<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended August 31, 1998
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to
Commission File Number : 0-7908
PIONEER HI-BRED INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Iowa
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(State or other jurisdiction of incorporation or organization)
42-0470520
------------------------------------
(I.R.S. Employer Identification No.)
800 Capital Square, 400 Locust, Des Moines, Iowa 50309
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(Address of principal executive offices)
(515) 248-4800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------- -----------------------------------------
Common Stock ($1.00 par value) New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------
NONE
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
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of October 30, 1998, was $5,197,915,599. As of October 30, 1998,
190,533,634 shares of the Registrant's Common Stock, $1.00 par value, were
outstanding. As of October 30, 1998, there were also 49,333,758 shares of the
Registrant's Class B common stock outstanding to E.I. du Pont de Nemours and
Company (DuPont) which are convertible into 49,333,758 shares of the
Registrant's Common Stock upon transfer of beneficial ownership of such shares
of Class B common stock to a person not a member of a DuPont group (generally
defined as an affiliate of DuPont).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company continued record-setting financial results in 1998. Current
year net income after tax totaled $270 million, or $1.08 per-diluted share, on
sales of $1.8 billion. After-tax income in 1997 totaled $243 million, or $0.98
per-diluted share, on sales of $1.8 billion. The result was a per-diluted share
earnings growth of 10.2% for 1998. Current year earnings produced a Return on
Ending Equity (ROE) of 21.7%, the fifth consecutive year above the targeted
level of 20%. This performance enabled the Company to exceed its primary
financial goals: double-digit earnings growth over time and maintaining an ROE
of 20% or higher.
Historically, the Company's growth has primarily been driven by North
American seed corn operations. The Company achieved record operating income in
1998 from its North American corn operations, in spite of an unprecedented level
of discounting and promotions by competitors. The Company also maintained its
42% share of the North American corn market and improved profit margins in this
aggressive environment. In addition, record sales and profits from the Company's
soybean business and improved profitability from the Company's other product
lines were positive factors affecting 1998 income. Foreign currency
devaluations, on a worldwide basis, reduced current year operating income
approximately $32 million.
YEAR ENDED AUGUST 31, 1998, COMPARED TO YEAR ENDED AUGUST 31, 1997
HYBRID SEED CORN
The strong operating performance in North America was offset by a
decrease in regions outside North America, which were impacted by local currency
devaluation, acreage reduction, and weather. Current year seed corn operating
income decreased $6 million, or 1.5%, from prior year results. North America
corn continues to dominate the mix of revenue and contribution margins,
generating approximately 70% of companywide revenue and 73% of operating income.
CORN NET SALES AND PRODUCT LINE OPERATING INCOME
<TABLE>
<CAPTION>
Increase Increase
1998 (Decrease) 1997 (Decrease) 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In millions)
NET SALES:
North America........ $ 970 $ 63 6.9 % $ 907 $ (1) (0.1)% $ 908
Europe............... 300 (27) (8.3)% 327 (1) (0.3)% 328
Other regions........ 123 (28) (18.5)% 151 10 7.1 % 141
------ ------- ------- ------- ------- ------ -------
Total net sales.......... $1,393 $ 8 0.6 % $ 1,385 $ 8 0.6 % $ 1,377
====== ======= ======= ======= ======== ====== =======
OPERATING INCOME:
North America........ $ 290 $ 24 9.0 % $266 $ (10) (3.6)% $ 276
Europe............... 98 (15) (13.3)% 113 13 13.0 % 100
Other regions........ 8 (15) (65.2)% 23 (11) (32.4)% 34
------ ------- ------- ------- ------- ------ -------
Total operating income... $ 396 $ (6) (1.5)% $402 $ (8) (2.0)% $ 410
====== ======= ======= ======= ======== ====== =======
UNIT SALES:
(80,000-kernel units)
North America........ 12.0 0.5 4.3 % 11.5 (0.6) (4.6)% 12.1
Europe............... 2.8 (0.1) (3.4)% 2.9 0.1 3.6 % 2.8
Other regions........ 2.2 (0.3) (12.0)% 2.5 -- -- % 2.5
------ ------- ------- ------- ------- ------ -------
Total unit sales......... 17.0 0.1 0.6 % 16.9 (0.5) (3.0)% 17.4
====== ======= ======= ======= ======== ====== =======
ACRES:
North America............ 84.1 0.8 1.0 % 83.3 0.6 0.7 % 82.7
====== ======= ======= ======= ======== ====== =======
</TABLE>
The primary drivers affecting North American operations are per-unit
price and cost, market share, and market size. Seed corn operating income in
North America improved $24 million, or 9%, over 1997 results. The improved
results were primarily due to increased revenue. Revenue increased $63 million,
or 6.9%, over 1997 as a result of two factors: (i) an increase in the average
per-unit selling price, which accounted for $25.1 million of the total increase,
and (ii) additional units
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sold of 500,000, which accounted for $37.7 million of the total increase. Higher
investments in research and product development and product promotion also
impacted current year results. In addition, the stronger U.S. dollar reduced
operating income from Canada by approximately $2.3 million.
Despite the competitive environment in North America, the average
per-unit net seed corn selling price increased approximately 3%. During 1998,
this increase would have been higher had the Company not implemented changes to
its replant program. In previous years, the price of seed sold for replant was
discounted 50%, while in 1998 replant seed was provided free of charge. In
addition to the program change, adverse weather conditions resulted in
significantly higher replanting in 1998. Excluding these two factors, the net
selling price of seed in North America increased approximately 5% as a result of
the introduction of several new premium-priced elite products and a continued
shift in the sales mix to higher-priced premium products.
Current year per-unit seed corn cost of sales decreased $0.30, largely
due to lower inventory reserves and lower commodity costs. When combined with
the sales price effect, net seed corn margins increased approximately $2.40 per
unit. Provisions for inventory reserves in 1998 were $1.75 per unit compared to
$1.98 per unit in 1997. The Company's policy is to provide adequate reserves for
inventory obsolescence. Approximately 8% of North American unit sales were
reserved in 1998 compared to 9% in 1997.
An increase in North American market size impacted current year
operating results. Based on information to date, North American market size was
estimated at 84.1 million acres, an increase of approximately 1% from 1997.
Based on current year unit sales, the Company maintained its 42% share of the
North American seed corn market.
Increased investments in research and product development and higher
selling costs associated with the launch of an unprecedented number of new
products reduced operating income approximately $18 million. New genetics
accounted for more than 40% of current year unit sales, including 2.4 million
units of the Company hybrids with the YieldGard(1) gene for European Corn Borer
(ECB) resistance.
Operating income in Europe, on a constant dollar basis, increased 2%
over 1997. In Europe, seed corn operations were challenged in 1998 by reduced
acreage. In addition, results reported in U.S. dollars were negatively impacted
by the strengthening of the U. S. dollar against European currencies, reducing
1998 operating income by $17 million compared to 1997. Excluding this effect,
the region achieved a new record in operating income. Seed corn market share
gains in Italy and Spain and higher per-unit prices in Central Europe
contributed to the increase. These factors more than offset the effect of a 6 to
8% reduction in hectares planted to corn.
The Company achieved record operating income in several countries
within the Africa, Middle East, Asia, and Pacific region. Seed corn operations
in South Africa, Turkey, and Pakistan all reported record results in 1998 driven
by increases in market share and per unit prices. However, overall results of
operations for the region were hampered by reduced market size and by
significant devaluation in the local currencies in Southeast Asia. The currency
devaluation in Southeast Asia negatively impacted 1998 corn operating income by
$5 million. Key markets in Asia and Africa experienced a 10 to 15% reduction in
market size due to adverse weather conditions.
The Company's corn operations in Latin America experienced an operating
loss of $11 million compared to a $2 million loss in 1997. The Company's
operations in Brazil continued to be affected by the decrease in market size
reported last year. In Argentina, performance issues with key hybrids noted last
year continued to impact 1998 operations. As a result, unit sales and price per
unit were lower than 1997. To address these performance issues, new products
were introduced in 1998 in Brazil and Argentina and additional new products will
be introduced in upcoming years.
Operating income in Mexico decreased $3 million from 1997. This was due
to drought and currency devaluation. The drought conditions resulted in fewer
acres planted to corn and decreased unit sales in 1998. The stronger U. S.
dollar compared to the Mexican peso reduced reported results in 1998 by $2
million.
- --------
(1) Registered trademark of, and used under license from, Monsanto Company.
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North American Seed Corn Unit Sales (in millions)
1998 1997 1996
---- ---- ----
12.0 11.5 12.1
North American Corn Acreage (in millions)
1998 1997 1996
---- ---- ----
84.1 83.3 82.7
Estimated North American Seed Corn Market Share
1998 1997 1996
---- ---- ----
42% 42% 44%
SOYBEAN SEED
Soybean seed is the Company's second largest product in terms of
revenue and operating income. The primary drivers for operating income are
premium product sales, market size, market share, and price. Current year
soybean operating income in North America improved $7 million, or 26%, over 1997
results to a record $33.7 million. Record North American soybean revenues and
profits in 1998 were primarily driven by the increased demand for premium-priced
glyphosate-resistant soybeans with the Roundup Ready gene. Unit sales of these
soybeans more than doubled in the current year.
North American Soybean Unit Sales (in millions)
1998 1997 1996
---- ---- ----
13.5 13.5 11.3
North American Soybean Acreage (in millions)
1998 1997 1996
---- ---- ----
75.2 73.5 66.4
Estimated North American Soybean Market Share
1998 1997 1996
---- ---- ----
15.8% 18.1% 17.2%
North America unit sales account for approximately 97% of worldwide
soybean unit sales. Unit sales included over 5 million units of
glyphosate-resistant products, compared to 2.3 million units in 1997. The
Company's current year unit sales of these products totaled approximately 39% of
total soybean unit sales compared to 17% in 1997. The strong demand for and
available supply of glyphosate-resistant products limited the Company's market
share.
Higher commodity prices and additional acres available for planting due
to acres coming out of conservation programs resulted in additional acres
planted to soybeans in the current year. Net margins improved from a year ago
despite higher commodity costs. An increase in list prices for the current year,
combined with the sales price effect of glyphosate-resistant products, which are
sold at a premium, more than offset the increase in unit costs.
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OTHER PRODUCTS
Other products' current year operating results improved $4 million over
those recorded in 1997. Wheat, sunflower, and canola accounted for most of the
change. Wheat operating income increased $4 million over 1997 results. Sunflower
operations provided a positive impact to the current year mainly due to
operations in North America and Europe. An increase in sunflower operating
income of $4 million is the result of a $10 million increase in sales over 1997.
Operating income for canola products in 1998 improved $2.5 million from 1997
results primarily due to the increased sales of herbicide resistant products.
Operating results decreased $6 million due to the Company's equity ownership in
Optimum Quality Grains, L.L.C., which began operations in 1998.
OTHER PRODUCTS NET SALES AND COMBINED PRODUCT LINE OPERATING INCOME (LOSS)
<TABLE>
<CAPTION>
Increase Increase
1998 (Decrease) 1997 (Decrease) 1996
- -----------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES
Alfalfa.............. $ 46 $ 1 2.2 % $ 45 $13 40.6 % $ 32
Sorghum.............. 36 - -- % 36 5 16.1 % 31
Wheat................ 24 4 20.0 % 20 (5) (20.0)% 25
Sunflower............ 34 10 41.7 % 24 2 9.0 % 22
Microbial products... 29 (1) (3.3)% 30 2 7.1 % 28
Other products....... 41 5 13.9 % 36 (6) (14.3)% 42
---- --- ---- ---- --- ----- ----
Total net sales.......... $210 $19 9.9 % $191 $11 6.1 % $180
==== === ==== ==== === ===== ====
Total combined
operating income
(loss)............... $15 $4 $11 $14 ($3)
==== === ==== === ====
</TABLE>
These products provide the sales organization a full line of seed products,
significantly aiding in the sale of higher-margin products. In addition, the
opportunity for some of these product lines to generate greater levels of
operating income in the future is promising.
CORPORATE AND OTHER ITEMS
Current year indirect general and administrative expenses increased $11
million, or 14%, over 1997 levels. Increased employee compensation costs and
higher training and development costs resulting from investments in information
systems within North America and Europe were a significant part of the current
year increase. The protection of research technology through the filing of
patents and the cost of litigation associated with the ownership of technology
also contributed to this increase. The Company filed 187 patent applications in
the United States through September of calendar year 1998 compared to 121 and
109 in calendar years 1997 and 1996, respectively.
Net financial income for fiscal 1998 increased $38 million from 1997.
Net exchange and other gains and losses in the current year were impacted by a
$20 million gain on the sale of two million shares of Mycogen Corporation stock
in 1998 compared to a $7 million gain on the sale of one million shares in 1997.
The Mycogen transactions, net of expenses, increased diluted earnings per share
$0.04 and $0.01 in 1998 and 1997, respectively. In addition, net financial
income was impacted by interest earned on the proceeds from equity transactions
with DuPont.
The decrease in the effective tax rate from 34% in 1997 to 33% in 1998
was primarily attributable to the Company's operations outside the United States
and an increase in research tax incentives. The decrease in the effective tax
rate between years increased earnings per share by $0.02. The Company's
effective tax rate will vary based on the mix of earnings and tax rates from the
various countries in which it operates.
ALLIANCE WITH DUPONT
In September 1997, the Company and DuPont finalized an agreement that
created one of the world's largest private agricultural research and development
collaborations. The companies also formed a joint venture, Optimum Quality
Grains, L.L.C., that markets improved quality traits to increase the value of
crops for livestock feeders, grain processors, and other
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end users. The joint venture does not sell seed. The Company is the preferred
worldwide provider and marketer of quality trait seed for the joint venture.
In connection with the above agreements, DuPont also acquired an equity
interest in the Company through the purchase of 164,446 shares of preferred
voting stock for $1.7 billion. Effective January 30, 1998, each preferred share
was converted into 100 shares of Class B common stock with a stated value of
$1.00 per share. As required by the agreement, the Company used approximately
$1.5 billion of the proceeds from the DuPont investment to purchase
approximately 16.4 million shares of the Company's outstanding common stock
through a Dutch auction self-tender. The common shares reacquired by the Company
were retired, but remain authorized and unissued. The net effect of these equity
transactions, including associated transaction costs, was an increase in Class B
common stock of $16.4 million, a decrease in common stock of $16.4 million, and
an increase in additional paid-in capital of approximately $170 million, the use
of which is unrestricted. Immediately following the completion of the Dutch
auction self-tender, DuPont's equity interest in the Company was approximately
20%.
The agreements include, among other things, a standstill provision that
prohibits DuPont from increasing its ownership interest in the Company for 16
years from the date of the agreement without the consent of the Company. DuPont
also gained two seats on the Company's Board of Directors.
These agreements with DuPont will bring additional opportunities to
compete for corn acres in 1999 and the potential to become a significant
supplier in the rapidly growing market for high-oil corn. Financial results for
the year ended August 31, 1998 were affected by the completion of the agreement
with DuPont. Without the DuPont equity transactions less cash would have been
available for investment, short-term borrowings would have been higher, and the
Company would not have paid preferred stock dividends. Current year results,
excluding the impact from the above equity transactions, were income of $257.9
million, or $1.05 per diluted share. The following table summarizes the
components of income per share as reported and excludes the impact from the
equity transactions with DuPont:
<TABLE>
<CAPTION>
Pro forma
As Reported Excluding Equity Transactions
------------------------------------- -----------------------------
Shares Shares
Income (Denom- Per-Share Income (Denom- Per-Share
Year Ended August 31, 1998 (Numerator) inator) Amount (Numerator) inator) Amount
-------------------------- ------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In millions, except
per share amounts)
Net income ...................... $ 270 $ 270
Items resulting from the
DuPont equity transactions
Preferred stock dividends .. (9) --
Interest benefit from DuPont
proceeds* .............. -- (12)
----- ---
Basic earnings per share
Net income attributable to
common shareholders .... $ 261 231.5 $ 1.13 $258 244.4 $ 1.06
Effect of dilutive securities
Convertible preferred stock 9 17.7 -- --
Stock options .............. -- 1.1 1.1
----- ----- --- -----
Diluted earnings per share
Net income attributable to
common shareholders .... $ 270 250.3 $ 1.08 $258 245.5 $ 1.05
===== ===== ====== ==== ===== ======
</TABLE>
* Based on the assumption that the proceeds generated by DuPont equity
transactions earned an investment return during the period on the excess funds
and reduced borrowing costs at the Company's after-tax investment and borrowing
rates.
YEAR ENDED AUGUST 31, 1997, COMPARED TO YEAR ENDED AUGUST 31, 1996
HYBRID SEED CORN
August 31, 1997 seed corn operating income decreased $8 million, or 2%
from 1996 results. Operations in North America played a significant role in the
decrease, primarily the result of fewer unit sales, increased per-unit net
margins, and
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higher investments in research and product development. Seed corn operations
outside North America provided increased operating income from 1996 on higher
unit sales; however, this was tempered by the stronger U.S. dollar in 1997.
Seed corn market share in North America declined approximately two
points in 1997, bringing the Company's estimated leading share of the North
American market to approximately 42%. The Company introduced a number of new
products in limited volumes in 1997 which were targeted to replace hybrids that
had been leading sellers in recent years. Lower unit sales of these older
hybrids were largely responsible for the estimated 1997 market share decrease.
Delayed regulatory approval for the Company's ECB resistant corn
products also contributed to the 1997 market share decline. Despite regulatory
approval for these products coming late in the selling season, the Company sales
representatives were able to place the Company seed in more than 20% of the
estimated North American acres planted to ECB resistant corn in 1997. However,
due to the late start, the Company was unable to attain its normal market
presence for these products.
The sale of two key hybrids, 3394 and 3489, accounted for approximately
23% and 28% of the Company's 1997 and 1996 North American hybrid seed corn unit
sales, respectively.
Corn acreage in North America during 1997 rose modestly above 1996
levels which positively affected operating income. Although operating results in
North America were affected by higher per-unit seed corn costs, the average seed
corn selling price also increased.
In 1997, the average net seed corn selling price per unit to customers
in North America increased 7% resulting from the introduction of several new
elite products, which were priced at a premium, and an increase in list prices
across the entire product line. However, during 1997 a change was made to the
Company's commission program, which eliminated some ties between the commission
and quantity savings discount programs. Reported quantity savings discounts
increased and reported net commission expense decreased accordingly. As a
result, reported net price for 1997 based on reported net sales only reflects an
increase of approximately 5%. Net selling price per unit to customers, North
American seed corn net margin per unit, and net compensation to sales
representatives were essentially unaffected by this program change.
Per-unit seed cost of sales increased approximately $2.50 in 1997,
principally due to the prior year cost of sales mix. Fiscal 1996 cost of sales
included large quantities of lower-priced carryover seed from the 1994 crop
year. When combined with the sales price effect, net seed corn margins increased
approximately $2.25 per unit. Provisions for inventory reserves in 1997 were
$1.98 per unit, compared to $2.22 per unit in 1996. Approximately 9% of North
American unit sales were reserved in 1997.
North American research and product development costs for seed corn
increased $11 million in 1997, or 15%, to $86 million. The increase was the
result of additional spending on classical plant genetic activities and
investments to access technology that will help expand and improve the Company's
germplasm base.
As a result of investments in research and product development, the
Company research program turned out 27 new corn hybrids in limited volumes for
the North American market in 1997. First-year sales of these new hybrids reached
nearly 600,000 units, four times more than any previous group of new product
introductions.
Seed corn operating results outside North America increased $2 million
compared to the prior year. European operations (Europe, CIS, and Japan)
provided the largest impact, accounting for $13 million in additional operating
income. Strengthening of the U.S. dollar against European currencies had a
significant negative impact on 1997 reported results for European operations.
Excluding this impact, the region reflected an improvement of $32 million over
1996 results. Additional unit sales in Italy, Southern Europe, and Central
Europe were significant factors in the current year increase in operating
income. Market size and market share increases, individually or in concert,
played roles in these improvements.
Operating income in the Latin American region decreased $23 million
compared to 1996. Supply availability and decreased corn acreage reduced 1997
operating income in Brazil. Also affecting 1997 results was a performance issue
related to the previous year's top selling hybrids in Argentina. As a result,
operating income decreased due to reduced unit sales and higher cost of sales.
Operating income in Mexico improved $4 million from 1996 results as
favorable weather conditions and improved water supply resulted in increased
unit sales. Increased selling price per unit also favorably impacted 1997
results.
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Volume and price increases in several countries within Asia, Africa,
and the Middle East improved this region's 1997 operating results $3 million.
SOYBEAN SEED
Soybean operating income improved $11 million, or 69%, over 1996
results. The primary drivers for operating income - market size, market share,
and price - had positive impacts on soybean operations.
Unit sales in North America increased 19%, or approximately 2.2 million
units, over 1996 levels as a result of increased acreage and improved market
share. Favorable commodity prices drove an 11% increase in acres planted to
soybeans in 1997. Continued strong product performance and the demand for
glyphosate-resistant varieties contributed to market share gains.
Net margin in North America improved approximately $0.60 per unit from
1996 despite higher commodity costs. An increase in list prices for 1997,
combined with the sales price effect of glyphosate-resistant products that are
sold at a premium, more than offset the increase in unit costs.
The demand for glyphosate-resistant products in North America was
strong in 1997. The Company's 1997 unit sales of these products totaled 2.3
million units, or approximately 17% of total soybean unit sales, compared to
unit sales of less than 100,000 in 1996.
OTHER PRODUCTS
Other products' 1997 operating results improved $14 million over those
recorded a year earlier. Comparisons in 1997 were affected by the elimination of
1996 losses from the sale of the Company's vegetable products line and
liquidation of the specialty oils inventory in 1996 not present in 1997, which
combined to improve 1997 operating results $7 million over 1996 levels.
Operating income for canola products in 1997 improved $3 million from results in
1996 due to increased acreage and higher market share. Microbial product results
improved $2 million for the year on strong performance of premium inoculant
products. Annual results for alfalfa, sorghum, and miscellaneous other seed
products in total improved $5 million from 1996. Decreased 1997 wheat sales in
North America, the result of reduced acreage, lowered operating income $3
million from 1996 levels.
CORPORATE AND OTHER ITEMS
Indirect general and administrative expenses in 1997, which totaled $77
million, were similar to those recorded in 1996. Increased general costs and
higher legal expenses, resulting from technology claims and disputes, were
offset by the one-time effect of adopting FAS116 "Accounting for Contributions
Made and Contributions Received" during 1996, not present in the 1997.
Net financial income increased $3 million from what was recorded in
1996. The retirement of the medium-term note program in February 1996, combined
with a lower average level of short-term borrowing in 1997, reduced 1997
interest expense $3 million. A gain in 1997 from the sale of one million shares
of Mycogen Corporation stock improved net financial income $7 million; however,
this was offset almost entirely by an increase in recorded net exchange losses,
principally due to the strengthening of the U.S. dollar against European
currencies.
The decrease in the effective tax rate from 36% in 1996 to 34% in 1997
was primarily attributable to the Company's operations outside the United
States.
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonal nature of the agricultural seed business, the
Company generates most of its cash from operations during the second and third
quarters of the fiscal year. Cash generated during this time is used to repay
commercial paper borrowings and accounts payable, which are the Company's
primary sources of credit during the first and fourth quarters of the fiscal
year. Any excess funds available are invested, primarily in short-term
commercial paper.
Historically, the Company has financed growth through earnings. Cash
provided by operating activities was $240 million in 1998, compared to $176
million and $389 million in 1997 and 1996, respectively. The effect on cash
provided by operating activities of building inventory levels and inventory
liquidation have the greatest impact on the Company in any
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given year. Excluding this effect, cash provided by operating activities was
$302 million in 1998, compared to $248 million and $346 million in 1997 and
1996, respectively.
Most of the Company's financing is done through the issuance of
commercial paper in the U.S., backed by revolving and seasonal lines of credit.
In addition, foreign lines of credit and direct borrowing agreements are relied
upon to support overseas financing needs. Short-term debt at August 31, 1998
totaled $76 million, a $15 million decrease from 1997. In 1998, short-term
borrowings peaked at $128 million compared to $250 million in 1997. Short-term
borrowings were lower due to the net proceeds of approximately $170 million
resulting from the sale of preferred shares to DuPont and the subsequent Dutch
auction self-tender.
In 1998, including net proceeds available from equity transactions with
DuPont, short-term domestic investments peaked at $429 million compared to $242
million in 1997. The 1998 amount does not include $1.5 billion of the proceeds
from the DuPont equity transaction used in the Dutch auction self-tender due to
the nonrecurring nature of the transaction. Short-term investments are made
through a limited number of reputable institutions after evaluation of their
investment procedures and credit quality. The Company invests in only
high-quality, short-term securities, primarily commercial paper. Individual
securities must meet credit quality standards, and the portfolios are monitored
to ensure diversification among issuers.
Fiscal 1998 and 1999 Available Domestic Lines of Credit
(In millions)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revolving $200 $200 $200 $200
Seasonal 100 100 -- --
----- ----- ----- -----
Total $300 $300 $200 $200
===== ===== ===== =====
</TABLE>
The Company believes the domestic lines of credit available in 1999 are
sufficient to meet domestic borrowing needs. Revolving line of credit agreements
expire August, 2001. The Company also has a seasonal revolving credit facility
to meet peak borrowing needs, which expires August, 1999.
At year end, cash and cash equivalents totaled $86 million, down from
$97 million at August 31, 1997. It is the Company's policy to repatriate excess
funds outside the U.S. not required for operating capital or to fund asset
purchases. The growth in trade receivables at August 31, 1998 was primarily due
to increased participation in the Company's credit programs.
Capital expenditures, including business and technology investments,
were $128 million in 1998 compared to $151 million in 1997 and $164 million in
1996. The Company's capital expenditures primarily represent continued
investment in production capacity, technology acquisitions, and research
collaborations. Capital expenditures for 1999 are expected to be approximately
$160 to $170 million and are expected to be funded through earnings.
The quarterly dividend paid in July of 1998 increased to $0.10 per
share, up 15% from the $0.087 per-share dividend paid the prior four quarters.
The Company's dividend policy is to annually pay out 40% of a four-year rolling
average of earnings.
During 1998, the Company repurchased 6,627,800 shares of its stock
under a Board authorized repurchase plan at a total cost of $234 million,
excluding the Dutch auction self-tender. At August 31, 1998, authorized shares
remaining to be purchased under the plan totaled 4.8 million. At August 31,
1998, there were 240 million shares of common stock and Class B common stock
outstanding.
MARKET RISKS
The Company uses derivative instruments to manage risks associated with
its grower compensation costs and foreign-currency-based transactions.
The Company uses derivative instruments such as commodity futures and
options to hedge the commodity risk involved in compensating growers. The
Company contracts with independent growers to produce the Company's finished
seed inventory. Contracts with growers generally allow them to settle with the
Company for the market price of grain for a period of time following harvest. It
is the Company's policy to hedge commodity risk prior to setting the retail
price of seed. The hedge gains or losses are accounted for as inventory costs
and expensed as cost of goods sold when the associated crop
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inventory is sold. At August 31, 1998 and 1997, net unrealized losses on these
contracts for corn and soybeans totaled $13 million and $4 million,
respectively. A 10% change in the market price of the commodity contracts would
impact 1998 net unrealized losses by approximately $1 million. The contract
volumes at year end depend upon the acreage contracted with growers, the crop
yield, the percentage growers have marketed to the Company, and the percentage
of crop hedged by the Company. Since these positions are a hedge to inventory
costs, any change in the cost of these positions is offset by an opposite change
in inventory costs.
The Company uses derivative instruments such as forward exchange
contracts, purchased options, and cross currency swaps to hedge
foreign-currency-denominated transactions such as exports, contractual flows,
and royalty payments. While derivative hedge instruments are subject to price
fluctuations from exchange and interest rate movements, the Company expects
these price changes to generally be offset by changes in the U.S. dollar value
of foreign sales and cash flows. Therefore, hedging gains and losses are matched
with the costs of the underlying exposures and accounted for in inventory,
sales, or net financial costs. At August 31, 1998 and 1997, net unrealized
losses from foreign-currency hedge contracts totaled $1 million and $4 million,
respectively. A 10% change in exchange rates would impact 1998 net unrealized
losses by approximately $14 million.
The Company does not trade in commodity-based or financial instruments
with the objective of earning financial gain on rate or price fluctuations, nor
does it trade in these instruments when there are no underlying transaction
related exposures.
ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" effective December 31, 1997. SFAS
No. 128 is retroactive to prior years; however, the adoption did not materially
affect prior years' earnings per share as previously reported under APB Opinion
No. 15.
The Financial Accounting Standards Board (FASB) issued SFAS No. 130,
"Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information"; and SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." These statements
will require revised and/or additional disclosure requirements but will not have
an effect on the results of operations or financial position of the Company. The
Company will adopt the provisions of SFAS No. 130 in the first quarter of fiscal
1999 and the provisions of SFAS No. 131 and SFAS No. 132 for the fiscal year
ended August 31, 1999.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for fiscal
years beginning after December 15, 1998. Therefore, the Company will adopt this
statement for its fiscal year ended August 31, 2000. Due to the recent issuance
and the complexity of the statement, the Company is still in the process of
determining the effect of adopting the statement on the Company's operations and
financial position.
EFFECTS OF INFLATION
Inflation typically is not a major factor in the Company's operations.
The cost of seed products is largely influenced by seed field yields and
commodity prices, which are not impacted by inflation. Costs normally impacted
by inflation -- wages, transportation, and energy -- are a relatively small part
of the total operations.
YEAR 2000
The Year 2000 issue refers to a flaw in software design that results in
(a) errors when systems process dates after December 31, 1999 or (b) a failure
to recognize 2000 as a leap year. The Year 2000 issue presents a unique
challenge to organizations, not because it is technically difficult to resolve,
but rather because it is so difficult to manage. The problem is pervasive,
existing throughout a wide variety of computing systems and hardware devices
within organizations and within their supply chains; and corrective actions must
be taken by a fixed point in time - no later than January 1, 2000.
The Company is well into its Year 2000 remediation effort, having begun
this process in 1996. The Company expects to see little, if any, direct impact
on operations given the nature of the business and the Company's business
relationships, the corrective steps taken to date, and the contingency plans to
be put in place in 1999. Additionally, the Company has long had a policy of
aggressively investing in and adopting new technologies. As a result, many of
the Company's core and end-user systems were developed or delivered in Year 2000
compliant form, greatly reducing the number of non-compliant legacy systems
requiring corrective measures. For example, the Company recently implemented SAP
AG's R/3 enterprise application software in the United States, Canada, Italy,
and France.
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Management has established a committee to direct the Company's
compliance activities. The committee meets on a regular basis and reports
quarterly to the Board of Directors. The committee has segregated the Company's
work on the Year 2000 issue into four phases: 1) inventory, 2) assessment, 3)
remediation, and 4) testing. At August 31, 1998, the committee reported that the
inventory, assessment, and remediation phases for the core-processing
infrastructure and for core business applications were 90 to 95% complete. The
remaining work in these phases is expected to be completed by February 1999.
Integration testing of core applications and infrastructure is scheduled to
begin in February 1999 and is expected to be completed by the end of September
1999.
At August 31, 1998, the Company had completed an inventory of personal
computer, office automation, laboratory, production, and telecommunication
equipment worldwide. Inventory of building systems was in progress. Assessments
had been completed for 40 to 50% of the components surveyed and should be
completed by the end of 1998. At this point in time, the Company estimates that
a small percentage of the equipment inventory will require remediation and that
upgrades or replacements will be completed by the end of June 1999.
The Company is also in the process of analyzing the Year 2000 readiness
of material third parties (suppliers). Replacement suppliers will be found in
1999 if the Company determines some suppliers are not likely to be compliant in
time.
The Company has spent approximately $1 million to date in direct costs
associated with reaching Year 2000 compliance. Total costs to the Company to
address Year 2000 issues are currently estimated not to exceed $3 million to $5
million and consist primarily of consulting fees for software remediation
activities and expected costs to replace noncompliant hardware components. These
costs are expected to be funded through earnings.
On the basis of research to date, the Company believes that the
greatest potential for disruption lies not in the Company's internal systems but
rather in the external systems of the Company's service providers. The Company
believes, however, that in North America and Europe, where the Company does most
of its business, disruptions in these external systems will be short-lived, and
that through contingency planning the Company can minimize the impact on seed
production and selling activities in the Northern Hemisphere. Analysis to date
also indicates that the vast majority of the Company's supplier and customer
base will likewise not be impacted by internal system problems. The Company
believes, however, given the number of supplier options available, that the Year
2000 challenge will not materially impact the Company's ability to produce seed
products or the ability to sell and distribute these products to customers for
planting in the spring of 2000.
Some of the unique factors of the Year 2000 issue which could impact
the Company's performance are inability of third parties to timely provide
remediation measures, impacts of the failure of businesses other than the
Company or its immediate suppliers that would ultimately have an impact on the
Company, failure of governmental agencies to properly address their own Year
2000 compliance, or misrepresentations of readiness by suppliers or vendors.
EURO CONVERSION
The Company believes the euro conversion will not have a material
impact on the Company's ability to execute transactions during the transition
period, which begins January 1, 1999, and ends December 31, 2001. The
significant requirement of companies during this period is the ability to
invoice and accept payment in euro at a customer's request. The Company has
systems and processes in place to manage euro denominated transactions if a
customer makes this request.
The Company continues to evaluate the impact the euro conversion will
have on its business, although the Company believes it will not have a material
impact on its results of operations or financial condition.
The Company has performed an analysis of the readiness of applicable
computer systems for the euro conversion. Plans are in place to upgrade existing
systems prior to 2001 to meet the needs of full euro conversion. The cost of
these upgrades is not expected to be material to the Company. In addition, the
Company has analyzed changing its hedging of foreign-currency-denominated
transactions in participating countries from their legacy currency to the euro.
Management expects hedging in the euro to reduce the number of hedging contracts
and associated administrative costs.
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OUTLOOK FOR 1999 AND BEYOND
The Company's prospects for 1999 and beyond are encouraging. The
Company plans to introduce over 50 new seed corn hybrids in North America in
1999, including high-oil products and several with the Bt gene for resistance to
European Corn Borer (ECB). Approximately 70% of the units sold in 1999 are
expected to be from hybrids introduced in 1997 or later. List prices of the
Company's hybrid corn seed in North America will not be increased in 1999.
However, the trend of customers to purchase new higher-priced, higher-value
products is expected to increase North America's average per-unit seed corn
selling price and per-unit margin. With the increased introduction of new
products, the Company anticipates more rapid obsolescence of older products.
Low commodity prices create financial stress for farmers in the United
States and around the world. One potential consequence of low corn prices is a
reduction in acres planted to corn, as farmers consider switching to other
crops. A reduction in corn acreage would hinder the Company's ability to grow
earnings. However, the Company anticipates that the 1998 fall harvest in North
America will substantiate continued strong product performance, thereby
positioning the Company for market share growth in 1999 and beyond.
During 1998, there was an unprecedented level of discounting and
promotions of hybrid seed corn by competitors. New alliances, combined with a
consolidation of industry players, have increased the level of uncertainty in
the industry. However, the Company is well positioned against its competitors.
The Company plans to continue to aggressively demonstrate to customers the
financial benefits of the yield advantage of its products.
The demand for glyphosate-resistant soybeans is expected to continue to
grow in 1999. The Company expects to have adequate supply available to meet the
expected demand. As a result, glyphosate-resistant products are expected to
represent a larger percentage of overall soybean sales in 1999, and margins are
expected to improve because of their premium sales price.
The Company anticipates continued growth in local currency sales and
operating profits outside of North America. Therefore, declines in the value of
foreign currencies against the U.S. dollar could adversely affect operating
income from these operations.
In 1999, the Company plans to introduce ECB resistant corn hybrids in
limited volumes in several countries outside of North America. This should help
position the Company for continued growth in sales and margins within these
countries in the years to come.
The Company expects growth in fixed costs to be led by increased
investments in research and product development, information management, and
sales and marketing, as well as an increase in legal costs. The Company expects
that its worldwide research and product development investments as a percentage
of sales will continue to climb, as it enhances its position as the world's
leading supplier of agricultural genetics and as a leading integrator of
technology. Sales and marketing expenses are also expected to increase as the
Company introduces an unprecedented number of new products. Legal costs will
likely climb as the Company continues to protect and defend its intellectual
property positions.
Salary and benefits are another factor that influences fixed costs.
Pioneer's commitment to the work force and responsiveness to the competitive
environment is expected to raise base compensation levels faster than inflation
in the next fiscal year.
In addition, a change in the mix of earnings between the Company's
North American seed business and other worldwide operations may put upward
pressure on the effective tax rate in the future.
FORWARD-LOOKING STATEMENT
This report contains forward-looking statements relating to the
Company's operations that are based on management's current expectations,
estimates, and projections. Words such as "expects", "anticipates", "plans",
"intends", "projects", and similar expressions are used to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions that are
difficult to predict. In addition to other factors discussed in this report,
some of the important factors that could cause actual results to vary
significantly from management's expectations noted in forward-looking statements
include the weather, government programs/approvals, commodity prices, changes in
corn acreage, intellectual property positions, product performance, product
returns, customer preferences, currency fluctuations, costs, the Year 2000
issue, and industry consolidations.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 18, 1998.
PIONEER HI-BRED INTERNATIONAL, INC.
/s/ Duane A. Suess
--------------------------
Duane A. Suess, Controller
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