FINANCIAL DISCUSSION
OPERATIONS
Fiscal 1994 Compared to Fiscal 1993
Sales in fiscal 1994 increased $304.8 million, or 26.7%, from fiscal 1993.
The increase was the result of a 20.2% increase in sales tonnage and a 4.8%
increase in unit sales prices. The increase in sales tonnage was the result of a
39.4% increase in fresh pork tonnage combined with a 4.8% increase in processed
meats tonnage. The substantial increase in fresh pork tonnage reflected the
operation of the Company's fresh pork facility in Bladen County, North Carolina
for the full 12 months of the year compared with six months of operation in
fiscal 1993.
Cost of sales increased $242.0 million, or 24.3%, in fiscal 1994, primarily
due to the increased sales tonnage and a 3.3% increase in the cost of live hogs.
Gross profit (sales less cost of sales) increased $62.8 million, or 43.4%, in
fiscal 1994 compared to fiscal 1993. This increase in gross profit resulted from
the increased sales tonnage of both fresh pork (46.9% of total dollar sales) and
processed meats (46.3% of total dollar sales), and increased margins on sales of
both fresh pork and processed meats.
Gross profit in fiscal 1994 was favorably affected by a $10.3 million
reduction in cost of sales as a result of the performance of Brown's of
Carolina, Inc. ("Brown's") and the Smithfield-Carroll's joint hog production
arrangement ("Smithfield-Car roll's"). In fiscal 1993, the performance of
these operations resulted in a reduction in cost of sales of $4.0 million. The
Company obtained 11.4% of the hogs which it processed in fiscal 1994 from
Brown's and Smithfield-Car roll's, compared with 9.4% in fiscal 1993.
Selling, general and administrative expenses increased $28.2 million, or
25.5%, in fiscal 1994, reflecting sharply increased distribution costs related
to increased sales tonnage of fresh pork produced at the Bladen County plant,
increased marketing costs associated with increased sales tonnage of both
fresh pork and processed meats and increased storage and warehousing costs
related to an overall increase in business levels.
Depreciation expense increased $3.0 million, or 16.0%, in fiscal 1994,
reflecting the high levels of capital expenditures in recent years related to
the expansion of the Company's hog production facilities and modernization and
expansion of its meat processing plants. In light of the Company's aggressive
capital expenditure programs over the past four fiscal years during which the
Company invested $218.6 million in new plant and equipment, the Company reviewed
the estimated useful lives of these most recently acquired assets which were
being used for depreciation purposes. As a result of this review, effective
November 1, 1993, the Company revised these lives to more accurately reflect the
economic useful lives of these assets and to better align them with those
generally used in the meat processing industry. This change in accounting
estimate increased net income in fiscal 1994 by $2.3 million ($.14 per share)
and will continue to have a positive impact on net income and net income per
share in future years.
Interest expense increased $5.5 million, or 81.8%, reflecting significantly
higher carrying costs on long-term debt related to the funding of capital
projects, including the Bladen County plant, and the impact of replacing short-
term borrowings with long-term debt at somewhat higher interest rates.
Minority interest increased $1.4 million in fiscal 1994, reflecting
increased profitability at Brown's and Patrick Cudahy Incorporated, each of
which had minority ownership at year end. The Company purchased the minority
interest in Patrick Cudahy in June 1994.
In fiscal 1993, the Company recorded a nonrecurring pre-tax charge of $3.6
million related to
23
FINANCIAL DISCUSSION
the closing of Esskay, Inc.'s meat processing plant in Baltimore, Maryland.
The effective income tax rate in fiscal 1994 increased to 39.6% from 33.7%
in the prior year, reflecting the impact of an increase in the statutory rate at
the federal level and the reduced impact of tax credits on the overall effective
rate for the year.
The increase in net income in fiscal 1994 was largely attributable to
improved sales margins and operating efficiencies at Gwaltney of Smithfield,
Ltd. ("Gwaltney") and The Smithfield Packing Company, Incorporated ("Smithfield
Packing") during the second half of the year. The improvement in financial
results also reflected generally improved conditions in the pork processing
industry. The Bladen County plant is currently operating at capacity on a one-
shift basis. The Company currently plans to begin processing hogs on a second
shift in the fourth quarter of fiscal 1995.
The results of Ed Kelly, Inc. ("Kelly"), the Company's retail consumer
electronics subsidiary, while not significant, contributed to the Company's
overall profitability in fiscal 1994.
Reflecting the factors discussed above, net income increased $15.7 million
in fiscal 1994, up sharply from $4.0 million in the prior fiscal year. Net
income in fiscal 1993 included the cumulative effect of a change in accounting
principle associated with the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," effective May 4, 1992. The
Company had no valuation allowance related to income tax assets as of May 1,
1994, and there was no change in the valuation allowance during fiscal 1994.
Fiscal 1993 Compared to Fiscal 1992
Sales in fiscal 1993 increased $91.9 million, or 8.8%, from fiscal 1992. The
increase was the result of a 13.9% increase in sales tonnage offset by a
3.1% decrease in unit sales prices. The increase in sales tonnage was the
result of an 8.1% increase in processed meats tonnage combined with a 15.4%
increase in fresh pork tonnage. The percentage changes in sales tonnage and unit
prices were computed on comparable 52-week periods.
The $87.4 million, or 9.6%, increase in cost of sales was primarily the
result of increased sales tonnage offset by a 2.5% decrease in the cost of live
hogs. Gross profit (sales less cost of sales) increased $4.5 million, or 3.2%,
in fiscal 1993 compared to fiscal 1992. This increase in gross profit resulted
from the increased sales tonnage of both processed meats (54.8% of total dollar
sales) and fresh pork (41.4% of total dollar sales), offset by lower margins on
overall sales. Additionally, gross profit reflected substantial start-up losses
at the Company's new fresh pork facility in Bladen County, North Carolina, which
began operations in October 1992, as well as operating inefficiencies associated
with plant expansion projects at several of the Company's other locations.
Gross profit in fiscal 1993 was favorably affected by a $4.0 million
reduction in cost of sales as a result of the performance of Brown's and
Smithfield-Carroll's. In fiscal 1992, the performance of these operations
resulted in a reduction in cost of sales of $2.1 million. The Company obtained
9.4% of the hogs which it processed in fiscal 1993 from Brown's and Smithfield-
Carroll's.
Selling, general and administrative expenses increased $18.3 million, or
19.8%, in fiscal 1993, reflecting increased marketing and distribution costs
related to increased sales tonnage, expenses at the Bladen County plant and the
inclusion of the operations of Kelly for a full fiscal year.
Depreciation expense increased $5.9 million, or 46.2%, reflecting the
opening of the Bladen
24
FINANCIAL DISCUSSION
County plant and significant plant expansion projects at Gwaltney and
Smithfield Packing.
Interest expense increased $2.6 million, or 62.0%, largely the result of
increased short-term borrowings associated with increased working capital needs
and the financing of large capital expenditures.
In fiscal 1993, the Company recorded a nonrecurring pre-tax charge of $3.6
million related to the closing of Esskay, Inc.'s meat processing plant in
Baltimore, Maryland. In fiscal 1992, the Company recognized a non-recurring pre-
tax gain of $2.8 million on the sale of marketable securities.
Net income before the cumulative effect of an accounting change decreased
$18.8 million, or 86.8%, in fiscal 1993, reflecting the factors discussed above.
During fiscal 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," which requires the use of the liability method in accounting for
income taxes. The cumulative effect of adopting this change as of May 2, 1993
totaled $1.1 million and has been reflected in the statements of income as the
cumulative effect of a change in accounting principle. The Company had no
valuation allowance related to income tax assets as of May 2, 1993, and there
was no change in the valuation allowance during fiscal 1993.
The operating efficiencies at the Bladen County plant steadily improved and
at year end approached levels comparable to those at the Company's other
slaughtering facilities. Throughout fiscal 1993, the Company as well as the pork
processing industry experienced depressed fresh pork margins which adversely
affected profitability.
FINANCIAL CONDITION
The pork processing industry is characterized by high sales tonnage and
rapid turnover of inventories and accounts receivable. Because of the rapid
turnover rate, the Company considers its inventories and accounts receivable
highly liquid and readily convertible into cash. Borrowings under lines of
credit are used to finance increases in the levels of inventories and accounts
receivable resulting from seasonal and other market-related fluctuations in raw
material costs. The demand for seasonal borrowings usually peaks in early
November when ham inventories are at their highest levels, and borrowings are
repaid in January when accounts receivable generated by sales of these hams
are collected. As of May 1, 1994, the Company had aggregate lines of credit of
$120.0 million. Borrowings under the lines of credit are secured by
substantially all of the Company's inventories and accounts receivable.
Weighted average borrowings under the lines were $66.6 million in fiscal 1994,
$79.2 million in fiscal 1993 and $29.4 million in fiscal 1992 at weighted
average interest rates of approximately 4%, 4% and 6%, respectively. Maximum
borrowings were $105.1 million in fiscal 1994, $105.7 million in fiscal 1993
and $56.0 million in fiscal 1992. The outstanding balances under these lines
totaled $52.1 million and $93.0 million as of May 1, 1994 and May 2, 1993 at
weighted average interest rates of 5% and 4%, respectively.
The decrease in fiscal 1994 in weighted average borrowings under the lines
was attributable to the funding of a $23.7 million sale and leaseback
arrangement for hog production facilities at Brown's and the placement of a
five-year $25.0 million bank term loan, the proceeds of which were used to
reduce short-term borrowings. The decrease was moderated to some extent by
increased working capital needs related to increased levels of inventories and
accounts receivable associated with increased levels of business activity.
25
FINANCIAL DISCUSSION
In connection with its strategy of vertical integration, the Company
expended $14.9 million on the construction of hog production facilities at
Brown's in fiscal 1994. In addition, the Company expended a total of $13.4
million for additional plant and equipment at its various operating companies,
primarily to improve plant operating efficiencies and reduce operating costs. In
the fourth quarter of fiscal 1994, the Company invested $1.0 million for a 25%
interest in the Circle Four joint hog production arrangement based in Milford,
Utah.
In fiscal 1995, the Company plans to expend approximately $85.0 million in
capital improvements, consisting of $45.0 million at the Bladen County plant to
accommodate the second shift, improve fresh pork quality and increase production
capacity for value-added fresh pork products; $24.0 million for additional hog
production facilities at Brown's; an additional investment of $4.0 million in
the Circle Four joint hog production arrangement, and $12.0 million as part
of an ongoing plant modernization program.
These capital expenditures will be funded with the proceeds of a $50.0
million long-term financing which will be placed in the second quarter of fiscal
1995 and anticipated cash flow from operations.
The Company's various debt agreements contain covenants regarding working
capital, current ratio, fixed charges coverage and net worth, and, among other
restrictions, limit additional borrowings, the acquisition, disposition and
leasing of assets, and payments of dividends to stockholders. Additionally,
existing loan covenants contain provisions which substantially limit the amount
of funds available for transfer from its subsidiaries to Smithfield Foods, Inc.
without the consent of certain lenders.
26
FINANCIAL DISCUSSION
Graphs not incorporated by reference
27
FINANCIAL SUMMARY
Smithfield Foods, Inc. and Subsidiaries
(Dollars in thousands, except per share data) May 1, 1994 May 2, 1993 May 3, 1992
Operations
Sales $1,447,300 $1,142,489 $1,050,558
Cost of sales 1,239,740 997,714 910,298
Selling, general and administrative expenses 138,599 110,434 92,163
Interest 12,177 6,697 4,134
Income before extraordinary loss and change in
accounting for income taxes 19,702 2,851 21,635
Extraordinary loss and change in
accounting for income taxes -- 1,138(1) --
Net income 19,702 3,989 21,635
Financial Position
Working capital $ 81,529 $ 64,671 $ 26,672
Total assets 452,279 399,567 277,685
Long-term debt and capital lease obligations 118,942 124,517 49,091
Stockholders' equity 154,950 135,770 113,754
Financial Ratios
Current ratio 1.56 1.57 1.27
Long-term debt to total capitalization 41.9% 46.1% 30.1%
Return on average stockholders' equity 13.1% 2.9% 23.4%
Per Common Share
Income per share before extraordinary loss
and change in accounting for income taxes $ 1.13 $ .15 $ 1.37
Extraordinary loss and change in
accounting for income taxes -- .07(1) --
Net income per common share 1.13 .22 1.37
Book value per common share 9.43 8.32 7.55
Weighted average common shares outstanding 16,768 16,372 15,813
Other Information
Capital expenditures(4) $ 29,291 $ 87,992 $ 74,793
Depreciation expense 21,636 18,652 12,759
Common stockholders of record 1,796 1,867 1,544
Number of employees 8,000 7,000 5,400
1 Change in accounting principle (see Note 4 to Consolidated Financial
Statements).
2 Extraordinary loss.
3 Computed using income before extraordinary loss.
4 Excludes capital expenditures related to acquisitions.
28
April 28, 1991 April 29, 1990 April 30, 1989 May 1, 1988 May 3, 1987 April 27, 1986 April 28, 1985
$1,071,791 $853,401 $774,790 $916,328 $1,046,642 $864,324 $669,138
931,489 755,897 679,814 810,308 948,079 778,186 605,960
81,052 71,831 67,042 67,150 66,377 59,773 45,289
7,739 6,346 4,130 4,670 5,628 5,986 6,004
28,658 7,060 9,814 15,152 9,743 9,193 2,887
-- -- -- -- (2,097)(2) (4,533)(2) --
28,658 7,060 9,814 15,152 7,646 4,660 2,887
$ 35,288 $ 14,991 $ 25,337 $ 21,747 $ 21,419 $ 23,280 $ 22,991
200,797 164,886 152,150 132,933 134,924 130,014 121,594
37,392 28,193 27,596 18,469 26,137 33,591 41,064
71,081 45,359 43,829 48,471 37,055 27,312 21,641
1.46 1.20 1.43 1.41 1.39 1.43 1.47
34.5% 38.3% 38.6% 31.4% 41.7% 55.2% 65.5%
49.1% 15.8% 23.2% 39.1% 30.3%3 40.5%3 13.8%
$ 1.99 $ .48 $ .60 $ .85 $ .55 $ .47 $ .13
-- -- -- -- (.12)(2) (.22)(2) --
1.99 .48 .60 .85 .43 .25 .13
5.29 3.20 2.92 2.60 2.13 1.69 1.23
14,402 14,818 16,242 17,900 18,220 20,184 25,528
$ 26,518 $ 19,555 $ 16,034 $ 6,941 $ 11,094 $ 6,602 $ 6,818
11,382 9,912 8,564 8,643 8,099 7,325 6,990
1,148 1,239 1,334 1,414 1,523 1,395 1,744
5,000 4,200 3,900 4,100 4,700 4,800 4,300
29
CONSOLIDATED BALANCE SHEETS
Smithfield Foods, Inc. and Subsidiaries
(In thousands) May 1, 1994 May 2, 1993
ASSETS
Current assets:
Cash $ 12,350 $ 3,079
Accounts receivable less allowances of $458 and $407 60,586 50,823
Inventories 119,269 94,822
Advances to joint hog production arrangements 20,178 19,830
Prepaid expenses and other current assets 13,946 9,417
Total current assets 226,329 177,971
Property, plant and equipment:
Land 8,039 8,501
Buildings and improvements 108,901 96,180
Machinery and equipment 203,443 192,637
Construction in progress 9,750 10,248
330,133 307,566
Less accumulated depreciation (124,112) (103,127)
Net property, plant and equipment 206,021 204,439
Other assets:
Cost in excess of net assets acquired less accumulated
amortization of $1,456 and $1,411 4,385 4,572
Investments in partnerships 10,672 8,415
Other 4,872 4,170
Total other assets 19,929 17,157
$452,279 $399,567
The accompanying notes are an integral part of these balance sheets.
30
(In thousands) May 1, 1994 May 2, 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 52,135 $ 47,813
Current portion of long-term debt and capital lease
obligations 9,655 6,655
Accounts payable 48,017 33,378
Accrued expenses and other current liabilities 31,840 25,454
Income taxes payable 3,153 --
Total current liabilities 144,800 113,300
Long-term debt and capital lease obligations 118,942 124,517
Other noncurrent liabilities:
Deferred income taxes 11,767 5,590
Pension and post-retirement benefits 5,220 6,814
Minority interest 3,836 2,173
Other 2,764 1,403
Total other noncurrent liabilities 23,587 15,980
Commitments and contingencies
Series B 6.75% cumulative convertible redeemable preferred
stock, $1.00 par value, 1,000 shares issued and outstanding 10,000 10,000
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 1,000,000
shares -- --
Common stock, $.50 par value, authorized 25,000,000
shares; issued 16,713,126 and 16,699,626 shares 8,357 8,350
Additional paid-in capital 47,964 47,818
Retained earnings 106,272 87,245
Treasury stock, at cost, 437,000 shares (7,643) (7,643)
Total stockholders' equity 154,950 135,770
$452,279 $399,567
31
CONSOLIDATED STATEMENTS OF INCOME
Smithfield Foods, Inc. and Subsidiaries
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
(In thousands, except per share data) May 1, 1994 May 2, 1993 May 3, 1992
Sales $1,447,300 $1,142,489 $1,050,558
Costs and expenses:
Cost of sales 1,239,740 997,714 910,298
Selling, general and administrative 138,599 110,434 92,163
Depreciation 21,636 18,652 12,759
Interest 12,177 6,697 4,134
Minority interest 2,525 1,093 684
Plant closing costs -- 3,598 --
Gain on sale of marketable securities -- -- (2,830)
1,414,677 1,138,188 1,017,208
Income before income taxes 32,623 4,301 33,350
Income taxes 12,921 1,450 11,715
Income before cumulative effect of change in
accounting for income taxes 19,702 2,851 21,635
Cumulative effect of change in accounting for
income taxes 1,138
Net income $ 19,702 $ 3,989 $ 21,635
Net income available to common stockholders $ 19,027 $ 3,624 $ 21,635
Income per share:
Before cumulative effect of change in
accounting for income taxes $ 1.13 $ .15 $ 1.37
Cumulative effect of change in
accounting for income taxes -- .07 --
Net income $ 1.13 $ .22 $ 1.37
The accompanying notes are an integral part of these statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
Smithfield Foods, Inc. and Subsidiaries
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
(In thousands) May 1, 1994 May 2, 1993 May 3, 1992
Cash flows from operating activities:
Net income $ 19,702 $ 3,989 $ 21,635
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,010 20,055 13,064
Loss on sale of property, plant
and equipment 1,088 1,169 184
(Increase) decrease in accounts receivable (9,763) (13,899) 3,395
(Increase) decrease in inventories (24,447) (43,327) 8,007
(Increase) decrease in prepaid expenses and
other current assets (4,529) 2,432 (1,869)
Increase in other assets (1,398) (3,489) (1,986)
Increase in accounts payable, accrued
expenses and other liabilities 23,945 7,023 9,886
Cumulative effect of change in accounting
for income taxes -- (1,138) --
Increase (decrease) in deferred income taxes 6,177 (1,023) --
Other -- -- 20
Net cash provided by (used in) operating activities 33,785 (28,208) 52,336
Cash flows from investing activities:
Capital expenditures (29,291) (87,992) (75,693)
Proceeds from sale of property, plant and equipment 4,494 1,112 1,156
Investments in partnerships (2,257) (100) (750)
Advances to joint hog production arrangements (20,178) (19,830) (23,330)
Repayments of advances to joint hog
production arrangements 19,830 23,330 --
Net cash used in investing activities (27,402) (83,480) (98,617)
Cash flows from financing activities:
Net borrowings on notes payable to banks 4,322 6,627 12,152
Proceeds from issuance of long-term debt
and capital lease obligations 5,341 83,036 20,000
Principal payments on long-term debt
and capital lease obligations (7,916) (5,303) (7,682)
Minority interest 1,663 644 (141)
Proceeds from sale of preferred stock -- 10,000 --
Proceeds from sale of common stock -- 16,750 24,999
Proceeds from exercise of options and warrants 153 1,642 3,682
Dividends on preferred stock (675) (365) --
Purchase of treasury stock -- -- (7,643)
Net cash provided by financing activities 2,888 113,031 45,367
Net increase (decrease) in cash 9,271 1,343 (914)
Cash at beginning of year 3,079 1,736 2,650
Cash at end of year $ 12,350 $ 3,079 $ 1,736
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized $ 12,379 $ 9,037 $ 5,213
Income taxes $ 5,574 $ 5,018 $ 10,823
The accompanying notes are an integral part of these statements.
33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Smithfield Foods, Inc. and Subsidiaries
Additional
Common Paid-In Retained Treasury
(In thousands) Stock Capital Earnings Stock
Balance, April 28, 1991 $6,266 $ 2,829 $ 61,986 $ --
Net income -- -- 21,635 --
Sale of common stock 625 24,374 -- --
Exercise of stock options and warrants 884 2,798 -- --
Purchase of treasury stock -- -- -- (7,643)
Balance, May 3, 1992 7,775 30,001 83,621 (7,643)
Net income -- -- 3,989 --
Sale of common stock 500 16,250 -- --
Exercise of stock options 75 1,567 -- --
Dividends on preferred stock -- -- (365) --
Balance, May 2, 1993 8,350 47,818 87,245 (7,643)
Net income -- -- 19,702 --
Exercise of stock options 7 146 -- --
Dividends on preferred stock -- -- (675) --
Balance, May 1, 1994 $8,357 $47,964 $106,272 $ (7,643)
The accompanying notes are an integral part of these statements.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Smithfield Foods, Inc., and subsidiaries (the "Company"). The Company's
principal subsidiaries include Brown's of Carolina, Inc. ("Brown's"), Esskay,
Inc. ("Esskay"), Gwaltney of Smithfield, Ltd. ("Gwaltney"), Patrick Cudahy
Incorporated ("Patrick Cudahy") and The Smithfield Packing Company,
Incorporated ("Smithfield Packing"). All material inter company balances and
transactions have been eliminated.
Fiscal Year
The Company's fiscal year is the 52 or 53 week period which ends on the
Sunday nearest April 30.
Inventories
The Company's inventories are valued at the lower of first-in, first-out
(FIFO) cost or market. Inventories consist of the following:
(In thousands) May 1, 1994 May 2, 1993
Fresh and processed meats $ 90,219 $75,273
Livestock and manufacturing
supplies 19,809 12,976
Other 9,241 6,573
$119,269 $94,822
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Buildings and improvements
are depreciated over periods from 10 to 40 years. Machinery and equipment is
depreciated over periods from 3 to 25 years. Maintenance and repairs are charged
to expense as incurred. Improvements and betterments are capitalized. Gains and
losses from dispositions or retirements of property, plant and equipment are
recognized currently.
In fiscal 1994, the Company revised the estimated useful lives of certain
assets to more accurately reflect their economic useful lives and to better
align them with those generally used in the meat processing industry. This
change was made to assets acquired after April 1990 and is reflected on a
prospective basis beginning in November 1993. The lives of the newly acquired
buildings and improvements were revised from 10 to 40 years to 20 to 40 years.
The lives of the newly acquired machinery and equipment were revised from 3 to
12 years to 10 to 25 years. This change reduced depreciation charges and
increased net income by $3,868,000 and $2,336,000, respectively, in fiscal 1994.
Interest on capital projects is capitalized during the construction period.
Total interest capitalized was $612,000 in fiscal 1994, $1,860,000 in fiscal
1993 and $1,328,000 in fiscal 1992. Repair and maintenance expenses totaled
$40,713,000, $36,830,000 and $31,731,000 in fiscal 1994, 1993 and 1992,
respectively.
Other Assets
Cost in excess of net assets acquired is amortized over periods ranging from
10 to 40 years. Organization costs are amortized over a five-year period.
Deferred debt issuance costs are amortized over the terms of the related loan
agreements. Start-up costs associated with hog production are amortized over a
three-year period.
Environmental Expenditures
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and/or cleanups are probable and the cost can be reasonably
estimated. Generally, the timing of these accruals coincides with the Company's
commitment to a formal plan of action.
Self-Insurance Programs
The Company is self-insured for certain levels of general and vehicle
liability, worker's compensation and health care coverage. Estimated costs of
these self-insurance programs are accrued based upon projected settlements for
known and anticipated claims. Any resulting adjustments to previously recorded
reserves are reflected in current operating results.
Commodity Futures
In connection with its hog production activities and meat processing
operations, the Company, from time-to-time, enters into commodity futures
contracts to reduce the risk of adverse price changes on the profitability of
hog production and future sales commitments. Gains and losses resulting from
changes in market value are recognized in income currently. As of May 1, 1994,
the Company had open contracts for all commodities with a total market value
of $42,067,000 and deposits with brokers for commodity futures contracts of
$2,232,000.
Income Taxes
In fiscal 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes." Under SFAS No. 109,
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
the difference between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period. Prior to fiscal 1993, deferred income tax expenses or credits
were recorded to reflect the tax consequences of timing differences between the
recording of income and expensesfor financial reporting purposes and for
purposes of filing federal income tax returns at income tax rates in effect when
the differences arose.
Income Per Share
Income per share is computed using the weighted average shares of common
stock and dilutive common stock equivalents (options and warrants) outstanding
during the respective periods. Net income available to common stockholders is
net income less dividends on preferred stock. The number of weighted average
shares used in calculating income per share was 16,768,000 in fiscal 1994,
16,372,000 in fiscal 1993 and 15,813,000 in fiscal 1992.
Reclassifications
Certain prior year balances have been reclassified to conform to 1994
presentations.
NOTE 2 - JOINT HOG PRODUCTION
ARRANGEMENTS
Smithfield-Carroll's
The Company has an arrangement with affiliates of Carroll's Foods, Inc.
("CFI") to produce hogs for the Company's meat processing plants. The
arrangement involves: (1) Smithfield-Carroll's Farms, a partnership owned
jointly by the Company and Carroll's Farms of Virginia, Inc. ("CFAV"), which
owns the hog raising facilities, and (2) a long-term purchase contract between
the Company and Carroll's Foods of Virginia, Inc. ("CFOV"), which leases and
operates the facilities, that obligates the Company to purchase all the hogs
produced by CFOV at prices which are equivalent to market at the time of
delivery. A director of the Company is the president and a director of CFI, CFAV
and CFOV. In addition, the Company has a long-term agreement to purchase hogs
from CFI at prices which, in the opinion of management, are equivalent to
market.
As of May 1, 1994 and May 2, 1993, the Company had investments of $7,757,000
and $7,701,000, respectively, in the partnership which are accounted for using
the equity method. In addition, as of May 1, 1994, the Company had $18,640,000
of working capital and construction loans outstanding to the partnership. These
demand loans are expected to be repaid in the next fiscal year. Shown below
is unaudited summarized financial information relative to the partnership.
(In thousands) May 1, 1994 May 2, 1993
Current assets $ 847 $ 1,436
Property and equipment 66,448 69,209
Other assets 383 503
$67,678 $71,148
Current liabilities $25,461 $22,927
Long-term debt 26,812 32,920
Partners' equity 15,405 15,301
$67,678 $71,148
Substantially all revenues of the partnership consist of lease payments
from CFOV which cover debt service, depreciation charges and other operating
expenses. For the fiscal years 1994, 1993 and 1992, revenues were $9,706,000,
$8,242,000 and $6,545,000, respectively.
Pursuant to the long-term purchase contract, the Company purchased
$62,348,000, $52,871,000 and $42,002,000 of live hogs from CFOV in fiscal years
1994, 1993 and 1992, respectively. The contract resulted in decreased raw
material costs (as compared to market costs) of $2,223,000, $2,892,000 and
$2,585,000 in fiscal 1994, 1993 and 1992, respectively.
Pursuant to the agreement with CFI, the Company purchased $127,849,000,
$87,477,000 and $62,993,000 of hogs in fiscal 1994, 1993 and 1992, respectively.
Circle Four
In fiscal 1994, the Company entered into a joint hog production arrangement
with three of its principal hog suppliers to produce hogs in the state of Utah.
The chief executive officers of two of the suppliers serve as directors of the
Company. Each of the participants invested $1,000,000 in exchange for an equal
25% interest in the arrangement. The Company accounts for its interest using the
equity method. In fiscal 1994, the Company transferred certain real estate and
related costs to the arrangement for an aggregate sales price of $1,694,000,
which represented the historical cost of the assets to the Company.
B & G
In April 1994, Brown's entered into a joint hog production arrangement with
a company owned by the daughter and son-in-law of the chairman, president and
chief executive officer of the Company. The arrangement involves the leasing of
hog production facilities to
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
Brown's and the production of hogs by Brown's on a
contractual basis. Profits and losses are shared equally
under the arrangement. Each participant invested
$1,200,000 and loaned an additional $1,100,000 to the
arrangement. In fiscal 1994, Brown's sold hog produc-
tion facilities to the arrangement for $3,302,000 which
represents the historical cost of the facilities to Brown's.
As of May 1, 1994, the arrangement had advanced
$1,295,000 to Brown's for working capital. All hogs pro-
duced by the arrangement will be sold to the Company.
There were no sales during fiscal 1994.
NOTE 3 - DEBT
Long-Term
Debt Long-term debt consists of the following:
(In thousands) May 1, 1994 May 2, 1993
Notes payable to institutional lenders:
6.24% notes, payable through
November 1998 $ 5,085 $ --
7.00% notes, payable through
September 1998 2,521 --
7.15% notes, payable through
October 1997 6,628 8,239
8.41% notes, payable through
February 2013 25,000 25,000
9.80% notes, payable through
August 2003 10,688 11,438
9.85% notes, payable through
November 2006 16,667 18,000
10.25% notes, payable through
January 1994 -- 454
10.75% notes, payable through
August 2005 11,250 12,250
11.00% notes, payable through
October 1994 500 1,000
12.75% notes, payable through
August 1994 -- 5,950
Notes payable to banks:
6.48% bank term loan,
payable through
September 1998 24,100 --
7.10% bank term loan,
payable through
September 1997 3,198 3,606
Commitments classified as
long-term debt -- 45,235
105,637 131,172
Less current portion (8,885) (6,655)
$ 96,752 $124,517
Scheduled maturities of long-term debt are as follows:
(In thousands)
Fiscal year
1995 $ 8,885
1996 8,980
1997 11,510
1998 12,894
1999 19,591
Thereafter 43,777
$105,637
In fiscal 1994, the Company placed a five-year 6.48% $25,000,000 term loan
with a bank and a five-year 7.00% $2,800,000 loan with an institutional lender.
In addition, the Company refinanced its 12.75% notes with five-year 6.24% notes.
In fiscal 1993, the Company placed a 20-year 8.41% $25,000,000 loan, a five-year
7.15% $9,000,000 loan and a five-year 7.10% $3,800,000 loan with institutional
lenders. Notes payable to institutional lenders and banks are collateralized by
substantially all of the assets of Gwaltney and Smithfield Packing.
The fair value of long-term debt as of May 1, 1994 was $99,926,000, based on
the market value of debt with similar maturities and covenants.
Lines of Credit
The Company has aggregate lines of credit of $120,000,000. The lines have no
material compensating balance requirements, but require commitment fees based on
the unused portions of the lines. Borrowings under the lines of credit are
secured by substantially all of the Company's inventories and accounts
receivable. Weighted average borrowings under the lines were $66,586,000 in
fiscal 1994, $79,206,000 in fiscal 1993 and $29,439,000 in fiscal 1992 at
weighted average interest rates of 4%, 4% and 6%, respectively. Maximum
borrowings were $105,079,000 in fiscal 1994, $105,653,000 in fiscal 1993 and
$55,982,000 in fiscal 1992. The outstanding balances under these lines totaled
$52,135,000 and $93,048,000 as of May 1, 1994 and May 2, 1993 at weighted
average interest rates of 5% and 4%, respectively.
Debt Covenants
The Company's various debt agreements contain covenants regarding current
ratio, fixed charges coverage, net worth, and, among other restrictions, limit
additional borrowings, the acquisition, disposition and leasing of assets and
payments of dividends to
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
stockholders. Additionally, existing loan covenants contain provisions which
substantially limit the amount of funds available for transfer from subsidiaries
to the parent company without the consent of certain lenders.
NOTE 4 - INCOME TAXES
Income tax expense consists of the following:
May 1, May 2, May 3,
(In thousands) 1994 1993 1992
Current tax expense:
Federal $ 7,559 $2,197 $12,152
State 1,727 16 935
9,286 2,213 13,087
Deferred tax expense
(benefit):
Federal 3,035 (1,079) (1,195)
State 600 316 (177)
3,635 (763) (1,372)
$12,921 $1,450 $11,715
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
May 1, May 2, May 3,
(In thousands) 1994 1993 1992
Federal income taxes at
statutory rate $11,418 $1,462 $11,339
State income taxes, net of
federal tax benefit 1,513 219 500
Employment incentive
tax credits (226) (77) (116)
Reduction in tax reserves -- (250) --
Other 216 96 (8)
$12,921 $1,450 $11,715
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for income tax and financial reporting purposes.
The sources of these differences and the related tax effects are as follows:
May 1, May 2, May 3,
(In thousands) 1994 1993 1992
Accelerated depreciation $3,685 $3,765 $ 177
Alternative minimum tax -- (2,516) --
Accrual of employee
benefit costs (156) (577) (1,315)
Accrual of casualty
insurance (1,038) (529) --
Plant closing costs 661 (727) --
Start-up costs 467 427 --
Inventory cost capitalization (71) (295) 64
Other 87 (311) (298)
$3,635 $ (763) $(1,372)
The tax effects of temporary differences consist of the following:
May 1, May 2,
1994 1993
Deferred tax assets:
Employee benefits $ 7,003 $ 5,252
Alternative minimum
tax credit 2,540 2,516
Plant closing costs 83 727
Net operating loss
carryforwards 867 --
Inventories 814 542
Accrued expenses 1,071 794
$12,378 $ 9,831
Deferred tax liabilities:
Property, plant and
equipment $13,791 $ 9,601
Investment in subsidiary 715 715
Start-up costs 1,033 572
$15,539 $10,888
During fiscal 1993, as discussed in Note 1, the Company adopted SFAS No.
109, "Accounting for Income Taxes," which requires the use of the liability
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
method in accounting for income taxes. The cumulative effect of adopting
this change totaled $1,138,000 ($.07 per share) and has been reflected in the
statements of income as the cumulative effect of a change in accounting for
income taxes.
As of May 1, 1994 and May 2, 1993, the Company had $8,470,000 and
$4,533,000, respectively, of deferred taxes assets included in prepaid expenses
and other current assets. The Company had no valuation allowance related to
income tax assets as of May 1, 1994 or May 2, 1993, and there was no change in
the valuation allowance during fiscal 1994 or 1993.
NOTE 5 - ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
(In thousands) May 1, 1994 May 2, 1993
Payroll and related benefits $11,599 $ 9,119
Self-insurance reserves 11,690 8,876
Pension costs 702 530
Other 7,849 6,929
$31,840 $25,454
NOTE 6 - STOCKHOLDERS' EQUITY
AND PREFERRED STOCK
Issuance of Common Stock
In fiscal 1993, the Company issued 1,000,000 shares of its common stock for
$16,750,000 in a private transaction (see Note 9). In fiscal 1992, the Company
issued 1,250,000 shares of its common stock in a public offering.
Preferred Stock
The Company has 1,000,000 shares of $1.00 par value preferred stock
authorized, of which 999,000 shares are unissued. The Board of Directors is
authorized to issue preferred stock in series and to fix by resolution the
designation, dividend rate, redemption provisions, liquidation rights, sinking
fund provisions, conversion rights and voting rights of each series of preferred
stock.
In fiscal 1993, the Company authorized and issued 1,000 shares of Series B
6.75% cumulative convertible redeemable preferred stock in a private transaction
for $10,000,000. These shares are convertible into 465,000 shares of the
Company's common stock at $21.50 per share. The shares are mandatorily
redeemable in fiscal 2003 at $10,000 per share plus accumulated and unpaid
dividends and have an equivalent liquidation preference.
In fiscal 1992, the Board of Directors authorized 25,000 shares of Series A
junior participating preferred stock as discussed below.
Stock Options and Warrants
Under the Company's 1984 Stock Option Plan ("1984 Plan"), officers and
certain key employees were granted incentive and nonstatutory stock options to
purchase shares of the Company's common stock for periods not exceeding 10 years
at prices that were not less than the fair market value of the common stock on
the dates of option grants. Stock appreciation rights which are exercisable upon
a change in control of the Company are attached to the options granted pursuant
to the 1984 Plan. The Company granted options for 1,400,000 shares of common
stock under the 1984 Plan, which expired in May 1994.
In fiscal 1993, the Company adopted the 1992 Stock Incentive Plan ("1992
Plan"). Under the plan, management and other key employees may be granted
nonstatutory stock options to purchase shares of the Company's common stock for
periods not exceeding 10 years at prices that are not less than 150% of the
fair market value of the common stock on the dates of the option grants. The
Company has reserved 1,250,000 shares of common stock under the 1992 Plan. In
fiscal 1994, the Company granted options for 755,500 shares of common stock
under the 1992 Plan which vest after five years.
The following is a summary of transactions for the 1984 Plan and 1992 Plan
during fiscal 1993 and 1994.
Number of Shares Per Share Range
Outstanding options
at May 3, 1992 1,060,500 $ 5.50-8.13
Exercised (150,500) 5.50-8.13
Outstanding options
at May 2, 1993 910,000 5.50-8.13
Granted 755,500 23.06
Exercised (13,500) 8.13
Outstanding options
at May 1, 1994 1,652,000 $5.50-23.06
Options exercisable
at May 1, 1994 896,500 $ 5.50-8.13
In fiscal 1992, warrants to purchase 1,666,666 shares of the Company's
common stock were exercised at $.75 per share.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
Preferred Share Purchase Rights
In fiscal 1992, the Company adopted a preferred share purchase rights plan
(the "Rights Plan") and declared a dividend of one preferred share purchase
right (a "Right") on each outstanding share of common stock. Under the terms of
the Rights Plan, if the Company is acquired in a merger or other business
combination transaction, each Right will entitle its holder to purchase, at the
Right's then current exercise price, a number of the acquiring company's common
shares having a market value of twice such price. In addition, if a person or
group acquires 20% (or other applicable percentage, as summarized in the Rights
Plan) or more of the outstanding common stock, each Right will entitle its
holder (other than such person or members of such group) to purchase, at the
Right's then current exercise price, a number of shares of common stock having a
market value of twice such price.
Each Right will entitle its holder to buy five ten-thousandths of a share of
Series A junior participating preferred stock, par value $1.00 per share, at an
exercise price of $75 subject to adjustment. Each share of Series A junior
participating preferred stock will entitle its holder to 1,000 votes and will
have an aggregate dividend rate of 1,000 times the amount, if any, paid to
holders of common stock. Currently, 25,000 shares of Series A junior
participating preferred stock have been reserved. The Rights will expire
in fiscal 2002 unless previously exercised or redeemed at the option of the
Board of Directors for $.005 per Right. Generally, each share of common stock
issued after May 31, 1991 will have one Right attached.
NOTE 7 - RETIREMENT PLANS
The Company and its subsidiaries sponsor several defined benefit pension
plans covering substantially all employees. Pension expense for fiscal 1994,
1993 and 1992 was $2,078,000, $2,301,000 and $2,925,000, respectively. It is the
Company's policy to fund the plans based on the minimum contribution required
under ERISA. The plans' assets consist of listed corporate stocks, corporate
and government bonds, insurance contracts and cash and cash equivalents. The
status of the Company's plans is as follows:
May 1, 1994 May 2, 1993
Overfunded Underfunded Overfunded Underfunded
(In thousands) Plans Plans Plans Plans
Accumulated benefit obligation $ 14,537 $22,952 $12,071 $ 22,914
Vested benefit obligation $ 12,510 $22,367 $10,394 $ 22,401
Plan assets at fair value $ 22,595 $17,830 $19,500 $ 18,116
Projected benefit obligation (21,005) (23,120) (18,185) (23,105)
Plan assets in excess of (less than) projected benefit
obligation 1,590 (5,290) 1,315 (4,989)
Items not recorded on balance sheet:
Unrecognized net assets at transition (362) -- (453) --
Unrecognized net loss (gain) due to past experience
different from assumptions made 1,413 (288) (539) (574)
Prior service cost (benefit) not yet recognized in
net periodic pension cost (640) 1,107 1,251 1,138
Prepaid (accrued) pension costs $ 2,001 $ (4,471) $1,574 $ (4,425)
1994 1993 1992
Net pension expense included the following:
Service costs-benefits earned during the year $ 1,690 $1,585 $ 1,684
Interest cost on projected benefit obligation 2,890 2,912 2,775
Actual return on plan assets (3,185) (3,303) (3,247)
Amortization of net assets at transition and
deferred gains 683 1,107 1,713
Net pension expense $ 2,078 $2,301 $ 2,925
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
In determining the projected benefit obligation in fiscal 1994 and 1993, the
weighted average assumed discount rate was 7% and 7.5%, respectively, while the
assumed rate of increase in future compensation was 6% in both years. The
weighted average expected long-term rate of return on plan assets was 7.5% in
each of fiscal 1994 and 1993. In determining net periodic pension cost,
unrecognized gains or losses and prior service costs or benefits are amortized
over the weighted average service lives of the employees.
In fiscal 1993, the Company curtailed certain pension plans covering
substantially all of the former bargaining and non-bargaining employees of
Esskay. Due to the maturity of these plans, the curtailment caused no
significant change in their status, and, therefore, no curtailment gains or
losses were recognized.
The Company provides health care and life insurance benefits for certain
retired employees at Esskay and Patrick Cudahy. Certain vested benefits for
employees retiring at Esskay were recorded at the date of acquisition. The
liabilities of Esskay and Patrick Cudahy are accrued. The total cost to provide
retiree benefits was $994,000, $746,000 and $928,000 in fiscal 1994, 1993 and
1992, respectively. The adoption of SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions" in fiscal 1994 resulted in no
additional expense and is not material to the Company on an overall basis.
NOTE 8 - LEASE AND SERVICE
OBLIGATIONS
The Company leases transportation equipment under operating leases ranging
from one to 10 years with options to cancel at earlier dates. In addition, the
Company has a long-term maintenance agreement related to this equipment.
Maintenance fees are based upon fixed monthly charges for each vehicle and the
maintenance facility itself and contingent fees based upon transportation
equipment usage. The amounts shown below as minimum rental commitments do not
include contingent maintenance fees.
The Company has an agreement, expiring in fiscal 2004, to use a cold storage
warehouse owned by a company, 18% of whose capital stock is owned by a group of
the Company's officers and directors. The Company has agreed to pay prevailing
competitive rates for use of the facility, subject to a guaranteed minimum
annual fee of $1,200,000. In fiscal 1994, 1993 and 1992, the Company paid
$2,474,000, $2,390,000 and $2,237,000, respectively, in fees for use of the
facility.
The Company has an agreement, expiring in fiscal 2008, to use a cold storage
warehouse owned by a partnership, 50% of which is owned by the Company. The
Company has agreed to pay prevailing competitive rates for use of the facility,
subject to a guaranteed minimum annual fee of $2,150,000. In fiscal 1994 and
1993, the Company paid $2,810,000 and $1,569,000, respectively, in fees for use
of the facility. As of May 1, 1994 and May 2, 1993, the Company had investments
of $645,000 and $714,000, respectively, in the partnership which is accounted
for using the equity method. Under certain conditions, the Company is obligated
to purchase the other 50% partnership interest for $750,000.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements as of May 1, 1994 are as follows:
(In thousands)
Fiscal year
1995 $ 9,939
1996 8,969
1997 6,615
1998 5,708
1999 2,879
Thereafter 6,579
$40,689
Rental expense was $12,159,000 in fiscal 1994, $10,525,000 in fiscal 1993
and $8,964,000 in fiscal 1992. Rental expense in fiscal 1994, 1993 and 1992
included $2,137,000, $1,955,000 and $1,660,000 of contingent maintenance fees,
respectively.
In fiscal 1994, the Company entered into a 12-year sale and leaseback
arrangement for certain hog production facilities at Brown's. These lease
agreements provide for an early termination at predetermined amounts after 10
years.
Property, plant and equipment under capital leases as of May 1, 1994 consist
of land of $1,906,000, buildings and improvements of $15,215,000 and machinery
and equipment of $6,555,000, net of accumulated amortization of $2,053,000.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
Future minimum lease payments for assets under capital leases and the
present value of the net minimum lease payments as of May 1, 1994 are as
follows:
(In thousands)
Fiscal year
1995 $ 2,659
1996 2,750
1997 2,822
1998 2,900
1999 3,016
Thereafter 22,238
36,385
Less amounts representing interest (13,425)
Present value of net minimum obligations 22,960
Less current portion (770)
Long-term capital lease obligations $ 22,190
NOTE 9 - RELATED PARTY
TRANSACTIONS
The Company's chairman, president and chief executive officer is an officer
and the majority owner of the capital stock of a company to which the Company
made sales of fresh pork and processed meat products totaling $321,000, $349,000
and $487,000 in fiscal 1994, 1993 and 1992, respectively. In fiscal 1994, 1993
and 1992, the Company purchased raw materials totaling $8,159,000, $7,986,000
and $5,132,000, respectively, from a company which is 48% owned by the
chairman's children.
A director of the Company is the chairman of the board of a company from
which the Company made purchases of automotive parts and equipment, as well as
maintenance and leasing services, totaling $515,000, $526,000 and $256,000 in
fiscal 1994, 1993 and 1992, respectively. In addition, the Company leases
substantially all of its automobiles under three-year leases arranged by this
company. As of May 1, 1994, the Company was obligated to make a total of
$777,000 in future lease payments under these leases.
In fiscal 1993, the Company sold 1,000,000 shares of its common stock in a
private transaction to CFI (see Notes 2 and 6) for $16,750,000.
In fiscal 1992, the Company purchased 200,000 shares of its common stock
from CFI (see Note 2) for $3,600,000. A director of the Company is the
chairman and chief executive officer and a director of Murphy Farms, Inc.
("MFI"). The Company has a long-term agreement to purchase hogs from MFI at
prices, which in the opinion of management, are equivalent to market. Pursuant
to this agreement with MFI, the Company purchased $197,997,000, $159,153,000
and $100,274,000 of hogs in fiscal 1994, 1993 and 1992, respectively.
NOTE 10 - COMMITMENTS AND
CONTINGENCIES
As of May 1, 1994, the Company had outstanding commitments for construction
of hog production facilities and plant expansion projects of approximately
$30,900,000.
The Company and its subsidiaries are defendants in various lawsuits and
claims arising in the ordinary course of business. In the opinion of management,
any ultimate liability with respect to these matters will not have a material
effect on the Company's consolidated financial position.
Like other participants in the meat processing industry, the Company is
subject to various laws and regulations administered by federal, state and other
government entities, including the Environmental Protection Agency and
corresponding state agencies such as the Virginia State Water Control Board
("SWCB"), the North Carolina Division of Environmental Management, the United
States Department of Agriculture and the Occupational Safety and Health
Administration. Management believes that the Company complies with all such laws
and regulations in all material respects, except as set forth immediately below,
and that continued compliance with these standards will not have a material
effect on the Company's financial position.
The wastewater discharge permits for the Company's major manufacturing
plants in Smithfield, Virginia, currently impose more stringent phosphorous and
ammonia effluent limitations than the plants can meet. The plants are currently
being operated in compliance with less stringent effluent limitations under an
administrative consent order entered into with the SWCB, pending reissuance of
the permits, for which timely applications have been filed. In May 1991, the
Company elected to comply with the SWCB's
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Smithfield Foods, Inc. and Subsidiaries
regulations by agreeing to connect the Company's wastewater treatment plants
to the regional sewer system operated by the Hampton Roads Sanitation District.
The Company will incur sewer charges in addition to the existing costs of
effluent treatment beginning in approximately two years. The sewer charges that
will be incurred will be accounted for as current period charges in the year in
which such costs are incurred. The Company expects to incur approximately
$2,000,000 in capital costs to upgrade the existing systems and connect to the
regional sewer system.
NOTE 11 - PLANT CLOSING COSTS
In fiscal 1993, the Company recorded a nonrecurring charge of $3,598,000
related to the closing of Esskay's Baltimore, Maryland plant.
NOTE 12 - GAIN ON SALE OF
MARKETABLE SECURITIES
In fiscal 1992, the Company recorded nonrecurring gains on the sale of
marketable securities of $2,830,000.
NOTE 13 - QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
Quarter
(In thousands, except per share data) First Second Third Fourth
1994
Sales $299,230 $354,873 $428,982 $364,215
Gross profit 38,686 46,038 66,393 56,443
Net income (loss) (369) 923 11,749 7,399
Net income (loss) per share (.03) .04 .69 .43
1993
Sales $228,256 $265,598 $339,425 $309,210
Gross profit 29,461 35,173 40,524 39,617
Income before cumulative effect of change
in accounting for income taxes 1,546 261 508 536
Cumulative effect of change in accounting
for income taxes 1,138 -- -- --
Net income 2,684 261 508 536
Net income per share:
Before cumulative effect of change in
accounting for income taxes .10 .02 .02 .02
Cumulative effect of change in
accounting for income taxes .07 -- -- --
Net income per share .17 .02 .02 .02
43
REPORT OF MANAGEMENT
The management of Smithfield Foods, Inc. and its subsidiaries has the
responsibility for preparing the accompanying financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles applied on a consistent basis. The
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
The Company's financial statements have been audited by Arthur Andersen &
Co., independent public accountants, elected by the stockholders. Management
has made available to Arthur Andersen & Co. all of the Company's financial
records and related data as well as the minutes of stockholders' and directors'
meetings. Furthermore, management believes that all representations made to
Arthur Andersen & Co. during its audits were valid and appropriate.
Management has established and maintains a system of internal control that
provides reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial reporting.
The system of internal control provides for appropriate division of
responsibilities among employees and is based upon policies and procedures that
are communicated to those with significant roles in the financial reporting
process. Management continually monitors the system of internal control for
compliance and updates this system as it deems necessary.
Management believes that, as of June 7, 1994, the Company's system of
internal control is adequate to accomplish the objectives discussed herein.
(Signature - of Joseph W. Luter, III)
JOSEPH W. LUTER, III
Chairman, President and Chief Executive Officer
(Signature - of Aaron D. Trub)
AARON D. TRUB
Vice President, Secretary and Treasurer
(Signature - of C. Larry Pope)
C. LARRY POPE
Controller
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Smithfield Foods, Inc.:
We have audited the accompanying consolidated balance sheets of Smithfield
Foods, Inc. (a Delaware corporation) and subsidiaries as of May 1, 1994 and May
2, 1993, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended May 1, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smithfield Foods, Inc. and
subsidiaries as of May 1, 1994 and May 2, 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
May 1, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 4 to the consolidated financial statements,
effective May 4, 1992, the Company changed its method of accounting for income
taxes.
(Signature - of Arthur Andersen & Co.)
ARTHUR ANDERSEN & CO.
Richmond, Virginia,
June 7, 1994.
45
OFFICERS AND DIRECTORS
OFFICERS Richard S. Patrick Aaron D. Trub DIRECTORS
Vice President, Secretary
Corporate Foodservice
Dean W. Jacobson Joseph W. Luter, III
Assistant Vice President, Chairman of the Board, President
Joseph W. Luter, III Timothy A. Seely Refinery and Chief Executive Officer
Chairman, President and Vice President, Smithfield Foods, Inc.
Chief Executive Officer Sales and Marketing,
Fresh Meats F. J. Faison, Jr.
Elaine C. Abicht THE SMITHFIELD PACKING President
Vice President, Aaron D. Trub COMPANY, INCORPORATED Carroll's Foods, Inc.,
Purchasing Secretary and Treasurer Warsaw, NC,
hog and turkey producer
Jeffrey M. Luckman Norman B. Fisher Joseph W. Luter, III
Vice President, Assistant Vice President, Chairman and Chief
Livestock Procurement Human Resources Executive Officer Joel W. Greenberg
Commodity Analyst
James D. Schloss Bobby L. Johnson, Jr. Robert W. Manly Alaron Trading Corp.,
Vice President, Assistant Vice President, President and Chief Chicago, IL,
Marketing, Distribution Operating Officer commodities brokerage firm
Design Foods
P . Scott Pesesky Henry L. Morris Cecil W. Gwaltney
Wendell R. Skinner Assistant Vice President, Executive Vice President Chairman of the Board
Vice President, Controller Gwaltney Motor Co.,
Distribution Lloyd R. Enix, Jr. Smithfield, VA,
Larry R. Seekford Vice President, automobile dealership
Aaron D. Trub, Assistant Vice President, Operations
Vice President, Financial Analysis
Secretary and Treasurer William B. Hunter George E. Hamilton, Jr.
Walter H. Voorhies, II Vice President, Retired; Former President and
Carl J. Wood, Jr. Assistant Vice President, Sales and Marketing, Chief Operating Officer
Vice President, Quality Assurance Processed Meats The Smithfield Packing
Engineering Company, Incorporated
Thomas L. Ross
C. Larry Pope PATRICK CUDAHY Vice President, Richard J. Holland
Controller INCORPORATED Human Resources Chairman of the Board
The Farmers Bank,
Raymond L. Edwards J. Michael Townsley Windsor, VA
Assistant Vice President, Joseph W. Luter, III Vice President,
Corporate Accounting Chairman and Chief Sales and Marketing, Roger R. Kapella
Executive Officer Fresh Meats President and Chief
Lawrence D. Lively Operating Officer
Assistant Vice President, Roger R. Kapella Aaron D. Trub Patrick Cudahy Incorporated
Environmental Affairs President and Chief Secretary and Treasurer
Operating Officer Lewis R. Little
Jeffrey A. Deel Jere T. Null President and Chief
Assistant Controller Dan W. Habighorst Controller Operating Officer
Vice President, Gwaltney of Smithfield, Ltd.
Human Resources Milton Z. Bailey
Assistant Vice President, Robert W. Manly
Operating Companies Carolina Food Processors President and Chief
Kenneth V . Nelson Division Operating Officer
Vice President, The Smithfield Packing
GWALTNEY OF Operations and Labor Company, Incorporated
SMITHFIELD, LTD. Joseph T. Greskevitch, Jr.
Peter Y. Ni Assistant Vice President,
Joseph W. Luter, III Vice President, Cost Accounting Wendell H. Murphy
Chairman and Chief Manufacturing Chairman of the Board and
Executive Officer Jean D. Moody Chief Executive Officer
James E. Steinke Assistant Vice President, Murphy Farms, Inc.,
Lewis R. Little Vice President, Credit Rose Hill, NC,
President and Chief Sales and Marketing hog producer
Operating Officer John R. Moody
Stephen W. Rodey Assistant Vice President,
H. Dean Garrett Treasurer Fresh Meats Aaron D. Trub
Vice President, Vice President,
Operations David J. Schulz G. K. Nelms, III Secretary and Treasurer
Controller Assistant Vice President, Smithfield Foods, Inc.
Paul L. Harp Landover Division
Vice President,
Sales and Marketing, John A. Oliver
Processed Meats Assistant Vice President,
Kinston Division
46
CORPORATE INFORMATION
Corporate Headquarters Form 10-K Report
501 North Church Street Copies of the Company's Form 10-K Annual Report
Smithfield, VA 23430 are available without charge, upon written request to:
Corporate Secretary, Smithfield Foods, Inc.,
Transfer Agent and Registrar 501 North Church Street, Smithfield, VA 23430.
First Union National Bank
Shareholder Services Group Common Stock Data
Two First Union Center The Common Stock of the Company is traded in the
Charlotte, NC 28288 national over-the-counter market and is authorized
for quotation on The Nasdaq National Market under
Independent Public Accountants the symbol "SFDS." The following table shows the
Arthur Andersen & Co. high and low sales prices of the Common Stock
Richmond, VA 23219 on The Nasdaq National Market for each quarter of
fiscal 1994 and 1993.
Annual Meeting
The Annual Meeting of Stockholders
will be held on August 31, 1994,
at 2 p.m. at the Omni Richmond
Hotel, 100 South 12th Street,
Richmond, VA 23219.
1994 1993
Quarter High Low High Low
First $17.25 $14.00 $18.75 $14.00
Second 18.00 14.75 21.75 15.88
Third 20.75 14.75 21.25 16.63
Fourth 24.75 19.63 18.00 12.75
Smithfield Foods, Inc. has not paid dividends on
its common stock since its incorporation.
(Recycle Logo) The majority of this Annual Report was printed on recycled
paper.
Project and Editorial Coordination: Readmore Communications, Inc.
Phoenix Communications, Ltd., Design: VSA Partners, Illustrations;
James Noel Smith