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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 March 31, 2001
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 April 30, 2001, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 75,829,489 shares
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PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
March 31, December 31, March 31,
2001 2000 2000
---------- ------------ ----------
ASSETS
Cash and short-term investments $ 63,023 $ 101,425 $ 8,328
Accounts receivable, less allowance for
doubtful accounts of $868, $889, $484 99,864 107,299 127,846
Inventories 182,833 101,526 118,546
Other current assets 30,374 17,448 43,786
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Total current assets 376,094 327,698 298,506
-----------------------------------------------------------------------------------------------------
Equity and other investments 1,956 1,865 1,991
Property, plant and equipment, net 872,946 902,801 973,847
Excess of cost over net assets of acquired businesses 219,920 231,372 247,431
Other assets 42,628 48,816 58,068
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Total assets $1,513,544 $1,512,552 $1,579,843
=====================================================================================================
LIABILITIES
Debt due within one year $ 13,028 $ 5,546 $ 16,943
Accounts payable 89,904 62,820 91,417
Accrued and other liabilities 77,073 60,324 69,265
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Total current liabilities 180,005 128,690 177,625
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Long-term debt 456,332 467,808 469,152
Deferred income taxes 153,850 156,475 143,554
Other liabilities 41,072 43,508 59,608
Minority interest 102,958 105,274 104,666
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Total liabilities 934,217 901,755 954,605
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STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 75,823, 75,885 and 75,874 shares 128,289 128,283 127,890
Paid-in capital 554,752 554,750 552,903
Accumulated other comprehensive loss (74,354) (48,115) (22,001)
Retained deficit (29,360) (24,121) (33,554)
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Total stockholders' equity 579,327 610,797 625,238
-----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,513,544 $1,512,552 $1,579,843
=====================================================================================================
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
March 31,
2001 2000
-------- --------
REVENUES
Net sales $243,868 $237,605
Other income, net 709 1,983
------------------------------------------------------------------
Total revenues 244,577 239,588
------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 234,475 247,316
Selling, general and administrative expense 6,842 8,355
Equity in earnings of unconsolidated
affiliates (90) (169)
------------------------------------------------------------------
241,227 255,502
------------------------------------------------------------------
Income (loss) from operations 3,350 (15,914)
Insurance settlement costs --- (960)
Interest income 1,700 772
Interest expense (12,582) (12,679)
Minority interest (528) (1,397)
------------------------------------------------------------------
Loss before income taxes (8,060) (30,178)
Income tax benefit 2,821 10,563
------------------------------------------------------------------
NET LOSS $ (5,239) $(19,615)
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Basic loss per share $ (0.07) $ (0.26)
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Basic weighted average shares outstanding 75,094 74,704
==================================================================
See Accompanying Notes to the Consolidated Financial Statements.
3
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
--------------------
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net loss from operations $ (5,239) $(19,615)
Adjustments to reconcile net loss from
operations to net cash flows from operating activities:
Depreciation and amortization 29,090 27,396
Deferred income taxes (2,703) (10,563)
Minority interest in earnings 528 1,397
Changes in current assets and liabilities excluding
working capital purchased/sold during the period:
Accounts receivable 5,597 (26,408)
Inventories (84,427) 14,004
Other current assets (13,273) (1,856)
Accounts payable 28,611 2,444
Accrued and other liabilities 13,508 18,060
Other (91) (169)
--------------------------------------------------------------------------------
Net cash flows from operating activities (28,399) 4,690
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INVESTING ACTIVITIES
Purchase of property, plant and equipment (3,730) (4,692)
Other items (337) ---
--------------------------------------------------------------------------------
Net cash flows from investing activities (4,067) (4,692)
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FINANCING ACTIVITIES
Net changes in short-term borrowings --- 2,000
Principal payments on long-term debt (3,994) (2,366)
Stock issuance-net 8 ---
Repurchases of TNCLP common units (1,671) ---
Distributions to minority interests (1,015) ---
Other 917 (1,035)
--------------------------------------------------------------------------------
Net cash flows from financing activities (5,755) (1,401)
--------------------------------------------------------------------------------
Effect of exchange rate changes on cash (181) (59)
--------------------------------------------------------------------------------
Increase (decrease) to cash and short-term investments (38,402) (1,462)
Cash and short-term investments at beginning of period 101,425 9,790
--------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 63,023 $ 8,328
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See Accompanying Notes to the Consolidated Financial Statements. 4
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED March 31, 2001 AND 2000
(in thousands)
(unaudited)
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
----------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $128,283 $554,750 $ (48,115) $ (24,121) $610,797
Comprehensive loss:
Net loss --- --- --- (5,239) (5,239)
Foreign currency
translation adjustment --- --- (25,322) --- (25,322)
Cumulative effect of change in
accounting for derivative
financial instruments --- --- 31,400 --- 31,400
Change in fair value of derivatives --- --- (32,317) --- (32,317)
--------
Comprehensive loss (31,478)
Exercise of stock options 6 2 --- --- 8
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Balance at March 31, 2001 $128,289 $554,752 $ (74,354) $ (29,360) $579,327
================================================================================================================
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
----------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $127,890 $552,903 $ (9,852) $ (13,939) $657,002
Comprehensive loss:
Net loss --- --- --- (19,615) (19,615)
Foreign currency
translation adjustment --- --- (12,149) --- (12,149)
--------
Comprehensive loss (31,764)
----------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $127,890 $552,903 $ (22,001) $ (33,554) $625,238
================================================================================================================
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 contain all adjustments necessary, in the opinion of management, to
summarize fairly the financial position of Terra Industries Inc. and all
majority-owned subsidiaries ("Terra") and the results of Terra's operations
for the periods presented. Because of the seasonal nature of Terra's
operations and effects of weather-related conditions in several of its
marketing areas, results of any single reporting period should not be
considered as indicative of results for a full year. These statements
should be read in conjunction with Terra's 2000 Annual Report to
Stockholders. Certain reclassifications have been made to prior years'
financial statements to conform with current year presentation.
2. 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.
3. Inventories consisted of the following:
March 31, December 31, March 31,
(in thousands) 2001 2000 2000
--------------------------------------------------------
Raw materials $ 20,299 $ 24,085 $ 38,010
Supplies 21,277 20,918 20,286
Finished goods 141, 257 56,523 60,250
-------------------------------------------------------
Total $ 182,833 $101,526 $118,546
=======================================================
4. Four lawsuits by U.K. soft drink producers and distributors have been filed
against Terra and other defendants seeking in excess of (Pounds)13.3
million in damages, plus costs and interest. The lawsuits seek to recover
damages following a product recall the plaintiffs initiated in reaction to
trace amounts of benzene allegedly found in carbon dioxide used as an
ingredient in the recalled products. Terra produced the carbon dioxide at
one of its U.K. plants. A fifth lawsuit seeking (Pounds)12.5 million and a
sixth lawsuit seeking (Pounds)0.6 million in damages were settled by
Terra's insurer in January 2000 and February 2001, respectively, with Terra
making no contribution toward the settlements. In addition to the filed
lawsuits, certain other soft drink producers have indicated their intention
to file claims in unspecified amounts. Terra has denied liability for these
lawsuits and claims and intends to vigorously defend its position. Terra
believes it has insurance coverage for any damages. Its insurer is paying
Terra's defense costs in all cases, has funded the January 2000 and
February 2001 settlements, and has extended full coverage in the single
case now before the court (wherein damages of (Pounds)9 million are
sought), but currently continues to reserve the right to deny coverage in
whole or in part for any adverse judgments in the remaining cases.
Terra is involved in various other legal actions and claims, including
environmental matters, arising from the normal course of business. While it
is not feasible to predict with certainty the final outcome of these
proceedings, management does not believe that either these matters, or the
U.K. benzene claims, will have an adverse effect on the results of
operations, financial position or net cash flows.
6
5. Natural gas is the principal raw material used in Terra's production of
nitrogen products and methanol. Terra enters into forward pricing
arrangements for natural gas provided that such arrangements would not
result in costs that would be greater than expected selling prices for
nitrogen products and methanol. Terra's normal natural gas procurement
policy is to effectively fix or cap the price of between 25% 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. In
response to extremely volatile natural gas costs during the last six months
of 2000 and uncertainties regarding the ability of finished goods to
recover the increases to gas costs, Terra amended its policy and eliminated
the minimum hedge requirement through the end of 2001. The financial
derivatives are traded in months forward and settlement dates are scheduled
to coincide with gas purchases during that future period. These contracts
reference physical natural gas prices or appropriate NYMEX futures contract
prices. Contract physical prices are frequently based on prices at the most
common and financially liquid location of reference for financial
derivatives related to natural gas. However, natural gas supplies for the
Corporation's facilities are purchased for each plant at locations other
than reference points, 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 Corporation has entered into forward pricing positions for a portion of
its natural gas requirements for the remainder of 2001 and part of 2002,
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. Contracts
were in place at March 31, 2001 to cover 20% of natural gas requirements
for the succeeding twelve months. The March 31, 2001 contracts covered 14%
of Terra's expected North American natural gas requirements and 44% of its
expected U.K. natural gas requirements.
Unrealized losses from forward pricing positions totaled $.8 million as of
March 31, 2001. In addition, Terra had purchase commitments for natural gas
at prices $17.0 million lower than March 31, 2001 forward markets. The
amount ultimately recognized by the Corporation will be dependent on
published prices in effect at the time of settlement. Terra also had $2.4
million of realized gains on closed contracts relating to future periods
that have been deferred to the respective period.
6. On November 30, 2000, Terra announced it would not restart its Blytheville,
Arkansas ammonia and urea production facility as the result of high natural
gas costs. The plant resumed production in March 2001, when natural gas
prices declined. On January 2, 2001, Terra announced that it would idle its
Beaumont, Texas, Woodward, Oklahoma, Port Neal, Iowa, and one of two sets
of ammonia and upgrading plants at its Verdigris, Oklahoma due to high
natural gas costs. The Port Neal plant resumed production on January 8,
2001, the Woodward and Verdigris plants resumed production on January 23,
2001 and Beaumont plant resumed production on February 6, 2001.
7. Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities" requires that all derivative instruments be recorded in
the balance sheet at fair value. Changes in the fair value of derivatives
are recorded in earnings or other comprehensive income, based on whether
the instrument is designated as part of a hedge transaction and, if so, the
type of hedge transaction. On January 1, 2001, Terra adopted SFAS 133 which
resulted in a $23.3 million increase in current assets to recognize the
value of open natural gas contracts, a $9.2 million reduction in current
liabilities to reclassify gains on closed contracts relating to future
periods, a $1.1 million increase in long-term debt related to interest rate
hedges and a $31.4 million increase to stockholders' equity as a reduction
7
in accumulated other comprehensive losses. Management does not expect the
adoption of SFAS 133 to have a material impact on Terra's results of
operations or cash flows.
8. Terra classifies its operations into two business segments: Nitrogen
Products and Methanol. The Nitrogen Products business produces and
distributes ammonia, urea, nitrogen solutions and ammonium nitrate to farm
distributors and industrial users. The Methanol business manufactures and
distributes methanol which is used in the production of a variety of
chemical derivatives and in the production of methyl tertiary butyl ether
(MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not
allocate interest, income taxes or infrequent items to continuing business
segments. Included in Other are general corporate activities not
attributable to a specific industry segment. The following summarizes
operating results by business segment.
Three Months Ended
March 31
-------------------
(in thousands) 2001 2000
-----------------------------------------------------------
Revenues - Nitrogen Products $200,221 $215,626
- Methanol 43,647 21,102
- Other 709 2,860
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Total revenues $244,577 $239,588
===========================================================
Income (loss) from operations
- Nitrogen Products $ 4,672 $(10,286)
- Methanol (2,007) (5,819)
- Other 685 191
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Total income (loss) from operations $ 3,350 $(15,914)
===========================================================
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED MARCH 31, 2001 COMPARED WITH
QUARTER ENDED MARCH 31, 2000
Consolidated Results
Terra reported a net loss of $5.2 million for the 2001 first quarter compared
with a net loss of $19.6 million in 2000. The decrease in the 2001 loss was
primarily related to increased operating income as the result of higher product
prices offset partly by higher natural gas costs.
Terra classifies its operations into two business segments: Nitrogen Products
and Methanol. The Nitrogen Products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The Methanol segment represents wholesale
sales of methanol produced at Terra's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the three-month
periods ended March 31, 2001 and 2000 follows:
(in thousands) 2001 2000
-------------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $200,221 $ 215,626
Methanol 43,647 21,102
Other 709 2,860
--------------------------------------------------------------------------------------
$244,577 $ 239,588
======================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ 4,672 $ (10,286)
Methanol (2,007) (5,819)
Other income - net 685 191
--------------------------------------------------------------------------------------
$ 3,350 $ (15,914)
======================================================================================
Nitrogen Products
Volumes and prices for the three-month periods ended March 31, 2001 and 2000 follow:
VOLUMES AND PRICES
2001 2000
------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
------------------------------------------------------------------------------------------
Ammonia 182 $ 258 367 $ 132
Nitrogen solutions 534 136 882 61
Urea 90 195 178 124
Ammonium nitrate 118 141 354 105
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Nitrogen revenues decreased $15.4 million to $200.2 million in the 2001 first
quarter compared with $215.6 million in the 2000 quarter. Lower sales volumes
reduced 2001 revenues $81.3 million primarily
9
as the result of wet field conditions that delayed the application of nitrogen
fertilizer in most of Terra's market areas. Sales volumes of ammonium nitrate,
which is the primary form of fertilizer sold by Terra in the United Kingdom,
were also limited as the result of British transportation restrictions in
response to the outbreak of foot and mouth disease. Most of the revenue
shortfall from lower sales volumes was offset by higher 2001 prices as compared
to last year's first quarter. Price increases in excess of $70 million were
realized in response to lower nitrogen supplies as high natural gas costs
resulted in industry-wide production curtailments and permanent closure of
marginal facilities since the middle of last year.
The Nitrogen segment had operating income of $4.7 million for the first quarter
of 2001 compared with operating loss of $10.3 million for the 2000 first
quarter. The increase in operating income was primarily related to higher
selling prices offset partly by higher natural gas costs. Natural gas costs
increased almost $52 million over the 2000 first quarter as unit costs, net of
forward pricing gains and losses, increased to $5.69/MMBtu, during the 2001
first quarter compared to $2.54/MMBtu during the same 2000 period. First
quarter 2001 natural gas costs were reduced $5.0 million from spot prices as the
result of forward price contracts.
Methanol
For the three months ended March 31, 2001 and 2000, respectively, the Methanol
segment had revenues of $43.6 million and $21.1 million. Sales volumes decreased
9.8% from prior year levels, but selling prices increased from $.33/gallon in
2000 to $.75/gallon in 2001 as the result of more balanced industry inventories
in relation to demand than was the case in the 2000 first quarter.
The Methanol segment generated a $2.0 million operating loss in the 2001 first
quarter compared to a $5.8 million operating loss in 2000. The decrease in the
operating loss was primarily related to higher selling prices offset partly by
higher natural gas costs. Natural gas costs increased almost $14 million over
the first quarter as unit costs, net of forward pricing gains and losses,
increased to $5.44/MMbtu, during the 2001 first quarter compared to $2.36/MMBtu
during the 2000 period First quarter 2001 natural gas costs were reduced $1.1
million by forward pricing contracts.
Other Income - Net
Other operating income of $.7 million in the 2001 first quarter was $.5 million
favorable to 2000 due primarily to reduced compensation costs.
Interest Expense - Net
Interest expense, net of interest income, totaled $10.9 million during the 2001
first quarter compared with $11.9 million for the prior year period.
Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest charges of $.5 million were recorded for the 2001 first quarter as the
result of TNCLP earnings that were included in their entirety in consolidated
operating results. The decreased charge as compared to the 2000 first quarter
reflected lower nitrogen earnings for TNCLP.
10
Income Taxes
Income taxes for the first quarter 2001 were recorded at an effective tax rate
of 35%, Terra's estimated annual effective tax rate.
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
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.
Net cash flows used in operations in the first three months of 2001 were $28.4
million comprised of $50.0 million used by increases to net working capital
balances, net of $21.6 million in operating profits after non-cash charges.
Working capital increases during the 2001 first quarter are primarily related to
seasonal changes in inventory balances. Working capital changes include $28.6
million of customer prepayments received since the beginning of the quarter that
were included in current liabilities at March 31, 2001. Terra expects
substantially all customer prepayment balances will be utilized during the 2001
second quarter.
Terra management believes that cash from operations and available financing
sources will be sufficient to meet anticipated cash requirements.
The Corporation funded plant and equipment expenditures of $3.7 million during
the first three months of 2001. The Corporation expects remaining 2001 capital
expenditures to be less than $30 million consisting principally of routine
equipment replacements.
Cash balances at March 31,2001, were $63.0 million, none of which was used to
collateralize letters of credit.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 49.5% of the
Corporation's outstanding shares. Anglo American has made public its intention
to dispose of its interest in the Corporation with the timing based on market
and other conditions.
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: changes in
financial markets, 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, changes in the
seasonality of demand patterns, changes in weather conditions, changes in
agricultural regulations, and other risks detailed in the "Factors that Affect
Operating Results" section of the Corporation's most recent Form 10-K.
11
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of stockholders was held on April 26, 2001, in
Sioux City, Iowa. At the meeting, a total of 67,419,869 votes were cast by
stockholders.
The following directors were elected to hold office until the next Annual
Meeting or until their successors are duly elected and qualified, and received
the votes set forth opposite their respective name:
NAME FOR WITHHELD
---- --- --------
Edward G. Beimfohr 67,053,635 366,234
Carole L. Brookins 67,052,579 367,290
Edward M. Carson 67,012,945 406,924
Thomas H. Claiborne 67,059,126 360,743
Eric K. Diack 67,059,275 360,594
David E. Fisher 67,055,215 364,654
Burton M. Joyce 66,979,591 440,278
William R. Loomis, Jr. 67,056,729 363,140
John R. Norton III 67,018,736 401,133
Henry R. Slack 67,056,717 363,152
The stockholders ratified the selection by the Corporation's Board of
Directors of Deloitte & Touche LLP as independent accountants for the
Corporation for 2001. The number of votes cast for such proposal was 67,064,007,
the number against was 292,461, and the number of abstentions was 63,401.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1.19 2001 Incentive Award Program for Officers and Key
Employees
(b) Reports on Form 8-K
None
12
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: April 30, 2001 /s/ Francis G. Meyer
--------------------
Francis G. Meyer
Senior Vice President and Chief Financial Officer
and a duly authorized signatory
13