226)
---------- ---------- ---------- ----------
Income before income taxes 92,686 152,181 61,438 158,823
Income tax provision 42,068 62,377 29,100 65,117
---------- ---------- ---------- ----------
NET INCOME $ 50,618 $ 89,804 $ 32,338 $ 93,706
========== ========== ========== ==========
Basic earnings per share $ 0.68 $ 1.22 $ 0.44 $ 1.27
Diluted earnings per share $ 0.67 $ 1.20 $ 0.43 $ 1.25
========== ========== ========== ==========
Basic weighted average shares outstanding 73,896 73,497 73,878 73,814
Diluted weighted average shares outstanding 75,054 74,614 75,099 74,826
========== ========== ========== ==========
Cash dividends declared per share $ 0.05 $ 0.04 $ 0.10 $ 0.08
========== ========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statments.
3
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 32,338 $ 93,706
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 58,292 45,879
Deferred income taxes 2,642 9,588
Minority interest in earnings 17,160 19,226
Other non-cash items (1,403) (1,393)
Changes in current assets and liabilities,
excluding working capital purchased/sold:
Accounts receivable (418,933) (450,968)
Inventories 18,986 72,469
Other current assets 9,932 52,973
Accounts payable 237,338 296,639
Accrued and other liabilities 11,643 (29,479)
Reimbursed Port Neal casualty 14,314 ---
Other 5,820 (1,622)
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (11,871) 107,018
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (6,353) (37,806)
Purchase of property, plant and equipment (37,443) (18,097)
Port Neal plant construction --- (9,712)
Other 737 1,815
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (43,059) (63,800)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings --- 5,668
Proceeds from issuance of long-term debt --- 7,000
Principal payments on long-term debt (801) (1,765)
Stock (repurchase) issuance - net 274 (22,096)
Distributions to minority interests (15,996) (17,437)
Distribution reserve fund --- 18,480
Repurchases of TNCLP common units (16,255) ---
Redemption of SPUs --- (6,604)
Redemption of preferred stock --- (24,950)
Dividends (7,496) (6,000)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (40,274) (47,704)
- ------------------------------------------------------------------------------------------------------
Foreign exchange effect on cash and short-term investments 321 (1,253)
- ------------------------------------------------------------------------------------------------------
Decrease in cash and short-term investments (94,883) (5,739)
Cash and short-term investments at beginning of period 180,062 100,742
- ------------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 85,179 $ 95,003
======================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statments. 4
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Retained
Comprehensive Capital Paid-In Comprehensive Earnings
Income Stock Capital Income (Deficit) Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $127,614 $550,850 $(1,430) $(70,942) $606,092
Comprehensive income:
Net income $93,706 --- --- --- 93,706 93,706
Foreign currency
translation adjustment (1,253) --- --- (1,253) --- (1,253)
-------
$92,453
=======
Exercise of stock options 38 346 --- --- 384
Repurchase of common shares (1,673) (20,759) --- --- (22,432)
Issuance of common shares 1,499 17,613 --- --- 19,112
Dividends --- --- --- (6,000) (6,000)
- ----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $127,478 $548,050 $(2,683) $ 16,764 $689,609
================================================================================================================
Accumulated
Other
Comprehensive Capital Paid-In Comprehensive Retained
Income Stock Capital Income Earnings Total
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $127,581 $548,772 $(8,488) $122,464 $790,329
Comprehensive income:
Net income $32,338 --- --- --- 32,338 32,338
Foreign currency
translation adjustment 321 --- --- 321 --- 321
-------
$32,659
=======
Exercise of stock options 41 233 --- --- 274
Dividends --- --- --- (7,496) (7,496)
- ----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $127,622 $549,005 $(8,167) $147,306 $815,766
================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statments.
5
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto contain all adjustments 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. 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 as
indicative of results for a full year. Certain reclassifications have been made
to prior years' financial statements to conform with current year presentation.
These statements should be read in conjunction with the Corporation's 1997
Annual Report to Stockholders.
2. Earnings per share are calculated in accordance with SFAS 128, "Earnings Per
Share". Basic earnings per share data are based on the weighted-average number
of Common Shares outstanding during the period. Diluted earnings per share data
are based on the weighted-average number of Common Shares outstanding and the
effect of all dilutive potential common shares including stock options,
restricted shares and contingent shares. All prior periods have been restated in
accordance with SFAS 128.
<TABLE>
<CAPTION>
3. Inventories consisted of the following:
June 30, December 31, June 30,
(in thousands) 1998 1997 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 56,303 $ 41,724 $ 45,819
Finished goods 320,651 354,216 334,777
- ----------------------------------------------------------------
Total $376,954 $395,940 $380,596
================================================================
</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's natural gas procurement policy is to effectively fix or
cap the price of between 40% and 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 North American 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 1998, 1999 and 2000,
consistent with its policy. As a result of its policies, the Corporation has
reduced the potential adverse
6
<PAGE>
financial impact of natural gas price increases during the forward pricing
period, but conversely, if natural gas prices were to fall, the Corporation
will incur higher costs. Unrealized gains from forward pricing positions
totaled $46.1 million and $30.0 million as of June 30, 1998 and 1997,
respectively. The amount recognized by the Corporation will be dependent on
prices in effect at the time of settlement.
For the first six months of 1998 and 1997, natural gas hedging activities
produced cost savings of approximately $12.9 million and $25.9 million,
respectively, compared with spot prices.
6. The Corporation has a revolving credit facility of up to $350 million for
working capital needs and other corporate purposes. Under the credit
facility, there was $7.0 million outstanding classified as long-term debt at
June 30, 1998. Interest on borrowings under this line is charged at current
market rates.
7. 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 June 30, 1998, the proceeds of the uncollected balance of
accounts receivable sold totaled $140 million. TFC is a separate legal
entity whose creditors have received security interests in its assets.
8. On December 17, 1997, the Corporation announced that it is resuming
purchases of common units of Terra Nitrogen Company, L.P. (TNCLP) on the
open market and through privately negotiated transactions. Under an existing
authorization of the Board of Directors dating back to May 1995, the
Corporation may acquire up to 5 million common units. The Corporation
acquired 621,800 common units in the first six months of 1998 for $16.3
million, bringing its total number of common units acquired since 1995,
under this authorization, to 1.6 million units.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED JUNE 30, 1998 COMPARED WITH
QUARTER ENDED JUNE 30, 1997
Consolidated Results
The Corporation reported net income of $50.6 million on revenues of $1.3 billion
for the second quarter of 1998 compared with net income of $89.8 million on
revenues of $1.2 billion in 1997. Basic earnings per share amounted to $0.68 and
$1.22 for the second quarter of 1998 and 1997, respectively, while diluted
earnings per share was $0.67 and $1.20, respectively.
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, feed, grain 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 June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Distribution $ 996,270 $ 980,457
Nitrogen Products 254,227 215,693
Methanol 20,840 40,874
Other - net of intercompany eliminations (12,088) (15,130)
---------- ----------
$1,259,249 $1,221,894
========== ==========
OPERATING INCOME (LOSS):
Distribution $ 95,422 $ 86,524
Nitrogen Products 27,718 76,528
Methanol (6,188) 15,265
Other income (expense) - net 1,078 (546)
---------- ----------
$ 118,030 $ 177,771
========== ==========
</TABLE>
8
<PAGE>
Distribution
Revenues from the Distribution segment for the three-month periods ended June
30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Distribution Revenues
(in thousands) 1998 1997
-------- --------
<S> <C> <C>
Resale fertilizer $236,687 $249,875
Crop protection products 595,707 601,057
Seed 85,364 70,828
Other 78,512 58,697
-------- --------
$996,270 $980,457
======== ========
</TABLE>
Distribution revenues for the 1998 second quarter totaled $996.3 million, an
increase of $15.8 million compared with the 1997 second quarter. An increase in
distribution locations, net of closed locations, generated additional revenues
of $7.9 million while "same store" revenues increased $7.9 million compared with
the second quarter of 1997.
Distribution operating income was $95.4 million for the second quarter of 1998
compared with $86.5 million in the 1997 quarter. New locations, net of closed
locations, increased operating income by $2.6 million and existing locations
provided $6.3 million to the operating income increase. Existing locations
contributed $1.0 million toward an increase in gross profits for the second
quarter of 1998 compared with the same period in 1997 while new locations, net
of closed locations, accounted for $4.7 million in gross profits. Selling,
general and administrative expenses decreased $3.2 million for the second
quarter of 1998 in comparison with the second quarter of 1997. Selling expenses
at new locations, net of closed locations, of $2.0 million was offset by a
reduction in expenses of $5.2 million at existing locations.
Nitrogen Products
Volumes and prices for the three-month periods ended June 30, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
VOLUMES AND PRICES
(excludes the Distribution segment) 1998 1997
---- ----
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Ammonia 456 $ 152 450 $194
Nitrogen solutions 1,400 71 913 96
Urea 167 140 195 161
Ammonium nitrate 164 137 30 150
----- ----- --- ----
</TABLE>
Nitrogen products revenues increased $38.5 million, or 18%, in the quarter ended
June 30, 1998 compared with the 1997 period. The acquisition of two nitrogen
plants in the United Kingdom from Imperial Chemical Industries PLC effective
December 31, 1997 contributed $69.3 million in revenues in the 1998 quarter.
Excluding the impact of the U.K. plants, nitrogen products revenues decreased
$30.8 million, or 14%, from the prior year quarter, primarily due to lower
prices for all products partially offset by increased nitrogen solutions sales
volumes. Ammonia, urea and nitrogen solutions prices declined 23%, 13% and 26%,
respectively from the 1997 quarter reflecting the downward pressure on pricing
which occurred in mid-1997 and carried over into 1998. Lower worldwide demand
for urea and increased nitrogen production capacity created excess nitrogen
supplies and caused prices to decline. Nitrogen solutions sales volumes
increased 53% due to weather
9
<PAGE>
conditions during the 1998 quarter which favored nitrogen solutions applications
over ammonia applications. Conversely, weather during the 1997 planting season
was more favorable for ammonia application which kept ammonia prices relatively
strong during 1997 while nitrogen solutions sales prices declined. Additionally
during 1998, nitrogen solutions sales volumes were also impacted by customer
purchase decisions which were delayed from the first quarter to the second
quarter. Lower nitrogen solutions prices, relative to other nitrogen products,
also contributed to increased nitrogen solutions sales volumes during the second
quarter of 1998.
Operating income for Nitrogen Products was $27.7 million for 1998 compared with
$76.5 million for the second quarter of 1997. A $48.8 million decrease in
operating income was due to lower prices as discussed above and a 4% increase in
natural gas costs in the 1998 quarter compared with 1997. (See Note 5 to the
Consolidated Financial Statements regarding the Corporation's natural gas
procurement policy.) The Corporation's U.K. plants generated an operating loss
of $1.4 million in the period.
Methanol
Methanol revenues decreased $20.0 million for the quarter ended June 30, 1998
compared with the same period in 1997. Lower worldwide demand for methanol
caused prices to decline. Methanol sales price averaged $.29 per gallon in the
1998 quarter compared with $.59 per gallon during the 1997 period. Sales volumes
increased 2% in 1998 to 71.1 million gallons compared with the second quarter of
1997.
The Methanol segment reported second quarter 1998 operating loss of $6.2 million
compared with operating income of $15.3 million for the 1997 quarter. The
operating income decrease was due to lower methanol sales prices in 1998 as
discussed above. Natural gas costs were 4% lower during the 1998 quarter in
comparison with the prior year period. (See Note 5 to the Consolidated Financial
Statements regarding the Corporation's natural gas procurement policy.)
Interest Expense - Net
Interest expense, net of interest income, totaled $14.5 million in 1998 compared
with $13.3 million in 1997. Additional borrowings used to fund the UK
acquisition caused the increase, offset in part by decreased borrowings for
working capital purposes.
Income Taxes
Income taxes for the second quarter 1998 were recorded at an effective tax rate
of 45%, compared with a 41% effective tax rate for the second quarter 1997. The
increase in the effective tax rate is due to goodwill charges that are not
deductible for tax purposes representing a higher percentage of 1998 pretax
income than in 1997.
Minority Interest
Minority interest, represents interest in the earnings of the publicly held
common units of Terra Nitrogen Company, L.P. (TNCLP) and a third-party's limited
partnership interests in Beaumont Methanol, Limited Partnership (BMLP). Minority
interest was $10.9 million for the second quarter 1998 compared with $12.3
million in 1997. Minority interest declined $5.7 million due to lower earnings
from TNCLP operations. Minority interest increased $4.3 million in 1998 due to
the BMLP minority interest issued by the Company on December 31, 1997 and not
outstanding in the 1997 quarter.
10
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1997
Consolidated Results
The Corporation reported net income of $32.3 million on revenues of $1.72
billion for the first six months of 1998 compared with net income of $93.7
million on revenues of $1.66 billion in the first six months of 1997. Basic
earnings per share for the first half of 1998 was $0.44 compared with $1.27 for
the comparable 1997 period. Diluted earnings per share was $0.43 and $1.25,
respectively for the six months ended June 30, 1998 and 1997.
Total revenues and operating income (loss) for the six-month periods ended June
30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Distribution $1,261,086 $1,241,000
Nitrogen Products 423,365 351,611
Methanol 54,811 83,872
Other - net of intercompany eliminations (14,341) (20,879)
- -----------------------------------------------------------------------
$1,724,921 $1,655,604
=======================================================================
OPERATING INCOME (LOSS):
Distribution $ 65,035 $ 61,489
Nitrogen Products 39,496 115,069
Methanol 1,051 28,423
Other income (expense) - net 915 (884)
- -----------------------------------------------------------------------
$ 106,497 $ 204,097
=======================================================================
</TABLE>
Distribution
Revenues from the Distribution segment for the six-month periods ended June 30,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Distribution Revenues
- -----------------------------------------------------------------------
(in thousands) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Resale fertilizer $ 302,346 $ 314,338
Crop protection products 737,584 759,748
Seed 107,295 88,403
Other 113,861 78,511
- -----------------------------------------------------------------------
$1,261,086 $1,241,000
=======================================================================
</TABLE>
Distribution revenues for the first six months of 1998 amounted to $1.26 billion
compared with $1.24 billion for the comparable 1997 period. New distribution
locations, net of closed locations, generated $15.7 million of revenues while
revenues from existing locations increased $4.4 million in 1998 compared with
the first six months of 1997. Fertilizer revenues were $12.0 million lower as
selling prices were 7% lower or $14.8 million driven principally by lower
nitrogen prices. Fertilizer sales volume was 3.5% higher than the volumes for
the first six months of 1997. Crop protection revenues of $737.6 million for the
six months ended June 30, 1998 were $22.2 million lower than the 1997 comparable
period. Continuously rainy weather in the spring throughout the cornbelt has
delayed significant spraying of acres. Seed revenues were $18.9 million higher
in the first six months of 1998 than in 1997 due to a marketing focus
concentrating on specialized seed sales and on a
11
<PAGE>
corresponding increase in demand and availability of these seeds. Other revenues
increased $35.3 million for the first six months of 1998 compared with 1997.
Grain and feed sales contributed $18.3 million to this increase while seed tech
fees added $12.3 million and application revenues increased $2.3 million.
The Distribution segment reported operating income of $65.0 million for the
first six months of 1998, compared with $61.5 million for the 1997 period.
Operating income at existing locations increased $3.0 million while new
locations, net of closed locations, provided operating income of $0.5 million.
Fertilizer and seed gross profits increased $1.7 million and $2.4 million,
respectively for the first six months of 1998 in comparison with 1997. A decline
in gross profit for crop protection products of $4.6 million compared with 1997
was due to delayed applications and reduced dealer volumes. Grain and feed
contributed a gross profit increase of $4.5 million. Selling, general and
administrative expenses increased $5.6 million in the 1998 six months compared
with 1997. Expenses at new locations, net of closed locations, contributed $6.6
million to the expense increase while existing location expenses decreased $1.0
million.
Nitrogen Products
Volumes and prices for the six-month periods ended June 30, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
VOLUMES AND PRICES
(excludes the Distribution segment) 1998 1997
- -------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 699 $153 675 $197
Nitrogen solutions 2,042 69 1,534 95
Urea 351 126 352 169
Ammonium nitrate 374 138 41 149
- -------------------------------------------------------------------------------
</TABLE>
Nitrogen Products revenues increased $71.8 million, or 20%, during the six
months ended June 30, 1998 compared with the 1997 period due to the acquisition
of the U.K. plants at the end of 1997. The U.K. plants contributed $146.6
million in revenues in the 1998 period. Excluding the impact of the U.K. plants,
Nitrogen Products revenues decreased $74.9 million, or 21%, from the prior-year
period primarily due to lower prices for all products partially offset by
increased nitrogen solutions sales volumes. Ammonia, urea and nitrogen solutions
prices declined 24%, 25% and 27%, respectively, compared with prices during the
six months ended June 30, 1997. Lower worldwide demand for urea and increased
nitrogen production capacity created excess nitrogen supplies and caused prices
to fall. Nitrogen solutions sales volumes increased 33% due to weather
conditions during the 1998 period which favored nitrogen solutions applications
over ammonia applications (ammonia sales volumes declined 17% during the 1998
period compared with 1997). In contrast, the weather during the 1997 planting
season favored ammonia applications over nitrogen solutions.
The Nitrogen Products segment reported operating income of $39.5 million for the
first six months of 1998 compared with $115.1 million for the same period in
1997. An $85.2 million decline in operating income was due to significantly
lower nitrogen prices. The U.K. plants contributed $6.0 million to operating
income in the first six months of 1998. Increased sales volumes of nitrogen
solutions and lower operating costs also offset a portion of the lower price
effects on operating income.
12
<PAGE>
Methanol
Methanol revenues were $54.8 million for the six months ended June 30, 1998, a
decline of $29.1 million in comparison with the 1997 period. Average methanol
sales prices were $.37 and $.58 per gallon for the 1998 and 1997 periods,
respectively. Lower prices in 1998 were due to oversupply conditions caused by
higher production and lower worldwide demand.
Methanol operating income was $1.1 million for the first six months of 1998
compared with $28.4 million for the 1997 period. Lower methanol prices in the
first six months of 1998 more than offset an 8% decrease in natural gas costs
compared with the same time frame in 1997 resulting in the operating income
decline. (See Note 5 to the Consolidated Financial Statements regarding the
Corporation's natural gas procurement policy.)
Interest Expense - Net
Net interest expense was $27.9 million in 1998 compared with $26.0 million in
1997. Interest expense increased as a result of additional borrowings used to
fund the U.K. acquisition, partially offset by decreased borrowings for working
capital needs.
Income Taxes
Income tax expense was recorded at an effective rate of 47% for the first six
months of 1998 compared with 41% in the 1997 first half. The increase in the
effective tax rate is due to goodwill charges that are not deductible for tax
purposes representing a higher percentage of 1998 pretax income than in 1997.
Minority Interest
Minority interest, represents interest in the earnings of the publicly held
common units of TNCLP and a third-party's limited partnership interest in BMLP.
Minority interest was $17.2 million for the first six months of 1998 compared
with $19.2 million in 1997. Minority interest declined $10.7 million due to
lower earnings from TNCLP operations. Minority interest increased $8.7 million
in 1998 due to the BMLP minority interest issued by the Company on December 31,
1997 and not outstanding in the 1997 first half.
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, make capital expenditures and acquisitions and fund repurchases of
TNCLP common units. 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 used for operations in the first six months of 1998 was $11.9 million. Net
working capital balances increased $141.0 million for the first six months of
1998 due to the seasonal nature of the Corporation's operations. The Corporation
has available a $350 million revolving credit facility for working capital
needs. As of June 30, 1998, $7.0 million was outstanding under this facility.
Cash used for investing activities was $43.1 million in the first six months of
1998, of which $37.4 million funded investments in plant and equipment. Cash
used for acquisitions ($6.4 million) represents amounts paid to acquire new
locations for the Corporation's distribution network.
13
<PAGE>
The Corporation began construction in the fourth quarter of 1997 on a $57
million ammonia production loop at the Beaumont, Texas plant with the facility
expected to be fully operational by the end of 1999. The Corporation expects
1998 capital expenditures, exclusive of expenditures related to the Beaumont
ammonia production loop and the acquisition of retail distribution locations, to
approximate $50 million consisting of the expansion of existing service centers,
routine replacement of equipment, and efficiency improvements at manufacturing
facilities.
During the first six months of 1998, the Corporation distributed $1.17 per unit,
or $7.3 million, to minority TNCLP Common Unitholders, distributed a preferred
return rate of 7.70%, or $8.7 million, to BMLP's minority partner, and paid a
dividend of $0.10 per Common Share which totaled $7.5 million. On July 22, 1998,
TNCLP announced a cash distribution of $1.72 per common unit, payable August 28,
1998 to unitholders of record August 6, 1998.
On December 17, 1997, the Corporation announced that it is resuming purchases of
common units of TNCLP on the open market and through privately negotiated
transactions. Under an existing authorization of the Board of Directors dating
back to May 1995, the Corporation may acquire up to 5 million common units. The
Corporation acquired 621,800 common units in the first half of 1998 for $16.3
million, bringing its total number of common units acquired since 1995, under
this authorization, to 1.6 million units.
Cash balances at June 30, 1998 were $85.2 million of which $5.4 million is used
to collateralize letters of credit supporting recorded liabilities.
YEAR 2000 ISSUES
The Year 2000 issue concerns computer programs that use only the last two digits
to identify the year in date fields. If not corrected, many of these computer
programs could fail or produce erroneous results on or before January 1, 2000.
This issue affects virtually every company.
The Corporation has assigned dedicated resources to address its Year 2000
issues. Most, but not all, of the Corporation's management information systems
environment have been assessed for Year 2000 issues and some remedial actions
have been identified in these assessed areas. The impact of these remedial
actions for areas where an assessment has already been completed is not expected
to be material to the Corporation. Some of these actions have already been
completed at minimal cost.
The Corporation plans to complete in the first quarter of 1999 an organization -
wide review of all computing functions, including the process control systems
and instrumentation in the manufacturing facilities. The Corporation is also
assessing Year 2000 issues in relation to its customers, suppliers and other
constituents because the actions or inactions of such third parties may
materially affect the Corporation. General contingency planning efforts have
recently been initiated for precautionary purposes.
The Corporation anticipates that it will complete all assessment, remediation,
testing and contingency planning efforts for Year 2000 issues in the third
quarter of 1999 with no material adverse consequences or material costs to the
Corporation. However, the costs or consequences of incomplete or untimely
resolution of Year 2000 issues by the Corporation or third parties could have a
material adverse effect on the Corporation.
14
<PAGE>
FORWARD LOOKING PRECAUTIONS
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
price changes (principally, sales prices of nitrogen and methanol products and
natural gas costs); changes in product mix, seasonality of demand patterns,
weather conditions, and 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
None
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: August 12, 1998 /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 June
30, 1998 and the related consolidated statement of income for the six months
then ended.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 51,042
<SECURITIES> 34,137
<RECEIVABLES> 545,172
<ALLOWANCES> (14,549)
<INVENTORY> 376,954
<CURRENT-ASSETS> 1,019,736
<PP&E> 1,475,343
<DEPRECIATION> (310,876)
<TOTAL-ASSETS> 2,617,518
<CURRENT-LIABILITIES> 684,628
<BONDS> 496,293
0
0
<COMMON> 127,622
<OTHER-SE> 688,144
<TOTAL-LIABILITY-AND-EQUITY> 2,617,518
<SALES> 1,683,075
<TOTAL-REVENUES> 1,724,921
<CGS> 1,439,744
<TOTAL-COSTS> 1,439,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,480
<INTEREST-EXPENSE> 32,089
<INCOME-PRETAX> 61,438
<INCOME-TAX> 29,100
<INCOME-CONTINUING> 32,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,338
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
