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| DLP > SEC Filings for DLP > Form 10-Q on 14-Jan-2004 | All Recent SEC Filings |
14-Jan-2004
Quarterly Report
OVERVIEW/OUTLOOK
In fiscal year 2004, we expect net sales and licensing fees to range from $315 million to $330 million and earnings per diluted share (a GAAP measure) to range from $0.82 to $0.96. We expect to incur expenses relating to our lawsuit against Monsanto (NYSE: MON) and Pharmacia to range from $10 million to $14 million, or $0.16 to $0.23 per diluted share. Earnings per diluted share before such expenses (a non-GAAP measure) is expected to range from $1.05 to $1.12. We base our assumptions on an expected increase in cotton acreage to 14.5 million acres over the approximately 13.3 million acres we believe were planted in 2003, constant or improved market share, higher selling prices of our seed, and a consistent product sales mix in 2004 with 2003. We believe that recent increased cotton fiber prices, coupled with further sales penetration in 2004 due to strong customer demand for our key products, some of which were launched in 2003, will all contribute to improved results in 2004.
In 2003, we expected planted cotton acreage to approximate 13.9 million acres. However, inclement weather during the spring reduced plantings to levels we estimate at 13.3 million acres. Therefore, we expect 2004 results to exceed not only 2003 actual, but also 2003 forecasted results.
We increased our cottonseed and soybean selling prices in 2004. We expect the incremental increase in cotton seed selling prices will exceed the anticipated incremental increase in seed costs. We expect our international business to remain flat in 2004. Drought conditions continue to impact our Australian business, and sales in key markets in Europe are also expected to remain flat. We also expect consolidated operating expenses to increase approximately $5 million to $6 million over last year, partially due to additional research and development expenses related to new technologies and product development initiatives.
Other Matters
In August 2003, we announced that we would begin packaging our cottonseed varieties in bags containing approximately 250,000 seed in the 2004 selling season, as compared to historically packaging our cottonseed varieties in 50-pound bags. Pima and Acala varieties will continue to be packaged in 50-pound bags. This is intended to simplify pricing and production planning, and will help standardize technology fees and make inventory management for our distribution partners and farmers more precise.
We are continuing to work with third-party trait providers to develop, test and evaluate elite cotton varieties containing insect resistant genes. If appropriate testing indicates these third-party traits combined with our germplasm is competitive and if commercialization agreements are reached, our elite varieties containing these traits may be available for introduction to growers as early as 2005, subject to U.S. government regulatory approval being received. In addition, our joint venture with Verdia, Inc., DeltaMax Cotton LLC, has initiated cotton transformation of proprietary glyphosate tolerant and insect resistance genes.
With respect to our suit against Monsanto and Pharmacia, the parties remain in discovery. A new trial date has not yet been scheduled, but the Court has ordered an April 2004 fact-discovery deadline as well as other deadlines from that date until April 15, 2005, when pre-trial statements are due to the Court. Therefore, the trial is not expected to occur prior to April 15, 2005. On September 12, 2003, Monsanto amended its response to our lawsuit to include four counterclaims against us. Monsanto is seeking unspecified damages for its counterclaims, including the $81 million paid by Monsanto to D&PL as a termination fee and related expenses. We have answered Monsanto's counterclaims and do not believe we have any liability. We continue to vigorously pursue our lawsuit and defend Monsanto's counterclaims. See Part II, Item 1 for further discussion.
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia & Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000, Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company, which, on March 31, 2000, changed its name to Monsanto Company. On August 31, 2002, Pharmacia distributed to its shareholders its remaining interest in the new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003, Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000, the term "Monsanto" refers to the entity then designated Monsanto Company and renamed Pharmacia Corporation on that date. With respect to events occurring between March 31, 2000 and April 16, 2003, this entity is referred to as "Pharmacia". With respect to events occurring after April 16, 2003, the entity referred to as "Pharmacia" is that entity which on that date became a wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
Pursuant to our previously announced share repurchase program, we repurchased 104,000 shares of our stock in the open market from September 1, 2003 to December 31, 2003.
Results of Operations
During the first quarter, we reported higher international sales than in the prior year. In the first quarter, almost all sales relate to our international business as shipments generally do not occur then in the U.S. due to the seasonality of our business. International sales increased due to increased volumes in Brazil and Argentina as well as improvements in our pricing and foreign exchange rates in those markets. In addition, our first quarter sales also increased in Australia and China due to the timing of customer shipments.
Due to the seasonal nature of our business, we typically incur losses in our first and fourth fiscal quarters because the majority of our domestic sales are made in our second and third quarters. Sales in the first and fourth quarters are generally limited to those made to export markets and those made by our non-U.S. joint ventures and subsidiaries located primarily in the Southern hemisphere.
The following sets forth selected operating data of D&PL (in thousands):
For the Three Months Ended
November 30, November 30,
2003 2002
------------------ -----------------
Operating results-
Net sales and licensing fees $ 13,845 $ 5,599
Gross profit 5,809 1,311
Operating expenses 11,259 9,543
Special charges - (500)
Operating loss (5,450) (8,732)
Loss before income taxes (10,653) (11,388)
Net loss applicable to common shares (7,085) (7,484)
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
November 30, August 31, November 30,
2003 2003 2002
---------------- --------------- ---------------
Balance sheet summary-
Current assets $ 204,495 355,261 181,432
Current liabilities 61,171 204,050 55,752
Working capital 143,324 151,211 125,680
Property, plant and equipment, net 63,220 64,441 62,693
Total assets 279,540 431,552 255,218
Outstanding borrowings 1,846 1,597 3,030
Stockholders' equity 206,348 217,107 192,145
Three months ended November 30, 2003, compared to three months ended November
30, 2002:
For the quarter ended November 30, 2003, we reported a net loss of $7.0 million, compared to a net loss of $7.4 million reported in the comparable prior year quarter. The decreased loss was due primarily to higher international sales, offset by an increase in operating expenses and legal costs related to the Monsanto/Pharmacia litigation.
Net sales and licensing fees increased approximately $8.2 million to $13.8 million from $5.6 million in the comparable period in the prior year. Gross profit increased approximately $4.5 million to $5.8 million from $1.3 million. The increase in net sales and licensing fees is primarily attributable to our international operations, particularly in Argentina, Brazil and China. Increases in prices, volumes and improved foreign exchange rates occurred in Argentina and Brazil. Cottonseed sales at our operations in Australia and in China increased due to changes in the timing of shipments to customers based on their orders.
Operating expenses increased approximately $1.8 million to $11.3 million from $9.5 million in the first quarter of 2003. This increase related primarily to higher insurance, pension and payroll related costs.
During the three months ended November 30, 2002, we reported special charges of $0.5 million related to the severance costs associated with the closing of our facility in Centre, Alabama as well as a headcount reduction at our joint venture in Hebei Province, People's Republic of China. We reported net other expense of approximately $3.1 million for the quarter ended November 30, 2003 compared to net other expense of approximately $2.1 million for the same period in the prior year. The increase is attributable to additional legal fees related to the Monsanto/Pharmacia litigation.
A reconciliation of net income before legal expenses related to the Monsanto/Pharmacia litigation and special charges (a non-GAAP measure) to net income (a GAAP measure) follows:
For the Three Months Ended November 30,
---------------------------------------
2003 2002
--------------- ----------------
Diluted Net Loss per Share:
Net loss before legal expenses
related to the Monsanto/Pharmacia
litigation and special charges
(a non-GAAP measure) $ (0.14) $ (0.16)
Effect of Monsanto/Pharmacia litigation (0.05) (0.03)
Effect of special charges - (0.01)
--------------- ----------------
Net loss (a GAAP measure) $ (0.19) $ (0.20)
=============== ================
Use of non-GAAP Financial Measures
In this filing, we disclose non-GAAP financial measures that exclude legal costs associated with the D&PL versus Monsanto/Pharmacia litigation and special charges associated with the closing of a U.S. location and a headcount reduction at an international joint venture. These non-GAAP financial measures are provided to enhance the user's overall understanding of our current financial performance from normal operations and our prospects for the future. We believe that the non-GAAP financial measures are more indicative of our core operating results. D&PL management uses these non-GAAP financial measures in analyzing D&PL's performance. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for GAAP results. The non-GAAP financial measures included in this filing have been reconciled to the most directly comparable GAAP measures.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Overview
Management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8 of our Annual Report on Form 10-K for the fiscal year ended August 31, 2003. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
We have identified below the accounting policies that involve those estimates and assumptions that we believe are critical to an understanding of our financial statements. Our management has discussed the development and selection of each critical accounting estimate with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the related disclosures below. Since application of these accounting policies involves the exercise of judgment and use of estimates, actual results could differ from those estimates.
Revenue Recognition
Revenues from domestic seed sales are recognized when the seed is shipped. Revenues from Bollgard and Roundup Ready licensing fees are recognized when the seed is shipped. Domestically, the licensing fees charged to farmers for Bollgard and Roundup Ready cottonseed are based on pre-established planting rates for each of nine geographic regions and consider the estimated number of seeds contained in each bag which may vary by variety, location grown, and other factors.
International export revenues are recognized upon the later of when the seed is shipped or the date letters of credit (or instruments with similar security provisions) are confirmed. Generally, international export sales are not subject to return. Generally, all other international revenues from the sale of planting seed, less estimated reserves for returns, are recognized when the seed is shipped.
All of our domestic seed products (including those containing Bollgard and Roundup Ready technologies) are subject to return and credit risk, the effects of which vary from year to year. The annual level of returns and, ultimately, net sales are influenced by various factors, principally commodity prices and weather conditions occurring in the spring planting season during our third and fourth quarters. We provide for estimated returns as sales occur. To the extent actual returns differ from estimates, adjustments to our operating results are recorded when such differences become known, typically in our fourth quarter. All significant returns occur or are accounted for by fiscal year end. Therefore, the application of this estimate primarily affects our quarterly information.
Domestically, we promote our cotton and soybean seed directly to farmers and sell our seed through distributors and dealers. We also offer various sales incentive programs for seed and participate in such programs related to the Bollgard and Roundup Ready technology fees offered by Monsanto. Generally, under these programs, if a farmer plants his seed and the crop is lost (usually due to inclement weather) by a certain date, a portion of the price of the seed and technology fees are forgiven or rebated to the farmer. The amount of the refund and the impact to D&PL depends on a number of factors including whether the farmer can replant the crop that was destroyed. We record monthly estimates to account for these programs. The majority of program rebates occur during the second and third quarters. Essentially all material claims under these programs have occurred or are accounted for by fiscal year end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision related to inventory based on our estimate of seed that will not pass our quality assurance ("QA") standards at year end, or is deemed excess based on our desired seed stock level for a particular variety ("dump seed"). Seed can fail QA standards based on physical defects (i.e., cut seed, moisture content, discoloration, etc.), germination rates, or transgenic purities. The amount recorded as inventory provision in a given year is calculated based on the total quantity of inventory that has not passed QA standards at any fiscal year end, any seed that is expected to deteriorate before it can be sold and seed deemed to be excess. In establishing the provision, we consider the scrap value of the seed to be disposed. An initial estimate of the needed provision is made at the beginning of each year and recorded over the course of the year. Adjustments are made monthly, as necessary.
See Note 7 of the Notes to Consolidated Financial Statements in Item 1 for further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the income and losses that we report in our financial statements and our taxable income and losses as determined under applicable tax laws. We estimate the value of deferred income taxes based on existing tax rates and laws, and our expectations of future earnings. For deferred income taxes, we applied a composite statutory income tax rate of 38%.
We are required to evaluate the likelihood of our ability to generate sufficient future taxable income that will enable us to realize the value of our deferred tax assets. If, in our judgment, we determine that we will not realize deferred tax assets, then valuation allowances are recorded. As of November 30, 2003, we had recorded deferred tax assets of approximately $5.4 million. We estimate that our deferred tax assets will be realized; therefore, we have not recorded any valuation allowances as of November 30, 2003.
We use management judgment and estimates when estimating deferred taxes. If our judgments and estimates prove to be inadequate, or if certain tax rates and laws should change, our financial results could be materially adversely impacted in future periods.
Contingent Liabilities
A liability is contingent if the amount is not presently known, but may become known in the future as a result of the occurrence of some uncertain future event. D&PL estimates its contingent liabilities based on management's estimates about the probability of outcomes and its ability to estimate the range of exposure. Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated. In addition, it must be probable that the loss will be confirmed by some future event. As part of the estimation process, management is required to make assumptions about matters that are by their nature highly uncertain. The assessment of contingent liabilities, including legal contingencies and income tax liabilities, involves the use of critical estimates, assumptions and judgments. Management's estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can be no assurance that future events, such as court decisions or I.R.S. positions, will not differ from management's assessments. Whenever practicable, management consults with third party experts (attorneys, accountants, claims administrators, etc.) to assist with the gathering and evaluation of information related to contingent liabilities.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and second fiscal quarters. Seed conditioning, treating and packaging commence late in the first fiscal quarter and continue through the third fiscal quarter. Seasonal cash needs normally begin to increase in the first fiscal quarter and cash needs peak in the third fiscal quarter. Cash is generated and loan repayments, if applicable, normally begin in the middle of the third fiscal quarter and are typically completed by the first fiscal quarter of the following year. In some cases, we offer customers financial incentives to make early payments. To the extent we attract early payments from customers, bank borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for licensing fees on Bollgard and Roundup Ready seed sales upon shipment, usually in our second and third quarters. Receivables from seed sales are generally due from May to July. The licensing fees are due in September, at which time we receive payment. We then pay Monsanto its royalty for the Bollgard and Roundup Ready licensing fees, which is recorded as a component of cost of sales. As a result of the timing of these events, licensing fees receivable and royalties payable peak at fiscal year end.
The seasonal nature of our business significantly impacts cash flow and working capital requirements. Historically, we have maintained credit facilities, and used early payments by customers and cash from operations to fund working capital needs. In the past, we have borrowed on a short-term basis to meet seasonal working capital needs. However, in fiscal 2002 and fiscal 2003, we used cash generated from operations and other available cash to meet working capital needs. We continue to evaluate potential uses of our cash for purposes other than for working capital needs. Potential uses may be the acquisition or funding of alternative technologies (such as DeltaMax Cotton, LLC) that could be used to enhance our product portfolio and ultimately our long-term earnings potential and/or an investment in new markets outside the U.S. Another potential use is the repurchase in the open market of our shares pursuant to our previously announced share repurchase program. Once the evaluation of certain transactions that are currently being considered is completed, we may consider other potential uses of the remaining cash, including increasing the dividend rate or repurchasing shares more aggressively depending on market considerations and other factors.
In April 1998, we entered into a syndicated credit facility with three lenders, which provided for aggregate borrowings of $110 million. This agreement provided a base commitment of $55 million and a seasonal commitment of $55 million. The base commitment was a long-term loan that could be borrowed upon at any time and was due April 1, 2001. The seasonal commitment was a working capital loan that could be drawn upon from September 1 through June 30 of each fiscal year. Each commitment offered variable and fixed interest rate options and required D&PL to pay facility or commitment fees and to comply with certain financial covenants. This agreement expired on April 1, 2001. D&PL and the lenders have had discussions about a replacement facility that will provide for aggregate borrowings sufficient to meet working capital needs that will contain terms and conditions similar to the 1998 facility.
Capital expenditures were $0.7 million and $1.1 million in first quarters of fiscal 2004 and 2003, respectively. We anticipate that capital expenditures will approximate $8.0 to $10.0 million in 2004.
In the first quarter, the Board of Directors authorized a quarterly dividend of $0.10 per share paid on December 12, 2003, to shareholders of record on November 28, 2003. The Board anticipates that quarterly dividends of $0.10 per share will continue to be paid in the future; however, the Board of Directors reviews this policy quarterly. Aggregate preferred and common dividends should approximate $15.6 million in 2004.
In February 2000, the Board of Directors authorized a program for the repurchase of up to $50 million of our common stock. The shares repurchased under this program are to be used to provide for option exercises, conversion of our Series M Convertible Non-Voting Preferred shares and for other general corporate purposes. At August 31, 2003, we had repurchased 1,303,000 shares at an aggregate purchase price of approximately $23.8 million under this program. During the year ended August 31, 2003, we purchased 310,100 shares at an aggregate purchase price of $6.1 million under this plan. Between September 1, 2003 and December 31, 2003, we repurchased 104,000 shares at an aggregate purchase price of $2.5 million.
Cash provided from operations, cash on hand, early payments from customers and borrowings under a loan agreement, if necessary, should be sufficient to meet the Company's 2004 working capital needs.
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