-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dx8cND5rc9PvMQJsezxCm6RT9u9ibz65dNeaDoa5Ez5nH1AxH3cLAolrer1KCIIM USjhlWI3y5Da00uaLQAZtA== 0000950131-97-005021.txt : 19970814 0000950131-97-005021.hdr.sgml : 19970814 ACCESSION NUMBER: 0000950131-97-005021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA INDUSTRIES INC CENTRAL INDEX KEY: 0000722079 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 521145429 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08520 FILM NUMBER: 97658337 BUSINESS ADDRESS: STREET 1: TERRA CENTRE 600 4TH ST STREET 2: P.O. BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 BUSINESS PHONE: 7122771340 MAIL ADDRESS: STREET 1: TERRA CENTER STREET 2: 600 4TH ST P O BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 FORMER COMPANY: FORMER CONFORMED NAME: INSPIRATION RESOURCES CORP DATE OF NAME CHANGE: 19920517 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission file number: 1-8520 TERRA INDUSTRIES INC. (Exact name of registrant as specified in its charter) Maryland 52-1145429 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Terra Centre P.O. Box 6000 600 Fourth Street 51102-6000 Sioux City, Iowa (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (712) 277-1340 ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 1997, the following shares of the registrant's stock were outstanding: Common Shares, without par value 74,946,711 shares ================================================================================ PART I. FINANCIAL INFORMATION TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands) (unaudited)
June 30, December 31, June 30, 1997 1996 1996 ---------- ------------ ---------- ASSETS Cash and short-term investments $ 95,003 $ 100,742 $ 47,897 Accounts receivable, less allowance for doubtful accounts of $15,875, $11,391 and $18,464 552,319 81,606 566,112 Inventories 380,596 422,938 364,615 Other current assets 31,251 107,008 102,447 - ------------------------------------------------------------------------------------------------------- Total current assets 1,059,169 712,294 1,081,071 - ------------------------------------------------------------------------------------------------------- Equity and other investments 19,615 16,579 18,381 Property, plant and equipment, net 874,054 846,353 766,463 Excess of cost over net assets of acquired businesses 282,024 291,645 300,872 Deferred tax asset 15,172 15,311 --- Partnership distribution reserve fund --- --- 18,480 Other assets 83,869 87,183 65,629 - ------------------------------------------------------------------------------------------------------- Total assets $2,333,903 $1,969,365 $2,250,896 ======================================================================================================= LIABILITIES Debt due within one year $ 124,512 $ 118,937 $ 198,481 Accounts payable 507,743 198,273 411,611 Accrued and other liabilities 185,645 207,927 202,610 - ------------------------------------------------------------------------------------------------------- Total current liabilities 817,900 525,137 812,702 - ------------------------------------------------------------------------------------------------------- Long-term debt 410,035 404,707 405,405 Deferred income taxes 140,312 134,523 122,449 Other liabilities 131,919 125,013 144,657 Minority interest 144,128 173,893 184,339 - ------------------------------------------------------------------------------------------------------- Total liabilities 1,644,294 1,363,273 1,669,552 - ------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Capital stock Common Shares, authorized 133,500 shares; outstanding 74,890, 75,010 and 75,775 shares 127,478 127,614 128,573 Paid-in capital 548,050 550,850 562,188 Cumulative translation adjustment (2,683) (1,430) (260) Retained earnings (deficit) 16,764 (70,942) (109,157) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 689,609 606,092 581,344 - ------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,333,903 $1,969,365 $2,250,896 =======================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 2 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per-share amounts) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- -------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- REVENUES Net sales $1,188,241 $1,066,861 $1,611,924 $1,455,173 Other income, net 33,653 18,817 43,680 25,246 - -------------------------------------------------------------------------------------------------------------------------- 1,221,894 1,085,678 1,655,604 1,480,419 - -------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of sales 951,116 849,780 1,289,168 1,127,297 Selling, general and administrative expense 96,030 92,126 164,339 154,206 Equity in earnings of unconsolidated affiliates (3,023) (2,265) (2,000) (1,184) Interest income (1,995) (1,396) (2,705) (3,727) Interest expense 15,269 15,203 28,753 26,768 Minority interest 12,316 12,628 19,226 25,797 - -------------------------------------------------------------------------------------------------------------------------- 1,069,713 966,076 1,496,781 1,329,157 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 152,181 119,602 158,823 151,262 Income tax provision 62,377 48,152 65,117 61,412 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 89,804 $ 71,450 $ 93,706 $ 89,850 ========================================================================================================================== Net income per share $ 1.20 $ 0.90 $ 1.25 $ 1.12 ========================================================================================================================== Weighted average number of shares outstanding 74,350 79,089 74,722 80,310 ========================================================================================================================== Cash dividends declared per share $ 0.04 $ 0.04 $ 0.08 $ 0.07 ==========================================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 3 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ---------------------------- 1997 1996 --------- --------- OPERATING ACTIVITIES Net income $ 93,706 $ 89,850 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 45,879 37,190 Deferred income taxes 9,588 9,312 Minority interest in earnings 19,226 25,797 Other non-cash items (1,393) (758) Changes in current assets and liabilities, excluding working capital purchased/sold: Accounts receivable (450,968) (385,464) Inventories 72,469 11,788 Other current assets 52,973 6,134 Accounts payable 296,639 205,885 Accrued and other liabilities (29,479) (32,726) Unreimbursed Port Neal casualty --- (34,017) Other (1,622) (3,654) - -------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 107,018 (70,663) - -------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisitions, net of cash acquired (37,806) (7,798) Port Neal plant construction (9,712) (58,962) Insurance proceeds from plant casualty --- 13,895 Purchase of property, plant and equipment (18,097) (26,722) Other 1,815 605 - -------------------------------------------------------------------------------------- Net cash used in investing activities (63,800) (78,982) - -------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net short-term borrowings 5,668 168,168 Proceeds from issuance of long-term debt 7,000 --- Principal payments on long-term debt (1,765) (1,869) Stock (repurchase) issuance - net (22,096) (77,205) Distributions to minority interests (17,437) (24,574) Distribution reserve fund 18,480 --- Redemption of SPUs (6,604) --- Redemption of preferred stock (24,950) --- Dividends (6,000) (5,696) - -------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (47,704) 58,824 - -------------------------------------------------------------------------------------- Foreign exchange effect on cash and short-term investments (1,253) 11 - -------------------------------------------------------------------------------------- Decrease in cash and short-term investments (5,739) (90,810) Cash and short-term investments at beginning of period 100,742 138,707 - -------------------------------------------------------------------------------------- Cash and short-term investments at end of period $ 95,003 $ 47,897 ======================================================================================
See accompanying Notes to the Consolidated Financial Statements. 4 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (in thousands) (unaudited)
Cumulative Capital Paid-In Translation Accumulated Stock Capital Adjustment Deficit Total - ------------------------------------------------------------------------------------- Balance at December 31, 1995 $133,970 $631,195 $ (271) $(193,311) $571,583 Exercise of stock options 121 486 --- --- 607 Stock repurchase (5,735) (72,078) --- --- (77,813) Issuance of common shares 215 2,580 --- --- 2,795 Stock incentive plan 2 5 --- --- 7 Translation adjustment --- --- 11 --- 11 Dividends --- --- --- (5,696) (5,696) Net income --- --- --- 89,850 89,850 - ------------------------------------------------------------------------------------- Balance at June 30, 1996 $128,573 $562,188 $ (260) $(109,157) $581,344 =====================================================================================
Cumulative Retained Capital Paid-In Translation Earnings Stock Capital Adjustment (Deficit) Total - ------------------------------------------------------------------------------------- Balance at December 31, 1996 $127,614 $550,850 $ (1,430) $(70,942) $606,092 Exercise of stock options 38 346 --- --- 384 Stock repurchases (1,673) (20,759) --- --- (22,432) Issuance of common shares 1,499 17,613 --- --- 19,112 Translation adjustment --- --- (1,253) --- (1,253) Dividends --- --- --- (6,000) (6,000) Net income --- --- --- 93,706 93,706 - ------------------------------------------------------------------------------------- Balance at June 30, 1997 $127,478 $548,050 $ (2,683) $ 16,764 $689,609 =====================================================================================
See accompanying Notes to the Consolidated Financial Statements. 5 TERRA INDUSTRIES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (the "Corporation") and the results of the Corporation's operations for the periods presented. All of these adjustments are of a normal recurring nature. Because of the seasonal nature of the Corporation's operations and effects of weather-related conditions in several of its marketing areas, results of operations of any single reporting period should not be considered as indicative of results for a full year. Certain reclassifications have been made to prior years' financial statements to conform with current year presentation. These statements should be read in conjunction with the Corporation's 1996 Annual Report to Stockholders. 2. Per-share data are based on the weighted average number of Common Shares outstanding and the dilutive effect of the Corporation's outstanding restricted shares and stock options. Fully diluted earnings per share is considered to be the same as primary earnings per share, since the effect of certain dilutive securities was not significant. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share." SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. The impact on earnings per share computed using SFAS 128 is immaterial, in comparison with net income per share disclosed in the Consolidated Statements of Operations. SFAS 128 is applicable for fiscal years ending after December 15, 1997. 3. Inventories consisted of the following:
June 30, December 31, June 30, (in thousands) 1997 1996 1996 -------------------------------------------------------------------- Raw materials $ 45,819 $ 39,782 $ 42,856 Finished goods 334,777 383,156 321,759 -------------------------------------------------------------------- Total $380,596 $422,938 $364,615 ====================================================================
4. The Corporation and certain of its subsidiaries are involved in various legal actions and claims, including environmental matters, arising during the normal course of business. Although it is not possible to predict with any certainty the outcome of such matters, it is the opinion of management that these matters will not have a material adverse effect on the results of operations, financial position or cash flows of the Corporation. 5. The Corporation entered into a methanol hedging agreement (the "Methanol Hedging Agreement") whereby, the Corporation agreed to make payments to the extent that average methanol prices exceed the sum of $0.65 per gallon plus 0.113 times the average spot price index, in cents per MMBtu for natural gas during 1997. The amount due, if any, is dependent upon average methanol and natural gas prices during 1997. The quantity subject to the agreement is 130 million gallons. The Corporation's methanol production facilities have a capacity of 320 million gallons of methanol per year. Approximately $626,000, pursuant to the Methanol Hedging Agreement was deferred at June 30, 1997 and will be recognized as income over the remaining term of the agreement. No amounts have been paid or are presently accrued under the terms of the agreement. The estimated fair value of the agreement, representing the amount that the Corporation would expect to pay at June 30, 1997 to liquidate the agreement for its remaining term, is less than $1 million. 6 6. On December 13, 1994, the Corporation's Port Neal facility in Iowa was extensively damaged as a result of an explosion. Insurance was in force to cover the Corporation's property damage, business interruption and third party liability claims. Estimated lost profits recoverable under the business interruption policy were included in income. Insurance proceeds received under the Corporation's property damage claim are being deferred pending final settlement of the claim. The Corporation has invested additional funds for enhancements and improvements at the Port Neal facility. As of June 30, 1997, the Corporation has received $203 million in insurance payments. The Corporation presented documentation to the insurance carriers supporting expenditures in excess of $350 million to rebuild the plant and to compensate for the property damage and business interruption losses. The Corporation filed a complaint in April 1997 in federal court against its property insurance carriers alleging the carriers have failed to act in a timely manner to handle the claim or to acknowledge their obligations to pay the amounts owed. The complaint seeks, among other things, monetary damages in excess of $150 million. The Corporation expects to record a substantial non-recurring gain, representing the difference between the property insurance settlement on the Port Neal facility with the Corporation's insurers and the carrying value of the facility at the time of the explosion. The amount of the gain will be dependent on the final settlement reached with the Corporation's insurance carriers. In September 1995, the Corporation transferred the Port Neal facility to Port Neal Holdings Corp. ("PNH"). PNH was structured to finance and complete the reconstruction of the Port Neal facility through its wholly owned subsidiary, Port Neal Corporation ("PNC"). PNH issued to unrelated third parties $25 million of non-convertible preferred stock. The preferred stock represented 25% of the voting rights of PNH and accrued dividends commensurate with market interest rates. PNH redeemed the preferred stock on June 30, 1997. 7. The Corporation's natural gas procurement policy is to effectively fix or cap the price of approximately 40% to 80% of its natural gas requirements for a one-year period and up to 50% of its natural gas requirements for the subsequent two-year period through supply contracts, financial derivatives and other forward pricing techniques. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices are frequently based on the Henry Hub Louisiana price, but natural gas supplies for the Corporation's six production facilities are physically purchased for each plant location which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. The Corporation has entered into firm contracts to minimize the risk of interruption or curtailment of natural gas supplies. Additionally, the Corporation has entered into forward pricing positions for a substantial portion of its natural gas requirements for the remainder of 1997, 1998 and 1999, consistent with its policy. As a result of its policies, the Corporation has reduced the potential adverse financial impact of natural gas price increases during the forward pricing period, but conversely, if natural gas prices were to fall, the Corporation will incur higher costs. Unrealized gains from forward pricing positions totaled $30.0 million and $78.3 million as of June 30, 1997 and 1996, respectively. The amount recognized by the Corporation will be dependent on prices in effect at the time of settlement. For the first six months of 1997 and 1996, natural gas hedging activities produced cost savings of approximately $25.9 million and $42.9 million, respectively, compared with spot prices. 8. The Corporation has revolving credit facilities of up to $355 million for domestic working capital needs and other corporate purposes. Under the credit facility, there was $122.0 million classified as short-term 7 borrowings and $7.0 million classified as long-term debt at June 30, 1997. Interest on borrowings under this line is charged at current market rates. 9. In August 1996, the Corporation, through Terra Funding Corporation ("TFC"), a beneficially owned subsidiary of the Corporation and a limited purpose corporation, entered into an agreement with a large financial institution to sell an undivided interest in its accounts receivable. Under the agreement, which expires August 1999, the Corporation may sell without recourse an undivided interest in a designated pool of its accounts receivable and receive up to $150 million in proceeds. Undivided interests in new receivables may be sold as amounts are collected on previously sold interests. As of June 30, 1997, the proceeds of the uncollected balance of accounts receivable sold totaled $136 million. TFC is a separate legal entity whose creditors have received security interests in its assets. 10. Pursuant to the provisions of the Terra Nitrogen Company, L.P. (TNCLP) Agreement of Limited Partnership, the holders of all Senior Preference Units (SPUs) had the right, through March 31, 1997, to convert their SPUs into Common Units on a one-for-one basis. As of March 31, 1997, approximately 13.3 million of the 13.6 million previously issued and outstanding SPUs converted to Common Units. The Common Units began trading on the New York Stock Exchange on April 1, 1997 under the symbol TNH. The 307,202 SPUs which did not convert to Common Units were redeemed by TNCLP on May 27, 1997 for $22.105 per unit, which includes a $0.605 distribution per unit for the first quarter of 1997. TNCLP paid a cash distribution for the quarter ended March 31, 1997 of $1.02 per Common Unit to holders of record as of May 5, 1997, on May 27, 1997. The cash distribution for the first quarter included $18.5 million from the elimination of the reserve amount required to support four quarters of minimum quarterly distributions on the SPUs. Due to the redemption of the SPUs on May 27, 1997, this reserve amount was no longer required to be maintained. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS --------------------- QUARTER ENDED JUNE 30, 1997 COMPARED WITH QUARTER ENDED JUNE 30, 1996 Consolidated Results The Corporation reported net income of $89.8 million, or $1.20 per share, on revenues of $1.2 billion for the second quarter of 1997 compared with net income of $71.5 million, or $0.90 per share, on revenues of $1.1 billion in the second quarter of 1996. The Corporation classifies its operations into three business segments: Distribution, Nitrogen Products and Methanol. The Distribution segment includes sales of products purchased from manufacturers, including the Corporation, and resold by the Corporation. Distribution revenues are derived primarily from grower and dealer customers through sales of crop protection products, fertilizers, seed and services. The Nitrogen Products segment represents only those operations directly related to the wholesale sales of nitrogen products produced at the Corporation's ammonia manufacturing and upgrading facilities. The Methanol segment represents wholesale sales of methanol produced at the Corporation's two methanol manufacturing facilities. Total revenues and operating income (loss) for the three-month periods ended June 30, 1997 and 1996 were as follows:
(in thousands) 1997 1996 - -------------------------------------------------------------------------------- REVENUES: Distribution $ 980,457 $ 881,733 Nitrogen Products 215,693 190,770 Methanol 40,874 29,664 Other - net of intercompany eliminations (15,130) (16,489) - -------------------------------------------------------------------------------- $1,221,894 $1,085,678 ================================================================================ OPERATING INCOME: Distribution $ 89,507 $ 68,964 Nitrogen Products 76,528 75,729 Methanol 15,265 1,615 Other expense - net (3,529) (271) - -------------------------------------------------------------------------------- 177,771 146,037 Interest expense - net (13,274) (13,807) Minority interest (12,316) (12,628) - -------------------------------------------------------------------------------- Total from operations $ 152,181 $ 119,602 ================================================================================
9 Distribution Revenues from the Distribution segment for the three month periods ended June 30, 1997 and 1996 were as follows:
Distribution Revenues - -------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------- Resale fertilizer $249,875 $214,007 Crop protection products 601,057 569,741 Seed 70,828 54,752 Other 58,697 43,233 - -------------------------------------------------------------------- $980,457 $881,733 ====================================================================
Distribution revenues for the 1997 second quarter totaled $980.5 million, an increase of $98.7 million or 11.2% compared with the 1996 second quarter. Acquisitions of distribution locations in the second quarter of 1997 increased the number of locations from 403 at March 31, 1997 to 426 at June 30, 1997. This increase in distribution locations generated additional revenues of $56.3 million while existing location revenues increased $42.4 million compared with the second quarter of 1996. Distribution operating income was $89.5 million for the second quarter of 1997 compared with $69.0 million in the 1996 quarter. The expansion of the distribution network contributed $6.6 million and existing locations provided $13.9 million to the operating income increase. Higher volumes due to acquisitions, more planted acres and an earlier planting season than in 1996 (when substantial sales demand was pushed to the following quarter due to weather) generated an increase in gross profit for the 1997 second quarter compared with the same quarter in 1996. Selling, general and administrative expense increased $10.0 million in the second quarter of 1997 compared with 1996. Compensation and related expenses increased due to expansion at existing locations and as a result of acquisitions by $7.9 million. Operating expenses including new equipment and advertising increased $5.7 million in 1997 compared with the 1996 second quarter. A reduction in bad debt expense offset the above expense increases by $3.4 million. Nitrogen Volumes and prices for the three month periods ended June 30, 1997 and 1996 were as follows:
Volumes and Prices - ------------------------------------------------------------------------------- (excludes the Distribution segment) 1997 1996 - ------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands) Volumes Unit Price Volumes Unit Price - ------------------------------------------------------------------------------- Ammonia (tons) 450 $194 390 $191 Nitrogen solutions (tons) 913 96 798 105 Urea (tons) 195 161 151 170 - -------------------------------------------------------------------------------
Nitrogen Products revenues totaled $215.7 million for the second quarter of 1997 compared with $190.8 million for the same period of 1996. The increase was due to higher sales volumes partially offset by 8% lower nitrogen solutions prices. Urea, ammonia and nitrogen solutions volumes increased 29%, 15% and 14%, respectively, in the 1997 quarter compared with the prior year. The higher sales volumes in 1997 were due to increased corn acres planted in 1997, and cold, wet weather during the first quarter of 1997 which shifted sales, especially of ammonia to the second quarter. Nitrogen solutions sales volumes were higher in 1997 reflecting a full quarter of production 10 from the Port Neal plant which started up in May 1996. Additionally, urea production increased as a result of expansion and efficiency improvement projects at Courtright and Blytheville manufacturing plants. Operating income for Nitrogen Products was $76.5 million for 1997 compared with $75.7 million for the second quarter of 1996. The increase in operating income was due to higher sales volumes as discussed above significantly offset by a 32% increase in natural gas costs in the 1997 quarter compared with 1996. Methanol Methanol revenues increased $11.2 million, or 37.8%, for the quarter ended June 30, 1997 compared with the same period in 1996 even though the Beaumont plant was down 17 days primarily for scheduled maintenance during the 1997 period. The revenue increase was the result of higher methanol prices, reflecting tight market conditions caused by planned and unplanned industry production outages, delayed startup of new foreign plants and increased worldwide demand. Methanol sales prices averaged $.59 per gallon in the 1997 quarter compared with $.39 per gallon during the 1996 period. Sales volumes declined 10% in 1997 to 69.7 million gallons compared with the second quarter of 1996. The Methanol segment reported second quarter 1997 operating income of $15.3 million compared with $1.6 million for the 1996 quarter. The operating income increase was due to higher methanol sales prices in 1997 as discussed above. Natural gas costs were essentially unchanged in comparison with the prior-year period. Other Operating Expense-Net Other operating expense was $3.5 million in the 1997 second quarter compared with $0.3 million in the comparable 1996 period. Other expense includes expenses not directly related to individual business segments, including certain insurance coverages, corporate finance fees and other costs. Other operating expenses in the second quarter of 1997 included higher legal and consulting fees than in 1996. Interest Expense-Net Interest expense, net of interest income, totaled $13.3 million in 1997 compared with $13.8 million in 1996. Income Taxes Income taxes for the second quarter of 1997 were recorded at an effective tax rate of 40.8%, comparable to the effective tax rate for the second quarter of 1996. 11 SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996 Consolidated Results The Corporation reported net income of $93.7 million, or $1.25 per share, on revenues of $1.66 billion for the first six months of 1997 compared with net income of $89.9 million, or $1.12 per share, on revenues of $1.48 billion in the first six months of 1996. Total revenues and operating income (loss) for the six-month periods ended June 30, 1997 and 1996 were as follows:
(in thousands) 1997 1996 - -------------------------------------------------------------------------------- REVENUES: Distribution $1,241,000 $1,104,646 Nitrogen Products 351,611 343,837 Methanol 83,872 58,560 Other - net of intercompany eliminations (20,879) (26,624) - -------------------------------------------------------------------------------- $1,655,604 $1,480,419 ================================================================================ OPERATING INCOME: Distribution $ 64,950 $ 45,555 Nitrogen Products 115,069 150,063 Methanol 28,423 5,644 Other expense - net (4,345) (1,162) - -------------------------------------------------------------------------------- 204,097 200,100 Interest expense - net (26,048) (23,041) Minority interest (19,226) (25,797) - -------------------------------------------------------------------------------- Total from operations $ 158,823 $ 151,262 ================================================================================
Distribution Revenues from the Distribution segment for the six month periods ended June 30, 1997 and 1996 were as follows:
Distribution Revenues - --------------------------------------------------------------- (in thousands) 1997 1996 - --------------------------------------------------------------- Resale fertilizer $ 314,338 $ 273,827 Crop protection products 759,748 696,430 Seed 88,403 72,184 Other 78,511 62,205 - --------------------------------------------------------------- $1,241,000 $1,104,646 ===============================================================
Distribution revenues for the first six months of 1997 amounted to $1.24 billion compared with $1.10 billion for the comparable 1996 period. New distribution locations generated $64.5 million of revenues and existing locations generated $71.8 million of additional revenues in 1997 compared with the first six months of 1996. Higher volumes contributed to the increase in revenue for all product lines due principally to new locations, increased planted acres and an earlier planting season than in 1996 due to favorable 1997 weather conditions. The Distribution segment reported operating income of $65.0 million for the first six months of 1997, an increase of $19.4 million over 1996. Existing locations generated an increase in operating income of $13.4 million while new locations provided operating income of $6.0 million. An increase in gross profit for fertilizer and crop 12 protection products of $7.9 million and $16.1 million, respectively, for 1997 compared with the first six months of 1996 was primarily caused by higher volumes. Seed gross profit and custom application income provided an increase to operating income of $6.2 million for the first six months of 1997 compared with the same period in 1996. Selling, general and administrative expense increased $16.4 million in 1997 compared with the first six months of 1996. Additional employees and equipment to meet expected increases in demand for products and services for the 1997 planting season contributed to increases in compensation, depreciation, operating and maintenance expenses. Offsetting these increases was a reduction in bad debt expense of $3.2 million for the first six months of 1997 compared with 1996. Nitrogen Volumes and prices for the six month periods ended June 30, 1997 and 1996 were as follows:
Volumes and Prices - ------------------------------------------------------------------------------- (excludes the Distribution segment) 1997 1996 - ------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands) Volumes Unit Price Volumes Unit Price - ------------------------------------------------------------------------------- Ammonia (tons) 675 $197 646 $190 Nitrogen solutions (tons) 1,534 95 1,464 102 Urea (tons) 352 169 283 187 - -------------------------------------------------------------------------------
Revenues for the Nitrogen Products segment were $351.6 million for the first six months of 1997 compared with $343.8 million for the comparable 1996 period. The increase in revenues was due to higher sales volumes which were mostly offset by lower nitrogen solutions and urea sales prices. Increased corn acres, which require more nitrogen than most other crops accounted for part of the higher 1997 sales volumes. Urea sales volumes in 1997 benefited from expansion and efficiency improvement projects at the Courtright and Blytheville plants. Nitrogen solutions sales volumes were higher in 1997, reflecting the impact of production from the Port Neal plant which began producing nitrogen solutions in May 1996. Weather during the 1997 planting season was more favorable for ammonia application rather than nitrogen solutions, which kept ammonia prices relatively strong while nitrogen solutions sales prices declined. In contrast, 1996 weather conditions forced a late planting season and favored nitrogen solutions applications resulting in higher nitrogen solutions prices during the prior year. The Nitrogen Products segment reported operating income of $115.1 million for the first six months of 1997 compared with $150.1 million for the same period in 1996. The decrease in operating income was due to a 48% increase in natural gas costs for the 1997 six months compared with the first six months of 1996, partially offset by the increase in revenues discussed above. Methanol Methanol revenues were $83.9 million for the six months ended June 30, 1997, an increase of $25.3 million over the comparable 1996 period. Average methanol sales prices were $.58 and $.38 per gallon for the 1997 and 1996 periods, respectively, creating a revenue increase of $28.5 million. The higher prices reflect tight methanol market conditions caused by planned and unplanned production outages, delayed startup of new foreign plants and increased worldwide demand. Sales volumes declined by 6% in the 1997 six months to 143.8 million gallons compared with 1996 due primarily to a scheduled maintenance turnaround at the Beaumont plant in 1997. Methanol operating income was $28.4 million for the first six months of 1997 compared with $5.6 million for the 1996 period. Higher methanol prices in the first six months of 1997 more than offset a 23% increase in natural gas costs, compared with the 1996 six months, resulting in the operating income increase. 13 Other Operating Expense - Net Other operating expense was $4.3 million in the first half of 1997 compared with $1.2 million in 1996. Other expense includes expenses not directly related to individual business segments, including certain insurance coverages, corporate finance fees and other costs. Other operating expenses in the first half of 1997 included additional legal and consulting fees in comparison with the 1996 period. Interest Expense - Net Net interest expense was $26.0 million in 1997 compared with $23.0 million in 1996. Interest expense increased as a result of additional borrowings used to fund operations. Income Taxes Income tax expense was recorded at an effective rate of 41.0% for the first six months of 1997 compared with 40.6% in the 1996 first half. Minority Interest Minority interest, representing primarily third party unitholder interest in the earnings of Terra Nitrogen Company, L.P. (TNCLP), was $19.2 million for the first half 1997 compared with $25.8 million in 1996. Minority interest declined primarily due to lower earnings from TNCLP operations. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Corporation's primary uses of funds will be to fund its working capital requirements, make payments on its indebtedness and other obligations, make quarterly distributions to minority interests, disburse quarterly dividends on common stock and make capital expenditures and acquisitions. The principal sources of funds will be cash flow from operations and borrowings under available bank facilities. The Corporation believes that cash from operations and available financing sources will be sufficient to meet anticipated cash requirements. Cash provided by operations in the first six months of 1997 was $107.0 million. Working capital balances increased $54.4 million for the first six months of 1997 due to the seasonal nature of the Corporation's operations. The Corporation has available a $355 million revolving credit facility for domestic working capital needs. As of June 30, 1997, $129.0 million was outstanding under this facility. Cash used for investing activities was $63.8 million in the first six months of 1997, $18.1 million funded investments in plant and equipment. Cash used for acquisitions ($37.8 million) represents amounts paid to acquire new locations for the Corporation's distribution network. The rebuild of the Port Neal manufacturing plant was substantially complete in 1996. The Corporation began construction in the third quarter of 1996 on a $23 million nitric acid plant at Port Neal with the facility expected to be fully operational by the end of 1997. Expenditures in 1997 for the nitric acid plant totalled $9.3 million. The Corporation expects 1997 capital expenditures, exclusive of expenditures related to the Port Neal nitric acid plant and the acquisition of retail distribution locations, to approximate $55 million consisting of the expansion of existing service centers, routine replacement of equipment, and efficiency improvements at manufacturing facilities. On April 30, 1996, the Board of Directors of the Corporation authorized the repurchase of up to 8.5 million Common Shares on the open market and through privately negotiated transactions over the ensuing fifteen months. The share repurchase was completed in May 1997 for a total cost of $114.2 million. 14 During the first six months of 1997, the Corporation distributed $2.52 per unit, or $16.4 million, to minority Unitholders, paid a dividend rate of 8.42%, or $1.1 million, to minority preferred stock shareholders, and paid a dividend of $0.08 per Common Share which totaled $6.0 million. Pursuant to the provisions of the Terra Nitrogen Company, L.P. (TNCLP) Agreement of Limited Partnership, the holders of all Senior Preference Units (SPUs) had the right, through March 31, 1997, to convert their SPUs into Common Units on a one-for-one basis. As of March 31, 1997, approximately 13.3 million of the 13.6 million previously issued and outstanding SPUs converted to Common Units. The 307,202 SPUs which did not convert to Common Units were redeemed by TNCLP on May 27, 1997 for $22.105 per unit, which included a $0.605 distribution per unit for the first quarter of 1997. The cash distribution for the first quarter included $18.5 million from the elimination of the reserve amount required to support four quarters of minimum quarterly distributions on the SPUs. Due to the redemption of the SPUs on May 27, 1997, this reserve amount was no longer required to be maintained. On July 22, 1997, TNCLP announced a cash distribution for the quarter ended June 30, 1997 of $2.38 per common unit, payable August 29, 1997 to unitholders of record as of August 4, 1997. Port Neal Holdings Corp. redeemed its $25.0 million non-convertible, preferred stock on June 30, 1997. Cash balances at June 30, 1997 were $95.0 million of which $5.4 million is used to collateralize letters of credit supporting recorded liabilities. RECENTLY ISSUED ACCOUNTING STANDARDS ------------------------------------ In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 128, "Earnings Per Share." SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The impact on earnings per share computed using SFAS 128 is immaterial, in comparison with net income per share disclosed in the Consolidated Statements of Operations. The Corporation will compute and disclose earnings per share in accordance with SFAS 128 in its annual 1997 financial statements. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION --------------------------------------------------------------- REFORM ACT OF 1995 ------------------ Information contained in this report, other than historical information, may be considered forward looking. Forward looking information reflects Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to , the following: general economic conditions within the agricultural industry; competitive factors and pricing pressures; changes in product mix; changes in the seasonality of demand patterns; changes in weather conditions; changes in agricultural regulations; and other risks detailed in the Corporation's Securities and Exchange Commission filing, in particular the "Factors that Affect Operating Results" section of its most recent Form 10-K. 15 PART II. OTHER INFORMATION Item 5. OTHER INFORMATION On August 5, 1997, the Board of Directors elected Dr. Robert L. Thompson to fill a vacant position on the Board. Thompson is President and Chief Executive Officer of Winrock International Institute for Agricultural Development. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.8 Amendment No. 5 dated as of May 27, 1997 to the 1995 Credit Agreement, filed as Exhibit 4.8 to Terra's Registration Statement on Form S-3 (No. 333-31769), is incorporated herein by reference. 27 Financial Data Schedule [EDGAR filing only] (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TERRA INDUSTRIES INC. Date: August 13, 1997 /s/ Francis G. Meyer ------------------------------------------ Francis G. Meyer Senior Vice President and Chief Financial Officer and a duly authorized signatory 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated statement of financial position of Terra Industries Inc. as of June 30, 1997 and the related consolidated statement of income for the six months then ended and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 87,843 7,160 568,194 (15,875) 380,596 1,059,169 1,118,973 (244,919) 2,333,903 817,900 410,035 0 0 127,478 562,131 2,333,903 1,611,924 1,655,604 1,289,168 1,289,168 0 5,619 28,753 158,823 65,117 93,706 0 0 0 93,706 1.25 0
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