-----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, RIQut2AoPwkbPU+wQwaxygbrNuosDpyAz3La6bzoTlWvtvk/59EJERaQgifpqeCB fAfcLKTXwEaJnOeS2iCA8w== 0000950131-98-004742.txt : 19980813 0000950131-98-004742.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950131-98-004742 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE 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: SEC FILE NUMBER: 001-08520 FILM NUMBER: 98683079 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 1-8520 TERRA INDUSTRIES INC. (Exact name of registrant as specified in its charter) Maryland 52-1145429 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Terra Centre 51102-6000 P.O. Box 6000 (Zip Code) 600 Fourth Street Sioux City, Iowa (Address of principal executive offices) Registrant's telephone number, including area code: (712) 277-1340 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 1998, the following shares of the registrant's stock were outstanding: Common Shares, without par value 74,897,511 shares ================================================================================ PART I. FINANCIAL INFORMATION TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands) (unaudited)
June 30, December 31, June 30, 1998 1997 1997 ----------- ------------- ----------- ASSETS Cash and short-term investments $ 85,179 $ 180,062 $ 95,003 Accounts receivable, less allowance for doubtful accounts of $14,549, $13,154 and $15,875 530,623 111,690 552,319 Inventories 376,954 395,940 380,596 Other current assets 26,980 51,287 31,251 - ----------------------------------------------------------------------------------------------------------------- Total current assets 1,019,736 738,979 1,059,169 - ----------------------------------------------------------------------------------------------------------------- Equity and other investments 26,808 24,485 19,615 Property, plant and equipment, net 1,164,467 1,181,384 874,054 Excess of cost over net assets of acquired businesses 294,398 304,567 282,024 Deferred tax asset 7,286 10,794 15,172 Other assets 104,823 99,745 83,869 - ----------------------------------------------------------------------------------------------------------------- Total assets $2,617,518 $2,359,954 $2,333,903 ================================================================================================================= LIABILITIES Debt due within one year $ 9,474 $ 9,538 $ 124,512 Accounts payable 440,892 203,554 507,743 Accrued and other liabilities 234,262 223,163 185,645 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 684,628 436,255 817,900 - ----------------------------------------------------------------------------------------------------------------- Long-term debt 496,293 497,030 410,035 Deferred income taxes non-current 193,376 193,456 140,312 Other liabilities 81,977 82,315 131,919 Minority interest 345,478 360,569 144,128 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 1,801,752 1,569,625 1,644,294 - ----------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Capital stock Common Shares, authorized 133,500 shares; outstanding 74,896, 74,977 and 74,890 shares 127,622 127,581 127,478 Paid-in capital 549,005 548,772 548,050 Accumulated other comprehensive income (8,167) (8,488) (2,683) Retained earnings 147,306 122,464 16,764 - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 815,766 790,329 689,609 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,617,518 $2,359,954 $2,333,903 =================================================================================================================
See accompanying Notes to the Consolidated Financial Statments. 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, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- REVENUES Net sales $1,227,454 $1,188,241 $1,683,075 $1,611,924 Other income, net 31,795 33,653 41,846 43,680 ---------- ---------- ---------- ---------- 1,259,249 1,221,894 1,724,921 1,655,604 ---------- ---------- ---------- ---------- COSTS AND EXPENSES Cost of sales 1,045,062 951,116 1,439,744 1,289,168 Selling, general and administrative expense 99,392 96,030 181,220 164,339 Equity in earnings of unconsolidated affiliates (3,235) (3,023) (2,540) (2,000) ---------- ---------- ---------- ---------- 1,141,219 1,044,123 1,618,424 1,451,507 ---------- ---------- ---------- ---------- Income from operations 118,030 177,771 106,497 204,097 Interest income 2,622 1,995 4,190 2,705 Interest expense (17,107) (15,269) (32,089) (28,753) Minority interest (10,859) (12,316) (17,160) (19,226) ---------- ---------- ---------- ---------- Income before income taxes 92,686 152,181 61,438 158,823 Income tax provision 42,068 62,377 29,100 65,117 ---------- ---------- ---------- ---------- NET INCOME $ 50,618 $ 89,804 $ 32,338 $ 93,706 ========== ========== ========== ========== Basic earnings per share $ 0.68 $ 1.22 $ 0.44 $ 1.27 Diluted earnings per share $ 0.67 $ 1.20 $ 0.43 $ 1.25 ========== ========== ========== ========== Basic weighted average shares outstanding 73,896 73,497 73,878 73,814 Diluted weighted average shares outstanding 75,054 74,614 75,099 74,826 ========== ========== ========== ========== Cash dividends declared per share $ 0.05 $ 0.04 $ 0.10 $ 0.08 ========== ========== ========== ==========
See accompanying Notes to the Consolidated Financial Statments. 3 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ----------------------------- 1998 1997 ---------- ---------- OPERATING ACTIVITIES Net income $ 32,338 $ 93,706 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 58,292 45,879 Deferred income taxes 2,642 9,588 Minority interest in earnings 17,160 19,226 Other non-cash items (1,403) (1,393) Changes in current assets and liabilities, excluding working capital purchased/sold: Accounts receivable (418,933) (450,968) Inventories 18,986 72,469 Other current assets 9,932 52,973 Accounts payable 237,338 296,639 Accrued and other liabilities 11,643 (29,479) Reimbursed Port Neal casualty 14,314 --- Other 5,820 (1,622) - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities (11,871) 107,018 - ------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Acquisitions, net of cash acquired (6,353) (37,806) Purchase of property, plant and equipment (37,443) (18,097) Port Neal plant construction --- (9,712) Other 737 1,815 - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (43,059) (63,800) - ------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net short-term borrowings --- 5,668 Proceeds from issuance of long-term debt --- 7,000 Principal payments on long-term debt (801) (1,765) Stock (repurchase) issuance - net 274 (22,096) Distributions to minority interests (15,996) (17,437) Distribution reserve fund --- 18,480 Repurchases of TNCLP common units (16,255) --- Redemption of SPUs --- (6,604) Redemption of preferred stock --- (24,950) Dividends (7,496) (6,000) - ------------------------------------------------------------------------------------------------------ Net cash used in financing activities (40,274) (47,704) - ------------------------------------------------------------------------------------------------------ Foreign exchange effect on cash and short-term investments 321 (1,253) - ------------------------------------------------------------------------------------------------------ Decrease in cash and short-term investments (94,883) (5,739) Cash and short-term investments at beginning of period 180,062 100,742 - ------------------------------------------------------------------------------------------------------ Cash and short-term investments at end of period $ 85,179 $ 95,003 ======================================================================================================
See accompanying Notes to the Consolidated Financial Statments. 4 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (in thousands) (unaudited)
Accumulated Other Retained Comprehensive Capital Paid-In Comprehensive Earnings Income Stock Capital Income (Deficit) Total - ---------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $127,614 $550,850 $(1,430) $(70,942) $606,092 Comprehensive income: Net income $93,706 --- --- --- 93,706 93,706 Foreign currency translation adjustment (1,253) --- --- (1,253) --- (1,253) ------- $92,453 ======= Exercise of stock options 38 346 --- --- 384 Repurchase of common shares (1,673) (20,759) --- --- (22,432) Issuance of common shares 1,499 17,613 --- --- 19,112 Dividends --- --- --- (6,000) (6,000) - ---------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 $127,478 $548,050 $(2,683) $ 16,764 $689,609 ================================================================================================================ Accumulated Other Comprehensive Capital Paid-In Comprehensive Retained Income Stock Capital Income Earnings Total - ---------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $127,581 $548,772 $(8,488) $122,464 $790,329 Comprehensive income: Net income $32,338 --- --- --- 32,338 32,338 Foreign currency translation adjustment 321 --- --- 321 --- 321 ------- $32,659 ======= Exercise of stock options 41 233 --- --- 274 Dividends --- --- --- (7,496) (7,496) - ---------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 $127,622 $549,005 $(8,167) $147,306 $815,766 ================================================================================================================
See accompanying Notes to the Consolidated Financial Statments. 5 TERRA INDUSTRIES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (the "Corporation") and the results of the Corporation's operations for the periods presented. Because of the seasonal nature of the Corporation's operations and effects of weather-related conditions in several of its marketing areas, results of operations of any single reporting period should not be considered as indicative of results for a full year. Certain reclassifications have been made to prior years' financial statements to conform with current year presentation. These statements should be read in conjunction with the Corporation's 1997 Annual Report to Stockholders. 2. Earnings per share are calculated in accordance with SFAS 128, "Earnings Per Share". Basic earnings per share data are based on the weighted-average number of Common Shares outstanding during the period. Diluted earnings per share data are based on the weighted-average number of Common Shares outstanding and the effect of all dilutive potential common shares including stock options, restricted shares and contingent shares. All prior periods have been restated in accordance with SFAS 128.
3. Inventories consisted of the following: June 30, December 31, June 30, (in thousands) 1998 1997 1997 - ---------------------------------------------------------------- Raw materials $ 56,303 $ 41,724 $ 45,819 Finished goods 320,651 354,216 334,777 - ---------------------------------------------------------------- Total $376,954 $395,940 $380,596 ================================================================
4. The Corporation and certain of its subsidiaries are involved in various legal actions and claims, including environmental matters, arising during the normal course of business. Although it is not possible to predict with any certainty the outcome of such matters, it is the opinion of management that these matters will not have a material adverse effect on the results of operations, financial position or cash flows of the Corporation. 5. The Corporation's natural gas procurement policy is to effectively fix or cap the price of between 40% and 80% of its natural gas requirements for a one- year period and up to 50% of its natural gas requirements for the subsequent two-year period through supply contracts, financial derivatives and other forward pricing techniques. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices are frequently based on the Henry Hub Louisiana price, but natural gas supplies for the Corporation's six North American production facilities are physically purchased for each plant location which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. The Corporation has entered into firm contracts to minimize the risk of interruption or curtailment of natural gas supplies. Additionally, the Corporation has entered into forward pricing positions for a substantial portion of its natural gas requirements for the remainder of 1998, 1999 and 2000, consistent with its policy. As a result of its policies, the Corporation has reduced the potential adverse 6 financial impact of natural gas price increases during the forward pricing period, but conversely, if natural gas prices were to fall, the Corporation will incur higher costs. Unrealized gains from forward pricing positions totaled $46.1 million and $30.0 million as of June 30, 1998 and 1997, respectively. The amount recognized by the Corporation will be dependent on prices in effect at the time of settlement. For the first six months of 1998 and 1997, natural gas hedging activities produced cost savings of approximately $12.9 million and $25.9 million, respectively, compared with spot prices. 6. The Corporation has a revolving credit facility of up to $350 million for working capital needs and other corporate purposes. Under the credit facility, there was $7.0 million outstanding classified as long-term debt at June 30, 1998. Interest on borrowings under this line is charged at current market rates. 7. In August 1996, the Corporation, through Terra Funding Corporation ("TFC"), a beneficially owned subsidiary of the Corporation and a limited purpose corporation, entered into an agreement with a large financial institution to sell an undivided interest in its accounts receivable. Under the agreement, which expires August 1999, the Corporation may sell without recourse an undivided interest in a designated pool of its accounts receivable and receive up to $150 million in proceeds. Undivided interests in new receivables may be sold as amounts are collected on previously sold interests. As of June 30, 1998, the proceeds of the uncollected balance of accounts receivable sold totaled $140 million. TFC is a separate legal entity whose creditors have received security interests in its assets. 8. On December 17, 1997, the Corporation announced that it is resuming purchases of common units of Terra Nitrogen Company, L.P. (TNCLP) on the open market and through privately negotiated transactions. Under an existing authorization of the Board of Directors dating back to May 1995, the Corporation may acquire up to 5 million common units. The Corporation acquired 621,800 common units in the first six months of 1998 for $16.3 million, bringing its total number of common units acquired since 1995, under this authorization, to 1.6 million units. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS --------------------- QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED JUNE 30, 1997 Consolidated Results The Corporation reported net income of $50.6 million on revenues of $1.3 billion for the second quarter of 1998 compared with net income of $89.8 million on revenues of $1.2 billion in 1997. Basic earnings per share amounted to $0.68 and $1.22 for the second quarter of 1998 and 1997, respectively, while diluted earnings per share was $0.67 and $1.20, respectively. The Corporation classifies its operations into three business segments: Distribution, Nitrogen Products and Methanol. The Distribution segment includes sales of products purchased from manufacturers, including the Corporation, and resold by the Corporation. Distribution revenues are derived primarily from grower and dealer customers through sales of crop protection products, fertilizers, seed, feed, grain and services. The Nitrogen Products segment represents only those operations directly related to the wholesale sales of nitrogen products produced at the Corporation's ammonia manufacturing and upgrading facilities. The Methanol segment represents wholesale sales of methanol produced at the Corporation's two methanol manufacturing facilities. Total revenues and operating income (loss) by segment for the three-month periods ended June 30, 1998 and 1997 were as follows:
(in thousands) 1998 1997 ----------- ----------- REVENUES: Distribution $ 996,270 $ 980,457 Nitrogen Products 254,227 215,693 Methanol 20,840 40,874 Other - net of intercompany eliminations (12,088) (15,130) ---------- ---------- $1,259,249 $1,221,894 ========== ========== OPERATING INCOME (LOSS): Distribution $ 95,422 $ 86,524 Nitrogen Products 27,718 76,528 Methanol (6,188) 15,265 Other income (expense) - net 1,078 (546) ---------- ---------- $ 118,030 $ 177,771 ========== ==========
8 Distribution Revenues from the Distribution segment for the three-month periods ended June 30, 1998 and 1997 were as follows:
Distribution Revenues (in thousands) 1998 1997 -------- -------- Resale fertilizer $236,687 $249,875 Crop protection products 595,707 601,057 Seed 85,364 70,828 Other 78,512 58,697 -------- -------- $996,270 $980,457 ======== ========
Distribution revenues for the 1998 second quarter totaled $996.3 million, an increase of $15.8 million compared with the 1997 second quarter. An increase in distribution locations, net of closed locations, generated additional revenues of $7.9 million while "same store" revenues increased $7.9 million compared with the second quarter of 1997. Distribution operating income was $95.4 million for the second quarter of 1998 compared with $86.5 million in the 1997 quarter. New locations, net of closed locations, increased operating income by $2.6 million and existing locations provided $6.3 million to the operating income increase. Existing locations contributed $1.0 million toward an increase in gross profits for the second quarter of 1998 compared with the same period in 1997 while new locations, net of closed locations, accounted for $4.7 million in gross profits. Selling, general and administrative expenses decreased $3.2 million for the second quarter of 1998 in comparison with the second quarter of 1997. Selling expenses at new locations, net of closed locations, of $2.0 million was offset by a reduction in expenses of $5.2 million at existing locations. Nitrogen Products Volumes and prices for the three-month periods ended June 30, 1998 and 1997 were as follows:
VOLUMES AND PRICES (excludes the Distribution segment) 1998 1997 ---- ---- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price ------- ---------- ------- ---------- Ammonia 456 $ 152 450 $194 Nitrogen solutions 1,400 71 913 96 Urea 167 140 195 161 Ammonium nitrate 164 137 30 150 ----- ----- --- ----
Nitrogen products revenues increased $38.5 million, or 18%, in the quarter ended June 30, 1998 compared with the 1997 period. The acquisition of two nitrogen plants in the United Kingdom from Imperial Chemical Industries PLC effective December 31, 1997 contributed $69.3 million in revenues in the 1998 quarter. Excluding the impact of the U.K. plants, nitrogen products revenues decreased $30.8 million, or 14%, from the prior year quarter, primarily due to lower prices for all products partially offset by increased nitrogen solutions sales volumes. Ammonia, urea and nitrogen solutions prices declined 23%, 13% and 26%, respectively from the 1997 quarter reflecting the downward pressure on pricing which occurred in mid-1997 and carried over into 1998. Lower worldwide demand for urea and increased nitrogen production capacity created excess nitrogen supplies and caused prices to decline. Nitrogen solutions sales volumes increased 53% due to weather 9 conditions during the 1998 quarter which favored nitrogen solutions applications over ammonia applications. Conversely, weather during the 1997 planting season was more favorable for ammonia application which kept ammonia prices relatively strong during 1997 while nitrogen solutions sales prices declined. Additionally during 1998, nitrogen solutions sales volumes were also impacted by customer purchase decisions which were delayed from the first quarter to the second quarter. Lower nitrogen solutions prices, relative to other nitrogen products, also contributed to increased nitrogen solutions sales volumes during the second quarter of 1998. Operating income for Nitrogen Products was $27.7 million for 1998 compared with $76.5 million for the second quarter of 1997. A $48.8 million decrease in operating income was due to lower prices as discussed above and a 4% increase in natural gas costs in the 1998 quarter compared with 1997. (See Note 5 to the Consolidated Financial Statements regarding the Corporation's natural gas procurement policy.) The Corporation's U.K. plants generated an operating loss of $1.4 million in the period. Methanol Methanol revenues decreased $20.0 million for the quarter ended June 30, 1998 compared with the same period in 1997. Lower worldwide demand for methanol caused prices to decline. Methanol sales price averaged $.29 per gallon in the 1998 quarter compared with $.59 per gallon during the 1997 period. Sales volumes increased 2% in 1998 to 71.1 million gallons compared with the second quarter of 1997. The Methanol segment reported second quarter 1998 operating loss of $6.2 million compared with operating income of $15.3 million for the 1997 quarter. The operating income decrease was due to lower methanol sales prices in 1998 as discussed above. Natural gas costs were 4% lower during the 1998 quarter in comparison with the prior year period. (See Note 5 to the Consolidated Financial Statements regarding the Corporation's natural gas procurement policy.) Interest Expense - Net Interest expense, net of interest income, totaled $14.5 million in 1998 compared with $13.3 million in 1997. Additional borrowings used to fund the UK acquisition caused the increase, offset in part by decreased borrowings for working capital purposes. Income Taxes Income taxes for the second quarter 1998 were recorded at an effective tax rate of 45%, compared with a 41% effective tax rate for the second quarter 1997. The increase in the effective tax rate is due to goodwill charges that are not deductible for tax purposes representing a higher percentage of 1998 pretax income than in 1997. Minority Interest Minority interest, represents interest in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP) and a third-party's limited partnership interests in Beaumont Methanol, Limited Partnership (BMLP). Minority interest was $10.9 million for the second quarter 1998 compared with $12.3 million in 1997. Minority interest declined $5.7 million due to lower earnings from TNCLP operations. Minority interest increased $4.3 million in 1998 due to the BMLP minority interest issued by the Company on December 31, 1997 and not outstanding in the 1997 quarter. 10 SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 Consolidated Results The Corporation reported net income of $32.3 million on revenues of $1.72 billion for the first six months of 1998 compared with net income of $93.7 million on revenues of $1.66 billion in the first six months of 1997. Basic earnings per share for the first half of 1998 was $0.44 compared with $1.27 for the comparable 1997 period. Diluted earnings per share was $0.43 and $1.25, respectively for the six months ended June 30, 1998 and 1997. Total revenues and operating income (loss) for the six-month periods ended June 30, 1998 and 1997 were as follows:
(in thousands) 1998 1997 - ----------------------------------------------------------------------- REVENUES: Distribution $1,261,086 $1,241,000 Nitrogen Products 423,365 351,611 Methanol 54,811 83,872 Other - net of intercompany eliminations (14,341) (20,879) - ----------------------------------------------------------------------- $1,724,921 $1,655,604 ======================================================================= OPERATING INCOME (LOSS): Distribution $ 65,035 $ 61,489 Nitrogen Products 39,496 115,069 Methanol 1,051 28,423 Other income (expense) - net 915 (884) - ----------------------------------------------------------------------- $ 106,497 $ 204,097 =======================================================================
Distribution Revenues from the Distribution segment for the six-month periods ended June 30, 1998 and 1997 were as follows:
Distribution Revenues - ----------------------------------------------------------------------- (in thousands) 1998 1997 - ----------------------------------------------------------------------- Resale fertilizer $ 302,346 $ 314,338 Crop protection products 737,584 759,748 Seed 107,295 88,403 Other 113,861 78,511 - ----------------------------------------------------------------------- $1,261,086 $1,241,000 =======================================================================
Distribution revenues for the first six months of 1998 amounted to $1.26 billion compared with $1.24 billion for the comparable 1997 period. New distribution locations, net of closed locations, generated $15.7 million of revenues while revenues from existing locations increased $4.4 million in 1998 compared with the first six months of 1997. Fertilizer revenues were $12.0 million lower as selling prices were 7% lower or $14.8 million driven principally by lower nitrogen prices. Fertilizer sales volume was 3.5% higher than the volumes for the first six months of 1997. Crop protection revenues of $737.6 million for the six months ended June 30, 1998 were $22.2 million lower than the 1997 comparable period. Continuously rainy weather in the spring throughout the cornbelt has delayed significant spraying of acres. Seed revenues were $18.9 million higher in the first six months of 1998 than in 1997 due to a marketing focus concentrating on specialized seed sales and on a 11 corresponding increase in demand and availability of these seeds. Other revenues increased $35.3 million for the first six months of 1998 compared with 1997. Grain and feed sales contributed $18.3 million to this increase while seed tech fees added $12.3 million and application revenues increased $2.3 million. The Distribution segment reported operating income of $65.0 million for the first six months of 1998, compared with $61.5 million for the 1997 period. Operating income at existing locations increased $3.0 million while new locations, net of closed locations, provided operating income of $0.5 million. Fertilizer and seed gross profits increased $1.7 million and $2.4 million, respectively for the first six months of 1998 in comparison with 1997. A decline in gross profit for crop protection products of $4.6 million compared with 1997 was due to delayed applications and reduced dealer volumes. Grain and feed contributed a gross profit increase of $4.5 million. Selling, general and administrative expenses increased $5.6 million in the 1998 six months compared with 1997. Expenses at new locations, net of closed locations, contributed $6.6 million to the expense increase while existing location expenses decreased $1.0 million. Nitrogen Products Volumes and prices for the six-month periods ended June 30, 1998 and 1997 were as follows:
VOLUMES AND PRICES (excludes the Distribution segment) 1998 1997 - ------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - ------------------------------------------------------------------------------- Ammonia 699 $153 675 $197 Nitrogen solutions 2,042 69 1,534 95 Urea 351 126 352 169 Ammonium nitrate 374 138 41 149 - -------------------------------------------------------------------------------
Nitrogen Products revenues increased $71.8 million, or 20%, during the six months ended June 30, 1998 compared with the 1997 period due to the acquisition of the U.K. plants at the end of 1997. The U.K. plants contributed $146.6 million in revenues in the 1998 period. Excluding the impact of the U.K. plants, Nitrogen Products revenues decreased $74.9 million, or 21%, from the prior-year period primarily due to lower prices for all products partially offset by increased nitrogen solutions sales volumes. Ammonia, urea and nitrogen solutions prices declined 24%, 25% and 27%, respectively, compared with prices during the six months ended June 30, 1997. Lower worldwide demand for urea and increased nitrogen production capacity created excess nitrogen supplies and caused prices to fall. Nitrogen solutions sales volumes increased 33% due to weather conditions during the 1998 period which favored nitrogen solutions applications over ammonia applications (ammonia sales volumes declined 17% during the 1998 period compared with 1997). In contrast, the weather during the 1997 planting season favored ammonia applications over nitrogen solutions. The Nitrogen Products segment reported operating income of $39.5 million for the first six months of 1998 compared with $115.1 million for the same period in 1997. An $85.2 million decline in operating income was due to significantly lower nitrogen prices. The U.K. plants contributed $6.0 million to operating income in the first six months of 1998. Increased sales volumes of nitrogen solutions and lower operating costs also offset a portion of the lower price effects on operating income. 12 Methanol Methanol revenues were $54.8 million for the six months ended June 30, 1998, a decline of $29.1 million in comparison with the 1997 period. Average methanol sales prices were $.37 and $.58 per gallon for the 1998 and 1997 periods, respectively. Lower prices in 1998 were due to oversupply conditions caused by higher production and lower worldwide demand. Methanol operating income was $1.1 million for the first six months of 1998 compared with $28.4 million for the 1997 period. Lower methanol prices in the first six months of 1998 more than offset an 8% decrease in natural gas costs compared with the same time frame in 1997 resulting in the operating income decline. (See Note 5 to the Consolidated Financial Statements regarding the Corporation's natural gas procurement policy.) Interest Expense - Net Net interest expense was $27.9 million in 1998 compared with $26.0 million in 1997. Interest expense increased as a result of additional borrowings used to fund the U.K. acquisition, partially offset by decreased borrowings for working capital needs. Income Taxes Income tax expense was recorded at an effective rate of 47% for the first six months of 1998 compared with 41% in the 1997 first half. The increase in the effective tax rate is due to goodwill charges that are not deductible for tax purposes representing a higher percentage of 1998 pretax income than in 1997. Minority Interest Minority interest, represents interest in the earnings of the publicly held common units of TNCLP and a third-party's limited partnership interest in BMLP. Minority interest was $17.2 million for the first six months of 1998 compared with $19.2 million in 1997. Minority interest declined $10.7 million due to lower earnings from TNCLP operations. Minority interest increased $8.7 million in 1998 due to the BMLP minority interest issued by the Company on December 31, 1997 and not outstanding in the 1997 first half. LIQUIDITY AND CAPITAL RESOURCES The Corporation's primary uses of funds will be to fund its working capital requirements, make payments on its indebtedness and other obligations, make quarterly distributions to minority interests, disburse quarterly dividends on common stock, make capital expenditures and acquisitions and fund repurchases of TNCLP common units. The principal sources of funds will be cash flow from operations and borrowings under available bank facilities. The Corporation believes that cash from operations and available financing sources will be sufficient to meet anticipated cash requirements. Cash used for operations in the first six months of 1998 was $11.9 million. Net working capital balances increased $141.0 million for the first six months of 1998 due to the seasonal nature of the Corporation's operations. The Corporation has available a $350 million revolving credit facility for working capital needs. As of June 30, 1998, $7.0 million was outstanding under this facility. Cash used for investing activities was $43.1 million in the first six months of 1998, of which $37.4 million funded investments in plant and equipment. Cash used for acquisitions ($6.4 million) represents amounts paid to acquire new locations for the Corporation's distribution network. 13 The Corporation began construction in the fourth quarter of 1997 on a $57 million ammonia production loop at the Beaumont, Texas plant with the facility expected to be fully operational by the end of 1999. The Corporation expects 1998 capital expenditures, exclusive of expenditures related to the Beaumont ammonia production loop and the acquisition of retail distribution locations, to approximate $50 million consisting of the expansion of existing service centers, routine replacement of equipment, and efficiency improvements at manufacturing facilities. During the first six months of 1998, the Corporation distributed $1.17 per unit, or $7.3 million, to minority TNCLP Common Unitholders, distributed a preferred return rate of 7.70%, or $8.7 million, to BMLP's minority partner, and paid a dividend of $0.10 per Common Share which totaled $7.5 million. On July 22, 1998, TNCLP announced a cash distribution of $1.72 per common unit, payable August 28, 1998 to unitholders of record August 6, 1998. On December 17, 1997, the Corporation announced that it is resuming purchases of common units of TNCLP on the open market and through privately negotiated transactions. Under an existing authorization of the Board of Directors dating back to May 1995, the Corporation may acquire up to 5 million common units. The Corporation acquired 621,800 common units in the first half of 1998 for $16.3 million, bringing its total number of common units acquired since 1995, under this authorization, to 1.6 million units. Cash balances at June 30, 1998 were $85.2 million of which $5.4 million is used to collateralize letters of credit supporting recorded liabilities. YEAR 2000 ISSUES The Year 2000 issue concerns computer programs that use only the last two digits to identify the year in date fields. If not corrected, many of these computer programs could fail or produce erroneous results on or before January 1, 2000. This issue affects virtually every company. The Corporation has assigned dedicated resources to address its Year 2000 issues. Most, but not all, of the Corporation's management information systems environment have been assessed for Year 2000 issues and some remedial actions have been identified in these assessed areas. The impact of these remedial actions for areas where an assessment has already been completed is not expected to be material to the Corporation. Some of these actions have already been completed at minimal cost. The Corporation plans to complete in the first quarter of 1999 an organization - wide review of all computing functions, including the process control systems and instrumentation in the manufacturing facilities. The Corporation is also assessing Year 2000 issues in relation to its customers, suppliers and other constituents because the actions or inactions of such third parties may materially affect the Corporation. General contingency planning efforts have recently been initiated for precautionary purposes. The Corporation anticipates that it will complete all assessment, remediation, testing and contingency planning efforts for Year 2000 issues in the third quarter of 1999 with no material adverse consequences or material costs to the Corporation. However, the costs or consequences of incomplete or untimely resolution of Year 2000 issues by the Corporation or third parties could have a material adverse effect on the Corporation. 14 FORWARD LOOKING PRECAUTIONS Information contained in this report, other than historical information, may be considered forward looking. Forward looking information reflects Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions within the agricultural industry; competitive factors and price changes (principally, sales prices of nitrogen and methanol products and natural gas costs); changes in product mix, seasonality of demand patterns, weather conditions, and agricultural regulations; and other risks detailed in the Corporation's Securities and Exchange Commission filings, in particular the "Factors that Affect Operating Results" section of its most recent Form 10-K. 15 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27 Financial Data Schedule [EDGAR filing only] (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TERRA INDUSTRIES INC. Date: August 12, 1998 /s/ Francis G. Meyer ------------------------------------------------- Francis G. Meyer Senior Vice President and Chief Financial Officer and a duly authorized signatory 16 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, 1998 and the related consolidated statement of income for the six months then ended. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 51,042 34,137 545,172 (14,549) 376,954 1,019,736 1,475,343 (310,876) 2,617,518 684,628 496,293 0 0 127,622 688,144 2,617,518 1,683,075 1,724,921 1,439,744 1,439,744 0 3,480 32,089 61,438 29,100 32,338 0 0 0 32,338 0.44 0.43
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