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SEGMENT OVERVIEW
Land O’Lakes operates in six segments: Dairy Foods, Feed,
Seed, Swine, Agronomy and Layers. The Dairy Foods segment produces,
markets and sells a variety of premium butter, spreads, cheese and
other related dairy products. Feed develops, produces, markets and
distributes animal feed to both the lifestyle and livestock animal
markets. The Seed segment markets and sells seed for a variety of
crops, including alfalfa, corn, soybeans and forage and turf grasses.
Swine produces and markets both young feeder pigs and mature market
hogs. The Agronomy segment, through investments in CF Industries,
Inc. and Agriliance LLC, manufactures, markets and distributes crop
nutrient and crop protection products. Layers, through MoArk LLC,
produces and markets shell and liquid egg products.
SALES AND EARNINGS
Net sales for Land O’Lakes, Inc. and subsidiaries (the “Company”)
in 2003 were $6.3 billion compared with $5.8 billion in 2002, an
increase of $474 million. Excluding the effect of the consolidation
of MoArk, which began July 1, 2003, net sales in 2003 increased
$156 million or three percent over last year.
Dairy Foods segment sales increased slightly in 2003, mainly due
to higher market prices for butter and cheese products and volume
gains in butter and foodservice cheese. Feed segment sales were
also up slightly, largely due to the effects of higher commodity
prices for feed ingredients, volume growth in horse, lab and companion
animal feeds within the lifestyle feed category and the consolidation
of an animal health, farm and ranch product joint venture. Volume
declines within the livestock feed category partially offset the
increase. Improved prices for market hogs led to an increase in
Swine segment sales in 2003. Higher Seed segment sales were mainly
attributed to volume growth and product mix changes in both proprietary
and partnered crop seed.
Net earnings for Land O’Lakes in 2003 were
$83.5 million compared with $98.9 million in 2002, a decrease of
$15.4 million. Net earnings in 2003 were impacted by a reduction
in gain on legal settlements, net of income taxes, of $113.0 million.
Excluding this reduction, the Company’s net earnings increased
$97.6 million in 2003.
Land O’Lakes net earnings, excluding the effect of gain on
legal settlements, improved considerably in 2003. Net earnings were
favorably impacted by the effects of higher market prices for dairy
and egg products, higher prices for market hogs and volume growth
in the Seed and Layers segments. Other significant factors contributing
to this improvement included cost-reduction initiatives, increased
earnings from equity in affiliated companies, reduced one-time costs
related to the integration of Purina Mills, gains on the sale of
manufacturing facilities and reduced restructuring and impairment
charges. The change in net earnings includes an increase in unrealized
hedging gains of $10.7 million, net of income taxes.
Dairy Foods segment earnings in 2003 increased as a result of improved
margins for dairy products attributed to higher market prices and
lower production costs, volume gains in foodservice cheese, gains
from the sale of two cheese plants and reduced restructuring and
impairment charges. Additional losses associated with the production
of mozzarella cheese, largely due to the continuation of plant start-up
costs in California and depressed mozzarella prices, partially offset
the earnings increase. Feed segment earnings, excluding the effect
of gain on legal settlements, improved due to stronger margins and
volume growth in horse, lab and companion animal feeds within lifestyle
feed, stronger margins in ingredient sales, reduced one-time costs
related to the integration of Purina Mills and cost-reduction efforts.
This improvement was partially offset by reduced volumes and margins
in livestock feed, which were affected by an excess supply of animal
protein in the market and restructuring within the swine and dairy
industries. Layers segment earnings increased in 2003 due to higher
egg prices, which averaged $0.93 per dozen compared with $0.72 per
dozen last year. Losses in the Company’s Swine segment were
reduced due to higher prices in 2003 for market hogs. Double-digit
volume growth in corn and soybean crop seed led to higher earnings
in the Seed segment.
Earnings from equity in affiliated companies increased in 2003,
primarily from Land O’Lakes investments within the Agronomy
and Layers segments. This increase in earnings was attributed to
the effects of improved crop protection and crop nutrient product
margins in Agronomy and higher prices for eggs in Layers.
FINANCIAL CONDITION
Debt is comprised of notes and short-term obligations,
current portion of long-term debt and long-term debt. Notes and
short-term obligations at December 31, 2003 were $80.7 million compared
with $37.8 million at December 31, 2002. Excluding the effect of
the consolidation of MoArk (which increased notes and short-term
obligations $25.1 million at year end), short-term debt increased
$17.8 million in 2003.
Long-term debt, including current portion, was $1,073.2 million
at December 2003 compared with $1,111.9 million at December 31,
2002. Excluding the effect of the consolidation of MoArk (which
increased long-term debt $75.8 million at year end), long-term debt
decreased $114.5 million in 2003.
At December 31, 2003, long-term debt included a $250 million revolving
credit facility, a bank term loan due in 2006 and an institutional
term loan due in 2008. As of December 31, 2003, the revolver was
undrawn and the outstanding balances on the bank term loan and the
institutional term loan were $92.5 million and $152.4 million, respectively.
All of these facilities are senior debt and are secured by substantially
all of the assets of Land O’Lakes. Interest rates on these
loans are based upon the London Inter-Bank Offered Rate, plus applicable
spreads.
In mid-December 2003, a 7-year senior secured note offering for
$175 million was completed with the proceeds used to repay borrowings
under the outstanding term loans. These notes carry a rate of 9
percent and hold a second lien on essentially all of the assets
which secure the revolver, bank term loan and institutional term
loan. In addition, $350 million of unsecured notes are outstanding,
which carry a coupon rate of 8 3/4 percent and are due in 2011.
The Company’s capital securities, which are also included
in long-term debt, of $190.7 million carry a coupon interest rate
of 7.45 percent and are due in 2028. The capital securities are
subordinated to all other debt.
Land O’Lakes long-term debt-to-capital was 52.6 percent at
December 31, 2003 compared with 51.1 percent a year ago. Excluding
the effect of the MoArk consolidation, long-term debt-to-capital
was 50.9 percent at December 31, 2003.
As of December 31, 2003, the Company’s senior secured debt
rating was B+ (Standard & Poor’s) and B1 (Moody’s).
The senior secured notes were rated B (Standard & Poor’s)
and B2 (Moody’s) and the senior unsecured note rating was
B- (Standard & Poor’s) and B3 (Moody’s). Additionally,
the Company’s capital securities ratings were CCC (Standard
& Poor’s) and Caa1 (Moody’s).
Obligations under capital lease at December 31,
2003 were $110.0 million, which represents the present value of
the future minimum lease payments for the leases of CPI and MoArk.
CPI, a 96%-owned subsidiary, leases the real property and certain
equipment relating to its cheese manufacturing and whey processing
plant in Tulare, CA. The lease balance was $99.2 million at December
31, 2003. MoArk, a 57.5%-owned subsidiary, leases land, buildings
and equipment at various locations. MoArk had a lease balance of
$10.8 million at December 31, 2003.
Equities at December 31, 2003 were $896.7 million
compared with $911.5 million at December 31, 2002. The decrease
of $14.8 million resulted from equity revolvement, age retirements,
estate redemptions, patronage refunds payable and a minimum pension
liability adjustment of $65.6 million, net of income tax. This decrease
was partially offset by $83.5 million in net earnings.
Cash returned to members in 2003 was $24.4 million
compared with $37.9 million in 2002. Members received $16.9 million
of equity revolvement, $4.2 million of cash patronage related to
prior year’s earnings, and $3.3 million of age retirement,
estate and other payments during the year.
PERFORMANCE MEASURES
Land O’Lakes is committed to improving profitability in each
core business through the effective use of invested capital and
increased returns to members. The Company uses two primary performance
measures – return on invested capital (“ROIC”)
and return on equity (“ROE”). ROIC indicates the operating
return on invested capital before considering the costs of financing
and income taxes. ROE combines the results of operating performance
with the effects of financial leverage and income taxes to measure
the return on members’ investment in Land O’Lakes.
Return on invested capital in 2003 was 8.0 percent
compared with 8.6 percent in 2002. Land O’Lakes average ROIC
for the five-year period ended in 2003 was 8.0 percent.
Return on equity in 2003 was 9.2 percent compared
with 11.8 percent in 2002. This decrease was due to lower earnings
and a higher beginning of the year equity. Average ROE for the five-year
period ended in 2003 was 9.2 percent.
SEC REPORTING
Certain of Land O’Lakes debt is registered with the Securities
and Exchange Commission (“SEC”) and trades in public
markets. The Company files annual (10-K), quarterly (10-Q) and current
(8-K) reports with the SEC. The Company’s filings can be accessed
on the internet at www.sec.gov or the Company’s website (www.landolakesinc.com).
Senior
Strategy Team--> |
