NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Nature of Business
Cargill Fertilizer Businesses (the Company) are comprised of wholly and
majority owned subsidiaries of Cargill, Inc. (Cargill), divisions of
Cargill, Inc. and subsidiaries, and investments accounted for by the equity
method. The Company is organized into the following four business units, which
are engaged in phosphate production and the blending and global distribution of
fertilizer products:
Cargill Phosphate Production operates mines and processing plants in
Florida, which produce phosphate fertilizer and feed phosphate.
Cargill Fertilizantes, SA, is a leading producer and distributor of bulk
and bag blended fertilizers in Brazil. It has blending plants that produce
blended fertilizer and feed phosphate, a plant that granulates single super
phosphate, and a port terminal. It also is a minority owner of
Fertifos/Fosfertil, which operates phosphate and nitrogen chemical plants in
Brazil.
Saskferco is a 50% owned joint venture between the Company and
Investment Saskatchewan, Inc. of Saskatchewan accounted for by the equity
method, and is located in Saskatchewan, Canada. It produces granular urea and
anhydrous ammonia for shipment to nitrogen fertilizer customers in western
Canada and the northern tier of the United States.
Cargill Crop Nutrition markets fertilizer products and services to
wholesalers, cooperatives, independent retailers and agents and other
agricultural customers that, in turn, market these products and services to
agricultural producers around the world. It operates fertilizer blending and
bagging facilities, port terminals and warehouses in nine countries, and
maintains a sales presence in six more countries in North and South America,
Europe and Asia.
(b) Statement Presentation
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting. These financial statements do not necessarily
reflect the financial position and results of operations of the Company in the
future or what the financial position and results of operations would have been
had the Company been an independent entity during the periods presented. Certain
costs are charged to the Company by Cargill, Inc. and subsidiaries and are
generally based on proportional allocations and in certain circumstances based
on specific identification of applicable costs which management believes is
reasonable (see note 9). Proportional allocation of costs effectively allocates
cost among Cargill's operating units based on each operating units usage of the
related goods or service, which method of allocating expenses management
believes is reasonable. It is not practicable to estimate what the expenses
would have been on a stand-alone basis. Certain comparative amounts of prior
years have been reclassified to conform with the presentation in the current
year.
(c) Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of the Cargill Fertilizer Businesses. Investments in companies where the Company
does not have control, but has the ability to exercise significant influence
(generally 20-50% ownership), are accounted for by the equity method. Other
investments where the Company is unable to exercise significant influence over
operating and financial decisions are accounted for at cost.
(d) Revenue Recognition
The Company recognizes revenue when it is realized or realizable and
earned. Revenue is generally realized or realizable and earned when all of the
following criteria are met: (i) persuasive evidence of an arrangement
F-9
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
exists; (ii) delivery has occurred or services have been rendered; (iii) the
seller's price to the buyer is fixed and determinable; and (iv) collectibility
is reasonably assured. This occurs upon transfer of title to the customer, which
is generally at the time the product is shipped. For certain export shipments,
transfer of title occurs outside the United States. Net sales includes
adjustments for returns and allowances, rebates and quality adjustments.
(e) Income Taxes
Cargill, Incorporated and substantially all of its domestic subsidiaries
are members of a group which files a consolidated federal income tax return.
Federal income taxes or tax benefits are allocated to each company on the basis
of its individual taxable income or loss and tax credits included in the return.
Deferred income taxes are recognized for temporary differences between income
for financial reporting purposes and income for tax purposes. A valuation
allowance is recognized against any portion of deferred tax assets when
realization of the deferred tax asset is not considered more likely than not.
(f) Foreign Currency Translation
Gains and losses resulting from translating the financial statements of
foreign subsidiaries, whose functional currency is the local currency, at the
current rate are included directly in other comprehensive income. Translation
gains and losses of foreign subsidiaries where the U.S. dollar is the functional
currency are included in net earnings currently.
(g) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with
original maturities of 90 days or less.
(h) Short-Term Investments
Short-term investments include highly liquid investments with original
maturities greater than 90 days, but less than one year.
(i) Vendor Prepayments and Customer Prepayments
Customer prepayments and vendor prepayments are made prior to the
underlying sale or purchase transaction. Customer prepayments are recognized
into income when the risk and title of the fertilizer product is transferred to
the customer, which generally occurs at the time of shipment.
(j) Inventories
Inventories are stated at the lower of cost or market. Cost includes
materials and production labor and overhead, and is determined on a last-in,
first-out (LIFO) basis for the Phosphate Production business unit and weighted
average cost for the remaining business units.
(k) Recoverability of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived
assets when events and circumstances indicate the carrying value may not be
recoverable. Once an indication of a potential impairment exists, recoverability
of the respective assets is determined by comparing the forecasted undiscounted
net cash flows of the operation to which the assets relate, to the carrying
amount of such operation. If the carrying value is considered impaired, a loss
is recognized based on the amount by which the carrying value exceeds fair
market value.
F-10
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(l) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depletion expenses for
mining operations, including mineral reserves, are determined using the
units-of-production method based on estimates of recoverable reserves.
Recoverable reserves are the estimated proven and probable quantities of
mineable phosphate mineral reserves, based upon a third-party appraisal of those
reserves. Repairs and maintenance costs are expensed when incurred. Depreciation
is computed principally using the straight-line method over the following useful
lives:
Buildings 8-40 years
Machinery and equipment 4-20 years
Land improvements 12-40 years
The only costs capitalized and presented as mineral reserves are the result of
acquisitions. All exploration and development costs are expensed as incurred.
(m) Environmental Costs
Provisions for estimated costs are recorded on a discounted basis when
environmental remedial efforts are probable and the costs can be reasonably
estimated. In determining the provisions, the Company uses the most current
information available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.
(n) Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Actual results could differ from those
estimates.
(o) Derivative and Hedging Activities
The Company utilizes various types of derivative products (principally
options, futures and currency swaps) to hedge currency and raw material cost
risks arising from certain of its assets and liabilities. Currency risk is
primarily managed on a consolidated basis by Cargill, Inc. The Company
recognizes all derivative instruments in the balance sheet at fair value, with
changes in such fair values recognized immediately in earnings unless specific
hedging criteria are met. Effective changes in the fair value of derivatives
designated as cash flow hedges are recorded in accumulated other comprehensive
income. Amounts are reclassified from accumulated other comprehensive income
when the underlying hedged item impacts net earnings and all ineffective changes
in fair value are recorded currently in net earnings.
(p) Recently Issued Accounting Guidance
In June of 2003, the company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations. Under the new rules, legal obligations associated with
the retirement of long-lived assets are required to be recognized at their fair
value at the time that the obligations are incurred. Upon initial recognition of
a liability, that cost is capitalized as part of the related long-lived asset
and depreciated on a straight-line basis over the remaining estimated useful
life of the related asset. Accretion expense in connection with the discounted
liability is also recognized over the remaining useful life of the related
asset. Upon adoption, the Company had the following
F-11
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
legal obligations: (i) as a condition to receive permits for the mining of
phosphate rock reserves, the Company must reclaim lands disturbed by mining;
(ii) acidic water in the Phosphogypsum stack (Gypstack) ponds and pores must be
treated to neutralize the acidity and (iii) Gypstacks at Cargill Fertilizer's
Florida facilities must be closed and monitored at the end of their useful
lives. The estimated liability for these legal obligations is based on the
estimated cost to satisfy the above obligations and then discounted using a
credit-adjusted risk-free rate.
The adoption of SFAS No. 143, on June 1, 2003, resulted in an increase
in net property, plant and equipment of $24.9 million, recognition of an
additional deferred asset retirement obligation liability of $25.0 million, and
a cumulative effect of a change in accounting principle that decreased the net
earnings and stockholders' equity by $40,000.
If SFAS No. 143 had been applied in the prior years, the Company's
liability would have been $92.1 million and $65.9 million as of May 31, 2003 and
2002, respectively. The Company's net earnings would have increased (decreased)
by $0.6 million and ($0.8) million for the years ended May 31, 2003 and 2002,
respectively.
A reconciliation of the Company's liability as of May 31, 2004 is as
follows (in millions):
Upon adoption on June 1, 2003 $ 92.1
Liability incurred 9.3
Liability settled (8.6 )
Accretion expense 5.4
Ending balance $ 98.2
In January 2003, the FASB issued Interpretation (FIN) No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51, which is effective for the Company
June 1, 2005. FIN No. 46 defines variable interest entities (VIEs) and provides
guidance on when VIEs should be consolidated. The Company does not expect that
the adoption of FIN No. 46 will have a material effect on the consolidated
financial statements.
(2) Foreign Operations
The following summarizes amounts included in the accompanying
consolidated financial statements for operations located outside the U.S.,
before elimination of intercompany accounts with domestic companies.
2004 2003
(in thousands)
Working capital $ 122,702 93,178
Net other assets 217,350 167,969
340,052 261,147
Less minority interests 7,639 4,616
Net assets $ 332,413 256,531
Net earnings $ 55,817 39,083
F-12
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(3) Inventories
The components of inventories are as follows:
2004 2003
(in thousands)
Raw materials $ 147,363 124,644
Work in process 23,085 17,725
Finished goods 136,390 129,897
Spare parts 34,144 29,788
Supplies 2,508 3,184
Total $ 343,490 305,238
Phosphate production inventories of $141,399,000 and $136,624,000 at
May 31, 2004 and 2003, respectively, were valued using the last-in-first-out
(LIFO) method. Inventories would have been $14,466,000 and $18,952,000 higher at
May 31, 2004, and 2003, respectively, had the Company valued its LIFO
inventories using the first-in, first-out method. During 2003, inventory
quantities were reduced. These reductions resulted in a liquidation of LIFO
inventory quantities carried at lower costs prevailing in prior years as
compared with the cost of 2003 purchases. As a result, cost of sales was reduced
by $12,166,000, and net earnings increased by $7,908,000.
(4) Investments in Nonconsolidated Companies
Cargill Fertilizantes Brazil is a 33.4% minority owner of Fertifos,
which owns 55.6% of Fosfertil. Fosfertil operates phosphate and nitrogen
chemical plants in Brazil. Saskferco is a 50% owned joint venture between
Cargill and Investment Saskatchewan, Inc., and is located in Saskatchewan,
Canada. The summarized financial information shown below includes all
nonconsolidated companies carried on the equity method.
2004
Fertifos Saskferco Other Total
(in thousands)
Net sales $ 674,051 222,284 177,241 1,073,576
Net earnings 54,416 24,339 17,040 95,795
Equity in net earnings 18,157 12,122 5,560 35,839
Cash 141,898 741 20,810 163,449
Accounts receivable 29,959 16,352 15,546 61,857
Inventories 125,920 30,511 8,130 164,561
Investments - 77,686 6,670 84,356
Other assets 101,594 4,605 5,617 111,816
Property, plant and equipment 318,640 256,320 113,118 688,078
Total assets 718,011 386,215 169,891 1,274,117
Debt obligations 209,157 142,107 53,034 404,298
Other liabilities 269,548 94,788 28,230 392,566
Net assets $ 239,306 149,320 88,627 477,253
Equity in net assets $ 137,974 75,103 46,046 259,123
F-13
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2003
Fertifos Saskferco Other Total
(in thousands)
Net sales $ 585,228 195,765 95,197 876,190
Net earnings 51,586 14,752 3,609 69,947
Equity in net earnings 17,161 7,333 1,173 25,667
Cash 153,779 1,353 14,567 169,699
Accounts receivable 32,376 23,360 10,743 66,479
Inventories 52,852 14,374 4,951 72,177
Investments - 90,553 - 90,553
Other assets 85,260 4,186 1,773 91,219
Property, plant and equipment 331,188 253,973 35,619 620,780
Total assets 655,455 387,799 67,653 1,110,907
Debt obligations 208,866 112,277 56,304 377,447
Other liabilities 233,330 93,398 18,439 345,167
Net assets $ 213,259 182,124 (7,090 ) 388,293
Equity in net assets $ 129,031 91,830 39,473 260,334
2002
Fertifos Saskferco Other Total
(in thousands)
Net sales $ 512,328 173,225 41,635 727,188
Net earnings 32,144 210 2,864 35,218
Equity in net earnings 7,161 220 844 8,225
(5) Property
The components of property are summarized below:
2004 2003
(in thousands)
Property, plant and equipment at cost:
Land $ 88,956 75,379
Mineral reserves 48,201 39,613
Buildings and land improvements 372,957 325,272
Machinery and equipment 953,419 943,406
Vessels and vehicles 32,168 33,655
$ 1,495,701 1,417,325
Capitalized interest on major construction projects was $509,000,
$530,000, and $714,000 during the years ended May 31, 2004, 2003, and 2002,
respectively.
F-14
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(6) Long-term Debt
Long-term debt consists of the following:
2004 2003
(in thousands)
Industrial Development Revenue Bond 5.5%, due 2009 $ 13,800 13,800
Promissory Note 8.25%, due in installments through 2006 7 9
Fixed Asset Financing
LIBOR (a) + 1.5%, due in installments through 2005 706 1,411
Variable interest rate indexed to BNDES (d) plus 4.0%, due
in installments through 2008 322 -
Variable interest rate indexed to IGPM (b) plus 6.5%, due
in installments through 2006 15,112 21,239
Variable interest rate indexed to TJLP (c) plus 9.1%, due
in installments through 2006 1,955 2,826
Variable interest rate indexed to TJLP (c) plus 9.8%, due
in installments through 2008 352 300
Variable interest rate indexed to TJLP (c) plus 10.0%, due
in installments through 2008 1,372 667
Variable interest rate indexed to TJLP (c) plus 10.0%, due
in installments through 2009 1,484 -
8.0%, due in installments through 2010 3,781 6,756
Variable interest rate indexed to TJLP (c) plus 10.5%, due
in installments through 2009 3,489 4,262
12.0%, due 2010 - 6,236
42,380 57,506
Less current portion 9,756 8,277
$ 32,624 49,229
Annual maturities of long-term debt are: $8,463,000 in 2006, $5,137,000
in 2007, $1,505,000 in 2008, $895,000 in 2009, and $16,624,000 thereafter. The
fair value of long-term debt including the current portion at May 31, 2004 and
2003 was $32,134,000 and $51,675,000, respectively. Interest paid on long-term
debt for the years ended May 31, 2004, 2003, and 2002 was $8,210,000,
$14,972,000, and $11,158,000, respectively.
(a)-LIBOR as of May 31, 2004 and 2003 was 1.58% and 1.22% respectively.
(b)-IGPM is a Brazilian inflation index published by Fundacao Getulio
Vargas. The rate at May 31, 2004 and 2003 was 7.03% and 31.51%, respectively.
(c)-TJLP is a long-term interest rate set by the Brazilian Central Bank.
The rate at May 31, 2004 and 2003 was 3.54% and 5.66%, respectively.
(d)-BNDES reflects the weighted average of the exchange variations
amongst the currencies in the BNDES (Brazilian Development Bank) Currency
Basket. The rate at May 31, 2004 was 6.60%.
F-15
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(7) Lease Commitments
The Company has operating leases for plant equipment, real property,
rail and other transportation equipment. Rental expenses incurred in connection
with these leases were $24,260,000, $19,371,000, and $16,949,000 for the years
ended May 31, 2004, 2003, and 2002, respectively, of which $228,000, $251,000,
and $1,296,000, respectively, was paid to Cargill, Inc. and affiliates. The
future minimum lease commitments as of May 31, 2004 are as follows:
(in thousands)
Year ending May 31:
2005 $ 4,100
2006 3,342
2007 2,153
2008 1,596
2009 795
Later years 8,319
$ 20,305
(8) Income Taxes
U.S. and foreign income tax expense (benefit) is made up of the
following components:
2004 2003 2002
(in thousands)
United States, primarily Federal:
Current $ (13,586 ) (15,573 ) (6,362 )
Deferred 6,492 9,296 3,371
Foreign:
Current 3,821 (2,607 ) (5,437 )
Deferred 7,089 5,021 6,984
$ 3,816 (3,863 ) (1,444 )
The effective tax rate is different from the statutory U.S. Federal
income tax rate for the following reasons:
2004 2003 2002
U.S. statutory rate 35.0 % 35.0 % 35.0 %
Impact of foreign operations 21.4 (93.0 ) (24.4 )
Change in valuation allowance (26.9 ) 121.1 18.4
Extraterritorial benefit/Foreign Sales Corporation (2.7 ) - (10.2 )
Tax benefit due to sale of Lifosa (63.8 ) -
Depletion (19.3 ) (53.7 ) (23.3 )
Other 1.0 (0.5 ) (1.7 )
8.5 % (54.9 )% (6.2 )%
F-16
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
2004 2003
(in thousands)
Deferred tax liabilities:
Depreciation and amortization $ 66,301 56,472
Other 18,470 13,940
Total deferred tax liabilities 84,771 70,412
Deferred tax assets:
Accruals 26,112 27,287
Tax loss carryforwards and credits 6,438 16,381
Total deferred tax assets 32,550 43,668
Valuation allowance (3,274 ) (16,645 )
Total deferred tax assets 29,276 27,023
Net deferred tax liability $ 55,495 43,389
At May 31, 2004, the Company has tax loss carryforwards of approximately
$19,080,000. Of the total tax loss carryforwards, approximately $1,363,000
expires in various years through 2013 and $17,717,000 is available indefinitely.
A valuation allowance has been recognized against a portion of the deferred tax
asset because realization of the entire deferred tax asset is not considered
more likely than not. A net tax benefit of $11,995,000 was realized during the
year ended May 31, 2004, primarily resulting from utilizations of tax loss
carryforwards. Management believes it is more likely than not that the remaining
net deferred tax asset will be realized. Cash paid/(refunds received) for income
taxes was ($16,684,000), $221,000, $600,000 during the years ended May 31, 2004,
2003, and 2002, respectively.
(9) Related-party Transactions
Costs are allocated to the Company by Cargill, Inc. and affiliates for
corporate services such as technical and administrative services, warehousing,
brokerage and commission, insurance, and pension and postretirement expenses.
Such costs aggregated $27,352,000, $22,800,000 and $22,744,000 for the years
ended May 31, 2004, 2003 and 2002, respectively.
Cargill, Inc. also allocates certain insurance and employee benefit
reserves to the Company based on estimates of the portion of its total reserves
that relate to the Company's operations. Accrued expenses includes allocations
from Cargill, Inc. for worker's compensation and other casualty claims, health
and dental claims, and certain other self-insured risks totaling $5,327,000 and
$5,734,000 as of May 31, 2004 and 2003, respectively. Other deferred liabilities
(within long-term liabilities) includes allocations from Cargill, Inc. for
postretirement health care reserves of $11,571,000 and $11,161,000 as of May 31,
2004 and 2003, respectively. Other current assets include an allocation from
Cargill, Inc. of a prepaid pension asset of $20,660,000 and $17,190,000 as of
May 31, 2004 and 2003, respectively.
The amount due to Cargill, Inc. and affiliates bears interest at
variable rates. The long-term weighted average interest rate charged on the
balances was 6.0% and 6.8% at May 31, 2004 and 2003, respectively. The long-term
amounts due to Cargill are not subject to specific payment terms and will not be
due within 12 months subsequent to May 31, 2004. The short-term weighted average
interest rate charged to the balances was 1.2% and
F-17
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1.4% at May 31, 2004 and 2003, respectively. Interest paid during the years
ended May 31, 2004, 2003 and 2002 on the amount due to Cargill, Inc. and
affiliates was $20,326,000, $28,010,000 and $30,847,000, respectively.
Sales to Cargill, Inc. and its affiliates totaled $175,814,000,
$84,890,000 and $117,788,000 in 2004, 2003, and 2002, respectively. Sales to
Cargill, Inc. are at prevailing market prices. Purchases from Cargill, Inc. and
affiliates during the years ended May 31, 2004, 2003, and 2002 totaled
$51,035,000, $18,594,000, and $20,188,000, respectively.
As a part of the exclusive agreement to market Saskferco's products in
North America, the Cargill Fertilizer Businesses guarantee the collection of all
trade receivables from Saskferco's customers. Historical losses on these
receivables have been minimal and the Company records a reserve for anticipated
losses as necessary.
On May 28, 2004, Saskferco paid a $27,216,000 cash dividend on the
Class A shares held by the Company. In conjunction with that transaction, the
Company invested the same amount in a long-term subordinated note due from
Saskferco on June 1, 2014. The note is subordinate in right of payment to the
secured debt of Saskferco and bears interest at the CDOR Rate plus 2%. The CDOR
Rate is defined as the average rate for Canadian Dollar bankers' acceptances
with a term of 90 days per Reuters "Canadian Interbank Bid BA Rates", and was
2.1% at May 31, 2004.
(10) Acquisitions, Disposals and Discontinued Operations
During the year ended May 31, 2004, the Company acquired a phosphate
mine in Florida (mine acquisition). The acquisition during the year ended
May 31, 2003 was a phosphate mine and production facility in Florida (phosphate
acquisition). The operating results of the businesses acquired are included in
the consolidated statements of operations from the date of the acquisitions,
which were March 19, 2004 and November 6, 2002, respectively. A summary of the
fair values of assets acquired and liabilities assumed at the date of
acquisition is as follows:
2004 2003
(in thousands)
Inventory $ - 10,036
Property, plant and equipment 25,945 129,905
Deferred asset retirement obligations (4,485 ) (10,036 )
Total purchase price $ 21,460 129,905
The mine acquisition consisted of $16,060,000 in cash and $5,400,000 in
deferred payments, due in four annual installments of $1,350,000 starting on the
first anniversary of the March 19, 2004 closing date.
During the year ended May 31, 2004, the Company also acquired the
remaining minority interest in Cargill Fertilizantes, SA for $13,164,000.
The phosphate acquisition included a holdback of $10 million, which is
scheduled to be paid on May 6, 2005 after the Company assures that all
conditions of the holdback agreement have been met by the seller. The holdback
is currently expected to be paid in full and is financial security against
breaches of representations, warranties and covenants made by the seller.
The unaudited pro forma results of operations for the year ended May 31,
2003 would have reflected net sales of $1,760,823,000 and net earnings of
$43,273,000 for the Company assuming the phosphate acquisition had occurred on
June 1, 2002. The unaudited pro forma results of operations is for informational
purposes only and does not purport to represent what the Company's results of
operations would have been if the acquisition
F-18
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
had actually occurred on that date. The March 19, 2004 mine acquisition is not
currently an operating mine, therefore no pro forma results of operations are
shown for the current and prior year for it. The Company does plan to operate
this mine in the future.
During the year ended May 31, 2003, the Company disposed of its
investment in Lifosa, a Lithuanian phosphate production company. The total gain
on the sale was $1,493,000 and is recorded in (Gain)/loss on sale of assets in
the consolidated statement of operations. A tax benefit of $4,494,000 was
recorded on the disposal.
The Company sold its crop nutrition business in Colombia during the year
ended May 31, 2003. Earnings on the business are reported as discontinued
operations in the consolidated statement of operations. The gain on the sale of
the business was $545,000, net of tax expense of $423,000. The loss on
operations was $25,000, net of tax benefit of $20,000.
(11) Contingencies
(a) Environmental
The Company is required to comply with various environmental laws and
regulations incidental to its normal business operations. The Company has
reserved for future costs of remediation of identified issues. Additional costs
for losses, which may be identified in the future, cannot be presently
determined; however, management does not believe any such issues would
materially affect the consolidated financial position or results of operations
of the Company. The Company has a non-current liability of $98,177,000 and
$67,017,00 at May 31, 2004, and 2003, respectively, for reclamation activities
and phosphogypsum stack closure in its Florida phosphate operations.
Site restoration and reclamation costs of $41,477,000 and $46,169,000
have been accrued as of May 31, 2004 and 2003 for various sites. These amounts
represent the Company's current estimate of potential restoration and
reclamation costs and are generally incurred over an extended period of time.
In Florida, regulations require companies to "cap" the gypsum stacks in
order to reduce seepage into the groundwater when such stacks reach their design
capacity. In addition to capping, regulations require postclosure monitoring of
the stacks for an extended period. At May 31, 2004 and 2003, an amount of
$56,700,0 and $20,848,000, respectively, was included in deferred asset
retirement obligations for gypsum stack capping and post-closure monitoring.
The operations of the Cargill Fertilizer Businesses are subject to
foreign, federal, state and local laws and regulations pertaining to the
environment, among which are the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control
Act, and various other foreign, federal and state statutes. Liability under
these laws involves inherent uncertainties. Violations of environmental, health
and safety laws are subject to civil, and, in some cases, criminal sanctions.
Additionally, the facilities operated by the Cargill Fertilizer Businesses
require operating permits that are subject to review by governmental agencies.
The Cargill Fertilizer Businesses have received notices from
governmental agencies alleging that we are a potentially responsible party at
certain sites under CERCLA or other environmental cleanup laws. The Cargill
Fertilizer Businesses are aware of additional sites for which we may receive
such notices in the future. Some of these sites may require the Cargill
Fertilizer Businesses to expend significant amounts for cleanup costs. The
remedial liability relating to these sites is not expected to have a material
adverse effect on the business, financial condition or results of operations of
the Cargill Fertilizer Businesses. As more information is obtained regarding
these sites and the potentially responsible parties involved, this expectation
could change.
F-19
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(b) Guarantee
The Company is contingently liable for guaranteed obligations of certain
Brazilian customers totaling $26,054,000 and $33,300,000 as of May 31, 2004 and
2003, respectively. Historical losses on these obligations have been minimal and
the Company records a reserve for anticipated losses as necessary.
(c) Litigation
In December 2003, the Mulberry and Bartow Phosphate Production
facilities in Florida were inspected by the United States Environmental
Protection Agency (USEPA). Since the inspection, USEPA has requested additional
information, under RCRA Section 3007, regarding the hazardous waste handling
practices at each facility. Both facilities have provided detailed answers to
those requests. Additionally, USEPA has provided an inspection report
identifying certain potential violations at the Mulberry facility. USEPA has not
provided an inspection report for the Bartow facility at this time. An official
with the Florida Department of Environmental Protection has informally advised
the Cargill Fertilizer Businesses that it was likely that USEPA would initiate a
regulatory enforcement action against the Cargill Fertilizer Businesses for
certain aspects of the facilities' hazardous waste handling practices.
Typically, these types of actions can result in a required modification of the
Cargill Fertilizer Businesses' waste handling procedures, the imposition of
monetary penalties, or both.
The Cubatao Public Prosecution Office (Brazil), jointly with OIKOS-UNIO
DOS DEFENSORES DA TERRA (Defenders of the Earth Union), filed a suit on
January 15, 1986 against several companies, including a facility operated by the
Cargill Fertilizer Businesses in the Cubatao valley in Brazil. The plaintiffs
sought redress for the companies' alleged continuous discharge of pollutants
into the atmosphere, which they assert would have caused, among other damage,
degradation and the perishing of a considerable part of the vegetation cover in
the slopes of the Serra do Mar mountain range. Review of this matter by a
court-appointed expert panel is pending with no set deadline.
The State of Parana Public Prosecution Service has prepared penal
charges against Fospar and former directors and employees of Fospar on April 10,
2003, alleging that they caused pollution by allowing rainwater to discharge
solid residues of phosphatic rock from an outdoor storage area through a
rainwater drainpipe into a mangrove area, thus causing contamination to an
environmentally protected area. The alleged acts occurred in January 1999, prior
to the Cargill Fertilizer Businesses' acquisition of its interest in Fospar
through the Fertiza acquisition which occurred in October 2000. Although it has
been named in the charges, Fospar has not received a citation to date and is
therefore not yet an official party to the proceeding. The Cargill Fertilizer
Businesses are continuing to evaluate the matter.
On January 30, 2004, a lawsuit was filed in the Court of Chancery for
New Castle County in Wilmington, Delaware by a common stockholder of IMC on
behalf of a purported class of all stockholders of IMC. Named as defendants in
the complaint are IMC, all members of IMC's board of directors and Cargill. The
plaintiff alleges, among other things, that the individual defendants breached
their fiduciary duties of care and loyalty to IMC's common stockholders by,
among other things, failing to conduct an auction or otherwise checking the
market value of IMC before voting to approve the merger and contribution
agreement, and that the merger consideration to be received by the IMC common
stockholders is inadequate because, among other things, it is less than the
"intrinsic value" of the IMC common stock and it does not offer a premium to the
IMC common stockholders. The lawsuit seeks, among other things, to enjoin or
rescind the transactions or, alternatively, to recover unspecified damages and
costs. The defendants have secured an extension of the time to answer or
otherwise plead to the complaint.
On February 24, 2004, a second lawsuit, similar to the lawsuit described
above, was filed in the Court of Chancery for New Castle County in Wilmington,
Delaware. On March 17, 2004, the Court of Chancery
F-20
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
consolidated these two lawsuits and named the complaint in the lawsuit described
in the previous paragraph as the operative complaint for the consolidated
lawsuit.
An action was brought against Fospar, S.A. and the Brazilian Institute
for the Environment and Renewable Natural Resources ("IBAMA") by the Parana
Public Prosecution Service in August 1999 seeking to cause Fospar to suspend any
work or activities that might result in full or partial elimination of a
mangrove swamp in the area of a proposed maritime terminal and bulk pier. The
action also sought to void the existing environmental licens and authorizations
and sought redress of environmental damage. The court initially granted
injunctive relief; however, the injunction was later cancelled. A second action
was subsequently brought by the Parana Public Prosecution Service in
October 1999 against Fospar and IBAMA seeking to enjoin Fospar from carrying out
any work or activities relating to dredging or intervention in the marine
ecosystem that could cause an adverse environmental impact on the estuary, and
to void all environmental licenses and authorizations issued for the company in
relation to the setup of the proposed maritime terminal and bulk pier. It also
sought redress of environmental damage. No injunctive relief was granted because
of the status of the first case filed in August.
Shortly after the cases were filed in 1999, a federal judge ordered an
expert environmental investigation relating to both cases. The results of the
investigation were issued in October 2003 and were favorable to Fospar. Fospar,
therefore, expected a favorable result in both cases because, in addition to the
favorable results of the expert investigation, the injunctive relief had been
cancelled and the maritime terminal and bulk pier had been constructed in
compliance with applicable laws, licenses, and authorizations and had commenced
operations in February 2001.
In July 2004, the federal court issued a consolidated ruling unfavorable
to the defendants, including Fospar, finding that the request for canceling the
licenses and authorizations was partially valid. Fospar and IBAMA were ordered
to jointly pay R$22,800 (approximately US$7,600) plus monetary correction of
Brazilian currency and 6% interest from the date of the alleged violation.
Additionally, Fospar was ordered to pay two percent of its annual revenues for
the five year period of 2000-2004. If upheld, Fospar estimates the liability
could range from approximately US$742,000 to US$1,091,000. Fospar is appealing
the monetary aspects of the ruling and the Public Prosecution Service has filed
an appeal requesting that the maritime terminal and bulk pier built within the
mangrove area be torn down and that the licenses and authorizations previously
issued be cancelled.
(d) General
In addition to those described in (c) above, certain claims and lawsuits
have been filed in the ordinary course of business. It is management's opinion
that settlement of all litigation would not require payment of an amount, which
would be material to the consolidated financial position or results of
operations of the Company
(12) Allowance for Doubtful Accounts
The activity in the allowance for doubtful accounts is as follows (in
thousands):
Balance at Balance at
Beginning Charges/ End of
Year Ended May 31, of Year Expenses Other(a) Year
2002 $ 9,372 2,370 939 12,681
2003 12,681 1,827 (5,650 ) 8,858
2004 8,858 660 (3,733 ) 5,785
º (a)
º Includes accounts written-off, recoveries, acquisitions, and the impact of
consolidations.
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Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(13) Segment Information
The Company has four reportable business segments described in Footnote
1 that are engaged in phosphate production and the blending and global
distribution of fertilizer products. These business segments are differentiated
by their products and the customers that they serve. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies. Inter-segment net sales are made under terms that
approximate market value.
2004
Crop
Phosphate Brazil Saskferco Nutrition Elim Total
(in thousands)
Net sales-third party $ 943,494 525,850 - 904,639 - 2,373,983
Inter-segment sales 196,111 - - 18,420 (214,531 ) -
Gross profit 61,346 55,493 - 65,249 (13 ) 182,075
Total assets 1,106,746 402,725 103,288 264,359 (21,137 ) 1,855,981
Depreciation and 93,401 6,574 - 4,661 - 104,636
amortization
Equity in earnings 5,855 17,664 12,122 198 - 35,839
2003
Crop
Phosphate Brazil Saskferco Nutrition Elim Total
(in thousands)
Net sales-third party $ 618,240 382,905 - 661,525 - 1,662,670
Inter-segment sales 162,765 - - 12,356 (175,121 ) -
Gross profit 35,435 45,362 - 57,663 (1,302 ) 137,158
Total assets 967,690 350,570 91,830 200,884 (11,727 ) 1,599,247
Depreciation and amortization 78,439 5,097 - 4,314 - 87,850
Equity in earnings 1,069 16,897 7,333 368 - 25,667
2002
Crop
Phosphate Brazil Saskferco Nutrition Elim Total
(in thousands)
Net sales-third party $ 523,530 414,096 - 571,286 - 1,508,912
Inter-segment sales 112,573 - - 10,106 (122,679 ) -
Gross profit 63,804 56,794 - 53,212 (657 ) 173,153
Total assets 728,668 410,369 84,439 214,641 (34,249 ) 1,403,868
Depreciation and amortization 69,750 3,819 - 4,301 - 77,870
Equity in earnings (loss) 1,240 7,055 220 (290 ) - 8,225
Financial information relating to the Company's operations by geographic
area was as follows:
2004 2003 2002
(in thousands)
Net sales(a)
United States $ 1,123,359 763,208 666,914
Brazil 525,850 382,905 414,096
Other 724,774 516,557 427,902
Consolidated $ 2,373,983 1,662,670 1,508,912
Long-lived assets:
United States $ 82 9,507 712,615 560,070
Brazil 225,703 219,076 237,229
Other 146,800 133,643 124,152
Consolidated $ 1,202,010 1,065,334 921,451
º (a)
º Net sales reflect continuing operations and are attributed to countries
based on the selling location.
F-22
Cargill Fertilizer Businesses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(14) Accumulated Other Comprehensive Income
Components of accumulated other comprehensive income/(loss) consist of
the following:
Balance Balance Balance Balance
May 31, 2002 May 31, 2003 May 31, 2004 May 31,
2001 Change 2002 Change 2003 Change 2004
(In thousands)
Foreign currency
translation adjustments $ (1,260 ) (61,193 ) (62,453 ) (35,234 ) (97,687 ) (15,997 ) (113,684 )
Unrealized gain (loss) on
cash flow hedges - (126 ) (126 ) 400 274 (368 ) (94 )
Accumulated other
comprehensiveloss $ (1,260 ) (61,319 ) (62,579 ) (34,834 ) (97,413 ) (16,365 ) (113,778 )
The unrealized gain (loss) on cash flow hedges is net of income tax
expense (benefit) of ($68,000), $183,000 and ($198,000) for the years ended
May 31, 2002, 2003 and 2004, respectively.
(15) Stock Based Compensation Plans
Effective June 1, 1996, Cargill, Inc. implemented a Stock Option Plan
(Plan) to encourage stock ownership and provide greater incentive for key
management employees and officers of the Cargill Fertilizer Businesses through
the granting of options to purchase shares of Management Stock. The Plan
provides for the granting of options at fair market value on the date of grant.
Options may be exercised after three years and expire ten years from the grant
date.
A summary of stock option activity under the Plan is as follows:
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