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 August 2, 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.
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
Virginia 52-0845861
- ------------------- -----------------
(State of (I.R.S. Employer
Incorporation) 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
----- -----
Shares outstanding at
Class September 9, 1998
- -------------------------- ---------------------
Common Stock, $.50 par value 37,537,362
1-13
SMITHFIELD FOODS, INC.
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - August 2, 1998 and May 3,
1998 3-4
Consolidated Condensed Statements of Operations - 13 Weeks Ended
August 2, 1998 and 13 Weeks Ended July 27, 1997 5
Consolidated Condensed Statements of Cash Flows - 13 Weeks Ended
August 2, 1998 and 13 Weeks Ended July 27, 1997 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
2-13
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
( In thousands) August 2, 1998 May 3, 1998
-------------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 37,944 $ 60,522
Accounts receivable, net 177,991 156,091
Inventories 294,938 249,511
Prepaid expenses and other current assets 36,324 44,999
---------- ----------
Total current assets 547,197 511,123
---------- ----------
Property, plant and equipment 820,214 705,872
Less accumulated depreciation (245,395) (233,652)
---------- ----------
Net property, plant and equipment 574,819 472,220
---------- ----------
Other assets:
Investments in partnerships 33,572 49,940
Goodwill 17,463 12,360
Other 60,785 38,002
---------- ----------
Total other assets 111,820 100,302
---------- ----------
$1,233,836 $1,083,645
========== ==========
See accompanying notes to consolidated condensed financial statements.
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SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) August 2, 1998 May 3, 1998
- -------------- -------------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 12,165 $ -
Current portion of long-term debt and
capital lease obligations 12,871 8,511
Accounts payable 123,042 118,909
Accrued expenses and other current
liabilities 120,945 124,515
---------- ----------
Total current liabilities 269,023 251,935
---------- ----------
Long-term debt and capital lease obligations 539,144 407,272
---------- ----------
Other noncurrent liabilities:
Pension and post-retirement benefits 32,633 38,486
Other 37,101 24,942
---------- ----------
Total other noncurrent liabilities 69,734 63,428
---------- ----------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000
authorized shares - -
Common stock, $.50 par value, 100,000,000
authorized shares; 37,537,362 issued 18,769 18,769
Additional paid-in capital 96,971 96,971
Retained earnings 239,945 245,270
Accumulated other comprehensive income 250 -
---------- ----------
Total shareholders' equity 355,935 361,010
---------- ----------
$1,233,836 $1,083,645
========== ==========
See accompanying notes to consolidated condensed financial statements.
4-13
SMITHFIELD FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks Ended 13 Weeks Ended
(In thousands, except per share data) August 2, 1998 July 27, 1997
- ------------------------------------- -------------- --------------
Sales $865,823 $914,963
Cost of sales 793,046 839,779
-------- --------
Gross Profit 72,777 75,184
Selling, general and administrative expenses 57,997 49,192
Depreciation expense 12,939 9,715
Interest expense 9,706 7,367
Nonrecurring charge - 12,600
-------- --------
Loss before income taxes (7,865) (3,690)
Income taxes (benefit) (2,540) 2,851
-------- --------
Net loss $ (5,325) $ (6,541)
======== ========
Net loss per common share:
Basic $ (.14) $ (.17)
======== ========
Diluted $ (.14) $ (.17)
======== ========
Average common shares outstanding:
Basic 37,537 37,527
======== ========
Diluted 37,537 37,527
======== ========
See accompanying notes to consolidated condensed financial statements.
5-13
SMITHFIELD FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 Weeks 13 Weeks
Ended Ended
(In thousands) August 2, 1998 July 27, 1998
- -------------- -------------- -------------
Cash flows from operating activities:
Net loss $ (5,325) $ (6,541)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,939 10,471
Loss (gain) on sale of property, plant and
equipment 588 (460)
Changes in operating assets and liabilities,
net of effect of Acquisitions:
Accounts receivable (18,109) (13,080)
Inventories (21,577) (13,250)
Prepaid expenses and other current
assets (10,981) (2,579)
Other assets 574 1,565
Accounts payable, accrued expenses
and other liabilities (11,504) (2,057)
-------- --------
Net cash used in operating activities (52,395) (25,931)
-------- --------
Cash flows from investing activities:
Capital expenditures (19,997) (18,518)
Business acquisitions, net of cash (23,837) (10,123)
Proceeds from sale of property, plant and equipment 7 148
Investments in partnerships (2,278) (6,731)
-------- --------
Net cash used in investing activities (46,105) (35,224)
-------- --------
Cash flows from financing activities:
Net repayments on notes payable - (75,000)
Net borrowings on long-term credit facility 77,000 215,000
Principal payments on long-term debt and capital
lease obligations (1,078) (78,280)
Exercise of common stock options - 83
-------- --------
Net cash provided by financing activities 75,922 61,803
-------- --------
Net increase (decrease) in cash and cash equivalents (22,578) 648
Cash and cash equivalents at beginning of period 60,522 25,791
-------- --------
Cash and cash equivalents at end of period $ 37,944 $ 26,439
======== ========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 6,049 $ 7,298
======== ========
Income taxes $ 39 $ 1,409
======== ========
See accompanying notes to consolidated condensed financial statements.
6-13
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 May 3, 1998.
(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) August 2, 1998 May 3, 1998
-------------- -------------- -----------
Fresh and processed meats $192,707 $171,090
Hogs on farms 70,594 49,263
Manufacturing supplies 20,407 18,538
Other 11,230 10,620
-------- --------
$294,938 $249,511
======== ========
(4) Income per basic share is computed based on the average common shares
outstanding during the period. Income per diluted share is computed based on
the average common shares outstanding adjusted for the effect of potential
common shares, such as stock options. The fiscal quarters ended August 2,
1998 and July 27, 1997 reflected net losses, resulting in the Company's
stock options being antidilutive and, thus, excluded from the computation of
income per diluted share. Accordingly, basic income per share and diluted
income per share are the same.
Summarized below are stock option shares outstanding at the end of each
fiscal period which were not included in the computation of income per
diluted share because (a) the assumed exercise of the options would be
antidilutive, or (b) the average exercise price of the options was greater
than the average market price of the common shares.
August 2, 1998 July 27, 1997
-------------- -------------
Antidilutive stock option shares 3,451,000 3,061,000
Average option price per share $10.81 $8.92
Stock options shares above exercise
price 65,000 -
Average option price per share $32.42 -
(5) The Company has adopted Statement of Financial Accounting Standards
No. 128, "Reporting Comprehensive Income," effective for the first
quarter of fiscal 1999. The components of comprehensive loss, net
of related tax, consist of:
(in thousands) August 2, 1998 July 27, 1997
------------- -------------- -------------
Net loss $(5,325) $(6,541)
Unrealized gains on securities 250 -
------- -------
Comprehensive loss $(5,075) $(6,541)
======= =======
As of August 2, 1998, accumulated other comprehensive income, net of
related tax, consisted of unrealized gains on securities of $250,000. As of
July 27, 1997, there were no components of accumulated other comprehensive
income.
(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 thirteen weeks ended July 27,
1997. The Company has appealed this decision to the U.S. Court of Appeals
for the Fourth Circuit.
(7) In fiscal 1998, 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
loss per share amounts have been adjusted in the consolidated condensed
statements of operations to reflect the stock split.
7-13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group
("MPG") and a Hog Production Group ("HPG"). The MPG consists of five pork
processing subsidiaries, Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell
& Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), Partrick Cudahy
Incorporated ("Patrick Cudahy") and The Smithfield Packing Company, Incorporated
("Smithfield Packing"). The HPG consists of Brown's of Carolina, Inc.
("Brown's"), an 86%-owned subsidiary of the Company; a 50% interest in
Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production
arrangement between the Company and an affiliate of Carroll's Foods, Inc., and a
74% interest in Circle Four ("Circle Four"), a joint hog production arrangement
with certain of the principal hog suppliers for the Company's Eastern
operations. Brown's and Smithfield-Carroll's produce hogs in North Carolina and
Virginia which are sold to the MPG. Circle Four produces hogs in Utah which are
sold to an unrelated party.
RECENT DEVELOPMENTS
In December 1997, the Company reached an irrevocable agreement with members of
the Schneider family, the controlling shareholders, to purchase all of their
shares in Schneider Corporation ("Schneider") as part of an offer by the Company
to acquire all of the shares of Schneider. Schneider produces and markets fresh
pork and a full line of processed meats in Canada and had revenues in its fiscal
year ended October 1997 of US$512.7 million. A lawsuit contesting the
acquisition was filed by a Canadian competitor and other Schneider shareholders.
The Court dismissed these claims, which have since been appealed and heard,
although a decision has not yet been rendered.
On September 1, 1998, the Company acquired 100% of the common stock of
Societe Bretonne De Salaisons ("SBS"), the largest private-label
manufacturer of ham, pork shoulder and bacon products in France, with annual
sales of approximately US$115.0 million.
RESULTS OF OPERATIONS
During the current quarter, the Company increased its investment in Circle Four
from 37% to 74%, requiring the Company to consolidate the accounts of Circle
Four and to discontinue using the equity method of accounting for Circle Four.
The impact of this consolidation on the consolidated condensed balance sheet as
of August 2, 1998 was to increase total assets $121.7 million and long-term debt
$54.0. The Company's operating results for the first quarter ended August 2,
1998 include those of Circle Four for nine weeks.
While the Company has consolidated the accounts of Circle Four in
the accompanying consolidated condensed financial statements, it is
negotiating the sale of a substantial portion of its investment in Circle
Four to a related party.
13 Weeks Ended July 27, 1997 -
13 Weeks Ended August 2, 1998
- ------------------------------
Sales in the first quarter of fiscal 1999 decreased $49.1 million, or 5.4%, from
the comparable period in fiscal 1998. The decrease in sales reflected a 16.7%
decrease in unit sales prices reflecting the impact of significantly lower live
hog costs, which were not totally offset by a 12.5% increase in sales tonnage
and the inclusion of the operating results of Circle Four. The increase in sales
tonnage reflected a 12.1% increase in fresh pork tonnage, an 11.0% increase in
processed meats tonnage and a 16.2% increase in the tonnage of other products.
The increase in fresh pork tonnage was primarily related to operations of the
second shift of John Morrell's Sioux City, Iowa plant which was temporarily
shutdown in the first quarter of fiscal 1998.
Cost of sales decreased $46.7 million, or 5.6%, in the first quarter of
fiscal 1999, reflecting a 30.5% decrease in live hog costs offset by increased
sales tonnage, the inclusion of the operating results of Circle Four and a loss
incurred in the Company's commodity hedging program on certain anticipatory hog
purchase hedges that locked in raw material costs at relatively high prices.
These positions were closed out in June and July.
8-13
Gross profit in the first quarter of fiscal 1999 decreased $2.4 million,
or 3.2%, from the comparable period in fiscal 1998. The decrease in gross profit
was primarily due to substantially lower margins at the HPG, reflecting sharply
lower hog prices, and the loss in the commodity hedging program partially offset
by improved margins on higher sales of fresh pork and processed meats at the
MPG.
Selling, general and administrative expenses increased $8.8 million, or
17.9%, in the first quarter of fiscal 1999 from the comparable period in fiscal
1998. The increase was primarily due to higher selling, marketing and product
promotion costs associated with intensive efforts to market branded fresh pork
and processed meats and the inclusion of the operating results of Circle Four.
Depreciation expense increased $3.2 million, or 33.2%, in the first
quarter of fiscal 1999 from the comparable period in fiscal 1998. The increase
was related to completed capital projects at several of the Company's processing
plants and the inclusion of the operating results of Circle Four.
Interest expense increased $2.3 million, or 31.7%, in the first quarter of
fiscal 1999 from the comparable period in fiscal 1998, reflecting the higher
cost of long-term debt placed in the fourth quarter of fiscal 1998 and the
inclusion of the operating results of Circle Four.
A nonrecurring charge of $12.6 million in the first quarter of fiscal 1998
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 taxes in the first quarter of fiscal 1999 was adversely
affected by a loss of $3.7 million at the HPG compared to a profit of $10.4
million in the same period of fiscal 1998.
The effective income tax rate for the first quarter of fiscal 1999 was
32.3% compared with 32.0%, excluding the nonrecurring charge, in the
corresponding period in fiscal 1998.
Reflecting the factors previously discussed, the Company incurred a net
loss of $5.3 million, or $.14 per diluted share, in the first quarter of fiscal
1999 compared with a net loss of $6.5 million, or $.17 per diluted share, in the
comparable period of fiscal 1998. Excluding the nonrecurring charge, net income
was $6.1 million, or $.15 per diluted share, in the first quarter of fiscal
1998.
The operating results of the MPG and the HPG are influenced by several
factors, including the supply and price levels of hogs, and, as a result, are
largely counter-cyclical in nature. While the Company expects to incur losses at
the HPG for the remainder of fiscal 1999, these losses should be offset by
improved margins at the MPG.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operations totaled $52.4 million, in the first
quarter of fiscal 1999, primarily related to an increase in the level of
accounts receivable and a seasonal build-up of inventories for the fall holiday
season.
The Company's capital expenditures totaled $20.0 million in the first
quarter of fiscal 1999. These capital expenditures included renovations and
expansion projects at several of the Company's processing plants, additional hog
production facilities at Circle Four and replacement systems associated with the
Year 2000. In addition, the Company invested $23.5 million in Circle Four and
acquired all of the capital stock of a processed meats company in Iowa for $6.5
million in cash and $2.0 million in notes. These capital expenditures and
acquisitions were funded with borrowings under the Company's revolving credit
facility.
As of August 2, 1998, the Company had definitive commitments of $25.2
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.
9-13
YEAR 2000
The Company began addressing the potential exposure associated with the Year
2000 during fiscal 1998. The Company has completed the hardware and application
software inventory of its information technology ("IT") and non-IT systems.
Management has approved the plan necessary to remediate, upgrade, and replace
the affected systems to be Year 2000 compliant. A corrective five-point action
plan has been developed including: 1) analysis and planning, 2) allocation of
resources and commencing correction, 3) remediation, correction and replacement,
4) testing, and 5) development of contingency plans.
The Company is in the second phase of this plan, allocating resources and
commencing corrective action. Critical systems are being given the highest
priority. These systems include any necessary technology used in manufacturing
or administration with date-sensitive information which is critical to the
day-to-day operations of the business. The replacement, remediation and testing
of all critical non-IT and IT systems is expected to be completed by the end of
June 1999. The Company has expensed approximately $.07 million to date including
$.03 million in the first quarter of fiscal 1999 for the Year 2000, primary
related to planning and evaluating system status. The forecasted cost of the
Year 2000 solution, including hardware and software replacement, is expected to
be approximately $31.7 million. The Company estimates $18.5 million will be
capitalized in accordance with generally accepted accounting principles. These
expenditures are anticipated to be incurred through December 1999.
Third party risk is being proactively assessed through inquiries and
questionnaires. Significant vendors, electronic commerce customers and financial
institutions have been sent inquiries about the status of their compliance for
the Year 2000. Additionally, the Company will follow-up the inquiries and
questionnaires with interviews. This process is expected to be an ongoing
evaluation and at this point management cannot determine the level of risk
associated with third parties.
The Company believes its planning efforts are adequate to address its Year
2000 concerns. The Company is not at a stage to determined a worse case
scenario; however the Company is developing including evaluating the criticality
of each manufacturing process, determining possible manual alternatives
including the purchase of additional inventory and related storage for
production supplies.
While the Company believes it is taking the appropriate steps to address
its readiness for the Year 2000, the costs of the project and expected
completion dates are dependent upon the continued availability of certain
resources and other factors. There can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that could influence the results may include, but are not
limited to, the availability and cost of personnel trained in this area, and the
ability to locate and correct all relevant computer codes and similar
uncertainties.
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 beliefs, future plans and strategies or
anticipated events and similar expressions concerning matters that are not
historical facts. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of Smithfield, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties, and
other important factors include, among others: availability and prices of raw
materials, product pricing, competitive environment and related market
conditions, operating efficiencies, access to capital, integration of
acquisitions and changes in, or the failure or inability to comply with
governmental regulations, including without limitation environmental and health
regulations.
10-13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual meeting of Shareholders held August 27, 1998.
(b) Not applicable.
(c) There were 37,537,362 shares of Company's Common Stock outstanding
as of July 10, 1998, the record date for the 1998 Annual Meeting of
Shareholders. A total of 29,376,584 shares were voted. All of
management's nominees for directors of the corporation were elected
with the following vote:
Votes Broker
Director Nominee Votes For Withheld Non-Voters
---------------- --------- -------- ----------
Robert L. Burrus, Jr. 28,246,212 1,130,372 0
F.J. Faison, Jr. 28,998,137 378,447 0
Joel W. Greenberg 29,030,837 345,747 0
George E. Hamilton, Jr. 29,000,692 375,892 0
Richard J. Holland 29,033,787 342,797 0
Roger R. Kapella 29,010,661 365,923 0
Lewis R. Little 29,009,361 367,223 0
Joseph W. Luter, III 29,007,901 368,683 0
William H. Prestage 28,998,567 378,017 0
Joseph B. Sebring 28,404,312 972,272 0
Timothy A. Seely 28,998,812 377,772 0
Aaron D. Trub 29,009,661 366,923 0
A proposal to ratify the adoption of the Smithfield Foods, Inc. 1998 Stock
Incentive Plan was approved by the shareholders with the following vote:
Votes Broker
Votes For Votes Against Withheld Non-Votes
--------- ------------- -------- ---------
29,269,021 1,989,956 117,607 0
A proposal to ratify the selection of Arthur Andersen LLP as independent
public accountants of the Company for the fiscal year ending May 2, 1999
was approved by the shareholders with the following vote:
Votes Broker
Votes For Votes Against Withheld Non-Votes
---------- ------------- -------- ---------
29,151,182 203,091 22,311 0
(d) Not applicable.
11-13
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 3.2 - By-Laws of the Registrant, as amended to date.
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
Annual Report on Form 10-K for its fiscal year ended April 27, 1997
filed with the Commission on July 25, 1997); Amendment Number One
to the Five-Year Credit Agreement dated as of November 19, 1997
(incorporated by reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed
with the Commission on March 17, 1998); and Amendment Number Two to the
Five-Year Credit Agreement dated as of August 26, 1998.
Exhibits 27 - Financial Data Schedule
B. Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter for which
this report is filed.
12-13
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, Chief Financial Officer and Secretary
/s/ C. LARRY POPE
------------------------
C. Larry Pope
Vice President, Finance
Date: September 11, 1998
13-13
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..
_____________________________
Aaron D. Trub
Vice President, Chief Financial Officer and Secretary
_______________________________
C. Larry Pope
Vice President, Finance
Date: September 11, 1998
13-13