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 1, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from.................to.............
COMMISSION FILE NUMBER 0-2258
SMITHFIELD FOODS, INC.
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
Virginia 52-0845861
- ---------------------------- -------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Class Shares outstanding at September 10, 1999
- --------------------------------- ----------------------------------------
Common Stock, $.50 par value 45,339,805
1-17
SMITHFIELD FOODS, INC.
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - August 1, 1999 and May 2, 1999 3-4
Consolidated Condensed Statements of Operations - 13 Weeks Ended August 1, 1999
and 13 Weeks Ended August 2, 1998 5
Consolidated Condensed Statements of Cash Flows - 13 Weeks Ended August 1, 1999
and August 2, 1998 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
2-17
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) August 1, 1999 May 2, 1999
- ------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 27,305 $ 30,590
Accounts receivable, net 283,689 252,332
Inventories 496,513 348,856
Prepaid expenses and other current assets 20,370 50,302
------------- -----------
Total current assets 827,877 682,080
------------- -----------
Property, plant and equipment 1,325,537 1,083,416
Less accumulated depreciation (315,590) (292,640)
------------- -----------
Net property, plant and equipment 1,009,947 790,776
------------- -----------
Other assets:
Investments in partnerships 80,371 80,182
Goodwill 129,041 103,017
Other 183,314 115,559
------------- -----------
Total other assets 392,726 298,758
------------- -----------
$ 2,230,550 $1,771,614
============= ===========
See accompanying notes to consolidated condensed financial statements.
3-17
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) August 1, 1999 May 2, 1999
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Current liabilities:
Notes payable $ 122,649 $ 63,900
Current portion of long-term debt and capital lease obligations 31,638 25,828
Accounts payable 215,385 207,703
Accrued expenses and other current liabilities 164,994 168,784
------------ ------------
Total current liabilities 534,666 466,215
------------ ------------
Long-term debt and capital lease obligations 785,605 594,241
Other noncurrent liabilities:
Pension and postretirement benefits 69,743 62,276
Other 142,112 49,161
------------ ------------
Total other noncurrent liabilities 211,855 111,437
------------ ------------
Minority interests 40,017 57,475
------------ ------------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized
shares Common stock, $.50 par value, 100,000,000
authorized shares; 46,150,959 and 41,847,359 issued 23,075 20,924
Additional paid-in capital 288,417 180,020
Retained earnings 347,084 340,154
Accumulated other comprehensive income (169) 1,148
------------ ------------
Total shareholders' equity 658,407 542,246
------------ ------------
$2,230,550 $1,771,614
============ ============
See accompanying notes to consolidated condensed financial statements.
4-17
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks Ended 13 Weeks Ended
(In thousands, except per share data) August 1, 1999 August 2, 1998
- ------------------------------------------------------------------------------------------
Sales $1,142,415 $865,823
Cost of sales 994,919 793,645
---------- --------
Gross profit 147,496 72,178
Selling, general and administrative expenses 94,550 57,997
Depreciation expense 24,858 12,939
Interest expense 14,533 9,706
Minority interests 2,761 (599)
---------- --------
Income (loss) before income taxes 10,794 (7,865)
Income tax expense (benefit) 3,864 (2,540)
---------- --------
Net income (loss) $ 6,930 $ (5,325)
========== =========
Net income (loss) per common share:
Basic $ .15 $ (.14)
========== ========
Diluted $ .15 $ (.14)
========== ========
Average common shares outstanding:
Basic 45,859 37,537
========== ========
Diluted 47,088 37,537
========== ========
See accompanying notes to consolidated condensed financial statements.
5-17
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
13 Weeks Ended 13 Weeks Ended
August 1, 1999 August 2, 1998
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 6,930 $ (5,325)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 25,968 13,939
Loss on sale of property, plant and equipment 603 588
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (6,413) (18,109)
Inventories (16,496) (21,577)
Prepaid expenses and other current assets 32,562 (10,981)
Other assets (10,475) 574
Accounts payable, accrued expenses and other liabilities (18,234) (11,504)
-------- --------
Net cash provided by (used in) operating activities 14,445 (52,395)
-------- --------
Cash flows from investing activities:
Capital expenditures (28,877) (19,997)
Business acquisitions, net of cash (4,849) (23,837)
Proceeds from sale of property, plant and equipment 983 7
Investments in partnerships 2,372 (2,278)
-------- --------
Net cash used in investing activities (30,371) (46,105)
-------- --------
Cash flows from financing activities:
Net repayments on notes payable (84,685) -
Proceeds from issuance of long-term debt 11,006 -
Net borrowings on long-term credit facility 94,000 77,000
Principal payments on long-term debt and capital lease obligations (9,969) (1,078)
Exercise of common stock options 1,886 -
-------- -------
Net cash provided by financing activities 12,238 75,922
-------- -------
Net decrease in cash and cash equivalents (3,688) (22,578)
Effect of foreign exchange rate changes on cash 403 -
Cash and cash equivalents at beginning of period 30,590 60,522
-------- -------
Cash and cash equivalents at end of period $ 27,305 $37,944
======== =======
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 10,980 $ 6,049
======== =======
Income taxes $ 10,886 $ 39
======== =======
Noncash Investing and Financing Activities:
As discussed in Note 7, effective May 3, 1999 the Company completed the
acquisition of CFI and its affiliated companies and partnership interests in
exchange for 4.2 million shares of the Company's common stock and the
assumption of approximately $231.0 million in debt, plus other liabilities.
See accompanying notes to consolidated condensed financial statements.
6-17
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 2, 1999.
(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 results of
operations for the periods included in this report.
(3) Inventories consist of the following:
(In thousands) August 1, 1999 May 2, 1999
-------------- -------------- -----------
Fresh and processed meats $224,533 $219,647
Hogs on farms 197,732 83,352
Manufacturing supplies 45,007 30,201
Other 29,241 15,656
------- -------
$496,513 $348,856
========= =======
(4) Net income (loss) per basic share is computed based on the average common
shares outstanding during the period. Net Income per diluted share is
computed based on the average common shares outstanding during the period
adjusted for the effect of potential common shares, such as stock options.
The net loss reflected in fiscal 1999 resulted in the Company's stock
options being antidilutive and, thus, excluded from the computation of
income per diluted share. The computation for basic and diluted net income
(loss) per share is as follows:
13 Weeks 13 Weeks
Ended Ended
(In thousands, except per share data) August 1, 1999 August 2, 1998
- ------------------------------------- -------------- --------------
Net income (loss) $6,930 $ (5,325)
------ --------
Average common shares outstanding:
Basic 45,859 37,537
Dilutive stock options 1,229 -
------ ------
Diluted 47,088 37,537
====== ======
Net income (loss) per common share:
Basic $ .15 $ (.14)
====== =======
Diluted $ .15 $ (.14)
====== =======
7-17
The summary below lists stock options outstanding at the end of each
fiscal period which were not included in the computation of net income per
diluted share because the options' exercise price were greater than the
average market price of the common shares.
August 1, 1999 August 2, 1998
-------------- --------------
Antidilutive stock option shares - 3,451,000
Average option price per share - $10.81
Stock option shares excluded 50,000 65,000
Average option price per share $32.38 $32.42
(5) The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," in fiscal 1999. The components of
comprehensive income, net of related tax, consist of:
13 Weeks 13 Weeks
Ended Ended
(In thousands) August 1, 1999 August 2, 1998
- -------------- -------------- --------------
Net income (loss) $6,930 $(5,325)
Other comprehensive income:
Foreign currency translation
adjustment (1,400) -
Unrealized gain on securities 82 250
------- -------
Comprehensive income $5,612 $(5,075)
======= =======
(6) The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," in
fiscal 1999. The segments identified include the Meat Processing Group
("MPG") and the Hog Production Group ("HPG"). The underlying factors used
to identify the reportable segments include differences in products
produced and sold. The following table presents information about the
results of operation for each of the Company's reportable segments for the
first quarters ended August 1, 1999 and August 2, 1998. In connection with
the acquisition of CFI in the current quarter, total assets for the HPG
increased by approximately $372.4 million to $715.4 million.
Meat Hog General
(In thousands) Processing Production Corporate Total
- -------------------- ---------------------------------------------------------------------------------
13 Weeks Ended
August 1, 1999
- -----------
Sales $ 1,166,711 $ 120,371 $ -- $ 1,287,082
Intersegment sales (45,091) (99,576) -- (144,667)
Operating profit 14,900 16,486 (20,592) 10,794
13 Weeks Ended
August 2, 1998
- -----------
Sales $ 876,523 $ 42,799 $ -- $ 919,322
Intersegment sales (20,436) (33,063) -- (53,499)
Operating profit 6,791 (748) (13,908) (7,865)
8-17
(7) Effective May 3, 1999, the Company completed the acquisition of Carrolls
Foods Inc. ("CFI") and its affiliated companies and partnership interests
for 4.2 million shares of the Company's common stock (subject to post
closing adjustments) and the assumption of approximately $231.0 million in
debt, plus other liabilities. The acquisition included 100% of the capital
stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16%
interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery,
100% of CFI's turkey grow-out operations, CFI's 49% interest in Carolina
Turkey's, and certain hog production interests in Brazil and Mexico. CFI
was accounted for using the purchase method of accounting. Had the
acquisition of CFI occurred at the beginning of fiscal 1999, it would not
have had a material effect on sales, net income or net income per
diluted share in the previous years first quarter.
8) In the third quarter of fiscal 1999, the Company acquired 100% of the
voting common shares of Schneider Corporation ("Schneider") and
approximately 59% of its Class A non-voting shares, which in the aggregate
represents approximately 63% of the total equity of Schneider, in exchange
for approximately 2.5 million Exchangeable Shares of Smithfield Canada
Limited, a wholly-owned subsidiary of the Company. Each Exchangeable Share
is exchangeable by the holder at any time for one common share of the
Company. Schneider had sales in its fiscal year ended October 1998 of
$548.1 million.
In April 1999, the Company acquired, in a tender offer, 11.5 million shares
of the capital stock of Animex S.A. ("Animex") which represented 67% of
total equity and 51% of the voting control of Animex. During the 13-week
period ended August 2, 1999, the Company acquired an additional 3.2 million
shares of the capital stock of Animex increasing the Company's ownership to
80% of total equity. Animex had calendar year 1998 sales of approximately
$400.0 million.
In September 1998, the Company acquired all of the capital stock of Societe
Bretonne de Salaisons ("SBS"). SBS had calendar year 1998 sales of $100.0
million.
In October 1998, the Company acquired all of the assets and business of
North Side Corp. ("North Side"). North Side had calendar year 1998 sales of
$58.0 million.
Each of these acquisitions was accounted for using the purchase method of
accounting and, accordingly, the accompanying financial statements include
the financial position and results of operations from the dates of
acquisition.
(9) On September 2, 1999, the Company announced an agreement in principle to
acquire all of the capital stock of the corporate entities known as Murphy
Farms, Inc. and Quarter M Farms, Inc. (collectively "Murphy Farms") for
10.0 million shares of Company stock and the assumption of approximately
$170.0 million of debt, plus other liabilities. Murphy Farms is the second
largest hog production company in the U.S. with 325.0 thousand sows and 5.5
million market hogs annually. The acquisition is expected to be effective
in January 2000. Sales for Murphy Farms for its fiscal year ended October
1998 were approximately $500.0 million. A significant portion of those
sales were to the Company's MPG group.
9-17
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 six wholly-owned
domestic pork processing subsidiaries, Gwaltney of Smithfield, Ltd.
("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc.
("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated
("Patrick Cudahy"), and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), and three international pork processing subsidiaries,
Schneider Corporation ("Schneider"), a 63%-owned Canadian subsidiary of the
Company, Animex S.A. ("Animex") an 80%-owned Polish Company and Societe Bretonne
de Salaisons, ("SBS"), a wholly-owned French subsidiary. The HPG consists of
Brown's of Carolina, Inc. ("Brown's"), an 86%-owned subsidiary of the Company;
Carroll's Foods, Inc. ("CFI") a wholly-owned subsidiary of the Company, Carrolls
Foods of Virginia (formerly Smithfield-Carroll's) a hog production operation
based in Virginia and Circle Four, a hog production operation based in Utah. As
a result of the acquisition of CFI effective May 3,1999, Carroll's Foods of
Virginia (formerly Smithfield-Carroll's) and Circle Four are wholly-owned
operations of the Company. Brown's, CFI and Carroll's Foods of Virginia produce
hogs in North Carolina, Virginia and Colorado which are sold to the MPG. Circle
Four produces hogs in Utah which are sold to an unrelated party.
RESULTS OF OPERATIONS
- ---------------------
Several acquisitions affect the comparability of the results of operations of
the 13 week periods ended August 1, 1999 and August 2, 1998, including the
following:
In May 1999, the Company completed the acquisition of CFI and its
affiliated companies and partnership interests for 4.2 million shares of the
Company's common stock (subject to post closing adjustments) and the assumption
of approximately $231.0 million in debt, plus other liabilities. CFI had sales
of $348.0 million in calendar year 1998. A significant portion of these sales
were to the MPG.
In the third quarter of fiscal 1999, the Company acquired 100% of the
voting common shares of Schneider and approximately 59% of its Class A
non-voting shares, which in the aggregate represents approximately 63% of the
total equity of Schneider, in exchange for approximately 2.5 million
Exchangeable Shares of Smithfield Canada Limited, a wholly-owned subsidiary of
the Company. Each Exchangeable Share is exchangeable by the holder at any time
for one common share of the Company. Schneider had sales in its fiscal year
ended October 1998 of $548.1 million.
In April 1999, the Company acquired, in a tender offer, 11.5 million
shares of the capital stock of Animex which represented 67% of total equity and
51% of the voting control of Animex. During the 13-week period ended August 2,
1999, the Company acquired an additional 3.2 million shares of the capital stock
of Animex increasing the Company's ownership to 80% of total equity. Animex had
calendar year 1998 sales of approximately $400.0 million.
In September 1998, the Company acquired all of the capital stock of
SBS. SBS had calendar year 1998 sales of $100.0 million.
In October 1998, the Company acquired all of the assets and business
of North Side. North Side had calendar year 1998 sales of $58.0 million.
Each of these acquisitions was accounted for using the purchase method
of accounting and, accordingly, the accompanying financial statements include
the results of operations from the dates of acquisition.
10-17
Consolidated
13 Weeks Ended August 1, 1999 -
13 Weeks Ended August 2, 1998
Sales in the first quarter of fiscal 2000 increased $276.6 million, or 31.9%,
from the comparable period in fiscal 1999. The increase was primarily
attributable to the incremental sales of the acquired businesses and higher
processed meats volume in the base businesses in the MPG. See the following
section for comments on sales changes by business segment.
Gross profit in the current quarter increased $75.3 million, or 104.4%,
from the comparable period in the prior year on the increased volumes and lower
live hog costs in the MPG and lower feed costs and production efficiencies in
the HPG. Gross profit in the HPG was also favorably impacted by commodity
hedging gains recognized in the first quarter of the current year. In the prior
period, the MPG recognized losses from its commodity positions.
Selling, general and administrative expenses increased $36.6 million,
or 63.0%, in the first quarter of fiscal 2000 from the comparable period in
fiscal 1999. The increase was primarily due to the inclusion of expenses of
acquired businesses, higher selling and marketing costs associated with efforts
to market branded fresh pork and processed meats and expenses associated with
the Year 2000.
Depreciation expense increased $11.9 million, or 92.1%, in the first
quarter of fiscal 2000 from the comparable period in fiscal 1999, primarily from
the inclusion of acquired businesses.
Interest expense increased $4.8 million, or 49.7%, in the first quarter
of fiscal 2000 from the comparable period in fiscal 1999, reflecting the
inclusion of the interest expense of the acquired businesses and the cost of
borrowings to finance the acquisitions of Animex, SBS and North Side.
The effective income tax rate for the first quarter of fiscal 2000
increased to 35.8% compared to 32.3% in the corresponding period of fiscal 1999
primarily on the inclusion of foreign earnings at higher marginal tax rates.
Reflecting the factors previously discussed, net income increased to
$6.9 million, or $ .15 per diluted share, in the first quarter of fiscal 2000,
up from a net loss of $5.3 million, or $.14 per diluted share, in the first
quarter of fiscal 1999.
Meat Processing Group
13 Weeks Ended August 1, 1999 -
13 Weeks Ended August 2, 1998
Sales in the MPG segment increased $265.5 million or 31.0% on a sharp increase
in processed meat volumes and higher fresh meat volumes partially offset by a
slight decline in average unit selling prices. A 58.2% increase in processed
meat volumes reflects the impact of acquired businesses as well as increased
volumes in the base businesses. Fresh meat volumes were up 14.1% principally on
the inclusion of fresh meat volumes of Schneider and Animex. The decline in unit
selling prices reflects the impact of lower live hog costs being passed through
to customers.
Operating profit of the MPG increased to $14.9 million from $6.8 million in
the prior year on higher volumes and margins in fresh and processed meats
partially offset by increased selling and marketing expenses on efforts to
expand distribution and in strengthening the Company's fresh and processed meat
brands. Included in the current quarter were certain nonrecurring costs and
production inefficiencies related to the implementation of food safety programs
at Company facilities as well as increased spending on information systems
related to Year 2000 projects. Acquired businesses contributed to improved
operating results in the current quarter, however, these results were somewhat
offset by operating losses in Animex. Included in last year's first quarter are
certain commodity hedging program results that locked in raw material costs at
higher than current market prices.
11-17
Hog Production Group
13 Weeks Ended August 1, 1999 -
13 Weeks Ended August 2, 1998
The majority of the sales of the HPG group are to the MPG and, therefore, are
eliminated in the Company's consolidated statement of operations. Before
intercompany eliminations, HPG sales increased sharply as a result of the
inclusion of the sales of CFI which were partially offset by lower live hog
prices which decreased 14.5% compared to the same period in the previous year.
With the acquisition of CFI, hogs sold in the current quarter increased to 1.3
million compared to approximately 600.0 thousand for the first quarter of fiscal
1999.
Operating profit of the HPG improved to $16.5 million compared to a
loss of $750.0 thousand in the previous year as a result of lower feed costs and
improved production efficiencies coupled with the impact of favorable commodity
hedging contracts. In the current quarter, commodity hedging contracts for hog
production were closed in connection with delivery of the hogs to the Company's
hog slaughter plants.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operations totaled $14.4 million for the three months ended
August 1, 1999 compared to cash used in operations of $52.4 million in the same
period last year. In addition to the impact of additional earnings in the
current quarter, non-cash charges increased to $26.0 from $13.9 million due
primarily to the incremental depreciation and amortization of acquired
businesses. In the prior year first quarter, the Company made a larger seasonal
investment in inventories for the fall holiday season. In the current quarter,
the Company's normal seasonal investment in working capital was partially offset
by lower live hog prices and average unit selling prices.
Cash used in investing activities declined to $30.4 million in the
current year from $46.1 million from the same period in the prior year. Capital
expenditures totaled $28.9 million in the first quarter of fiscal 2000. These
capital expenditures included processed meat expansion and improvement projects,
additional hog production facilities at Circle Four and replacement systems
associated with the Year 2000. In addition, during the current quarter, the
Company invested $8.2 million to acquire an additional 13% of the capital stock
of Animex increasing the Company's ownership percentage to 80% of total equity.
These capital expenditures and investments were funded with cash provided by
operations and borrowings under the Company's long-term revolving credit
facility. As of August 1, 1999, the Company had definitive commitments of $31.1
million for capital expenditures primarily to increase its value-added fresh
pork capacity at several of its processing plants and for additional hog
production facilities at Circle Four. These expenditures are expected to be
funded with cash provided by operations.
Financing activities provided $12.2 million in the current quarter as
additional borrowings on revolving credit facilities were used primarily for the
repayment of notes payable. During the second quarter of fiscal 2000 the Company
intends to refinance a substantial portion of the debt assumed in connection
with the CFI acquisition. This refinancing will include the placement of $225.0
million of 10 year senior secured notes with two institutional lenders and an
increase in the Company's existing revolving credit facility from $300.0 million
to $400.0 million. The financing is being structured to more closely align the
debt with the underlying assets.
RECENT DEVELOPMENTS
- -------------------
On April 28, 1999 the board of directors authorized the repurchase of up to 2.0
million shares of the Company's common stock. As of September 10, 1999 the
Company has repurchased 810.0 thousand shares under this authorization.
On September 2, 1999, the Company announced an agreement in principle
to acquire all of the capital stock of the corporate entities known as Murphy
Farms, Inc. and Quarter M Farms, Inc. (collectively "Murphy Farms") for 10.0
million shares of Company stock and the assumption of approximately $170.0
million of debt and other liabilities. Murphy Farms is the second largest hog
production company in the U.S. with 325.0 thousand
12-17
sows and markets approximately 5.5 million hogs annually. The acquisition is
expected to be effective in January 2000. Sales for Murphy Farms for its fiscal
year ended October 1998 were approximately $500 million. A significant portion
of those sales were to the Company's MPG group.
On August 12, 1999, the Company acquired the capital stock of Societe
Financiere de Gestion et de Participation S.A. ("SFGP"), a private-label
processed meats manufacturer in France. SFGP had sales of approximately $100.0
million in calendar 1998.
YEAR 2000
- ---------
The Year 2000 problem relates to computer systems that have date-sensitive
programs that were designed to read years beginning with "19," but may not
recognize the year 2000. Company information technology ("IT") systems
(including non-IT systems) and third party information systems that fail due to
the Year 2000 may have a material adverse effect on the Company. The Year 2000
issue has the potential to effect the Company's supply, production, distribution
and financial chains.
The Company began addressing the potential exposure associated with the
Year 2000 during fiscal 1998. 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 had 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 has identified and defined the critical IT and non-IT
projects. These projects relate to systems that include any necessary technology
used in manufacturing or administration with date-sensitive information that is
critical to the day-to-day operations of the business. Of the critical IT
projects identified, 96% have been completed, 3% are in correction and
replacement and the remaining 1% are commencing the correction phase. The non-IT
(plant) projects have identified system components that have a potential issue
with rolling dates into the Year 2000. Of these components, 99% are fully
compliant and the few that remain are in the final remediation testing stage.
Following their acquisition in the fourth quarter of fiscal year 1999 and the
first quarter of fiscal 2000, respectively, the Company completed its assessment
and is well into the remediation phase for Animex and CFI. The overall
compliance status of Animex subsidiaries is currently 81%. The preliminary
review of CFI's Year 2000 readiness is complete, and approximately 77% of the
critical systems are compliant. The remaining systems are targeted to be
compliant by October 31, 1999.
The forecasted cost of the Year 2000 solution, including hardware and
software replacement, is expected to be approximately $34.9 million, of which
$30.2 million has been expended to date. The Company has expensed a total of
$11.0 million, including $2.6 million in the first quarter of fiscal 2000. The
Company estimates $19.6 million of the total 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 developing a worse case scenario and a
contingency plan which includes an evaluation of the criticality of each
manufacturing process and the determination of possible manual alternatives,
including the purchase of additional inventory and related storage for
production supplies. As of August 1, 1999, contingency plans have been written
and documented for 69% of the critical IT (plant) systems.
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
13-17
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 the Company, 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 live
hogs and other 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, domestic and foreign governmental regulations, including without
limitation, environmental and health regulations.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual meeting of Shareholders held September 2, 1999.
(b) Not applicable
(c) There were 44,935 shares of Company's Common Stock and one Series B
Special Voting Preferred Share outstanding as of July 9, 1999, the
record date for the 1999 Annual Meeting of Shareholders. Each share of
Common Stock entitled the holder thereof to one vote; the Series B
Special Voting Preferred Share entitled the holder thereof to 1,174,219
votes; the total number of votes that shareholders could cast at the
1999 Annual Meeting of Shareholders was therefore 46,109,667. A total
of 41,103,633 votes (or 89.1% of the total) were cast.
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. 40,464,723 638,910 0
Douglas W. Dodds 39,915,616 1,188,017 0
F.J. Faison, Jr. 37,186,506 3,917,127 0
Ray A. Goldberg 39,543,797 1,559,836 0
George E. Hamilton, Jr. 40,462,393 641,240 0
Robert G. Hofmann, II 40,470,023 633,610 0
Richard J. Holland 40,632,054 471,579 0
Roger R. Kapella 40,471,297 632,336 0
Lewis R. Little 39,207,947 1,895,686 0
Joseph W. Luter, III 40,466,397 637,236 0
William H. Prestage 36,882,216 4,221,417 0
Joseph B. Sebring 39,936,157 1,167,476 0
Timothy A. Seely 40,636,994 466,639 0
A proposal to ratify the selection of Arthur Andersen LLP as
independent public accountants of the Company for the fiscal year
ending April 30, 2000 was approved by the shareholders with the
following vote:
Votes Broker
Votes For Votes Against Withheld Non-Votes
------------ -------------- ----------- ---------
39,554,281 25,194 1,524,158 0
(d) Not applicable
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Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 3.2 - By-Laws of the Registrant, as amended
to date.
Exhibit 4.6(a) - Amended and Restated Multi-Year Credit
Agreement dated as of September 8,
1999, among Smithfield Foods,
Inc., the Subsidiary Guarantors party
thereto, the Lenders party thereto,
and The Chase Manhattan Bank, as
Administrative Agent, relating to a
$400,000,000 secured multi-year
revolving credit facility.
Exhibits 27 - Financial Data Schedule
B. Reports on Form 8-K
1. A Current Report on Form 8-K for May 7, 1999, was filed with
the Securities and Exchange Commission on May 12, 1999 to
report, under Item 2, the acquisition of Carroll's Foods, Inc.
and its affiliated companies.
2. A Current Report on Form 8-K for July 16, 1999, was filed with
the Securities and Exchange Commission on July 19, 1999, to
report, under Item 5, the audited consolidated financial
statements and the notes thereto of Smithfield Foods, Inc.
for the fiscal year ended May 2, 1999.
3. An Amended Current Report on Form 8-K/A for May 7, 1999, was
filed with the Securities and Exchange Commission on July 21,
1999 to file certain historical and pro forma financial
information relating to the acquisition of Carroll's Foods,
Inc. and its affiliated companies.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SMITHFIELD FOODS, INC.
/s/ C. LARRY POPE
- -----------------
C. Larry Pope
Vice President and Chief Financial Officer
/s/ DANIEL G. STEVENS
- ---------------------
Daniel G. Stevens
Corporate Controller
(Principal Accounting Officer)
Date: September 14, 1999
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