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 February 1, 1998
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.
999 Waterside Drive, Suite 900
Norfolk, Virginia 23510
(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 March 16, 1998
- ----------------------------- -----------------------------------------
Common Stock, $.50 par value 37,537,362
1-16
SMITHFIELD FOODS, INC.
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - February 1, 1998 and April 27, 1997 3-4
Consolidated Condensed Statements of Income - 14 Weeks Ended February 1,
1998 and 13 Weeks Ended January 26, 1997 and 40 Weeks Ended February 1,
1998 and 39 Weeks Ended January 26, 1997 5
Consolidated Condensed Statements of Cash Flows - 40 Weeks Ended February 1, 1998
and 39 Weeks Ended January 26, 1997 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9-12
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 6. Exhibits and Reports on Form 8-K 14-15
2-16
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) February 1, 1998 April 27, 1997
---------------- --------------
ASSETS (Unaudited)
Current assets:
Cash $ 36,416 $ 25,791
Accounts receivable, net 161,227 166,094
Inventories 252,460 253,276
Prepaid expenses and other current assets 55,101 43,217
---------- ---------
Total current assets 505,204 488,378
---------- ---------
Property, plant and equipment 687,926 614,393
Less accumulated depreciation (223,336) (187,518)
---------- ---------
Net property, plant and equipment 464,590 426,875
---------- ---------
Other assets:
Investments in partnerships 53,287 44,582
Other 39,487 35,419
---------- ---------
Total other assets 92,774 80,001
---------- ---------
$1,062,568 $ 995,254
========== =========
See accompanying notes to consolidated condensed financial statements.
3-16
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) February 1, 1998 April 27, 1997
- -------------- ---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Notes payable $ - $ 77,500
Current portion of long-term debt and capital lease obligations 9,036 7,800
Accounts payable 120,836 132,268
Accrued expenses and other current liabilities 143,077 106,498
---------- --------
Total current liabilities 272,949 324,066
---------- --------
Long-term debt and capital lease obligations 386,211 288,486
---------- --------
Other noncurrent liabilities:
Pension and post-retirement benefits 47,978 55,320
Other 15,094 19,896
---------- --------
Total other noncurrent liabilities 63,072 75,216
---------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares
Common stock, $.50 par value, 100,000,000 and 25,000,000
authorized shares; 37,527,362 and 19,196,681 issued 18,769 9,598
Additional paid-in capital 96,971 113,661
Retained earnings 224,596 191,870
Treasury stock, at cost, 437,000 shares - (7,643)
---------- --------
Total stockholders' equity 340,336 307,486
---------- --------
$1,062,568 $995,254
========== ========
See accompanying notes to consolidated condensed financial statements.
4-16
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
14 Weeks 13 Weeks 40 Weeks 39 Weeks
Ended Ended Ended Ended
(In thousands, except per share data) February 1, 1998 January 26, 1997 February 1, 1998 January 26, 1997
- ------------------------------------- ---------------- ---------------- ---------------- ----------------
Sales $1,095,999 $1,080,979 $2,993,661 $2,943,075
Cost of sales 979,336 992,275 2,707,844 2,722,032
---------- ---------- ---------- ----------
Gross profit 116,663 88,704 285,817 221,043
Selling, general and
administrative expenses 64,157 48,423 166,526 135,296
Depreciation expense 11,018 9,036 31,086 26,141
Interest expense 8,424 7,278 23,827 20,378
Nonrecurring charge - - 12,600 -
---------- ---------- ---------- ----------
Income before income taxes 33,064 23,967 51,778 39,228
Income taxes 9,345 8,233 19,052 13,731
---------- ---------- ---------- ----------
Net income $ 23,719 $ 15,734 $ 32,726 $ 25,497
=========== =========== ========== ==========
Net income per common share:
Basic $.63 $.43 $.87 $.68
===== ===== ===== =====
Diluted $.60 $.40 $.82 $.66
===== ===== ===== =====
Average common shares outstanding:
Basic 37,537 36,073 37,531 36,046
====== ====== ====== ======
Diluted 39,781 38,926 39,687 37,137
====== ====== ====== ======
See accompanying notes to consolidated condensed financial statements.
5-16
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
40 Weeks 39 Weeks
Ended Ended
(In thousands) February 1, 1998 January 26, 1997
- -------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 32,726 $ 25,497
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 33,592 28,451
Decrease (increase) in accounts receivable 9,813 (39,680)
Decrease (increase) in inventories 8,820 (980)
Increase in prepaid expenses and other current assets (10,405) (3,925)
Decrease (increase) in other assets 4,313 (9,271)
(Decrease) increase in other liabilities (1,227) 19,544
Gain on sale of property, plant and equipment (764) (2,893)
-------- --------
Net cash provided by operating activities 76,868 16,743
-------- --------
Cash flows from investing activities:
Capital expenditures (73,287) (47,258)
Business acquisitions, net of cash (6,997) (34,086)
Proceeds from sale of property, plant and equipment 1,161 3,452
Investments in partnerships (8,705) (7,387)
-------- --------
Net cash used in investing activities (87,828) (85,279)
-------- --------
Cash flows from financing activities:
Net repayments on notes payable (75,000) (10,063)
Proceeds from issuance of long-term debt 2,900 146,250
Proceeds from long-term credit facility 177,000 -
Principal payments on long-term debt and capital lease obligations (83,439) (74,876)
Exercise of common stock options 124 1,270
Preferred dividends - (1,012)
-------- --------
Net cash provided by financing activities 21,585 61,569
-------- --------
Net increase (decrease) in cash 10,625 (6,967)
Cash at beginning of period 25,791 28,529
-------- --------
Cash at end of period $ 36,416 $ 21,562
======== ========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 22,337 $ 19,421
======== ========
Income taxes $ 3,886 $ 7,968
======== ========
See accompanying notes to consolidated condensed financial statements.
6-16
SMITHFIELD FOODS, INC.
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 27, 1997.
(2) 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 to a fair statement of the financial position and the results of
operations for the periods included in this report.
(3) Inventories consist of the following:
(In thousands) February 1, 1998 April 27, 1997
-------------- ---------------- --------------
Fresh and processed meats $172,533 $183,480
Hogs on farms 51,536 44,563
Manufacturing supplies 18,218 15,732
Other 10,173 9,501
-------- --------
$252,460 $253,276
======== ========
(4) In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share," ("SFAS 128") which is effective this quarter. All
earnings per share amounts for all periods are presented to conform to SFAS
128 requirements. The computation for basic and dilutive net income per
share follows:
14 Weeks 13 Weeks 40 Weeks 39 Weeks
(In thousands, Ended Ended Ended Ended
except per share data) Feb. 1, 1998 Jan. 26, 1997 Feb. 1, 1998 Jan. 26, 1997
------------------------ ------------ ------------- ------------ -------------
Net income $23,719 $15,734 $32,726 $25,497
Dividends on preferred stock - (337) - (1,012)
------- -------- ------- -------
Net income available to common
stockholders $23,719 $15,397 $32,726 $24,485
======= ======= ======= =======
Average common shares
outstanding:
Basic 37,537 36,073 37,531 36,046
Dilutive stock options 2,244 1,520 2,156 1,091
Dilutive convertible
preferred stock - 1,333 - -
------- ------- ------- -------
Diluted 39,781 38,926 39,687 37,137
======= ======= ======= =======
Net income per common share
Basic $.63 $.43 $.87 $.68
======= ======= ======= =======
Diluted $.60 $.40 $.82 $.66
======= ======= ======= =======
7-16
(5) On February 9, 1998, the Company issued $200 million of 10-year 7.625%
senior subordinated notes. The net proceeds from the sale of the notes were
used to repay indebtedness classified as long-term debt under the Company's
revolving credit facilities with the balance invested temporarily in
short-term marketable debt securities.
(6) In August 1997, the U.S. District Court for the Eastern District of
Virginia imposed $12.6 million in civil penalties against the Company in a
civil action brought by the U.S. Environmental Protection Agency. This
amount is reflected as a nonrecurring charge in the 40 weeks ended
February 1, 1998. In December 1997, the Company filed an appeal of the
Court's judgment with the U.S. Court of Appeals for the Fourth Circuit.
(7) In August 1997, the Board of Directors of the Company declared a 2-for-1
stock split of the Company's common stock. Common shares outstanding and
net income per share amounts have been adjusted in the consolidated
condensed statements of income to reflect the stock split. Also in August
1997, the Company's stockholders approved an increase in the number of
authorized common shares from 25,000,000 to 100,000,000 and approved the
reincorporation of the Company in Virginia from Delaware. The
reincorporation does not affect the manner in which the Company operates.
Since Virginia law does not recognize treasury stock, the shares previously
classified as treasury stock were returned to unissued resulting in a
reduction in common stock and additional paid-in capital for the cost basis
of the shares.
8-16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Smithfield Foods, Inc. (the "Company"), as a holding company, conducts its pork
processing operations through five principal subsidiaries: Gwaltney of
Smithfield, Ltd. ("Gwaltney") and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), both based in Smithfield, Virginia; John Morrell & Co.
("John Morrell"), based in Cincinnati, Ohio; Patrick Cudahy, Incorporated
("Patrick Cudahy"), based in Cudahy, Wisconsin; and Lykes Meat Group, Inc.
("Lykes"), based in Plant City, Florida. The Company also conducts hog
production operations through its 86-percent owned subsidiary, Brown's of
Carolina, Inc. ("Brown's"), and through a 50-percent interest in
Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production
arrangement between the Company and Carroll's Foods of Virginia, Inc., an
affiliate of Carroll's Foods, Inc., one of the largest hog producers in the
United States. Both Brown's and Smithfield-Carroll's produce hogs for the
Company's pork processing plants in Bladen County, North Carolina and
Smithfield, Virginia. The Company is also a 33-percent participant in the Circle
Four joint hog production arrangement ("Circle Four") with Carroll's Foods,
Inc., Murphy Family Farms, Inc. and Prestage Farms, Inc., three of the largest
hog producers in the United States, which conducts hog production operations in
Milford, Utah. The hogs produced by Circle Four are sold to an unrelated party.
RECENT DEVELOPMENT
On December 18, 1997, the Company announced that it had reached an agreement
with the members of the Schneider family who control approximately 75% of the
voting common shares ("Schneider Common Shares") and 17% of the nonvoting Class
A Shares ("Schneider Class A Shares") of Schneider Corporation ("Schneider"), a
Canadian meat processor based in Kitchener, Ontario, on the terms of a proposed
offer to purchase such shares. Based on filings made by Schneider with the
Ontario Securities Commission, as of December 18, 1997, there are 738,954
Schneider Common Shares and 6,105,565 Schneider Class A Shares outstanding.
Under the agreement, the Company has agreed to make a registered public
exchange offer to acquire any and all Schneider Common Shares and Schneider
Class A Shares on the basis of 0.5415 of an exchangeable share ("Exchangeable
Share") of a newly incorporated, wholly-owned Canadian subsidiary of the Company
for each share of Schneider. Under the agreement, the members of the Schneider
family party to the agreement have committed to tender all of their Schneider
shares into the offer. Each whole Exchangeable Share may be exchanged for one
share of the Company's Common Stock. For purposes of establishing the exchange
ratio, the parties agreed on a value of $25.00 (Can.) for each Schneider share
and $32.50 (U.S.) for each Company share. The Exchangeable Shares will have
voting, dividend and liquidation rights that are, as nearly as practicable,
equivalent to those of the Company's Common Stock.
Schneider products include bacon, hams, sausages, specialty sausage,
wieners, sliced meats, deli meats and grocery entrees. According to Schneider's
most recent audited financial statements filed with the Ontario Securities
Commission, prepared in accordance with Canadian generally accepted accounting
principles, for Schneider's fiscal year ended October 25, 1997, Schneider
recorded sales of $813.4 million (Can.) and at such date Schneider had total
assets of $278.0 million (Can.) and total debt of $87.5 million (Can.).
Subject to regulatory approvals and customary conditions, the Company
expects to consummate its exchange offer in April 1998, but there can be no
assurance that the proposed transaction will be consummated as expected. If all
Schneider Common Shares and Schneider Class A Shares are tendered and accepted
in the Company's exchange offer, the Company would over time issue approximately
3.8 million shares of the Company's Common Stock upon surrender of the
Exchangeable Shares. The Schneider Board of Directors has not made any
recommendation with respect tot he Company's proposed offer, and has announced a
position of "no recommendation" with respect to the competing tender offer by
Maple Leaf Foods, Inc. ("Maple Leaf") of $29.00 (Can.) cash (or, at the
offeree's option, equivalent value in Maple Leaf stock, provided such amount
does not exceed 6.2 million Maple Leaf common shares in the aggregate) per
Schneider share.
In January 1998, certain shareholders of Schneider Class A Shares
commenced an action in a court in Ontario, Canada, seeking, among other things,
an order that Schneider's Board of Directors acted in an oppressive manner in
regard to certain action taken in support of the Company's offer and the
Company's agreement with the Schneider family, an order permitting holders of
the Schneider Class A Shares to convert such shares into the Company's Common
Stock, and an order enjoining the making of the Company's offer. In February,
two other lawsuits (including one by Maple Leaf) were commenced seeking
substantially the same remedies as in the first lawsuit. The Company
anticipates that all the lawsuits will be tried together in April 1998.
9-16
RESULTS OF OPERATIONS
The fiscal quarter ended February 1, 1998 represented 14 weeks of operations
compared to 13 weeks in the fiscal quarter ended January 26, 1997. Accordingly,
sales and all expense categories in the 14 weeks and the 40 weeks ended February
1, 1998 reflect the impact of an additional week of operations in comparison to
the corresponding periods in fiscal 1997.
14 Weeks Ended February 1, 1998 -
13 Weeks Ended January 26, 1997
Sales in the third quarter of fiscal 1998 increased $15.0 million, or 1.4%, from
the comparable period in fiscal 1997. The increase in sales reflected a 14.0%
increase in sales tonnage offset by an 11.1% decrease in unit sales prices
reflecting the impact of lower live hog costs. The increase in sales tonnage
reflected an 18.2% increase in fresh pork tonnage and a 3.5% increase in
processed meats tonnage.
Cost of sales decreased $12.9 million, or 1.3%, in the third quarter of
fiscal 1998, reflecting a 25.1% decrease in live hog costs offset by the
increased sales tonnage.
Gross profit in the third quarter of fiscal 1998 increased $28.0
million, or 31.5%, from the comparable period in fiscal 1997. The increase in
gross profit was primarily due to sharply improved margins on higher sales of
fresh pork and improved margins on higher sales of processed meats.
Selling, general and administrative expenses increased $15.7 million,
or 32.5%, in the third quarter of fiscal 1998 from the comparable period in
fiscal 1997. The increase was primarily due to higher selling, marketing and
product promotion costs associated with intensified efforts to market branded
fresh pork and processed meats.
Depreciation expense increased $2.0 million, or 21.9%, in the third
quarter of fiscal 1998 from the comparable period in fiscal 1997. The increase
was related to completed capital projects at several of the Company's processing
plants.
Interest expense increased $1.1 million, or 15.7%, in the third quarter
of fiscal 1998 from the comparable period in fiscal 1997, reflecting the funding
of capital projects.
Income before taxes in the third quarter of fiscal 1998 was adversely
affected by a $3.1 million loss at the Company's hog production group, compared
to a $5.5 million profit in the same period of fiscal 1997. The Company's hog
production group consists of the Company's ownership interests in Brown's,
Smithfield-Carroll's and Circle Four. During the 14 weeks ended February 1,
1998, the Company obtained 11.0% of the hogs it processed from Brown's and
Smithfield-Carroll's.
The effective income tax rate for the third quarter of fiscal 1998,
excluding the nonrecurring charge, was 28.3% compared with 34.4% in the
corresponding period in fiscal 1997, reflecting a lower tax rate on increased
foreign sales, benefits related to certain insurance contracts and the use of
employment related tax credits.
Reflecting the factors previously discussed, net income increased to
$23.7 million, or $.60 per diluted share, in the third quarter of fiscal 1998
compared with net income of $15.7 million, or $.40 per diluted share, in the
comparable period of fiscal 1997.
10-16
40 Weeks Ended February 1, 1998 -
39 Weeks Ended January 26, 1997
Sales in the first nine months of fiscal 1998 increased $50.6 million, or 1.7%,
from the comparable period in fiscal 1997. The increase in sales reflected a
7.2% increase in sales tonnage offset by a 5.1% decrease in unit sales prices
reflecting the impact of lower live hog costs. The increase in sales tonnage
reflected a 5.7% increase in fresh pork tonnage combined with a 12.8% increase
in processed meats tonnage.
Costs of sales in the first nine months of fiscal 1998 were flat from
the comparable period of fiscal 1997 reflecting the increase sales tonnage which
was offset by lower unit costs reflecting lower live hog costs.
Gross profit in the first nine months of fiscal 1998 increased $64.8
million, or 29.3%, from the comparable period in fiscal 1997. The increase in
gross profit reflected improved margins on higher sales tonnage of both fresh
pork and processed meats.
Selling, general and administrative expenses increased $31.2 million,
or 23.1%, in the first nine months of fiscal 1998 from the comparable period in
fiscal 1997. The increase was related to the inclusion of the operations of
Lykes, which was acquired in November 1996, for the full fiscal period, and to
higher selling, marketing and product promotion costs associated with
intensified efforts to market branded fresh pork and processed meats.
Depreciation expense increased $4.9 million, or 18.9%, in the first
nine months of fiscal 1998 from the comparable period in fiscal 1997. The
increase was related to the inclusion of the operations of Lykes for the full
fiscal period and completed capital projects at several of the Company's
processing plants.
Interest expense increased $3.4 million, or 16.9%, in the first nine
months of fiscal 1998 from the comparable period in fiscal 1997. The increase
primarily reflected the interest costs on borrowings to finance the acquisition
of Lykes for the full fiscal period and the funding of capital projects.
A nonrecurring charge of $12.6 million reflected the imposition of
civil penalties against the Company by the U.S. District Court for the Eastern
District of Virginia in a civil action brought by the U.S. Environmental
Protection Agency. The Company has appealed the Court's judgment to the U.S.
Court of Appeals for the Fourth Circuit.
Income before income taxes in the first nine months of fiscal 1998
benefited from a $12.5 million profit at the Company's hog production group
compared to a $16.8 million profit in the same period of fiscal 1997. During the
40 weeks ended February 1, 1998, the Company obtained 10.9% of the hogs it
processed from Brown's and Smithfield-Carroll's.
The effective income tax rate for the first nine months of fiscal 1998,
excluding the nonrecurring charge, decreased to 29.6% from 35.0% in the
corresponding period in fiscal 1997, reflecting a lower tax rate on increased
foreign sales, benefits related to certain insurance contracts and employment
related tax credits.
Excluding the nonrecurring charge, net income was $45.3 million, or
$1.12 per diluted share, for the first nine months of fiscal 1998. Including the
nonrecurring charge, net income in the first nine months of fiscal 1998 was
$32.7 million, or $.82 per diluted share, compared to net income of $25.5
million, or $.66 per diluted share, in the comparable period in fiscal 1997.
11-16
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of fiscal 1998, the Company's cash provided by
operations totaled $76.9 million. This increase in cash was the result of
profitable operations, noncash charges and decreased levels of accounts
receivable and inventories related to lower live hog costs.
The Company's capital expenditures totaled $73.3 million in the first
nine months of fiscal 1998. These capital expenditures included renovations and
expansion projects at several of the Company's processing plants, as well as the
acquisition of an idle slaughter facility in South Dakota and a hog production
operation in North Carolina. Additionally, the Company acquired substantially
all of the assets and business of Curly's Foods, Inc., based in Sioux City, Iowa
and certain of the assets and business of Mohawk Packing Co., based in San Jose,
California, both further processors primarily for the foodservice trade, for an
aggregate $15.9 million in cash plus $11.8 million of assumed liabilities.
The capital expenditures and acquisitions were funded with cash from
operations and borrowings under the Company's revolving credit facilities. Prior
to July 1997, the Company maintained $300 million of credit facilities,
consisting of a 364-day $225 million revolver and a two-year $75 million
revolver (the "Old Credit Facilities"). In July 1997, the Company and certain of
its subsidiaries entered into a loan agreement with a bank group providing for
$350 million in senior secured revolving credit facilities, consisting of a
five-year $300 million revolving credit facility and a 364-day $50 million
revolving credit facility (together, the "Revolving Credit Facilities"). In
connection with this refinancing, the Company repaid all borrowings under the
Old Credit Facilities, which were terminated. All credit facility borrowings
outstanding at February 1, 1998 were borrowed under the five-year revolving
credit facility and are reflected as long-term debt in the Company's financial
statements.
On February 9, 1998, the Company issued $200 million of 10-year 7.625%
senior subordinated notes in a transaction exempt from registration requirements
of the U.S. Securities Act. Substantially all the proceeds from the sale of the
notes were used to repay the Revolving Credit Facilities, with the balance
invested in short-term marketable debt securities. On February 10, 1998, the
364-day $50 million revolving credit facility was terminated. The issuance of
the $200 million of senior subordinated notes combined with internally generated
funds, provides the Company with significant flexibility to finance future
capital expenditures as well as expansion of its processed meats business
through strategic acquisitions and joint ventures.
As of February 1, 1998, the Company had definitive commitments of $13.1
million for capital expenditures primarily to increase its processed meats
capacity at several of its processing plants and to replace and upgrade portions
of its hardware and software in response to the Year 2000 issue. The Company
believes that the total costs of the Year 2000 issue will not have a material
effect on the Company's results of operations nor pose significant operational
problems.
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, among
other information, statements concerning the Company's outlook for the future.
There may also be other statements of belief, future plans and strategies or
anticipated events and similar expressions concerning matters that are not
historical facts. The forward-looking information and statements in this Form
10-Q are subject to risks and uncertainties, including availability and prices
of raw materials, product pricing, competitive environment and related market
conditions, operating efficiencies, access to capital and actions of
governments (including agencies and courts), that could cause actual results to
differ materially from those expressed in or implied by the information or
statements.
12-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Regulation Generally. Like other participants in the meat processing
industry, the Company is subject to various laws and regulations administered by
United States, state and other government entities, including the Environmental
Protection Agency ("EPA") and corresponding state agencies such as the Virginia
State Water Control Board ("VSWCB"), the Virginia Department of Environmental
Quality ("VDEQ"), the North Carolina Department of Environment and Natural
Resources ("DENR"), the Iowa Department of Natural Resources and the South
Dakota Department of Environment and Natural Resources, as well as the United
States Department of Agriculture, the United States Food and Drug Administration
and the United States Occupational Safety and Health Administration. Management
believes that the Company presently is in compliance with all such laws and
regulations in all material respects, and that continued compliance with these
standards will not have a material adverse effect on the Company's financial
position or results of operations. Furthermore, with respect to the litigation
and investigations discussed below, the Company believes that the ultimate
resolution of these suits will not have a material adverse effect on its
financial position or annual results of operations.
Permit Violations At Smithfield Packing And Gwaltney Plants;
Administrative Consent Orders; Connection To HRSD System. The National Pollutant
Discharge Elimination System permit (the "discharge permit") for the Smithfield
Packing and Gwaltney plants in Smithfield, Virginia, as modified by the VSWCB in
1990, imposed more stringent effluent limitations on phosphorus and two species
of nitrogen (ammonia and Total Kjeldahl Nitrogen) than the wastewater treatment
facilities at those plants were designed to meet. To achieve compliance with
these new limitations, the Company agreed to discontinue wastewater discharges
into the Pagan River and connect its wastewater treatment facilities to the
regional sewage collection and treatment system operated by the Hampton Roads
Sanitation District ("HRSD"), when available. This agreement was embodied in an
administrative consent order issued by the VSWCB in 1991 (the "1991 Order"). The
VSWCB issued a second consent order (the "1994 Order") which concerned
compliance with other discharge permit terms pending connection to the HRSD
system.
The Company connected its Gwaltney and Smithfield Packing wastewater
treatment facilities to the HRSD system in June 1996 and July 1997,
respectively, which were the earliest dates that the HRSD could serve those
individual plants. To prepare for making these connections, the Company made
more than $2.7 million in capital expenditures to upgrade its existing
wastewater treatment facilities. The Company must continue to operate these
facilities to produce a wastewater suitable for treatment in the HRSD system
and, in addition, pay the HRSD approximately $1.8 million per year for
wastewater treatment. The Company will account for these wastewater treatment
costs as current period charges in the years in which such costs are incurred.
These wastewater treatment facilities no longer make any discharges
that are subject to regulation under the discharge permit. However, before being
connected to the HRSD system, these facilities exceeded applicable discharge
permit and consent orders limitations as discussed below.
Record-Keeping Violations. Under its discharge permit, the Company
regularly tested wastewater to determine compliance with applicable effluent
limitations. United States and state laws require that records of such tests be
maintained for three years. Failure to maintain these records may result in the
imposition of civil penalties, and criminal sanctions may be imposed in the
event of false reporting or destruction of records. In July 1994, the Company
learned that records of many tests conducted from 1991 through early 1994 could
not be found. Despite a careful search, most of these records were never found
and are believed to have been destroyed. The employee responsible for the
supervision of the tests and the maintenance of the test records was replaced
and subsequently terminated. In October 1996, that former employee entered a
guilty plea and was convicted in the United States District Court for the
Eastern District of Virginia of 23 violations of the United States Clean Water
Act, including records destruction and making false reports. Eight of these
violations related to his duties as the Company's employee, while 15 violations
were committed during his outside consulting activities for public and private
entities unrelated to the Company. In January 1998, several Smithfield employees
responsible for wastewater treatment were subpoenaed and testified before a
federal grand jury in Norfolk, Virginia. Subsequently, the grand jury issued
subpoenas requiring production of various environmental materials relating to
the Company's Smithfield, Virginia wastewater. Neither the Company nor any of
its other present or former employees has been charged with any criminal
violation arising from these matters, but there can be no assurance that charges
will not be brought.
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EPA Suit. On August 8, 1997, in United States of America v. Smithfield
Foods, Inc. et al. (Civil Case No. 2:96:cv1204), a federal judge for the United
States District Court for the Eastern District of Virginia imposed a $12.6
million civil penalty on the Company and its Smithfield Packing and Gwaltney
subsidiaries. The Company recognized a nonrecurring charge of $12.6 million
during the first quarter of fiscal 1998 with respect to this penalty. This suit
was brought by the EPA for violations of the United States Clean Water Act
before the Company's wastewater treatment facilities were connected to the HRSD
system. The court found 6,982 days of violation. The Company asserted in its
defense that approximately 5,500 of these violations were excused by the 1991
and 1994 Orders, which were issued by VSWCB in its role as primary enforcement
authority under the federal-state Clean Water Act program. The Court held that
the EPA was not bound by its awareness of, and failure to object to, those
orders. The Company has appealed this and other aspects of the court's decision
to the United States Court of Appeals for the Fourth Circuit in Richmond,
Virginia. There can be no assurance as to the outcome of such appeal or any
subsequent proceedings regarding this matter.
Suit by Commonwealth Of Virginia. On August 30, 1996, VDEQ filed a
civil suit under the laws of the Commonwealth of Virginia against the Company in
the Circuit Court of the County of Isle of Wight, Virginia. This suit alleged a
total of 22,517 discharge permit violations at the Gwaltney and Smithfield
Packing facilities during the period from 1986 until such facilities were
connected to the HRSD system in 1996 and 1997, respectively. The difference in
the number of total violations charged by the EPA and the Commonwealth of
Virginia is mainly attributable to their different methods of counting
violations. The same categories of violations were involved in both suits,
except that the Commonwealth of Virginia did not charge the Company with any
permit violation excused by the 1991 and 1994 Orders. The Commonwealth's total
was larger in part because the Commonwealth counted every missing record as a
separate violation, and the EPA counted the number of days records were missing.
In addition, the Commonwealth's suit alleged a separate violation for each
failure to test chlorine levels every hour, failure to make certain required
reports, and failure on certain days to properly staff the Company's facilities.
While each violation is subject to a maximum penalty of $25,000, the
Commonwealth's civil penalties policy is designed to recapture any economic
benefit which accrued to the violator as a result of the noncompliance, and to
impose a surcharge penalty for having committed such violations. In addition,
the policy would increase the amount of penalties based upon the extent of
environmental damage caused by the violations.
At the beginning of the July 1997 trial of its case, the Commonwealth
contended that the Company should pay a total of $6 million for the violations
alleged, which included an alleged economic benefit of $4 million. In the middle
of the trial, however, the Commonwealth voluntarily dismissed its suit. One week
later, the Commonwealth refiled the same suit in Isle of Wight County Circuit
Court. The Company has asked the Court to dismiss this second suit on double
jeopardy and res judicata grounds. If the Commonwealth's charges go to trial
again, the Company will argue that no economic benefit accrued to the Company
and that no environmental damage was caused by the violations. There can be no
assurance as to the outcome of any such proceeding.
Bladen County, North Carolina Plant. The Company has been notified that
DENR is considering enforcement action with respect to alleged violations of
wastewater discharge limits at Smithfield's Bladen County, North Carolina plant.
There can be no assurance as to the result of this investigation, but the
Company does not expect the result to have a significant impact on the Company's
financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 2.1 Lock-Up Agreement, dated as of December 18, 1997,
between Smithfield Foods, Inc. and the members of the
Schneider family set forth in Schedule B thereto
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement of Form S-4 filed
with the Commission on February 18, 1998,
registration number 333-91388).
Exhibit 4.5 Five-Year Credit Agreement dated as of July 10, 1997,
among Smithfield Foods, Inc., the Subsidiary
Guarantors party thereto, the Lenders party thereto,
and The Chase Manhattan Bank, as Administrative
Agent, relating to a $300,000,000 secured five-year
revolving credit facility (incorporated by reference
to Exhibit 4.5 of the Company's Form 10-K Annual
Report for the fiscal year ended April 27, 1997); and
Amendment No. 1 to the Five-Year Credit Agreement
dated as of November 19, 1997.
Exhibit 4.5(a) 364-Day Credit Agreement dated as of July 10, 1997,
among Smithfield Foods, Inc., the Subsidiary
Guarantors party thereto, the Lenders party thereto,
and The Chase Manhattan Bank, as Administrative
Agent, relating to a $50,000,000 secured 364-day
revolving credit facility (incorporated by reference
to Exhibit 4.5(a) of the Company's Form 10-K Annual
Report for the fiscal year ended April 27, 1997); and
Amendment No. 1 to the 364-Day Credit Agreement dated
as of November 19, 1997.
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Exhibit 4.6 Note Purchase Agreement dated as of July 15, 1996,
among Smithfield Foods, Inc. and each of the
Purchasers listed on Annex 1 thereto, relating to
$140,000,000 of senior secured notes (incorporated by
reference to Exhibit 4.7 to the Company's Form 10-Q
Quarterly Report for the fiscal quarter ended July
28, 1996); Amendment Number One to the Note Purchase
Agreement dated as of July 15, 1997 (incorporated by
reference to Exhibit 4.6 of the Company's Form 10-K
Annual Report for the fiscal year ended April 27,
1997); and Amendment Number Two to the Note Purchase
Agreement dated as of December 1, 1997.
Exhibit 4.8 Indenture dated as of February 9, 1998, between
Smithfield Foods, Inc. and SunTrust Bank,
Atlanta, relating to the Company's issuance of
$200,000,000 of 7-5/8% senior subordinated notes due
2008.
Exhibit 4.8(a) Purchase Agreement dated as of February 4, 1998,
between Smithfield Foods, Inc. and Chase Securities
Inc. relating to the Company's issuance of
$200,000,000 of 7-5/8% senior subordinated notes due
2008.
Exhibit 4.8(b) Exchange and Registration Rights Agreement dated as
of February 9, 1998, between Smithfield Foods, Inc.
and Chase Securities Inc. relating to the Company's
issuance of $200,000,000 of 7-5/8% senior
subordinated notes due 2008.
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
1. A Current Report on Form 8-K for December 18, 1997, was
filed with the Securities and Exchange Commission on
December 24, 1997 to report, under Item 5, that the
Company had reached an agreement with members of the
Schneider Family who control approximately 75% of the
voting shares and 17% of the nonvoting shares of Schneider
Corporation on the terms of a proposed offer to purchase
such shares.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITHFIELD FOODS, INC.
/s/ AARON D. TRUB
-----------------------------
Aaron D. Trub
Vice President, Secretary and Treasurer
/s/ C. LARRY POPE
-----------------------------
C. Larry Pope
Vice President and Controller
Date: March 16, 1998
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