UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 28, 1999
OR
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------------
Commission File Number : 0-7908
PIONEER HI-BRED INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Iowa 42-0470520
------------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Capital Square, 400 Locust, Des Moines, Iowa 50309
------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (515) 248-4800
--------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 23, 1999
- ----------------------------- -----------------------------
Common Stock ($1.00 par value) 190,140,155
Common Stock - Class B ($1.00 stated value) 49,333,758
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -- February 28, 1999,
<S> <C> <C> <C> <C> <C>
August 31, 1998, and February 28, 1998......................... 3-4
Consolidated Condensed Statements Of Operations-- Six Months
Ended February 28, 1999 and 1998............................... 5
Consolidated Condensed Statements Of Cash Flows-- Six Months
Ended February 28, 1999 and 1998............................... 6
Notes to Consolidated Condensed Financial Statements............. 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 11-15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 16
Signatures................................................................ 17
</TABLE>
2
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
February 28, August 31, February 28,
ASSETS 1999 1998 1998
----------- ------------ ------------
(Unaudited) (Unaudited)
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents........... $ 272 $ 86 $ 578
Accounts and notes receivable, net.. 367 400 339
Inventories:
Finished seed..................... 565 273 593
Unfinished seed................... 262 201 197
Other............................. 16 7 11
Income taxes receivable............. 9 -- --
Deferred income taxes............... 77 69 68
Prepaid expenses and other
current assets.................. 78 3 72
-------- -------- --------
....................Total current assets $ 1,646 $ 1,039 $ 1,858
LONG-TERM ASSETS........................ 59 47 85
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and allowances
February 28, 1999 - $552
August 31, 1998 - $520
February 28, 1998 - $514............ 619 576 555
INTANGIBLES............................. 65 55 60
-------- -------- --------
$ 2,389 $ 1,717 $ 2,558
======== ======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' February 28, August 31, February 28,
EQUITY 1999 1998 1998
------------ ------------- ------------
(Unaudited) (Unaudited)
CURRENT LIABILITIES
<S> <C> <C> <C>
Short-term borrowings................. $ 79 $ 76 $ 67
Current maturities of long-term debt.. 1 14 6
Accounts payable, trade............... 240 81 228
Customer Deposits..................... 525 -- 843
Accrued compensation.................. 38 61 45
Income taxes payable.................. -- 46 4
Other accruals........................ 78 _____67 _____77
------- -- --
Total current liabilities........... $ 961 $ 345 $ 1,270
-------- -------- --------
LONG-TERM DEBT............................ $ 205 $ 5 $ 18
-------- -------- --------
DEFERRED ITEMS
Retirement benefits................... $ 98 $ 94 $ 88
Income taxes.......................... 18 19 18
-------- -------- --------
$ 116 $ 113 $ 106
-------- -------- --------
MINORITY INTEREST IN SUBSIDIARIES......... $ 7 $ 7 $ 6
-------- -------- --------
SHAREHOLDERS' EQUITY
Preferred stock, $100 stated value.... $ -- $ -- $ --
Common stock, $1 par or stated value.. 231 230 93
Class B common, $1 stated value....... 49 49 --
Additional paid-in capital............ 260 246 242
Retained earnings..................... 1,308 1,428 1,342
Accumulated other comprehensive loss,
Net............................ (42) (46) (28)
------- ------- ---
$ 1,806 $ 1,907 $ 1,649
Less: Cost of common shares
acquired for the treasury........... (669) (631) (457)
Unearned compensation............... (37) (29) (34)
-------- -------- --------
$ 1,100 $ 1,247 $ 1,158
-------- -------- --------
$ 2,389 $ 1,717 $ 2,558
======== ======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited, in millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net sales.......................... $ 300 $ 302 $ 376 $ 381
-------- -------- -------- --------
Operating costs and expenses:
Cost of goods sold............... $ 137 $ 147 $ 193 $ 198
Research and product development. 45 38 85 72
Selling.......................... 75 69 129 124
General and administrative....... 36 41 71 69
-------- -------- -------- --------
$ 293 $ 295 $ 478 $ 463
-------- -------- -------- --------
Operating income (loss).......... $ 7 $ 7 $ (102) $ (82)
Investment income.................. 7 7 12 25
Interest expense................... (5) (3) (10) (5)
Net exchange and other
losses.................... (3) (3) (8) (8)
------------ -------- -------- --------
Income (loss) before items shown
below.......................... $ 6 $ 8 $ (108) $ (70)
Provision for income taxes......... (3) (2) 36 25
Minority interest and other........ -- (2) -- (2)
-------- -------- -------- --------
Net income (loss)................ $ 3 $ 4 $ (72) $ (47)
Preferred stock dividend........... -- 5 -- 9
-------- -------- -------- --------
Net income (loss) attributable to
common shareholders............ $ 3 $ (1) $ (72) $ (56)
======== ======== ======== ========
Basic net income (loss) per
common share*.................... $ .01 $ (.01) $ (.30) $ (.25)
Diluted net income (loss) per
common share*.................... $ .01 $ (.01) $ (.30) $ (.25)
Dividends per common share*........ $ .10 $ .09 $ .20 $ .17
Basic average common shares
outstanding...................... 239.4 214.8 239.8 220.5
Diluted average common shares
outstanding....................... 240.1 214.8 239.8 220.5
*Not in millions
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
<TABLE>
<CAPTION>
Six Months Ended
February 28,
1999 1998
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss)....................................... $ (72) $ (47)
Noncash items included in net (loss):
Depreciation and amortization.................. 52 43
Other.......................................... 14 (9)
Net change in assets and liabilities............. 174 511
-------- --------
Net cash provided by operating activities...... $ 168 $ 498
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. $ (81) $ (64)
Technology Investments........................... (5) (5)
Other............................................ (21) 5
-------- --------
Net cash used in investing activities.......... $ (107) $ (64)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on short-term borrowings. $ 22 $ (20)
Purchase of common stock......................... (34) (1,583)
Dividends paid................................... (48) (47)
Net proceeds from issuance of preferred stock.... -- 1,701
Net proceeds (payments) on long-term debt........ 187 (1)
-------- --------
Net cash provided by financing activities...... $ 127 $ 50
-------- --------
Effect of foreign currency exchange................ $ (2) $ (3)
-------- --------
Net increase in cash and cash equivalents...... $ 186 $ 481
Cash and cash equivalents, beginning............... 86 97
-------- --------
CASH AND CASH EQUIVALENTS, ENDING.................. $ 272 $ 578
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for:
Interest....................................... $ 7 $ 5
======== ========
Income taxes................................... $ 33 $ 23
======== ========
NONCASH FINANCING ACTIVITIES:
Retirement of 49,398,135 shares of treasury stock:
Common stock................................... $ -- $ 16
Additional paid-in capital..................... -- 1,509
-------- --------
Treasury stock................................. $ -- $ 1,525
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
6
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to fairly present,
in accordance with generally accepted accounting principles, the financial
position as of February 28, 1999 and 1998, and the results of operations
and cash flows for the six months ended February 28, 1999 and 1998. Because
of the seasonal nature of the Company's business, the results of operations
for the six months ended February 28, 1999, may not be indicative of the
results to be expected for the full year.
2. Pioneer has guaranteed the repayment of principal and interest on certain
obligations of Village Court Associates, an affiliated real estate venture.
Such guarantees totaled approximately $23 million at February 28, 1999 and
1998.
3. Since April, 1996, DeKalb Genetics Corporation ("DeKalb") has filed six
lawsuits against Pioneer. The lawsuits allege that insect resistant corn
products that use a Bt gene, and corn products resistant to a glufosinate
herbicide, infringe on certain DeKalb patents. On November 10, 1998, two of
the six lawsuits filed were dismissed with prejudice. These two lawsuits
alleged the Company had infringed on Dekalb patents by using glufosinate
resistant products in developing corn hybrids.
After reviewing the Company's intellectual property position, DeKalb's
patent filings, DeKalb's lawsuits, and conducting extensive discovery,
Pioneer continues to believe all DeKalb's claims are without merit. Pioneer
has denied DeKalb's allegations and raised defenses that, if successful,
would render DeKalb's patents invalid. Pioneer believes that disposition of
the lawsuits will not have a materially adverse effect on the consolidated
financial position and results of operations of the Company. Pioneer also
does not expect delays in the introductions of advanced corn hybrids with
insect and herbicide resistance because of these lawsuits.
7
<PAGE>
4. The following table summarizes the computation of weighted average shares
outstanding:
Three Months Ended February 28 1999 1998
----------------------------------------------------------------------------
(in millions)
Number of shares of common stock
outstanding at beginning of the period..... 239.7 197.4
Weighted average number of shares of
common stock issued during the period...... 0.2 18.0
Weighted average number of shares of
common stock purchased for the treasury.... (0.5) (0.6)
--- ---
Weighted average number of shares of
common stock outstanding during the period. 239.4 214.8
===== =====
Six Months Ended February 28, 1999 1998
---------------------------------------------------------------------------
(in millions)
Number of shares of common stock
outstanding at beginning of the period..... 240.3 246.6
Weighted-average number of shares of
common stock issued during the period...... 0.1 9.0
Weighted-average number of shares of
common stock purchased for the treasury.... (0.6) (35.1)
---- -----
Weighted-average number of shares of
common stock outstanding during the period. 239.8 220.5
===== =====
8
<PAGE>
5. The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for
the periods presented:
<TABLE>
<CAPTION>
February 28, 1999 February 28, 1998
-------------------------------- -------------------------------
Income/ Shares Income/ Shares
(Loss) Denom- Per-Share (Loss) Denom- Per-Share
Three Months Ended Numerator inator Amount Numerator inator Amount
------------------------- -------------------------------- -------------------------------
(in millions, except
per share amounts)
Net income $ 3 $ 4
Less: Preferred
stock dividends -- (5)
----- -----
Basic earnings per share:
Income(loss) attributable to
<S> <C> <C> <C> <C> <C> <C>
common shareholders $ 3 239.4 $ .01 $ (1) 214.8 $ (.01)
====== ======
Effect of dilutive securities:
Convertible preferred stock -- -- -- --
Stock options -- .7 -- --
----- ------ ----- --------
Diluted earnings per share:
Income(loss) attributable to
common shareholders $ 3 240.1 $ .01 $ (1) 214.8 $ (.01)
===== ======= ======= ==== ======== ======
February 28, 1999 February 28, 1998
-------------------------------- ------------------------------
Income/ Shares Income/ Shares
(Loss) Denom- Per-Share (Loss) Denom- Per-Share
Six Months Ended Numerator inator Amount Numerator inator Amount
------------------------- -------------------------------- -------------------------------
(in millions, except
per share amounts)
Net (loss) $ (72) $ (47)
Less: Preferred
stock dividends -- (9)
----- ------
Basic earnings per share:
(loss) attributable to
common shareholders $ (72) 239.8 $ (.30) $ (56) 220.5 $ (.25)
====== =======
Effect of dilutive securities:
Convertible preferred stock -- -- -- --
Stock options -- -- -- --
----- ------- ----- -------
Diluted earnings per share:
(loss) attributable to
common shareholders $ (72) 239.8 $ (.30) $ (56) 220.5 $ (.25)
===== ======= ====== ===== ======== =======
</TABLE>
The periods presented, with the exception of the Three Months Ended February 28,
1999, reflect a loss attributable to common shareholders. As a result, the
effect of convertible preferred stock and stock options are not included in the
calculation of diluted earnings per share for the periods with losses as their
effects are anti-dilutive.
9
<PAGE>
6. Accounting Pronouncements
As of September 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement has no
impact on a company's net income (loss) or shareholders' equity. SFAS No.
130 requires other comprehensive income to include foreign currency
translation adjustments and unrealized gains and losses on certain
investments in debt and equity securities classified as available-for-sale
securities, which prior to adoption were reported separately in
shareholders' equity. The February 28, 1998, and August 31, 1998, financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
Total comprehensive loss for the six months ended February 28, 1999 and
1998, which includes net loss and other comprensive income (loss) amounted
to $67 million and $68 million, respectively.
7. Subsequent Events:
On March 15, 1999, Pioneer Hi-Bred International, Inc., an Iowa corporation
("Pioneer"), E. I. du Pont de Nemours and Company, a Delaware corporation
("DuPont"), and Delta Acquisition Sub, Inc., a Delaware corporation and a
wholly owned subsidiary of DuPont ("Delta"), entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which Pioneer will be
merged (the "Merger") into Delta, with Delta surviving the Merger.
At the effective time of the Merger, each share of Pioneer Common Stock
(other than shares held by DuPont and any shares as to which appraisal
rights are perfected) will be converted in the Merger, at the election of
the holders thereof, into either a fraction of a share of DuPont common
stock with an average trading price of $40 or the right to receive $40 in
cash, subject to the overall limitation that 45% of the consideration paid
to Pioneer stockholders will be cash and 55% will be DuPont common stock.
The closing of the Merger is subject to various conditions, including the
approval of Pioneer stockholders and the expiration of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
10
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes, and with the
Company's audited financial statements and notes for the fiscal year ended
August 31, 1998.
MATERIAL CHANGES IN FINANCIAL CONDITION:
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 meet the cash
needs of the period and to pay the commercial paper and accounts payable which
are the Company's primary sources of financing during the first and fourth
quarters of the fiscal year. Any excess funds are invested, primarily in
short-term commercial paper.
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 February 28, 1999,
consisted of $79 million in direct short-term borrowings from foreign banks.
During fiscal 1999 the Company has the following domestic lines of credit
available: (in millions) Revolving Seasonal Total
First quarter $200 $100 $300
Second quarter $200 $100 $300
Third quarter $200 $ -- $200
Fourth quarter $200 $ -- $200
During the fiscal year ended August 31, 1998, the Company finalized an
agreement with DuPont that created one of the world's largest private
agricultural research and development collaborations. The Company and DuPont
also formed a joint venture, Optimum Quality Grains, L.L.C. that markets
improved quality traits.
In connection with the above agreement, the Company issued convertible
preferred stock to DuPont, which was converted to Class B common stock during
fiscal year 1998. As required by the agreement, Pioneer used a majority of the
proceeds to purchase shares of the Company's outstanding common stock through a
Dutch auction self-tender. The excess proceeds from these transactions of
approximately $170 million were used for 1998 operations and to purchase
additional shares of Pioneer common stock on the open market through the
Company's stock repurchase program.
The growth in receivables at February 28, 1999, when compared to February
28, 1998, was primarily due to a $37 million increase in trade receivables
resulting from deliveries running ahead of prior years in Italy and Greece. This
was partially offset by a decrease in North America trade receivables due to
timing of deliveries.
Cash and cash equivalents decreased $306 million primarily due to a decrease
of $318 million in customer deposits. The decrease in customer deposits is due
to the high level of acceptance to the Company's enhanced customer credit
programs offered for the 1999 sales season.
Long-term debt increased $187 million as a result of the Company's issuance
of $200 million in debt securities in January 1999.
11
<PAGE>
MATERIAL CHANGES IN RESULTS OF OPERATIONS:
Net loss for the six months ended February 28, 1999, was $72 million, or
$.30 per share, on sales of $376 million. In the first six months of the prior
fiscal year, the Company recorded a loss of $47 million on sales of $381
million. After the payment of preferred dividends the net loss attributable to
common shareholders for February 28, 1998 totaled $56 million or $.25 per share.
Due to the seasonality of the seed business, partial-year results and
quarter-to-quarter comparisons are not always meaningful. Accordingly, such
quarterly comparisons are not emphasized. Typically, most of the Company's
revenue and operating profit are generated in the third quarter. Revenues during
the Company's first six months of the fiscal year are generated mostly from
Southern Hemisphere operations, North American wheat sales, initial southern
North America seed corn sales and worldwide microbial product sales and
generally represent less than 25 percent of the Company's annual sales.
Six Months Ended February 28, 1999 compared to the Six Months Ended February 28,
1998
The current operating loss increased $20 million to $102 million largely due
to increase fixed costs through the second quarter of fiscal 1999. The increase
in fixed costs of approximately 8 percent was expected due to planned
expenditures in research and product development, sales and marketing,
information management and other targeted areas. Increased investments in
research and product development of $13 million accounted for over 65 percent of
the current year increase in fixed costs. Net sales were $5 million lower than
prior year sales. Increased seed corn sales were offset by decreases in other
products, primarily wheat. Earlier seed corn deliveries outside of North
America, primarily Europe, more than offset a decrease in North America seed
corn sales resulting from the timing of deliveries to southern United States
dealers.
Net Sales and Operating Profit (Loss)
(Unaudited, in millions)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
February 28, Increase/ February 28, Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
---------------------------------- ------------------------------------
Net sales:
<S> <C> <C> <C> <C> <C> <C>
Corn................ $ 255 $ 254 $ 1 $ 288 $ 277 $ 11
Other................. 45 48 (3) 88 104 (16)
------- ------- ------- ------- ------- -------
Total net sales....... $ 300 $ 302 $ (2) $ 376 $ 381 $ (5)
======== ======== ======== ======== ======== ========
Operating profit (loss):
Corn................ $ 45 $ 46 $ (1) $ (29) $ (22) $ (7)
Other............... (14) (14) -- (26) (15) (11)
-------- -------- -------- -------- -------- --------
Product line operating
profit (loss)..... $ 31 $ 32 $ (1) $ (55) $ (37) $ (18)
Indirect general and
administrative
expenses........ (24) (25) 1 (47) (45) (2)
-------- -------- -------- -------- -------- --------
Operating income
(loss).............. $ 7 $ 7 $ -- $ (102) $ (82) $ (20)
======== ======== ======== ======== ======== ========
Units delivered,
North America:
Corn 1.499 1.723 (.224) 1.447 1.723 (.276)
</TABLE>
12
<PAGE>
SEED CORN
North America
Year-to-date North American seed corn operating loss increased $11 million
from the same period a year ago. Deliveries of Pioneer products through the
second quarter are running behind last year. Seed corn units delivered are down
approximately 13 percent due to fewer units shipped to dealer areas in the
southern United States. It is anticipated that corn acreage will be down in this
region. The Company does not record a sale until the customer takes delivery of
the seed. Average net seed price per unit has increased compared to the prior
year as customers are trading up to new higher-value genetics.
Current year-to-date operating income was also impacted by increased
research and product development. Research and product development costs in
North America increased $10 million, or 22 percent, compared to the same period
a year ago. The Company's continued emphasis on developing improved products for
customers played a significant role in the current year increase. Pioneer is
increasing its rate of research investment in genomics and lab sciences.
Other Regions
Seed corn sales outside North America increased $27 million for the first
six months of fiscal 1999 compared to the previous year. The increased sales
resulted in a $4 million increase in operating income over February 28, 1998
results.
Current year European seed corn operating income increased $9 million from
the same period a year ago. Earlier seed deliveries in southern Europe was the
primary driver for improved current period results. Research and product
development expenditures increased $6 million or 22 percent.
OTHER PRODUCTS
The current year operating loss from other products increased $11 million
from the loss recorded a year earlier. This increase is due primarily to
decreased wheat sales in North America and lower alfalfa sales in Latin America.
Almost all of the Company's wheat sales occur by the end of the second quarter
of the year. Wheat sales were down $8 million with a decrease in operating
profit of $5 million due to low commodity prices which decreased sales price and
acreage. Operating results decreased $4 million due to the Company's equity
ownership in Optimum Quality Grains, L.L.C..
NET FINANCIAL AND TAXES
Year-to-date net financial income decreased $18 million from previous year
results due to decreased investment income and increased interest expense.
Investment income decreased $13 million primarily due to fiscal 1998 first
quarter results including interest earned on proceeds from DuPont's investment
in the Company. The Company did not have excess cash to invest in the first
quarter of the current year. Typically the Company borrows money during its
first quarter to fund operations. The availability of the excess proceeds from
the DuPont transactions last year reduced borrowings, which reduced prior year
interest expense.
The estimated worldwide tax rate of 33 percent reflected in the first six
months of fiscal 1999 is the same as the 33 percent effective tax rate reflected
on an annual basis for fiscal 1998. The worldwide effective tax rate for the
first half of fiscal 1998 was 35 percent. The lower effective tax rate increased
the year-to-date loss by approximately $2 million, or $.01 per share, compared
to last year. The effective tax rate reflected for the second quarter is based
on information available to date. The effective tax rate on an annual basis may
vary from what is reflected in the current period, in part as a result of any
changes in the mix of earnings between the Company's North American seed
business and other worldwide operations.
13
<PAGE>
YEAR 2000
The Company's Year 2000 compliance program is on schedule. The following key
objectives were met during the first six months of fiscal 1999. Core
infrastructure and core application remediation efforts are estimated to be more
than 95 percent complete. The inventory of building, lab, and seed production
equipment is complete and assessments started. The Company has completed
assessments for a large percentage of third party suppliers and has established
a schedule for further investigation of Year 2000 compliance status for specific
suppliers. An integrated network testing environment was established covering
all corporate processing platforms. Over the next six months, compliance efforts
will focus on developing and executing test plans, completing assessment of
legacy data, remediation of non-compliant equipment, and completion of supplier
assessments to include developing formal contingency plans.
Total costs to address the Year 2000 issue are currently estimated not to
exceed $3 to $5 million, unchanged from original estimates.
Pioneer believes 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.
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 began 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, however, the Company believes it will not have a material
impact on its results of operations or financial condition. Several specific
areas have been analyzed as noted.
The Company has performed an analysis of applicable computer systems
readiness 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.
OUTLOOK
Pioneer products continue to demonstrate value for our customers. The
Company's corn hybrids anticipated to be the top ten volume products for 1999 on
average posted a yield advantage of nearly 8 bushels an acre over the average of
the top ten competitor hybrids in side-by-side comparisons last fall. Of the
seed corn units invoiced to date in North America nearly two-thirds are from new
genetics -- hybrids introduced in 1997 or later. In addition, corn hybrids with
the Bt gene for resistance to European Corn Borer represented approximately
one-third of North America seed corn units invoiced. The sales of new genetics
is expected to result in higher seed corn margins in North America.
Invoiced seed corn units in North American sales rep areas are running ahead
of last year. Sales rep areas account for nearly 90 percent of the Company's
annual North America seed corn sales volume. Invoiced seed corn units in North
American dealer areas are behind last year primarily due to lower anticipated
corn acreage in the southern United States. The Company expects market share
gains in North America and other key seed markets around the world.
14
<PAGE>
Pioneer brand soybeans are demonstrating excellent results. Based on 28,000
variety comparisons, Pioneer leader soybeans with the Roundup Ready(1) gene on
average held a 2 bushel-per-acre yield advantage over competitive Roundup Ready
products. Through second quarter, glyphosate-resistant products represented
nearly two-thirds of total soybeans invoiced, compared to nearly 40 percent for
fiscal year 1998. Soybean operating income is expected to improve as a result of
anticipated market share increase and higher average price per unit due to a
higher proportion of glyphosate resistant products sold. Invoicing of current
year soybean sales are ahead of the same period last year by over 2 million
units.
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, the Year 2000 issue, the Euro
conversion, and industry consolidations.
(1) Registered trademark of, and used under license from, Monsanto Company.
15
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
a. Exhibits
Financial Data Schedule (Exhibit 27).
b. Reports on Form 8-K
No reports on Form 8-K were filed with the Commission during the
six months ended February 28, 1999.
16
<PAGE>
PIONEER HI-BRED INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER HI-BRED INTERNATIONAL, INC.
(Registrant)
By /s/ JERRY L. CHICOINE
----------------------------------------
JERRY L. CHICOINE
Executive Vice President and Chief
Operating Officer
By /s/ BRIAN G. HART
----------------------------------------
BRIAN G. HART
Vice President and Chief
Financial Officer
Dated: March 30, 1999
17
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