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 October 28, 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 0-2258
SMITHFIELD FOODS, INC.
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
Virginia 52-0845861
- ----------------------------- ---------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
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 [_]
Class Shares outstanding at December 7, 2001
- ---------------------------- --------------------------------------
Common Stock, $.50 par value 111,572,839
1-20
SMITHFIELD FOODS, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Statements of Income - 13 Weeks Ended October 28, 2001 and October 29, 2000 3
and 26 Weeks Ended October 28, 2001 and October 29, 2000
Consolidated Condensed Balance Sheets - October 28, 2001 and April 29, 2001 4-5
Consolidated Condensed Statements of Cash Flows - 26 Weeks Ended October 28, 2001 and October 29, 2000 6
Notes to Consolidated Condensed Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K. 17-19
2-20
PART I -- FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 WeeksEnded
(In thousands, except per share data) October 28, 2001 October 29, 2000 October 28, 2001 October 29,2000
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 1,670,315 $ 1,430,918 $ 3,306,727 $ 2,852,244
Cost of sales 1,387,333 1,196,123 2,768,327 2,388,049
----------- ----------- ----------- -----------
Gross profit 282,982 234,795 538,400 464,195
Selling, general and administrative expenses 126,848 108,417 243,067 212,262
Depreciation expense 33,978 30,524 65,685 61,179
Interest expense 23,237 25,007 42,873 48,395
Minority interests 44 (923) 1,622 (1,169)
Gain on sale of IBP common stock -- -- (7,008) --
----------- ----------- ----------- -----------
Income before income taxes 98,875 71,770 192,161 143,528
Income taxes 38,363 27,194 74,745 54,383
----------- ----------- ----------- -----------
Net income $ 60,512 $ 44,576 $ 117,416 $ 89,145
=========== =========== =========== ===========
Net income per common share:
Basic $ .58 $ .41 $ 1.12 $ .82
=========== =========== =========== ===========
Diluted $ .56 $ .40 $ 1.10 $ .81
=========== =========== =========== ===========
Average common shares outstanding:
Basic 105,191 108,948 105,063 109,134
=========== =========== =========== ===========
Diluted 107,440 110,316 107,201 110,504
=========== =========== =========== ===========
See Notes to Consolidated Condensed Financial Statements
3-20
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) October 28, 2001 April 29, 2001
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 70,200 $ 56,532
Accounts receivable, net 534,265 387,841
Inventories 883,195 729,167
Prepaid expenses and other current assets 93,351 90,155
----------- -----------
Total current assets 1,581,011 1,263,695
----------- -----------
Property, plant and equipment 2,070,170 1,796,655
Less accumulated depreciation (586,911) (522,178)
----------- -----------
Net property, plant and equipment 1,483,259 1,274,477
----------- -----------
Other assets:
Goodwill 466,079 347,342
Investments in partnerships 110,194 88,092
Other 209,899 277,282
----------- -----------
Total other assets 786,172 712,716
----------- -----------
$ 3,850,442 $ 3,250,888
=========== ===========
See Notes to Consolidated Condensed Financial Statements
4-20
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Current liabilities:
Notes payable $ 18,060 $ 35,504
Current portion of long-term debt and capital lease obligations 71,825 79,590
Accounts payable 372,745 278,093
Accrued expenses and other current liabilities 288,810 235,095
----------- -----------
Total current liabilities 751,440 628,282
----------- -----------
Long-term debt and capital lease obligations 1,377,483 1,146,223
----------- -----------
Other noncurrent liabilities:
Deferred income taxes 278,608 271,516
Pension and postretirement benefits 76,232 77,520
Other 26,643 25,820
----------- -----------
Total other noncurrent liabilities 381,483 374,856
----------- -----------
Minority interests 15,881 48,395
----------- -----------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares - -
Common stock, $.50 par value, 200,000,000 and 100,000,000
authorized shares; 111,708,839 and 52,502,951 issued and outstanding 55,854 26,251
Additional paid-in capital 520,411 405,665
Retained earnings 756,194 638,779
Accumulated other comprehensive loss (8,304) (17,563)
----------- -----------
Total shareholders' equity 1,324,155 1,053,132
----------- -----------
$ 3,850,442 $ 3,250,888
=========== ===========
See Notes to Consolidated Condensed Financial Statements
5-20
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
26 Weeks Ended 26 Weeks Ended
(In thousands) October 28, 2001 October 29, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 117,416 $ 89,145
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 69,211 68,169
Gain on sale of IBP common stock (7,008) -
(Gain) loss on sale of property, plant and equipment (2,669) 4,857
Changes in operating assets and liabilities, net of effect of acquisitions (23,251) (43,798)
--------- ---------
Net cash provided by operating activities 153,699 118,373
--------- ---------
Cash flows from investing activities:
Capital expenditures (59,560) (69,709)
Business acquisitions, net of cash (144,283) (7,930)
Proceeds from sale of IBP common stock 58,654 -
Proceeds from sale of property, plant and equipment 8,554 387
Investments in IBP common stock - (60,415)
Investments in partnerships (12,531) (17,936)
--------- ---------
Net cash used in investing activities (149,166) (155,603)
--------- ---------
Cash flows from financing activities:
Net repayments on notes payable (17,591) (9,206)
Proceeds from issuance of long-term debt 390,650 19,688
Net (repayments) borrowings on long-term credit facility (196,000) 57,000
Principal payments on long-term debt and capital lease obligations (110,149) (22,558)
Repurchase and retirement of common stock (60,354) (9,691)
Exercise of common stock options 2,505 906
--------- ---------
Net cash provided by financing activities 9,061 36,139
--------- ---------
Net increase (decrease) in cash and cash equivalents 13,594 (1,091)
Effect of foreign exchange rate changes on cash 74 1,504
Cash and cash equivalents at beginning of period 56,532 49,882
--------- ---------
Cash and cash equivalents at end of period $ 70,200 $ 50,295
========= =========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 40,858 $ 52,801
========= =========
Income taxes $ 71,214 $ 47,639
========= =========
Common Stock issued for acquisitions $ 197,103 $ -
========= =========
See Notes to Consolidated Condensed Financial Statements
6-20
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) These statements should be read in conjunction with the Consolidated
Financial Statements and related notes, which are included in the
Company's Annual Report, for the fiscal year ended April 29, 2001. The
interim consolidated condensed financial information furnished herein is
unaudited. The information reflects all adjustments (which include only
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the periods included in the report.
(2) Inventories consist of the following:
(In thousands) October 28, 2001 April 29, 2001
-------------- ---------------- --------------
Hogs on farms $ 343,523 $ 331,060
Fresh and processed meats 442,301 316,929
Manufacturing supplies 70,926 60,823
Other 26,445 20,355
----------- ----------
$ 883,195 $ 729,167
=========== ==========
(3) Net income per basic share is computed based on the average common shares
outstanding during the period. Net income per diluted share is computed
based on the average common shares outstanding during the period adjusted
for the effect of potential common stock equivalents, such as stock
options. The computation for basic and diluted net income per share is as
follows:
13 Weeks Ended 26 Weeks Ended
---------------------------------------------------------------------
(In thousands, October 28, October 29, October 28, October 29,
except per share data) 2001 2000 2001 2000
--------------------- ---------- --------- ----------- ---------
Net income $ 60,512 $ 44,576 $ 117,416 $ 89,145
---------- --------- ----------- ---------
Average common shares outstanding:
Basic 105,191 108,948 105,063 109,134
Dilutive stock options 2,249 1,368 2,138 1,370
---------- --------- ----------- ---------
Diluted 107,440 110,316 107,201 110,504
========== ========= =========== =========
Net income per common share:
Basic $ .58 $ .41 $ 1.12 $ .82
========== ========= =========== =========
Diluted $ .56 $ .40 $ 1.10 $ .81
========== ========= =========== =========
7-20
(4) The components of comprehensive income, net of related taxes, consist of:
13 Weeks Ended 26 Weeks Ended
-------------------------------------------------------------
October 28, October 29, October 28, October 29,
(In thousands) 2001 2000 2001 2000
- -------------- ----------- ----------- ----------- -----------
Net income $60,512 $44,576 $ 117,416 $ 89,145
Other comprehensive income:
Unrealized gain on cash flow hedges 13,145 - 11,348 -
Unrealized (loss) gain on securities - 25,355 1,540 19,064
Foreign currency translation (1,485) (6,327) (3,630) (7,640)
------- -------- --------- --------
Comprehensive income $72,172 $ 63,604 $ 126,674 $100,569
======= ======== ========= ========
(5) The following table presents information about the results of operations
for each of the Company's reportable segments for the 13 and 26 weeks
ended October 28, 2001 and October 29, 2000, respectively. In connection
with the acquisitions of Moyer Packing Company (Moyer) and
Gorges/Quik-to-Fix Foods, Inc. (Quik-to-Fix) in the first quarter and the
acquisition of Packerland Holdings, Inc. (Packerland) in the second
quarter, assets for the Meat Processing Group increased by approximately
$516.5 million to $2.4 billion.
Meat Hog General
(In thousands) Processing Production Corporate Total
- -------------------------------------------------------------------------------------------------------------
13 Weeks Ended:
October 28, 2001
---------------------
Sales $1,582,130 $ 347,807 $ - $1,929,937
Intersegment sales - (259,622) - (259,622)
Operating profit (loss) 38,783 98,969 (15,640) 122,112
October 29, 2000
---------------------
Sales $1,351,582 $ 311,752 $ - $1,663,334
Intersegment sales - (232,416) - (232,416)
Operating profit (loss) 32,429 72,736 (8,388) 96,777
- -------------------------------------------------------------------------------------------------------------
26 Weeks Ended:
October 28, 2001
---------------------
Sales $3,123,651 $ 709,404 $ - $3,833,055
Intersegment sales - (526,328) - (526,328)
Operating profit (loss) 38,332 218,669 (28,975) 228,026
October 29, 2000
---------------------
Sales $2,681,606 $ 636,469 $ - $3,318,075
Intersegment sales - (465,831) - (465,831)
Operating profit (loss) 24,611 183,887 (16,575) 191,923
(6) On October 23, 2001, the Company issued $300.0 million of eight-year 8.0%
senior unsecured notes. The net proceeds from the sale of the notes were
used to repay indebtedness under the Company's revolving credit
facilities.
8-20
In fiscal 2002, Animex S.A., the Company's Polish subsidiary, entered into
a US$100.0 million Senior Secured Facilities Agreement (Facility). The
proceeds of the financing were used to repay existing borrowings and to
provide working capital financing. This Facility is secured by a pledge of
the operating assets, including accounts receivable and inventories of
Animex and its subsidiaries.
The Company's Canadian subsidiary, Schneider Corporation (Schneider),
entered into a CDN$65.0 million debenture with five institutional
investors, during the period. The proceeds of this financing were used to
repay existing borrowings and to provide working capital financing. The
debenture obligations are secured by charges against the fixed assets of
Schneider.
At October 28, 2001, the outstanding balance on the Company's five-year
$650.0 million revolving credit facility of $211.0 million was included in
long-term debt and capital lease obligations on the Consolidated Condensed
Balance Sheet. Subsequent to October 28, 2001, the Company entered into a
loan agreement with a bank group for a five-year $750.0 million revolving
credit facility. In connection with this refinancing, the Company repaid
all of its borrowings under its previous $650.0 million revolving credit
facility, which was terminated.
(7) In October 2001, the Company completed the acquisition of Packerland and
its affiliated companies for approximately 6.3 million shares of the
Company's common stock and the assumption of $124.8 million of debt and
other liabilities. The balance of the purchase price in excess of the fair
value of the assets acquired and the liabilities assumed at the date of
the acquisition was recorded as intangible assets. Prior to the
acquisition, Packerland had annual sales of approximately $1.4 billion.
In June 2001, the Company completed the acquisition of Moyer for
approximately $90.5 million in cash and assumed debt. The balance of the
purchase price in excess of the fair value of the assets acquired and the
liabilities assumed at the date of the acquisition was recorded as
intangible assets. Prior to the acquisition, Moyer had annual sales of
approximately $600 million.
In September 2001, the Company acquired virtually all the remaining common
shares of Schneider, for approximately 2.8 million shares of the Company's
common stock. Prior to this transaction, the Company owned approximately
63% of the outstanding shares of Schneider. The balance of the purchase
price in excess of the fair value of the assets acquired and the
liabilities assumed at the date of acquisition was recorded as
intangible assets.
In July 2001, the Company acquired substantially all of the assets and
business of Quik-to-Fix for approximately $31.0 million in cash. Prior to
the acquisition, Quik-to-Fix had annual sales of approximately $140
million.
During the third quarter of fiscal year 2001, Schneider increased its
investment in Saskatchewan-based Mitchell's Gourmet Foods Inc.
(Mitchell's) to 54%. Prior to the third quarter of fiscal year 2001, the
Company had used the equity method of accounting for Mitchell's. For the
fiscal year ended October 2000, Mitchell's had sales of approximately $190
million.
These acquisitions were accounted for using the purchase method of
accounting, and accordingly, the accompanying financial statements include
the financial position and results of operations from the dates of
acquisition. Had these acquisitions occurred at the beginning of the
fiscal years in which they were acquired, there would not have been a
material effect to net income or net income per share for the 13 or the 26
weeks ended October 28, 2001 or October 29, 2000.
(8) On April 30, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS No. 137 and No. 138. SFAS 133
requires that all derivative instruments be reported on the Company's
Consolidated Balance Sheet at fair value and provides guidance on the
accounting treatment of gains and losses from derivatives based on the
type of hedging transaction. As substantially all of the Company's
derivatives are considered cash flow hedges, as defined in SFAS 133,
changes in
9-20
the fair value of derivatives are recorded in other comprehensive income
or current earnings depending on whether the derivative is designated as a
hedge transaction and the effectiveness of the hedging relationship. Gains
and losses on derivative instruments reported in other comprehensive
income are recognized in earnings in the period in which earnings are
impacted by the underlying hedged item. The ineffective portions of cash
flow hedges are recognized in current period earnings.
The Company uses futures and option contracts for the purpose of hedging
its exposure to changes in the cost of raw materials, including live hogs
and grains, and to changes in the market prices for the sale of live hogs
when management determines the conditions are appropriate for such hedges.
Substantially all of the Company's products are produced from
commodity-based raw materials, corn and soybean meal in the Hog Production
Group (HPG) and live hogs in the Meat Processing Group (MPG). The cost of
corn and soybean meal and live hogs are subject to wide fluctuations due
to unpredictable factors such as weather conditions, economic conditions,
government regulation and other unforeseen circumstances. In addition, the
unpredictability of raw material costs in the MPG limits the Company's
ability to forward price fresh and processed meat products without the use
of commodity contracts through a program of price-risk management. The
Company uses price-risk management techniques to engage in forward sales
contracts, where prices for future deliveries are fixed, by purchasing (or
selling) commodity contracts to reduce or eliminate the effect of
fluctuations in future raw material costs. The particular hedging methods
employed and the time periods for the contracts depend on a number of
factors, including the availability of adequate contracts for the
respective periods and commodity hedged. The Company attempts to closely
match the contract expiration periods with the dates for product sale and
delivery.
In accordance with the provisions of SFAS No. 133, the Company recorded a
transition adjustment on April 30, 2001, (the first day of the Company's
current fiscal year) of $12.7 million after-tax, cumulative effect loss in
Accumulated Other Comprehensive Loss and a net decrease in current assets
of $20.6 million to recognize the fair value of derivative instruments
that are designated as hedge transactions. For the 13 weeks and the 26
weeks ended October 28, 2001, $1.1 million and $8.4 million of net
derivative losses were reclassified from Accumulated Other Comprehensive
Loss into earnings and $1.2 million and $0.9 million of net gains related
to cash flow hedge ineffectiveness were recognized in earnings,
respectively.
As of October 28, 2001, the net accumulated gain on derivative instruments
in Accumulated Other Comprehensive Loss was $11.3 million. The Company
expects that substantially all of these gains will be reclassified into
earnings over the next twelve months as the underlying hedged transactions
are realized. At October 28, 2001, the maximum maturity date for any
commodity contract outstanding was 12 months.
(9) In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142 "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The Statement requires that acquired
goodwill and other intangible assets are no longer periodically amortized
into income, but are subject to an annual impairment measurement. The
Company has elected early adoption of SFAS 142. In accordance with SFAS
142, the 13 weeks and 26 weeks ended October 28, 2001 do not include
amortization of acquired goodwill and certain other intangible assets. The
Company has allocated goodwill to its reporting units and performed an
assessment of potential capital impairment. Management does not currently
believe that there is significant exposure to a loss from impairment of
acquired goodwill and other intangible assets. Had SFAS 142 been effective
in the previous fiscal year, net income and diluted net income per common
share would have been $46.7 million, or $.42 per diluted share, and $93.4
million, or $.85 per diluted share, for the 13 weeks and 26 weeks ended
October 29, 2000, respectively.
(10) On August 29, 2001, the board of directors of the Company declared a
2-for-1 stock split of the Company's common stock effective September 14,
2001. Share amounts presented in the Consolidated Condensed Balance Sheets
reflect the actual share amounts issued and outstanding for each period
presented.
10-20
All per common share amounts have been restated to reflect the effect of
the stock split. In addition, on August 29, 2001, the Company's
shareholders approved an amendment to the articles of incorporation
providing for an increase in the authorized shares of common stock from
100 million to 200 million.
11-20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
Smithfield Foods, Inc. (the Company) is comprised of a Meat Processing
Group (MPG) and a Hog Production Group (HPG). The MPG consists of primarily
eight wholly owned domestic meat processing subsidiaries and four international
meat processing entities. The HPG consists primarily of three hog production
operations located in the United States and certain joint ventures outside the
United States.
ACQUISITIONS
- ------------
The Company made several acquisitions in fiscal years 2002 and 2001
including:
In October 2001, the Company completed the acquisition of Packerland
Holdings, Inc. (Packerland) and its affiliated companies for approximately 6.3
million shares of the Company's common stock and the assumption of $124.8
million of debt and other liabilities. Prior to the acquisition, Packerland had
annual sales of approximately $1.4 billion.
In June 2001, the Company completed the acquisition of Moyer Packing
Company (Moyer) for approximately $90.5 million in cash and assumed debt. Prior
to the acquisition, Moyer had annual sales of approximately $600.0 million.
In September 2001, the Company acquired virtually all the remaining
common shares of Schneider Corporation (Schneider), for approximately 2.8
million shares of the Company's common stock. Prior to this transaction, the
Company owned approximately 63% of the outstanding shares of Schneider.
In July 2001, the Company acquired substantially all of the assets and
business of Gorges/Quik-to-Fix Foods, Inc. (Quik-to-Fix) for approximately $31.0
million in cash. Prior to the acquisition, Quik-to-Fix had annual sales of
approximately $140.0 million.
During the third quarter of fiscal year 2001, Schneider increased its
investment in Saskatchewan-based Mitchell's Gourmet Foods Inc. (Mitchell's) to
54%. Prior to the third quarter of fiscal year 2001, the Company had used the
equity method of accounting for Mitchell's. For the fiscal year ended October
2000, Mitchell's had sales of approximately $190.0 million.
These acquisitions were accounted for using the purchase method of
accounting and, accordingly, the accompanying financial statements include the
results of operations from the dates of acquisition.
RESULTS OF OPERATIONS
- ---------------------
The acquisitions of Moyer, Quik-to-Fix, and Mitchell's affect the
comparability of the results of operations for the 13 and 26 weeks ended October
28, 2001 and October 29, 2000.
Consolidated
Sales in the 13 and 26 weeks ended October 28, 2001 increased by $239.4
million, or 16.7%, and by $454.5 million, or 15.9%, respectively, from the
comparable prior year periods. The increases in sales reflected a 6.7% and a
8.3% increase in unit selling prices in the MPG for the 13 and 26 weeks
12-20
ended October 28, 2001, respectively, and the incremental sales of acquired
businesses. See the following sections for comments on sales changes by business
segment.
Gross profit in the 13 and 26 weeks ended October 28, 2001 increased
$48.2 million, or 20.5%, and $74.2 million, or 16.0%, respectively, from the
comparable prior year periods. The current year gross profit increases are
primarily the result of higher unit selling prices of meat products, the gross
profit of acquired businesses and lower raising costs.
Selling, general and administrative expenses in the 13 and 26 weeks
ended October 28, 2001 increased $18.4 million, or 17.0%, and $30.8 million, or
14.5%, respectively, from the comparable prior year periods. The increases were
primarily due to the inclusion of expenses of acquired businesses, increased
promotion of branded fresh and processed meats in both periods, and a $5.0
million loss incurred in the current 26-week period as a result of a fire at a
Circle Four farm in Utah. These increases were partially offset by the adoption
of the Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Had SFAS 142 been effective in the previous
fiscal year, selling, general and administrative expenses would have been
reduced by $2.1 million and $4.3 million for the 13 weeks and 26 weeks ended
October 29, 2000, respectively.
Depreciation expense in the 13 and 26 weeks ended October 28, 2001
increased $3.5 million, or 11.3%, and $4.5 million, or 7.4%, respectively, from
the comparable periods a year earlier. The increases are primarily due to the
inclusion of depreciation expense of acquired businesses.
Interest expense decreased $1.8 million, or 7.1%, and $5.5 million, or
11.4%, in the 13 and 26 weeks ended October 28, 2001, respectively, compared to
the same periods last year. The decrease in interest expense is primarily due to
the decrease in average interest rates.
In the first quarter of 2002, the Company sold 2.9 million shares of
IBP, inc. common stock resulting in a nonrecurring, pretax gain of $7.0 million
for the 26 weeks ended October 28, 2001.
The effective income tax rate for the 13 and 26 weeks ended October 28,
2001 increased to 38.8% and 38.9%, respectively compared with 37.9% in both
prior year periods on increased overall earnings at higher marginal rates. For
the 26 weeks ended October 28, 2001, the increase also reflected higher
effective tax rates on increased foreign income. The Company had a valuation
allowance of $21.6 million related to income tax assets as of October 28, 2001
primarily related to losses in foreign jurisdictions for which no tax benefit
was recognized.
Reflecting the foregoing factors, net income increased to $60.5
million, or $.56 per diluted share, and $117.4 million, or $1.10 per diluted
share, in the 13 and 26 weeks ended October 28, 2001, respectively. This
compares to net income of $44.6 million, or $.40 per diluted share, and $89.1
million, or $.81 per diluted share, in the comparable periods ended October 29,
2000, respectively. Excluding the after-tax gain on the sale of IBP common
stock, and the after-tax loss incurred as a result of a fire at a Circle Four
farm in Utah, net income increased to $116.2 million, or $1.08 per diluted share
for the 26 weeks ended October 28, 2001.
Meat Processing Group
Sales in the MPG segment increased $230.5 million, or 17.1%, and $442.0
million, or 16.5%, in the 13 and 26 weeks ended October 28, 2001, respectively,
from the comparable prior year periods. This increase is due to a 6.7% and 8.3%
increase in unit selling prices and a 9.8% and 8.9% increase in fresh and
processed meats sales volume in the 13 and 26 weeks ended October 28, 2001,
respectively, from the comparable prior year periods. The sales tonnage
increases are primarily related to the inclusion of sales of acquired
businesses, partially offset by the sale of a Canadian fresh pork plant.
Included in the sales tonnage of acquired businesses is 94.3 million and 128.9
million pounds of fresh beef from Moyer for the 13 and 26 weeks ended October
28, 2001, respectively. In the base business, fresh meat and processed meats
volumes increased 1.0% and 1.5%, respectively, for the 13 week period, while
fresh meat volumes have increased 5.9% and processed meats volumes have remained
flat for the 26 week period.
13-20
MPG operating profit in the 13 and 26 weeks ended October 28, 2001
increased to $38.8 million from $32.4 million and to $38.3 million from $24.6
million, respectively, from the comparable prior year periods. These increases
are due to higher margins in both fresh and processed meats, despite higher cost
of raw materials (live hogs) and increased promotional costs. Fresh meat margins
increased resulting from the continued emphasis on the branded, value-added
fresh pork categories. Increased processed meat margins reflected higher pricing
and improved product mix.
Hog Production Group
HPG sales for the 13 and 26 weeks ended October 28, 2001 increased
11.6% and 11.5%, respectively, from the comparable prior year periods. These
increases are primarily due to the increase in unit selling prices for hogs
while head sold has remained relatively flat from the comparable prior year
periods. Most HPG sales represent inter-segment sales to the MPG and, therefore,
are eliminated in the Company's Consolidated Condensed Statements of Income.
Operating profit in the 13 and 26 weeks ended October 28, 2001 at the
HPG improved to $99.0 million from $72.7 million and to $218.7 million from
$183.9 million, respectively, from the comparable prior year periods. Operating
profit for the periods improved on higher live hog prices and lower raising
costs, partially offset by the impact of unfavorable commodity hedging
contracts. In the 26-week period, operating profit improvement was also
partially offset by a loss incurred as a result of a fire at a Circle Four farm
in Utah. Included in the operating profit for the 13 and 26 weeks ended October
29, 2000 is a $7.0 million gain for insurance settlements for the recovery of
losses incurred in hog production operations related to Hurricane Floyd.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operations totaled $153.7 million for the 26 weeks
ended October 28, 2001 compared to $118.4 million in the same period last year.
The increase is due to higher earnings, net of a gain on the sale of IBP common
stock, and a reduction in working capital commitments compared to the same
period last year.
Cash used in investing activities decreased to $149.2 million for the
26 weeks ended October 28, 2001 compared to $155.6 million for the comparable
prior year period. The decrease is primarily due to proceeds from the sale of
IBP, inc. common stock in the current period and the investment made in IBP,
inc. common stock in the prior period offset by the acquisitions of Moyer and
Quik-to-Fix. Capital expenditures totaled $59.6 million in the current period
primarily related to fresh and processed meats expansion projects and plant
improvements. As of October 28, 2001, the Company has definitive commitments of
$101.1 million for capital expenditures primarily for processed meat expansion,
production efficiencies and additional hog production facilities in Utah.
Financing activities provided cash of $9.1 million in the current 26-
week period. In October 2001, the Company issued $300.0 million of eight-year
8.0% senior unsecured notes. The net proceeds from the sale of the notes went to
repay indebtedness under the Company's revolving credit facility. This repayment
was offset by borrowings on the revolving credit facility to fund net investment
activity and to repurchase 3.1 million shares of the Company's common stock. The
Company's Polish subsidiary, Animex S.A., entered into a US$100.0 million Senior
Secured Facilities Agreement (Facility) during the period. The proceeds of the
financing were used to repay existing borrowings and to provide working capital
financing. The Facility is secured by a pledge of the operating assets,
including the accounts receivable and inventories of Animex and its
subsidiaries. Schneider entered into a CDN$65.0 million debenture with five
institutional investors, during the period. The proceeds of this financing were
used to repay existing borrowings and to provide working capital financing. The
debenture obligations are secured by charges against the fixed assets of
Schneider. Management believes that through internally generated funds and
access to global credit markets, funds are available to adequately meet the
Company's current and future operating and capital needs. As of October 28,
2001, 14.3 million shares of the Company's common stock have been repurchased
under a 16.0 million share repurchase program.
14-20
At October 28, 2001, the outstanding balance on the Company's five-year
$650.0 million revolving credit facility of $211.0 million was included in
long-term debt and capital lease obligations on the Consolidated Condensed
Balance Sheet. Subsequent to October 28, 2001, the Company entered into a loan
agreement with a bank group for a five-year $750.0 million revolving credit
facility. In connection with this refinancing, the Company repaid all of its
borrowings under its previous $650.0 million revolving credit facility, which
was terminated.
OUTLOOK
- -------
The third quarter is traditionally the best quarter for the MPG as
fresh and processed meats margins generally are at their peak as a result of
strong demand related to sales for the fall and holiday seasons. HPG margins are
expected to continue benefiting from lower raising costs. The Company expects
the results of Packerland for the third quarter to be accretive to earnings.
Accordingly, the Company anticipates that the third quarter should compare
favorably with the results of the prior year.
RECENT DEVELOPMENTS
- -------------------
On November 1, 2001, the Company announced an agreement in principle to
acquire American Foods Group, Inc. (American Foods). On December 5, 2001, the
Company and American Foods announced that the two parties have agreed to
terminate any further discussions regarding the agreement for the Company to
acquire American Foods.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q may contain "forward-looking" information within the
meaning of the federal securities laws. The forward-looking information may
include statements concerning the Company's outlook for the future, as well as
other statements of beliefs, future plans and strategies or anticipated events,
and similar expressions concerning matters that are not historical facts. The
forward-looking information and statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in, or implied by, the statements. These risks and uncertainties
include the ability to make effective acquisitions and successfully integrate
newly acquired businesses into existing operations, the availability and prices
of live hogs, raw materials and supplies, livestock disease, live hog production
costs, product pricing, the competitive environment and related market
conditions, operating efficiencies, access to capital, the cost of compliance
with environmental and health standards, adverse results from on-going
litigation and actions of domestic and foreign governments.
15-20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended April 29, 2001, in April 2000, the Company and one of its
subsidiaries were named as defendants, along with IBP, inc., in a civil action
filed in the United States District Court for the Middle District of Georgia.
The case was filed by four named plaintiffs on behalf of a putative nationwide
class of hog producers who from 1994 to the present produced and sold finished
hogs to defendants on a spot, auction or cash market basis. The plaintiffs
contended that the defendants violated the Packers and Stockyards Act of 1921
(the PSA) by reason of the defendants' engaging in various captive supply
arrangements for the procurement of hogs for processing. The Company moved the
Georgia court to dismiss the case for lack of jurisdiction or in the alternative
transfer it to the Eastern District of Virginia, where the Company is
headquartered. On March 30, 2001, the Georgia court granted the Company's motion
to transfer. On May 11, 2001, the Company filed a motion to dismiss the case for
failure to state a claim upon which relief can be granted, arguing that the
alleged captive supply arrangements do not violate the PSA and are consistent
with similar vertical integration in the poultry industry. The Eastern District
of Virginia court denied the Company's motion to dismiss by order dated
September 19, 2001. However, in light of the issues raised by that motion
regarding the scope of the PSA, the court required the parties to comply with a
schedule for focused discovery relating to the plaintiffs' allegation that
captive hog procurement practices violate the PSA and required prompt briefing
on a motion for summary judgment by the defendants. A hearing on the defendants'
summary judgment motion was held on November 21, 2001. At the conclusion of
this hearing, the court stated its intention to rule in favor of the Company.
The Company expects a written order to this effect in the near future.
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended April 29, 2001, in February 2001, Water Keeper Alliance
Inc., Thomas E. Jones d/b/a Neuse Riverkeeper, and Neuse River Foundation filed
two lawsuits in the United States District Court for the Eastern District of
North Carolina against one of the Company's subsidiaries, and two of that
subsidiary's hog production facilities in North Carolina (the Citizens Suits).
The Company was named as a defendant in one of the suits and the plaintiffs
recently served an amended notice of intent to join the Company as a defendant
in the other suit. The Citizens Suits allege, among other things, violations of
various environmental laws at each facility and the failure to obtain certain
federal permits at each facility. The lawsuits seek remediation costs,
injunctive relief and substantial civil penalties. The Company and its
subsidiaries moved to dismiss each of the Citizen's Suits. These motions were
denied, as was the Company's subsequent motion for reconsideration.
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended April 29, 2001, in March 2001, Eugene C. Anderson and
other individuals filed what purports to be a class action in the United States
District Court for the Middle District of Florida, Tampa Division, against the
Company and Joseph W. Luter, III (the Anderson Suit). The Anderson Suit
purports to allege violations of various laws, including the Racketeer
Influenced and Corrupt Organizations Act, based on the Company's alleged failure
to comply with environmental laws. The complaint seeks treble damages that are
unspecified. The plaintiffs filed an amended complaint on May 1, 2001. The
Company has moved to dismiss the Anderson Suit. The plaintiffs have moved for
class certification, which the Company has opposed. There has been no ruling on
the plaintiffs' certification motion.
The Company believes that the Anderson Suit is baseless and without merit
and intends to defend the suit vigorously. The Company has investigated the
allegations made in the Citizens Suits and believes that the outcome of these
lawsuits will not have a material adverse effect on the Company's financial
condition or results of operations. The Company believes that all of the
litigation described above represents the agenda of special advocacy groups
including the Water Keeper Alliance Inc. The plaintiffs in these cases have
stated that federal and state environmental agencies have declined to bring any
of these suits and, indeed, have criticized these agencies.
16-20
Item 2. Changes in Securities and Use of Proceeds
The terms of certain of the Company's debt agreements, including the loan
agreements with a bank group for a five-year $750.0 million revolving credit
facility the Company entered into subsequent to October 28, 2001 (see Part I,
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, for further details), limit the payment of cash dividends on the
Common Stock. This limitation on the payment of cash dividends is a continuation
of a similar restriction contained in the Company's previous revolving credit
facility. The Company has never paid a cash dividend on its Common Stock and
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
Item 5. Other Information
On October 23, 2001, the Company issued $300 million 8% senior notes in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the senior notes may not be reoffered, resold, or otherwise
transferred unless registered under the Securities Act or any applicable
securities law or unless an applicable exemption from the registration and
prospectus delivery requirements of the Securities Act is available. In
connection with the sale of the senior notes, the Company agreed to file with
the Securities and Exchange Commission on or before 90 days after the issuance
of the senior notes a registration statement registering exchange notes to be
offered in exchange for the senior notes. The Company also agreed that the
notes to be registered, known as the exchange notes, would generally contain the
same terms as the senior notes, except for provisions restricting their
transfer.
On November 30, 2001, the Company filed a registration statement for the
exchange notes. The registration statement was declared effective on December
7, 2001 and the exchange offer is in process with a January 8, 2002 expiration
date. Failure to complete the exchange offer or certain alternative
transactions within the time periods the Company agreed to when the senior notes
were issued will result in an increase in the amount of interest on the senior
notes until the Company is able to complete the exchange offer or one of the
alternative transactions. At this time, the Company believes that it will not
be subject to the imposition of any additional interest.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 3.1 - Articles of Amendment effective August 29, 2001 to
the Amended and Restated Articles of Incorporation,
including the Amended and Restated Articles of
Incorporation of the Company, as amended to date
(incorporated by reference to Exhibit 3.1 to the
Company's Amendment No.1 to Form 10-Q Quarterly
Report filed with the Securities and Exchange
Commission (SEC) on September 12, 2001).
Exhibit 3.2 - Amendment to the Bylaws adopted May 30,
2001, including the Bylaws of the Company, as
amended to date (incorporated by reference to
Exhibit 2 to the Company's Registration Statement
on Form 8-A filed with the SEC on May 30, 2001).
Exhibit 4.1(a) - Indenture between Smithfield Foods, Inc. and
SunTrust Bank dated October 23, 2001 (incorporated
by reference to Exhibit 4.3(a) to the Company's
Registration Statement on Form S-4 filed with the
SEC on November 30, 2001).
17-20
Exhibit 4.1(b) - Purchase Agreement dated October 17, 2001, among
Smithfield Foods, Inc., J.P.Morgan Securities,
Inc. and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 4.3(a) to the Company's
Registration Statement on Form S-4 filed with the
SEC on November 30, 2001).
Exhibit 4.1(c) - Exchange and Registration Rights Agreement dated
October 23, 2001, among Smithfield Foods, Inc.,
J.P. Morgan Securities, Inc. and Goldman, Sachs &
Co. (incorporated by reference to Exhibit 4.3(a) to
the Company's Registration Statement on Form S-4
filed with the SEC on November 30, 2001).
Exhibit 4.2(a) - Multi-Year Credit Agreement dated as of December 6,
2001 among Smithfield Foods, Inc., the Subsidiary
Guarantors Party thereto, and J.P. Morgan Chase
Bank, as Administrative Agent, relating to a
$750,000,000 secured multi-year revolving credit
facility (filed herewith).
Exhibit 4.2(b) - Security Agreement dated as of December 6, 2001,
among Smithfield Foods, Inc., the Subsidiary
Guarantors party thereto, and J.P. Morgan Chase
Bank, as Collateral Agent, relating to the
Company's multi-year revolving credit facility
(filed herewith).
Exhibit 4.3(a) - Amendment Agreement No. 1 dated as of December 7,
2001, among Smithfield Foods and each of the
Holders listed on Annex No. 1 thereto, relating to
the Amended and Restated Note Purchase Agreement
dated as of October 27, 1999 relating to
$250,000,000 in senior secured notes (filed
herewith).
Exhibit 4.3(b) - Joint and Several Guaranty dated as of December 7,
2001, by Central Plains Farms LLC, Coddle Roasted
Meats, Inc., Great Lakes Cattle Credit Company,
LLC, Hancock's Old Fashioned Country Hams, Inc.,
Iowa Quality Meats, Ltd., Lykes Meat Group, Inc.,
Moyer Packing Company, Murco Foods, Inc., North
Side Foods Corp., Packerland Holdings, Inc.,
Packerland Processing Company, Inc., Patrick Cudahy
Incorporated, Premium Pork, Inc., Quarter M Farms,
LLC, Quik-To-Fix Foods, Inc., Stadler's Country
Hams, Inc., Sun Land Beef Company, Sunnyland, Inc.
and The Smithfield Companies, Inc. (filed
herewith).
Exhibit 4.4(a) - Amendment Agreement No. 1 dated as of December 7,
2001, among Smithfield Foods and each of the
Holders listed on Annex No. 1 thereto, relating to
the Amended and Restated Note Purchase Agreement
dated as of October 31, 1999 relating to
$196,882,354 in senior secured notes (filed
herewith).
18-20
Exhibit 4.4(b) - Joint and Several Guaranty dated as of December 7,
2001, by Central Plains Farms LLC, Coddle Roasted
Meats, Inc., Great Lakes Cattle Credit Company,
LLC, Hancock's Old Fashioned Country Hams, Inc.,
Iowa Quality Meats, Ltd., Lykes Meat Group, Inc.,
Moyer Packing Company, Murco Foods, Inc., North
Side Foods Corp., Packerland Holdings, Inc.,
Packerland Processing Company, Inc., Patrick Cudahy
Incorporated, Premium Pork, Inc., Quarter M Farms,
LLC, Quik-To-Fix Foods, Inc., Stadler's Country
Hams, Inc., Sun Land Beef Company, Sunnyland, Inc.
and The Smithfield Companies, Inc. (filed
herewith).
Exhibit 4.5(a) - Amendment Agreement No. 1 dated as of December 7,
2001, among Smithfield Foods and each of the
Holders listed on Annex No. 1 thereto, relating to
the Amended and Restated Note Purchase Agreement
dated as of June 2, 2000 relating to $100,000,000
in senior secured notes (filed herewith).
Exhibit 4.5(b) - Joint and Several Guaranty dated as of December 7,
2001, by Central Plains Farms LLC, Coddle Roasted
Meats, Inc., Great Lakes Cattle Credit Company,
LLC, Hancock's Old Fashioned Country Hams, Inc.,
Iowa Quality Meats, Ltd., Lykes Meat Group, Inc.,
Moyer Packing Company, Murco Foods, Inc., North
Side Foods Corp., Packerland Holdings, Inc.,
Packerland Processing Company, Inc., Patrick Cudahy
Incorporated, Premium Pork, Inc., Quarter M Farms,
LLC, Quik-To-Fix Foods, Inc., Stadler's Country
Hams, Inc., Sun Land Beef Company, Sunnyland, Inc.
and The Smithfield Companies, Inc. (filed
herewith).
B. Reports on Form 8-K.
1. A Current Report on Form 8-K for October 16, 2001 was filed with the
SEC on October 19, 2001 to report, under Item 5, the Company's
second quarter earnings, the Company's sale of $300 million in
senior notes, and the Company's new management structure.
19-20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SMITHFIELD FOODS, INC.
/s/ DANIEL G. STEVENS
- -----------------------
Daniel G. Stevens
Vice President and Chief Financial Officer
/s/ JEFFREY A. DEEL
- --------------------
Jeffrey A. Deel
Corporate Controller
Date: December 12, 2001
20-20