UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1998
______________________________
IBP, inc.
DELAWARE CORPORATION 42-0838666
(State of Incorporation) (Employer Identification Number)
800 STEVENS PORT DRIVE
SUITE 836
DAKOTA DUNES, SD 57049
(Address) (Zip Code)
Telephone Number: (605) 235-2061
________________________________________________
Securities registered pursuant to section 12(b) of Act:
Common Stock Registered with the New York Stock
Exchange and the Pacific Stock
Exchange.
Registrant has filed all reports required to be filed by
Section 13 or 15(d) of the Security Exchange Act of 1934 during the
preceding 12 months, and has been subject to such filing
requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is contained in definitive Proxy Statement
incorporated by reference in Part III of this Form 10-K.
The aggregate market value of the registrant's common stock
held by non-affiliates (91,642,114 shares) based on the New York
Stock Exchange average bid and ask price on March 22, 1999, was
approximately $1.82 billion.
As of March 22, 1999, the registrant had outstanding
92,288,986 shares of its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1998 Annual Report to
Stockholders (the "Annual Report") are incorporated by reference in
Parts I, II and IV of this Report. Portions of the registrant's
definitive Proxy Statement dated March 17, 1999, (the "Proxy
Statement") are incorporated by reference in Part III of this
Report. Other documents incorporated by reference in this Report
are listed in the Exhibit Index on pages 16 through 18.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
IBP, inc., ("IBP") a Delaware corporation, has two business
segments, Fresh Meats and Enterprises. Fresh Meats produces fresh
beef and processed beef and pork products. Fresh Meats' primary
products include boxed beef and fresh pork which are marketed
mainly in the United States to grocery chains, meat distributors,
wholesalers, retailers, restaurant and hotel chains, and processors
who produce cured and smoked products, such as bacon, ham, luncheon
meats and sausage items. Fresh Meats also produces inedible allied
products, such as hides and other items used to manufacture
products such as leather, animal feed and pharmaceuticals, and
edible allied products, which include variety meat items.
Enterprises produces frozen and refrigerated food products for the
foodservice industry.
IBP is currently moving into its new World Headquarters, and
the mailing address of IBP's corporate headquarters is 800 Stevens
Port Drive, Dakota Dunes, South Dakota 57049; its telephone number
is (605) 235-2061. All references to "IBP" include IBP, inc. and
its subsidiaries.
Fresh Meats
IBP operates an extensive sales network to service its
customers with regional sales/service centers in the United States
(including an independently-owned contractor in Los Angeles that is
licensed to use IBP trademarks) as well as sales/service centers in
foreign countries.
IBP operates 10 fed beef carcass production facilities in
seven cattle-producing states and one in Canada, which reduce live
cattle to dressed carcass form. Eight of these locations include
processing facilities which conduct fabricating operations to
produce boxed beef. Fed beef consists primarily of young steers
and heifers specifically raised for beef consumption. IBP operates
three cow boning facilities in Iowa, Nebraska and Texas, which
reduce cows and bulls to dressed carcass form and boneless meat
product. Cows and bulls processed by IBP are primarily breeding or
dairy stock which have been culled for various reasons. IBP also
operates one ground beef facility in Nebraska.
IBP operates six pork carcass facilities in Indiana, Iowa
and Nebraska which reduce live hogs to dressed carcass form. IBP
operates seven processing facilities which conduct fabricating
operations to produce boxed pork. The production process for pork
is similar to that employed in its beef operation.
Enterprises
Enterprises primarily consists of IBP's wholly-owned
subsidiaries Foodbrands America, Inc. ("Foodbrands") and The Bruss
Company ("Bruss"). Foodbrands and Bruss each are extensions of
IBP's Fresh Meats business, offering a wide range of value-added
food products to IBP's customers. Foodbrands manufactures and
markets frozen and refrigerated food products such as pepperoni,
beef and pork toppings, pizza crusts, appetizers, hors d'oeuvres,
desserts, prepared meals, Mexican and Italian foods, soups, sauces,
side dishes, and branded and processed meats. Bruss manufactures
and markets high quality, portion-controlled steaks, pork chops and
other products.
In 1998, IBP completed the acquisition of the assets of the
appetizer division of Diversified Foods Group, L.L.C. which assets
are operated under the name DFG Foods, Inc. ("DFG"). DFG operates
as a subsidiary of Foodbrands with production plants in Chicago,
Illinois and Newark, New Jersey. DFG markets a variety of premium
quality hors d'oeuvres, appetizers, desserts and prepared meals.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The company's businesses are classified into two business
segments: Fresh Meats and Enterprises. The contributions of each
business segment to net sales and operating earnings, and the
identifiable assets attributable to each business segment set forth
in Note M. "Business Segments" on page 43 of the Annual Report
incorporated herein by reference. The Annual Report is an Exhibit
to this Form 10-K.
History of IBP's Business
IBP was first incorporated in 1960. It began operations in
1961 with a single fed beef carcass production facility located
near Denison, Iowa, in what was then the nation's major cattle-
producing region. IBP grew in the Northern and Central Plains
states over the following nine years and added beef plants in
Dakota City, Nebraska; Emporia, Kansas; Luverne, Minnesota; and
West Point, Nebraska. IBP expanded into the Southern Plains in
1975, when it built its Amarillo, Texas facility near the large
commercial feedlot operations of that region. In 1976, it moved
into the Pacific Northwest through the acquisition and expansion of
plants in Pasco, Washington and Boise, Idaho. Company expansion
continued in 1980 with construction of a facility in Finney County,
Kansas and, in 1983, with the purchase and expansion of a plant in
Joslin, Illinois. In 1990, IBP opened its Lexington, Nebraska fed
beef plant and, in 1994, IBP purchased Lakeside Farm Industries, Ltd.
("Lakeside"), an agribusiness company with a fed beef plant in
Brooks, Alberta, Canada. Lakeside was IBP's first plant outside of
the United States. In March of 1998, IBP discontinued operations
at its Luverne, Minnesota facility.
IBP began its cow boning operations in 1995 by acquiring
facilities in Tama, Iowa; Gibbon, Nebraska; and Sealy, Texas. In
1996, IBP acquired its fourth cow boning facility in Palestine,
Texas. These plants supplemented IBP's expansion into hamburger
patty production. IBP increased its hamburger patty production
capabilities in 1997 with the acquisition of the Columbus,
Nebraska, ground beef facility. In August of 1998, IBP
discontinued operations at its Sealy, Texas facility and, in April
of 1999, IBP plans to discontinue its operations at the Palestine,
Texas facility.
IBP began pork operations in 1982 when it purchased,
expanded and commenced operation of a pork facility in Storm Lake,
Iowa. Additional pork facilities were added in 1986 in Louisa
County and Council Bluffs, Iowa; in 1987 in Madison, Nebraska; in
1989 in Perry, Iowa; in 1990 in Waterloo, Iowa; and in 1993 in
Logansport, Indiana. In 1994, IBP constructed ham processing
facilities at its Council Bluffs, Iowa and Madison, Nebraska,
locations. IBP no longer produces carcasses at the Council Bluffs,
Iowa facility; however, the facility is still used for processing
operations. In 1998, IBP entered into an agreement with Plumrose
USA, Inc. ("Plumrose") wherein Plumrose agreed to lease from IBP
the Council Bluffs, Iowa ham processing facility.
In 1990, IBP added its first value-added operation when a
cooked meats facility was added to the Waterloo, Iowa pork
facility. This operation processed fresh meat into value-added,
consumer-ready items such as pork and beef pizza toppings. In
1994, IBP purchased Prepared Foods, Inc. from International
Multifoods, Inc. that included a plant in Santa Teresa, New Mexico.
In 1995, IBP purchased and renovated a facility in Columbia, South
Carolina. The Santa Teresa and Columbia facilities process fresh
meat into value-added, consumer-ready items. In 1997, IBP
increased its presence in the value-added marketplace with the
Foodbrands and Bruss acquisitions. In addition to the Waterloo,
Santa Teresa, and Columbia value-added facilities listed above
which have been put under Foodbrands' management, Foodbrands
operates facilities in Rialto, California; Riverside, California;
Cherokee, Iowa; Edwardsville, Kansas; South Hutchinson, Kansas;
Hutchinson, Kansas; Carthage, Missouri; Concordia, Missouri;
Piedmont, Missouri; Albuquerque, New Mexico; New Rochelle, New
York; Oklahoma City, Oklahoma; Dallas, Texas; Fort Worth, Texas;
Jefferson, Wisconsin; and Green Bay, Wisconsin. In 1998, IBP
acquired the assets of Diversified Food Group, L.L.C. with plants
in Chicago, Illinois (leased facility) and Newark, New Jersey.
These plants are also operated by Foodbrands. The Bruss Company
operates one processing facility in Chicago, Illinois.
Prior to August 1981, when it was acquired by Occidental
Petroleum Corporation ("Occidental"), IBP was a publicly-held
corporation listed on the New York Stock Exchange (the "NYSE").
From August 1981 to October 1987, IBP was a wholly-owned subsidiary
of Occidental. In October 1987, IBP sold 49.5% of its common
stock and was again listed on the NYSE.
On September 4, 1991, Occidental offered all of its shares
of IBP Common Stock to Occidental's stockholders and certain
standby underwriters in an underwritten rights offering. As a
result of this transaction, Occidental sold its IBP Common Stock.
Operations
Cattle and Hog Supplies
IBP does not currently have facilities of its own to raise
cattle or hogs in the United States. However, IBP does have
various risk-sharing and procurement arrangements with producers
that help secure a supply of livestock for daily start-up
operations at its facilities. IBP's Canadian subsidiary, Lakeside,
has cattle feeding facilities, other agricultural divisions and a
beef carcass production and boxed beef processing facility. In
1998, Lakeside's feedlots provided approximately 19% of that
facility's live cattle needs. IBP's main supply of live cattle and
hogs is purchased by IBP buyers who are trained to select high
quality animals that are candidates for higher yields. IBP's buyers
purchase cattle and hogs on a daily basis, generally a few days
before the animals are required for processing. Live animals are
generally held in IBP's holding pens for only a few hours.
Production Process - Fresh Meats
IBP's fed beef carcass production facilities reduce live fed
cattle to dressed carcass form and process allied products. IBP's
beef processing facilities conduct fabricating operations to
produce boxed beef. IBP's fed carcass and beef processing
facilities operated in 1998 at approximately 86% and 83%,
respectively, of their production capacities.
IBP's cow boning facilities produce beef trimmings and
boneless cuts of beef that are further processed by IBP and
sold to customers who produce hamburger, sausage and deli
meats. IBP's cow boning facilities operated in 1998 at
approximately 56% of their production capacity. Due to variances
in product mix that may be processed at a ground beef facility, it
is difficult to estimate a facility's capacity. However, in 1998,
IBP estimates its Columbus, Nebraska ground beef facility operated
at approximately 41% of its production capacity.
IBP's pork facilities produce fresh boxed pork for shipment
to customers, as well as pork bellies, hams and boneless picnic
meat for shipment to customers who further process the pork into
bacon, cooked hams, luncheon meats and sausage items. In 1998,
IBP's pork facilities operated at approximately 85% of their
production capacity.
Throughout production, edible beef, cow boning and pork
allied products, such as variety meat items, are segregated and
prepared for shipment or further refinement. Inedible beef, cow
boning and pork products derived from processing operations are
used in the manufacture of leather, animal feed, gelatin,
pharmaceuticals and cosmetics.
Eight of IBP's fed beef and cow boning plants include hide
treatment facilities. The majority of the hides from IBP's other
fed beef and cow boning plants are transported to these facilities,
which include brine curing operations and, in four locations,
chrome hide tanneries. The chrome tanning process produces a
semifinished product that is shipped to leather good manufacturers
worldwide. Brine-cured hides are sold to other tanneries. IBP is
the largest chrome tanner of cattle hides in the United States.
Production Process - Enterprises
IBP Enterprises production facilities process fresh beef,
fresh pork, and other raw materials into pizza toppings, portion-
controlled steaks and pork chops, branded and processed meats,
appetizers, hors d'oeuvres, desserts, ethnic foods, soups, sauces,
side dishes and pizza crusts. Due to variances in product mix that
may be processed at a value-added facility, it is difficult to
estimate a facility's capacity. However, in 1998, IBP estimates
the Enterprises facilities operated at approximately 85% of their
production capacity.
Facilities
The corporate headquarters of IBP were located during 1998
primarily in Dakota City, Nebraska. In April of 1999, IBP
anticipates materially completing its move into a new corporate
headquarters in Dakota Dunes, South Dakota. IBP believes that its
plants are among the most modern in the world and strives to
maintain and enhance its facilities. Generally, plants and
additions are designed and constructed by IBP's personnel. IBP
generally considers its existing plants and equipment to be in
excellent condition. IBP's capital spending for 1999 is expected
to be in the range of $175 million, which includes expenditures for
environmental compliance activities. Its principal plants as of
December 26, 1998, are described below.
Fresh Meats - Beef
IBP's ten U.S. fed beef carcass production facilities are
located in the states of Idaho, Illinois, Iowa, Kansas, Nebraska,
Texas and Washington. IBP's eleventh fed beef carcass production
facility is in Alberta, Canada. At these locations, eight have
processing facilities, eight have hide treatment or tanning
operations, six have cold storage freezer operations and one has a
tallow refining plant. IBP's three cow boning facilities are
located in Iowa, Nebraska and Texas. IBP also has a ground beef
processing facility in Nebraska.
Fresh Meats - Pork
IBP's six pork carcass production and seven processing
facilities are located in the states of Indiana, Iowa and Nebraska.
At these locations, four have cold storage freezer operations and
two have skinning operations.
Enterprises
IBP's twenty-three facilities under the Enterprises business
are located in California, Illinois, Iowa, Kansas, Missouri,
Nebraska, New Jersey, New Mexico, New York, Oklahoma, South
Carolina, Texas, and Wisconsin.
Sales
IBP's customers for beef, pork and value-added products
include domestic and international grocery chains, meat
distributors, wholesalers, retailers, warehouse clubs, foodservice
distributors, restaurant and hotel chains, and meat processors who
produce cured and smoked products, such as bacon, ham, luncheon
meat and sausage items. Most sales are made pursuant to daily
orders as opposed to long-term supply contracts. In each of the
past three years for Fresh Meats, IBP's largest beef customer
accounted for less than 4% of its annual beef net sales, and its
largest pork customer accounted for less than 7% of its pork net
sales. In each of the past three years, Enterprises' largest
customer accounted for less than 15% of its annual net sales. For
the same periods, IBP's largest customer for all products combined
accounted for less than 4% of its annual net sales.
IBP sells to international customers through foreign and
domestic sales offices. In fiscal 1998, export sales accounted for
approximately 12% of IBP's net sales, which compares to
approximately 13% in fiscal 1997 and 13% in fiscal 1996.
Some allied products are sold as commodities in bulk, while
other items are trimmed, boxed and frozen by IBP. Cattle hides are
sold for both domestic and international use. Uncured and brine-
cured hides are sold to tanneries for further processing. Chrome-
tanned hides are sold to tanneries and directly to further
processors of leather.
Distribution
Fresh Meats
Most products are shipped by trucks, generally from plants
located closest to the purchaser, although other plants may
supplement such deliveries, depending upon prevailing supplies and
product demand.
Enterprises
Enterprises' products are transported by independent
carriers from its distribution/customer service centers in
Edwardsville, Kansas and Rialto, California, or are shipped
directly from the production facility with a view toward achieving
an efficient, cost-effective method of distribution. Customer
requirements vary from the need for large quantities of a limited
number of products to small quantities of a number of items, each
requiring a different distribution method. From the distribution
centers, orders for customers of the different divisions can be
filled and delivered in a single shipment regardless of the variety
of products ordered or the location of the manufacturing facility
at which they are produced. The company also can combine for
shipment the orders of many smaller customers in the same
geographic region. Management believes this flexible distribution
system allows the company to provide superior service to its
customers by reducing the time between the placement of customer
orders and delivery of the company's products. This also lowers
the customer's shipping costs through the elimination of higher-
cost, fragmented deliveries.
Competition
Fresh Meats
The primary industry in which IBP operates is highly
competitive and characterized by very small margins. IBP considers
its principal competition to come from domestic producers of fresh
beef and pork products, although IBP also competes with other
suppliers of protein, including other red meats, poultry, seafood,
grain, dairy products, eggs, soya and other protein products.
Competition exists both in the purchase of live cattle and hogs, as
well as in the sale of beef and pork products. The principal
competitive element in both buying and selling is price.
Failure to accurately assess the quality of cattle and hogs
can result in (i) the payment of an excessive price if the
livestock yields less than expected or (ii) the failure to bid a
price sufficiently high to purchase high quality livestock. To
effectively compete in the purchase of cattle, a cattle buyer must
be able to accurately judge the yield and quality of the cattle to
establish price. As part of IBP's cattle buying process, each
cattle buyer prepares an estimate by lot of the yield and quality
of the cattle purchased. IBP's information systems prepare a
report on each lot that compares the actual yield and quality to
the buyer's initial estimate. This enables IBP to monitor the
quality of various cattle producers and to measure the skill of its
cattle buyers, both of which are critical factors in determining
IBP's success and competitiveness.
IBP's hog buyers generally purchase hogs based upon an
average daily bid price. The average daily bid price is adjusted
for each producer by tracking the producer's yield and quality
results. From the results of the producer's prior sales, IBP is
able to generate a discount or a premium which adjusts the average
daily bid for that individual producer. In addition, IBP has
recently introduced an animal ultrasound system to its pork
facilities to measure the quality and other factors regarding the
profitability of a hog. IBP believes this purchasing system is one
of the most advanced and accurate methods for establishing carcass
values in the industry.
Product quality, product mix, location and service, in
addition to price, are important competitive elements in the sale
of fresh beef and pork products.
IBP is the largest producer of fresh beef and one of the
largest producers of pork products in the United States. IBP
believes that its two largest beef competitors in 1998 were
Monfort, a subsidiary of ConAgra, Inc. ("ConAgra") and Excel
Corporation, a subsidiary of Cargill, Incorporated. IBP believes
that its largest pork competitors in 1998 were Smithfield Foods,
Inc.; ConAgra; and Hormel Foods Corp.
Enterprises
Enterprises' products are sold in highly competitive markets
competing with a significant number of companies of various sizes.
The principal competitive factors in these markets are price,
service, innovative products, and quality.
Employees
As of December 26, 1998, IBP had approximately 40,000
employees. Whenever possible, production employees are recruited
locally and trained by IBP for specific tasks.
IBP considers its relations with its employees at its plants
to be good. Approximately 16,600 hourly employees at 16 of IBP's
45 production facilities are represented by labor organizations.
The labor contracts applicable to these plants expire as follows:
Contract Expiration
Plant Union Date
- ----------------------- -------------- -------------------
Amarillo, Texas Teamsters (1) November 2002
Chicago, Illinois (3) Teamsters (1) April 2001
Pasco, Washington Teamsters (1) May 1999
Rialto, California Teamsters (1) September 2001
Tama, Iowa Teamsters (1) December 2000
Albuquerque, New Mexico UFCW (2) November 2000
Cherokee, Iowa UFCW (2) March 2004
Chicago, Illinois UFCW (2) July 1999
Concordia, Missouri UFCW (2) June 2001
Dakota City, Nebraska UFCW (2) August 1999
Jefferson, Wisconsin UFCW (2) June 2002
Joslin, Illinois UFCW (2) December 2000
Logansport, Indiana UFCW (2) October 2003
Newark, New Jersey UFCW (2) September 1999
Perry, Iowa UFCW (2) May 2003
Riverside, California UFCW (2) May 2001
Rialto, California (4) UFCW (2) May 2001
Waterloo, Iowa UFCW (2) June 2002
_________________
(1) Teamsters local unions affiliated with The International
Brotherhood of Teamsters, Chauffeurs, Warehousemen, and
Helpers of America.
(2) United Food and Commercial Workers, International Union,
AFL-CIO.
(3) The Teamsters contract at the Chicago, Illinois facility
covers only those employees working in distribution.
(4) The UFCW labor contract at the Rialto, California facility
covers only those employees working in distribution.
Regulatory Matters
IBP's operations are subject to the constant inspection and
regulation of the United States Department of Agriculture (the
"USDA"), including (i) regulations of the USDA's Grain Inspection,
Packers and Stockyards Administration, (ii) continuous in-plant
inspection of IBP's production facilities (along with each live
animal, each carcass and all edible products) by USDA employees to
ensure compliance with USDA standards and (iii) grading of beef
carcasses by USDA employees.
IBP is subject to federal, state and local laws and
regulations governing environmental protection. In 1998, IBP
incurred expenses of $19 million to maintain compliance with such
regulations. IBP believes that it is in substantial compliance
with such applicable laws and regulations. IBP is not aware of any
violations of, or pending changes in, such laws and regulations
that are likely to result in material penalties or material
increases in compliance costs. IBP incurred $4 million in capital
expenditures for environmental control facilities in fiscal 1998
and anticipates capital expenditures of approximately $25 million
in fiscal 1999 for environmental related projects.
EXECUTIVE OFFICERS OF THE REGISTRANT
Age at Positions With IBP and
January 27, Five-Year Employment
Name 1999 History
- -------------------------- ----------- ---------------------------
Richard L. Bond 51 President and Chief
Operating Officer since
1997; Director since 1995;
1995-1997 President, Fresh
Meats; 1994-1995 Executive
Vice President, Beef; 1989-
1994 Group Vice President,
Beef Sales and Marketing;
1982-1989 Vice President,
Boxed Beef Sales and
Marketing
Kenneth W. Browning, Jr. 49 Executive Vice President
since 1996; 1989-1996
Senior Vice President, Hide
Division; 1982-1989 Vice
President, Hides
R. Randolph Devening 56 Chief Executive Officer and
President, Foodbrands
America, Inc. since 1994;
Chairman of the Board,
Foodbrands America, Inc.
1994 to 1997
Craig J. Hart 43 Vice President and
Controller since 1995;
1993-1995 Assistant Vice
President and Controller;
1990-1993 Controller
David C. Layhee 54 President, Value-Added
Ground Meats since 1997;
1995-1997 President,
Consumer Products; 1994-
1995 Executive Vice
President, Design Products;
1989-1994 Group Vice
President, Design Products;
1983-1989 Group Vice
President, Sales &
Marketing
Eugene D. Leman 56 President, Fresh Meats
since 1997; Director since
1989; 1995-1997 President,
Allied Group; 1986-1995
Executive Vice President,
Pork Division; 1981-1986
Group Vice President, Pork
Division
James V. Lochner 46 Executive Vice President,
since 1995; 1993-1995
Senior Vice President,
Technical Services; 1989-
1993 Vice President,
Technical Services; 1986-
1989 Assistant Vice
President Quality Control,
Beef; 1984-1986 Director,
Quality Control
Charles F. Mostek 51 Executive Vice President
since 1995; 1989-1995 Vice
President, Beef Sales;
1985-1989 Vice President,
Slaughter Division Sales;
1981-1985 Assistant Vice
President, Carcass Grading
and Administration
Robert L. Peterson 66 Chairman of the Board of
Directors since 1981; Chief
Executive Officer since
1980; Director since 1976;
1979-1995 President
Kenneth L. Rose 54 Executive Vice President
since 1995; 1989-1995
Senior Vice President,
Logistics Services; 1982-
1989 Vice President,
Transportation
Jerry S. Scott 53 Executive Vice President
since 1995; 1986-1995 Vice
President, Pork Operations
Larry Shipley 43 President, IBP Enterprises
since 1997; 1995-1997
Executive Vice President,
Corporate Development; 1995
Senior Vice President,
Corporate Development;
1994-1995 Assistant to the
Chairman; 1989-1994
Assistant to the President.
ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference from the Annual Report, page 44,
section entitled "Notes to Consolidated Financial Statements," at
note "O. Contingencies."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of IBP's security
holders during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference from Annual Report, page 37,
section entitled "Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive Income"; and from page 44,
section entitled "Notes to Consolidated Financial Statements," at
note "P. Quarterly Financial Data (Unaudited)".
IBP's Common Shares were held by approximately 7,000
stockholders of record at year-end 1998. The Common Stock is
listed on the New York and Pacific Stock Exchanges.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(in thousands, except net sales and per share data)
Fiscal Year Ended
--------------------------------------------------------
Dec. 26, Dec. 27, Dec. 28, Dec. 30, Dec. 31,
1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- ---------
OPERATIONS:
Net sales (in millions) $ 12,849 $ 13,259 $ 12,539 $ 12,668 $ 12,075
Gross profit 662,208 442,892 443,582 604,068 460,109
Selling, general
and administrative
expense 288,473 216,176 120,674 123,972 112,772
Earnings from
operations 373,735 226,716 322,908 480,096 347,337
Interest expense, net 43,213 38,002 3,373 20,784 38,448
Income taxes 125,700 71,700 120,800 179,200 126,600
Extraordinary loss (2) (14,815) - - (22,189) -
Net earnings 190,007 117,014 198,735 257,923 182,289
PER SHARE DATA:
Earnings per share:
Earnings before
extraordinary item $2.21 $1.26 $2.10 $2.96 $1.92
Extraordinary loss (2) (.16) - - (.24) -
Net earnings 2.05 1.26 2.10 2.72 1.92
Earnings per share -
assuming dilution:
Earnings before
extraordinary item $2.19 $1.25 $2.07 $2.92 $1.90
Extraordinary loss (2) (.16) - - (.23) -
Net earnings 2.03 1.25 2.07 2.69 1.90
Dividends per share .10 .10 .10 .10 .10
FINANCIAL CONDITION:
Working capital $ 231,003 $ 207,109 $ 540,903 $ 427,241 $359,238
Total assets 3,008,096 2,838,941 2,174,495 2,027,601 1,865,463
Long-term obligations 575,522 568,281 260,008 260,752 361,760
Stockholders' equity 1,400,914 1,237,069 1,203,655 1,022,939 780,494
(1) 53-week year.
(2) Extraordinary loss on early extinguishment of debt, net of applicable
income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference from the Annual Report, pages
45-46, section entitled "Management's Discussion and Analysis."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from the Annual Report page 46,
section entitled "Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the Annual Report, pages
32-46, sections entitled "Consolidated Financial Statements,"
"Notes to Consolidated Financial Statements" and "Report of
Independent Accountants."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Incorporated by reference from the Proxy Statement, page
12, section entitled "INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS."
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Proxy Statement,
pages 2-4, section entitled "ELECTION OF DIRECTORS" and reference
is also made to the information regarding executive officers set
forth in "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Proxy Statement,
pages 8-11, section entitled "SUMMARY COMPENSATION TABLE"; "OPTION
GRANTS TABLE," "AGGREGATED OPTION EXERCISES AND YEAR-END OPTION
VALUE TABLE," "PERFORMANCE GRAPH," and from page 5, section
entitled "ELECTION OF DIRECTORS," subsection "Information
Regarding Directors' Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the Proxy Statement, page
2 and page 6, sections entitled "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Proxy Statement,
pages 2-5, sections entitled "ELECTION OF DIRECTORS," subsection
"Information Regarding the Board of Directors and its Committees"
and from page 8, section entitled "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report.
The following financial information is
incorporated by reference from the Annual Report,
as identified below, or is found in this report.
1. Consolidated Financial Location
Statements
Report of Independent Accountants Annual Report, page 32
and page 19 of this
report
Consolidated Statements of Earnings Annual Report, page 33
Consolidated Balance Sheets Annual Report, pages
34-35
Consolidated Statements of Cash Flows Annual Report, page 36
Consolidated Statements of Changes in Annual Report, page 37
Stockholders' Equity and Comprehensive
Income
Notes to Consolidated Financial Annual Report, pages
Statements 38-44
2. Financial Statement Schedule
Reports of Independent Accountants on Financial
Statement Schedules
Schedule II Valuation and Qualifying Accounts and
Reserves
All other schedules are omitted because they are not
applicable or not required.
3. Exhibits
3.1* Restated Certificate of Incorporation of IBP (filed
as Exhibit No. 3.1. to the Annual Report on Form
10-K of IBP for the fiscal year ended December 28,
1996, File No. 1-6085).
3.2 Restated By-laws of IBP (filed as Exhibit No. 3.2 to
the Annual Report on Form 10-K of IBP for the
fiscal year ended December 28, 1996, File No. 1-
6085).
10.5* IBP's 1987 Stock Option Plan (Compensatory
Plan)(filed as Exhibit No. 28(a) to IBP's
Registration Statement on Form S-8, dated January
5, 1988, File No. 33-19441).
10.5.1* Form of Stock Option Agreement (10/1/87)
(Compensatory Plan) (filed as Exhibit No. 28(b) to
IBP's Registration Statement on Form S-8, dated
January 5, 1988, File No. 33-19441).
10.5.2* Form of Stock Option Agreement (12/31/87)
(Compensatory Plan) (filed as Exhibit No. 28(c) to
IBP's Registration Statement on Form S-8, dated
January 5, 1988, File No. 33-19441).
10.5.3* IBP Officer Long-Term Stock Plan (Compensatory Plan)
(filed as Exhibit No. 10.5.3 to the Annual Report
on Form 10-K of IBP for the fiscal year ended
December 25, 1993, File No. 1-6085).
10.5.4* IBP Directors Stock Option Plan (Compensatory Plan)
(filed as Exhibit No. 10.5.4 to the Annual Report
on Form 10-K of IBP for the fiscal year ended
December 25, 1993, File No. 1-6085).
10.5.5* IBP 1993 Stock Option Plan (Compensatory Plan)
(filed as Exhibit No. 10.5.5 to the Annual Report
on Form 10-K of IBP for the fiscal year ended
December 25, 1993, File No. 1-6085).
10.5.6* 1996 Officer Long-Term Stock Plan (Compensatory
Plan) (filed as Exhibit No. 10.5.6 to the Annual
Report on Form 10-K of IBP for the fiscal year
ended December 28, 1996, File No. 1-6085).
10.5.7* 1996 Stock Option Plan (Compensatory Plan) (filed as
Exhibit 10.5.7 to the Annual Report on Form 10-K of
IBP for the fiscal year ended December 28, 1996.
File No. 1-6085).
10.8* Form of IBP's Indemnification Agreement with
officers and directors (Management Contract) (filed
as Exhibit No. 10.8 to IBP's Registration Statement
on Form S-1, dated August 19, 1987, File No. 1-
6085).
10.21* Credit Agreement (Revolving/Term Credit Facility)
dated as of December 21, 1995, between IBP, inc.
and various lenders with First Bank National
Association as Administrative Agent and Bank of
America National Trust and Savings Association as
Co-Agent. (filed as Exhibit No. 10.21 to the
Annual Report on Form 10-K of IBP, for the fiscal
year ended December 30, 1995, File No. 1-6085).
10.23* Inter-company Agreement, dated as of September 4,
1991, between IBP and Occidental Petroleum
Corporation (filed as Exhibit No. 10.23 to the
Annual Report on Form 10-K of IBP for the fiscal
year ended December 28, 1991, File No. 1-6085).
10.24* Employment Agreement, effective as of August 18,
1997, between IBP and Larry Shipley (Management
Contract) (filed as Exhibit No. 10.24 to the Annual
Report on Form 10-K of IBP for the fiscal year
ended December 27, 1997, File No. 1-6085).
10.25* Employment Agreement, effective as of March 1, 1997,
between IBP and Richard L. Bond (Management
Contract)(filed as Exhibit No. 10.25 to the Annual
Report on Form 10-K of IBP for the fiscal year
ended December 27, 1997, File No. 1-6085).
10.26* Employment Agreement, effective as of March 1, 1997,
between IBP and Eugene D. Leman (Management
Contract)(filed as Exhibit No. 10.26 to the Annual
Report on Form 10-K of IBP for the fiscal year
ended December 27, 1997, File No. 1-6085).
10.27 Employment Agreement, effective as of December 22,
1995 between IBP and Craig Hart (Management
Contract).
10.28* Text of Retirement Income Plan of IBP, inc. (As
Amended and Restated Effective as of January 1,
1992), as amended. (Compensatory Plan) (filed as
Exhibit No. 10.28 to the Annual Report on Form 10-K
of IBP for the fiscal year ended December 26, 1992,
File No. 1-6085).
10.29* Employment Agreement, effective January 1, 1993,
between IBP and Dale Tinstman (filed as Exhibit No.
10.29 to the Annual Report on Form 10-K of IBP for
the fiscal year ended December 25, 1993, File No.
1-6085).
13. 1998 Annual Report to Stockholders.
21. Subsidiaries of IBP, inc. as of December 26, 1998.
22.* Matters submitted to vote of security holders (filed
as Item 4 to the Quarterly Report on Form 10-Q for
the 26 weeks ended June 27, 1998, File No. 1-6085).
23.1 Consent of Independent Public Accountants
(PricewaterhouseCoopers LLP).
27. Financial Data Schedule.
__________________
* Incorporated herein by reference
(b) Reports on Form 8-K
Not Applicable
(c) Other Matters
With the exception of the information expressly referenced
and thereby incorporated in ITEMS 3, 5, 6, 7 and 8, the Annual
Report is not to be deemed "filed" with the Securities and Exchange
Commission or otherwise subject to the liabilities of Section 18 of
the Securities and Exchange Act of 1934.
For the purpose of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities
Act of 1933, IBP hereby undertakes as follows, which undertaking
shall be incorporated by reference into IBP's Registration
Statement on Form S-8 No. 33-19441 (filed January 5, 1988):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of IBP pursuant to the foregoing provisions, or
otherwise, IBP has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
IBP of expenses incurred or paid by a director, officer or
controlling person of IBP in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, IBP will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IBP, inc.
Our audits of the consolidated financial statements referred to in
our report dated January 22, 1999, which has been incorporated by
reference in this Form 10-K from page 32 of the 1998 Annual Report
to Stockholders of IBP, inc., also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
Omaha, Nebraska
January 22, 1999
IBP, inc. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AND RESERVES
Fiscal Years 1996, 1997, and 1998
(In thousands)
Allowance
for Doubtful
Accounts
------------
Balance, December 30, 1995 $ 9,494
Amounts charged to costs and expenses 379
Recoveries of amounts previously
written off 115
Write-off of uncollectible accounts (112)
Other (3)
-------
Balance, December 28, 1996 9,873
Amounts charged to costs and expenses 514
Recoveries of amounts previously
written off 39
Write-off of uncollectible accounts (829)
Other 466
-------
Balance, December 27, 1997 10,063
Amounts charged to costs and expenses 1,890
Recoveries of amounts previously
written off 231
Write-off of uncollectible accounts (101)
Other 28
-------
Balance, December 26, 1998 $ 12,111
=======
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
IBP, inc.
By: /s/ Robert L. Peterson
-------------------------
Robert L. Peterson
Chairman of the Board
and Chief Executive Officer
Date: 3/25/99
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
- ------------------------ ------------------------ --------
/s/ Robert L. Peterson Chairman of the Board 3/25/99
- ------------------------ --------
Robert L. Peterson and Chief Executive
Officer (principal
executive officer)
/s/ Larry Shipley President, IBP 3/25/99
- ------------------------ --------
Larry Shipley Enterprises and Chief
Financial Officer
(principal financial
officer)
/s/ Craig J. Hart Vice President and 3/25/99
- ------------------------- --------
Craig J. Hart Controller
/s/ Richard L. Bond Director 3/25/99
- ------------------------- --------
Richard L. Bond
- ------------------------- Director --------
John S. Chalsty
/s/ Wendy L. Gramm Director 3/23/99
- ------------------------- --------
Wendy L. Gramm
/s/ John J. Jacobson, Jr. Director 3/22/99
- ------------------------- --------
John J. Jacobson, Jr.
/s/ Eugene D. Leman Director 3/25/99
- ------------------------- --------
Eugene D. Leman
- ------------------------- Director --------
Michael L. Sanem
/s/ Martin A. Massengale Director 3/23/99
- ------------------------- --------
Martin A. Massengale
/s/ JoAnn R. Smith Director 3/23/99
- ------------------------- --------
JoAnn R. Smith
/s/ Dale C. Tinstman Director 3/22/99
- ------------------------- --------
Dale C. Tinstman
EMPLOYMENT AGREEMENT
This Agreement, effective the 22nd day of December, 1995 (the "Effective
Date"), by and between IBP, inc., a Delaware corporation (hereinafter referred
to as "Employer"), and Craig J. Hart (hereinafter referred to as "Employee").
WITNESSETH:
Employer hereby agrees to employ, or agrees to continue to employ Employee, and
Employee agrees to be employed upon the following terms and conditions.
1. Duties. Employee shall perform the duties of Vice President & Controller
or shall serve in such other capacity and with such other duties for Employer as
Employer shall hereafter from time to time prescribe.
2. Term of Employment. The term of employment shall be for a period of
five (5) years, commencing on the Effective Date of this Agreement, unless
terminated prior thereto in accordance with the provisions of this Agreement.
3. Compensation. For the services to be performed hereunder, Employee
shall be compensated by Employer at the rate of not less than Eighty-Five
Thousand Dollars ($85,000.00) per year payable monthly, and in addition may
receive awards under Employer's Cash Bonus Plan subject to the discretion of
the senior management of Employer. Such compensation will be subject to review
from time to time when salaries of other officers and managers of Employer are
reviewed for consideration of increases therein.
4. Participation in Benefit Programs. Employee shall be entitled to
participate in any benefit programs generally applicable to officers of Employer
adopted by Employer from time to time.
5. Limitation on Outside Activities. Employee shall devote full
employment energies, interest, abilities and time (except for personal
investments) to the performance of obligations hereunder and shall not, without
the written consent of the Chief Executive Officer of the Company, render to
others any service of any kind or engage in any activity which conflicts or
interferes with the performance of duties hereunder.
6. Ownership of Employee's Inventions. All ideas, inventions, and
other developments or improvements conceived by Employee, alone or with others,
during the term of his employment, whether or not during working hours, that are
within the scope of Employer's business operations or that relate to any of the
Employer's work or projects, are the exclusive property of Employer. Employee
agrees to assist Employer, at its expense, to obtain patents on any such
patentable ideas, inventions, and other developments, and agrees to execute
all documents necessary to obtain such patents in the name of the Employer.
7. Termination.
(a) Voluntary Termination. Employee may terminate this Agreement at
any time by not less than one year's prior written notice to Employer.
Employee shall not be entitled to any compensation from Employer for any period
beyond Employee's actual date of termination.
(b) Resignation. In the event Employee shall resign from employment at
the request of Employer, Employer shall compensate Employee at the rate and in
the manner provided in Paragraph 3 above for a period after termination
equivalent to the lesser of (i) one year, or (ii) the remainder of the term of
this Agreement. During the time Employee is being compensated in lieu of
continued employment, the Employer shall have the right to require the
Employee to perform consulting services from time to time on behalf of the
Employer. Any out-of-pocket expenses associated with any such assignment
shall be, upon proper documentation, reimbursed by Employer to Employee.
In the event Employer compensates Employee in lieu of continued employment, all
remuneration or wages earned by Employee during such period, either as an
employee, independent contractor or consultant to any person, firm, or
corporation other than Employer, shall be a set-off to Employer's duty of
compensation to Employee.
(c) Company Termination. In the event Employer shall conclude, in its
sole discretion, that it is no longer in the interest of the Company to continue
the employment of Employee, the Employer may terminate this Agreement, and
Employer shall have no further obligation to pay compensation to Employee after
the effective date of termination.
(d) Incapacity. If Employee is materially incapacitated from fully
performing his or her duties pursuant to this Agreement by reason of illness or
other incapacity or by reason of any statute, law, ordinance, regulation, order,
judgement or decree, Employer may terminate this Agreement by 30 days written
notice to Employee, but only in the event that such incapacity shall aggregate
not less than one hundred twenty (120) days during any one year.
8. Confidential Information, Trade Secrets, Limitations on Solicitation and
Non-Compete Clause.
(a) Employee shall receive, in addition to all regular compensation for
services as described in Section 3 of this Employment Agreement, as additional
consideration for signing this Employment Agreement and for agreeing to abide
and be bound by the terms, provisions and restrictions of this Section 8, the
following:
(i) an award of such number of shares of Common Stock of
Employer under the terms and conditions of the Employer's new IBP Officer
Long-Term Stock Plan as shall be equal to an aggregate value of $150,000 less
amounts due to restrictions on promotional grants (see Employee Award; Letter)
(ii) a grant of options to purchase an aggregate of Three
Thousand Two Hundred (3,200) shares of Common Stock of Employer under the terms
and conditions of the Employer's new IBP 1993 Stock Option Plan and each year on
the annual grant date for stock options an Annual Option Grant of options to
purchase shares of Common Stock of the Employer which is equal to three times
(3x) the Annual Option Level of the Employee's officer-position band option
level, provided that the Employee has been on the payroll, whether as an officer
or otherwise, at least six months prior to the annual grant date; and
(iii) the right to receive Bonus Option Grants, under the terms and
conditions of the new IBP 1993 Stock Option Agreement with Bonus Options shall
be executed by the Employer and the Employee pursuant to the new IBP 1993 Stock
Option Plan, upon the Employee's exercise of any options granted to the Employee
which qualify as Incentive Stock Options (ISOs) under the Internal Revenue Code
of 1990, as amended or superseded.
(b) Employee recognizes that, as a result of his employment hereunder (and his
employment, if any, with Employer for periods prior to the Effective Date), he
has had and will continue to have access to confidential information, trade
secrets, proprietary information, intellectual property, and other documents,
data, and information concerning methods, processes, controls, techniques,
formulaes, production, distribution, purchasing, financial analysis, returns
and reports which is the property of and integral to the operations and
success of Employer, and therefore agrees to be bound by the provisions
of this Section 8, which Employee agrees and acknowledges to be reasonable and
to be necessary to protect legitimate and important business interests and
concerns of Employer.
(c) Employee agrees that he will not divulge to any person, nor use to the
detriment of Employer or any of its subsidiaries, nor use in any business or
process of manufacture competitive with or similar to any business or process of
manufacture of Employer or any of its subsidiaries, at any time during the term
of this Agreement or thereafter, any of the Employer's trade secrets, without
first obtaining the express written permission of Employer. A trade secret
shall include any formula, pattern, device or compilation of information used
by Employer in its business. For purposes of this Section 8, the compilation
of information shall include, without limitation, the identity of
customers and suppliers and information reflecting their interests, preferences,
credit-worthiness, likely receptivity to solicitation for participation in
various transactions and related information obtained during the course of his
employment with Employer.
(d) Employee agrees that at the time of leaving the employ of Employer
he will deliver to Employer, and not keep or deliver to anyone else, any and all
notebooks, memoranda, documents and, in general, any and all materials relating
to Employer's business, or constituting Employer's property. Employee
further agrees that he will not, directly or indirectly, request or advise any
customers or suppliers of employer or any of its subsidiaries to withdraw,
curtail or cancel its business with Employer or any of its subsidiaries.
(e) During the term of Employee's employment with the Employer and
for a period of one (1) year from the termination of Employee's employment
for any reason whatsoever Employee (i) will not directly or indirectly, in the
United States, own, manage, operate, control, or participate in as a partner,
director, holder of more than 5% of the outstanding voting shares, principal, or
officer, any business in direct competition with the business of the Employer
and (ii) will not accept employment or be employed by any such firm or
corporation in any position where he would perform services materially
similar to those which he has provided for Employer during the term hereof.
(f) Employee recognizes that he posses confidential information and trade
secrets about other employees of Employer and its subsidiaries relating to their
education, experience, skills, abilities, salary and benefits, and interpersonal
relationships with customers and suppliers of Employer and its subsidiaries.
Employee recognizes that the information he possesses about these other
employees is not generally known, is of substantial value to Employer in
securing and retaining customers and suppliers, and was acquired by Employee
because of his business position with Employer. Employee agrees that during
his employment hereunder, and for a period of three (3) years thereafter,
Employee shall not, directly or indirectly, solicit or contact any employee or
agent of Employer or any of its subsidiaries, with a view to inducing or
encouraging such employee or agent to leave the employ of Employer or any of its
subsidiaries, for the purpose of being hired by Employee, and employer
affiliated with Employee, or any competitor of Employer or any of its
subsidiaries. Employee agrees that he will not convey any such confidential
information or trade secrets about other employees to anyone affiliated with
Employee or to any competitor of Employer or any of its subsidiaries.
(g) Employee acknowledges that the restrictions contained in this Section
8 are reasonable and necessary to protect Employer's interest in this
agreement and that any breach thereof will result in an irreparable injury to
Employer for which Employer has no adequate remedy at law. Employee
therefore agrees that , in the event that Employee breaches any of the
provisions contained in this Section 8, Employer shall be authorized and
entitled to seek from any court of competent jurisdiction (i) a temporary
restraining order, (ii) preliminary and permanent injunctive relief, (iii) an
equitable accounting of all profits or benefits arising out of such breach, and
(iv) direct, incidental and consequential damages arising from such breach.
(h) Employer and Employee have attempted to specify a reasonable
period of time, a reasonable area and reasonable restrictions to which this
Section 8 shall apply. Employer and Employee agree that if a court or
administrative body should subsequently determine that the terms of this
Section 8 are greater than reasonable necessary to protect Employer's
interest, Employer agrees to waive those terms which are found by a court or
administrative body to be greater than reasonably necessary to protect
Employer's interest and to request that the court or administrative body reform
this Agreement specifying a reasonable period of time and such other reasonable
restrictions as the court or administrative body deems necessary.
(i) Employee further agrees that this Section 8 is an integral part of
this agreement, and that should a court fail or refuse to enforce the
restrictions contained herein in such a manner as to effectively enjoin
competitive activity, the Employer shall recover from Employee, and the court
shall award as damages to the Employer, the consideration provided to and
elected by Employee under the terms of Section 8(a) above (or the monetary
equivalent thereof), its cost and its reasonable attorney's fees.
9. Modification. This Agreement contains all the terms and conditions agreed
upon by the parties hereto, and no other agreements, oral or otherwise,
regarding the subject matter of this Agreement shall be deemed to exist or bind
either of the parties hereto, except for a confidentiality agreement between the
parties dated December 26, 1978. This Agreement cannot be modified except by a
writing signed by both parties.
10. Assignment. This Agreement shall be binding upon Employee, his heirs,
executors and assigns and upon Employer, its successors and assigns.
11. Applicable Law. This Agreement is made and entered into in the State of
South Dakota. The validity, interpretation, performance and enforcement of this
agreement shall be governed by the internal laws of said State of South Dakota,
without giving effect to the conflict of laws provisions thereof.
IN WITNESS WHEREOF , the parties hereto have executed this Agreement
effective as of the day and year first above written.
IBP, inc.
By /s/ Robert L. Peterson
---------------------------
/s/ Craig J. Hart 1/20/96
------------------ ---------
(Employee)
IBP, inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 26, December 27,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,254 $ 69,022
Marketable securities 1,400 3,120
Accounts receivable, less allowance for
doubtful accounts of $12,111 and $10,063 599,999 564,125
Inventories (Note B) 405,418 389,753
Deferred income tax benefits (Note E) 51,761 48,602
Prepaid expenses 10,983 9,305
--------- ---------
TOTAL CURRENT ASSETS 1,096,815 1,083,927
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and land improvements 106,492 108,055
Buildings and stockyards 544,711 501,166
Equipment 1,096,571 1,053,983
--------- ---------
1,747,774 1,663,204
Accumulated depreciation and amortization (843,937) (774,694)
--------- ---------
903,837 888,510
Construction in progress 168,256 128,572
--------- ---------
1,072,093 1,017,082
OTHER ASSETS: --------- ---------
Goodwill, net of accumulated amortization
of $158,808 and $137,996 724,089 671,557
Other 115,099 66,375
--------- ---------
839,188 737,932
--------- ---------
$3,008,096 $2,838,941
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note D) $ 565,517 $ 569,641
Notes payable to banks (Note C) 140,967 192,010
Federal and state income taxes 152,122 106,375
Deferred income taxes (Note E) 1,818 4,266
Other 5,388 4,526
----------- ---------
TOTAL CURRENT LIABILITIES 865,812 876,818
LONG-TERM OBLIGATIONS (Notes C and F) 575,522 568,281
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes (Note E) 17,037 15,446
Other 148,811 141,327
--------- ---------
165,848 156,773
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes N and O)
STOCKHOLDERS' EQUITY (Note G):
Preferred stock, 25,000,000 shares
authorized; none issued
Common stock, $.05 par value per share;
authorized 200,000,000 shares;
issued 95,000,000 shares 4,750 4,750
Additional paid-in capital 405,278 406,952
Retained earnings 1,067,725 886,964
Accumulated other comprehensive income (16,456) (6,114)
Treasury stock, at cost, 2,686,188
and 2,414,349 shares (60,383) (55,483)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,400,914 1,237,069
--------- ---------
$3,008,096 $2,838,941
========= =========
See notes to consolidated financial statements.
IBP, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
52 Weeks Ended
-------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
Net sales (Note A) $12,848,635 $13,258,784 $12,538,753
Cost of products sold 12,186,427 12,815,892 12,095,171
---------- ---------- ----------
Gross profit 662,208 442,892 443,582
Selling, general and
administrative expense 288,473 216,176 120,674
---------- ---------- ----------
Earnings from operations 373,735 226,716 322,908
Interest:
Incurred (55,653) (50,001) (19,536)
Capitalized 7,976 6,933 6,813
Income 4,464 5,066 9,350
---------- ---------- ----------
(43,213) (38,002) (3,373)
---------- ---------- ----------
Earnings before income taxes
and extraordinary item 330,522 188,714 319,535
Income taxes (Note E) 125,700 71,700 120,800
---------- ---------- ----------
Earnings before extraordinary
item 204,822 117,014 198,735
Extraordinary loss on early
extinguishment of debt,
less applicable taxes
(Note F) (14,815) - -
---------- ---------- ----------
Net earnings $ 190,007 $ 117,014 $ 198,735
========== ========== ==========
Earnings per share (Note K):
Earnings before extraordinary
item $2.21 $1.26 $2.10
Extraordinary item (.16) - -
---- ---- ----
Net earnings $2.05 $1.26 $2.10
==== ==== ====
Earnings per share - assuming dilution:
Earnings before extraordinary
item $2.19 $1.25 $2.07
Extraordinary item (.16) - -
---- ---- ----
Net earnings $2.03 $1.25 $2.07
==== ==== ====
See notes to consolidated financial statements.
<TABLE>
IBP,inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Total Stock Capital Earnings Income Stock
---------- ------ ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 30, 1995 $1,022,939 $4,750 $432,726 $ 589,936 $ 116 $(4,589)
Comprehensive income: ---------
Net earnings 198,735 198,735
Other comprehensive income:
Foreign currency
translation adjustments (148) (148)
---------
Comprehensive income 198,587
---------
Dividends declared on common
stock, $.10 per share (9,472) (9,472)
Treasury shares purchased (15,405) (15,405)
Treasury share delivered under
employee stock plans 7,006 (5,270) 12,276
--------- ----- ------- ------- ------ ------
Balances, December 28, 1996 1,203,655 4,750 427,456 779,199 (32) (7,718)
---------
Comprehensive income:
Net earnings 117,014 117,014
Other comprehensive income:
Foreign currency
translation adjustments (6,082) (6,082)
---------
Comprehensive income 110,932
---------
Dividends declared on common
stock, $.10 per share (9,249) (9,249)
Treasury shares purchased (73,915) (73,915)
Treasury share delivered under
employee stock plans 5,646 (20,504) 26,150
--------- ----- ------- ------- ----- -------
Balances, December 27, 1997 1,237,069 4,750 406,952 886,964 (6,114) (55,483)
---------
Comprehensive income:
Net earnings 190,007 190,007
Other comprehensive income:
Foreign currency
translation adjustments (10,342) (10,342)
---------
Comprehensive income 179,665
---------
Dividends declared on common
stock, $.10 per share (9,246) (9,246)
Treasury shares purchased (12,370) (12,370)
Treasury share delivered under
employee stock plans 5,796 (1,674) 7,470
--------- ----- ------- --------- -------- -------
Balances, December 26, 1998 $1,400,914 $4,750 $405,278 $1,067,725 $ (16,456) $(60,383)
========= ===== ======= ========= ======== =======
See notes to consolidated financial statements.
IBP, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
52 Weeks Ended
--------------------------------
Dec. 26, Dec. 27, Dec. 28,
1998 1997 1996
-------- -------- ---------
Inflows (outflows)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $190,007 $ 117,014 $ 198,735
------- -------- --------
Adjustments to reconcile net earnings
to cash flows from operations:
Depreciation and amortization 100,821 92,292 73,910
Amortization of intangible asts 25,405 17,638 8,780
Deferred income tax (benefit)rovision (5,300) 1,175 7,500
Extraordinary loss on
extinguishment of debt 14,815 - -
Working capital changes, net of
effects of acquisitions:
Accounts payable and accrued
liabilities 71,936 (21,901) (57,976)
Accounts receivable (32,070) (16,069) 28,950
Inventories (13,773) (11,761) 3,912
Other adjustments, net 8,989 9,529 4,167
------- -------- --------
170,823 70,903 69,243
Net cash flows provided by
operating activities 360,830 187,917 267,978
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposals of marketable
securities 257,721 403,723 922,051
Purchases of marketable securities (250,954) (237,243) (1,043,180)
Capital expenditures (245,692) (133,925) (170,664)
Investment in life insurance contracts (38,000) (4,000) -
Payments for stock of new subsidiaries,
net of cash acquired - (324,891) -
Other investing activities, net (2,051) 9,855 1,944
------- ------- --------
Net cash flows used in investing
activities (278,976) (286,481) (289,849)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
obligations (114,371) (212,054) (615)
Proceeds from issuance of long-term debt 49,773 132,187 197,878
Net change in checks in process of
clearance (29,464) (7,715) 22,520
Premiums paid on early retirement of debt (20,636) - -
Increase (decrease) in short-term debt 11,000 238,500 (200,000)
Dividends paid (9,252) (9,300) (9,473)
Purchases of treasury stock (12,370) (73,915) (3,129)
Other financing activities, net 3,246 6,465 (7,497)
------- ------- -------
Net cash flows (used in) provided by
financing activities (122,074) 74,168 (316)
------- ------- -------
Effect of exchange rate on cash and
cash equivalents (1,548) (746) 74
------- ------- ------
Net change in cash and cash equivalents (41,768) (25,142) (22,113)
Cash and cash equivalents at beginning
of year 69,022 94,164 116,277
------- ------- --------
Cash and cash equivalents at end of year $ 27,254 $ 69,022 $ 94,164
======= ======== ========
See notes to consolidated financial statements.
IBP, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997
AND DECEMBER 28, 1996
(Columnar amounts in thousands, except per share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - All subsidiaries are wholly-owned and
are consolidated in the accompanying financial statements. All material
intercompany balances, transactions and profits have been eliminated.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
FISCAL YEAR - IBP's fiscal year ends on the last Saturday of the
calendar year. Fiscal years 1998, 1997 and 1996 all consisted of 52
weeks.
EXPORT SALES - In 1998, 1997 and 1996, net export sales, principally
to customers in Asia and also to destinations in the Americas and Europe,
amounted to $1.6 billion, $1.7 billion and $1.7 billion, respectively.
STATEMENT OF CASH FLOWS - For purposes of the statement of cash
flows, management considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
Such investments are carried at cost, which approximates fair value.
DERIVATIVE INSTRUMENTS - To manage interest rate and currency
exposures, the company uses interest rate swaps and currency forward
contracts. IBP specifically designates interest rate swaps as hedges of
debt instruments and recognizes interest differentials as adjustments to
interest expense in the period they occur. Gains and losses related to
foreign currency hedges of firmly committed transactions are deferred and
are recognized in income when the hedged transaction occurs.
To manage its commodity exposures, the company uses commodity
futures, options and forward contracts. These instruments are used
primarily in forward purchases of livestock and, to a lesser extent,
forward sales of products. The company accounts for these instruments as
hedges of specific lots of livestock or sales and any gain or loss is not
recognized until the hedged transaction occurs.
Livestock hedging gains or losses are included in cost of
products sold while forward sales hedging transactions are recorded in
net sales. Cash flows related to derivative financial instruments are
classified in the statement of cash flows in a manner consistent with
those of transactions being hedged.
MARKETABLE SECURITIES - Marketable securities are classified as
available for sale, are highly liquid and are purchased and sold on a
short-term basis as part of IBP's management of working capital. Such
securities consist of auction market preferred stock, which management
does not intend to hold more than one year, and tax-exempt securities and
commercial paper with maturities of less than one year. Marketable
securities are carried at cost, which approximates fair value.
INVENTORIES - Inventories are valued on the basis of the lower of
first-in, first-out cost or market.
PROPERTY, PLANT AND EQUIPMENT - Depreciation is provided for
property, plant and equipment on the straight-line method over the
estimated useful lives of the respective classes of assets as follows:
Land improvements..................8 to 20 years
Buildings and stockyards..........10 to 40 years
Equipment..........................3 to 12 years
Leasehold improvements, included in the equipment class, are
amortized over the life of the lease or the life of the asset, whichever
is shorter.
GOODWILL - Goodwill is amortized on a straight-line basis over
periods ranging from 15 years to 40 years. Management reviews goodwill
as well as other long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
FOREIGN CURRENCY TRANSLATION - The translation of foreign currency
into U.S. dollars is performed for balance sheet accounts using the
current exchange rate in effect at the balance sheet date and for revenue
and expense accounts using the average exchange rate during the period.
The gains or losses resulting from translation are included in
stockholders' equity. Exchange adjustments resulting from foreign
currency transactions, which were not material in any of the years
presented, are generally recognized in net earnings.
ACCOUNTING CHANGES - In 1998, the company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" (see "Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive Income" and below), SFAS No.
131, "Disclosures About Segments of an Enterprise" (see Note M) and
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (see Note J). These standards expand or modify
disclosures and have no effect on the company's consolidated financial
position, results of operations or cash flows. Information for prior
years has been restated to conform to the requirements of these
standards.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued, and is effective no later than the
first quarter of fiscal 2000. Based upon the company's current level
of derivatives activity, management expects that this standard will not
materially affect the company's financial position or results of
operations.
COMPREHENSIVE INCOME - Comprehensive income consists of net
earnings and foreign currency translation adjustments. Management
considers its foreign investments to be permanent in nature and does
not provide for taxes on currency translation adjustments arising from
converting the investment in a foreign currency to U.S. dollars.
There are no reclassification adjustments to be reported in the
periods presented.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
financial statements to conform to the current year presentation.
B. INVENTORIES:
Inventories are comprised of the following:
December 26, December 27,
1998 1997
------------ ------------
Product inventories:
Raw materials $ 22,552 $ 22,952
Work in process 69,790 82,679
Finished goods 148,542 165,970
------- -------
240,884 271,601
Livestock 89,321 45,908
Supplies 75,213 72,244
------- -------
$405,418 $389,753
======= =======
C. CREDIT ARRANGEMENTS:
At December 26, 1998, IBP had in place two committed revolving
credit facilities totaling $600 million in potential borrowings. These
facilities include a $500 million multi-year credit facility (the "Multi-
Year Facility") and a $100 million revolving promissory note (the
"Promissory Note"). From time to time, IBP also may use uncommitted lines
of credit for some or all of its short-term borrowing needs.
The Multi-Year Facility is a revolving facility with a maturity date
of December 20, 2000, which may be extended for one-year increments
annually during the revolving period with consent of the banks involved.
Facility fees can vary from .085 to .200 of 1% on the total amount of the
facility.
The Promissory Note with Bank of America was extended on May 1, 1998
and matures on April 30, 1999.
There were total borrowings of $225 million outstanding under the
revolving facilities at December 26, 1998, $50 million of which was
classified as current liabilities. IBP also had $91 million of short-
term borrowings outstanding at year-end 1998 under uncommitted credit
lines. The remaining $175 million under revolving facilities, which IBP
does not intend to repay within one year, was classified as non-current
in the consolidated balance sheet. The interest rate at December 26,
1998 on the non-current portion was 5.4%.
During fiscal 1998, the maximum amount of borrowings under all of
IBP's credit arrangements, including any amounts considered non-current,
was $529 million. Average borrowings under IBP's credit arrangements and
the weighted average interest rate during fiscal 1998 were $423 million
and 5.8%. The comparable 1997 figures were average borrowings of $281
million and an average interest rate of 5.9%.
IBP's credit facility agreements contain certain restrictive
covenants which, among other things, (1) require the maintenance of a
minimum debt service coverage ratio; and (2) provide for a maximum funded
debt ratio.
D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses are comprised of the
following:
December 26, December 27,
1998 1997
------------ ------------
Accounts payable, principally
trade creditors $220,972 $219,449
------- -------
Checks in process of clearance 94,888 126,279
------- -------
Accrued expenses:
Employee compensation 74,728 73,724
Employee benefits 34,771 34,733
Property and other taxes 24,809 25,886
Marketing costs 14,352 13,808
Other 100,997 75,762
------- -------
249,657 223,913
------- -------
$565,517 $569,641
======= =======
E. INCOME TAXES:
Income tax expense consists of the following:
1998 1997 1996
------ ------- -------
Current:
Federal $118,260 $ 72,000 $100,775
State 13,380 3,825 8,275
Foreign (640) (5,300) 4,250
------- ------ -------
131,000 70,525 113,300
------- ------- -------
Deferred:
Federal (5,630) 3,100 6,575
State 480 300 550
Foreign (150) (2,225) 375
------- ------- -------
(5,300) 1,175 7,500
------- ------- -------
$125,700 $ 71,700 $120,800
======= ======= =======
Total income tax expense varies from the amount which would be
provided by applying the U.S. federal income tax rate to earnings before
income taxes. The major reasons for this difference (expressed as a
percentage of pre-tax earnings) are as follows:
1998 1997 1996
---- ---- ----
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net
of federal benefit 2.9 1.7 1.7
Goodwill amortization 1.8 2.5 0.8
Foreign Sales Corporation
benefits (0.4) (0.8) (0.5)
Other, net (1.3) (0.4) .8
---- ---- ----
38.0% 38.0% 37.8%
==== ==== ====
The Internal Revenue Service (IRS) has proposed certain income tax
adjustments which are being contested by the company involving the years
1989 through 1991. The IRS is currently examining the years 1992 through
1996. In management's opinion, adequate provisions for income taxes have
been made for all years.
Deferred income tax liabilities and assets were comprised of the
following:
December 26, December 27,
1998 1997
----------- ------------
Deferred tax assets:
Nondeductible accrued liabilities $ 95,085 $ 90,281
State tax credit carryforwards 8,543 9,996
Bad debt and claims reserves 4,372 3,598
Federal and state operating
loss carryforwards 20,874 27,404
Other 2,987 2,829
------- -------
Gross deferred tax assets 131,861 134,108
Valuation allowance (8,543) (9,996)
------- -------
Net deferred tax assets 123,318 124,112
------- -------
Deferred tax liabilities:
Fixed assets (75,107) (82,746)
Intangible assets (11,445) (8,210)
Other (3,860) (4,266)
------- -------
(90,412) (95,222)
------- -------
$ 32,906 $ 28,890
======= =======
The net $1.5 million decrease in the valuation allowance for
deferred tax assets was the result of net utilization of state tax credit
carryforwards. No benefit has been recognized for these state tax credit
carryforwards, most of which expire in the years 2004 through 2008.
At December 26, 1998, after considering utilization restrictions,
the company's acquired tax loss carryforwards approximated $65.9 million.
The net operating loss carryforwards, which are subject to utilization
limitations due to ownership changes, may be utilized to offset future
taxable income as follows: $16.0 million in 1999 and 2000, $16.1 million
in 2001 and 2002 and $1.7 million in 2003. Loss carryforwards not
utilized in the first year that they are available may be carried over
and utilized in subsequent years, subject to their expiration provisions.
These carryforwards expire as follows: $0.3 million in 2000, $4.2 million
in 2001, $17.2 million in 2002, and $44.2 million during the years 2004
through 2009.
F. LONG-TERM OBLIGATIONS:
Long-term obligations are summarized as follows:
December 26, December 27,
1998 1997
------------ ------------
Revolving credit facilities $175,000 $112,950
7.45% Senior Notes due 2007 125,000 125,000
10.75% Senior Subordinated
Notes due 2006 - 112,050
6.125% Senior Notes due 2006 100,000 100,000
7.125% Senior Notes due 2026 100,000 100,000
6.0% Securities due 2011 50,000 -
Present value of minimum
capital lease obligations 27,526 19,093
Other 1,076 1,400
------- -------
578,602 570,493
Less amounts due within one
year 3,080 2,212
------- -------
$575,522 $568,281
======= =======
In June 1997, the company completed its public offering of $125
million principal amount of 7.45% Senior Notes due 2007. Net proceeds
from the offering were ultimately used to reduce borrowings under IBP's
revolving credit facilities.
On January 15, 1998, the company settled and closed its public
offering of $50 million aggregate principal amount of 6.0% Remarketable
or Redeemable Securities, due January 15, 2011 (the "6.0% Securities").
The net proceeds from the 6.0% Securities were added to the company's
working capital. The 6.0% Securities were the first series of notes
issued under the company's $300 million aggregate principal amount,
Medium-Term Notes program which commenced on December 12, 1997.
During the first quarter 1998, the company completed its purchase of
all of the $112 million outstanding 10.75% Senior Subordinated Notes of
its wholly-owned subsidiary, Foodbrands America, Inc. Net prepayment
premiums, accelerated amortization of unamortized deferred financing
costs, and transaction expenses totaled $24 million, before applicable
income tax benefit of $9 million, and was accounted for as an
extraordinary loss.
The purchase of these obligations by IBP was funded with available
credit facilities and will likely be refinanced at a later date under the
company's $300 million registered Medium-Term Notes program. The portion
of borrowings under IBP's revolving credit facilities considered long-
term increased to $175 million at December 26, 1998 from $113 million at
December 27, 1997.
Substantially all of the leased assets under capital leases can be
purchased by IBP at the end of the respective lease terms. Leased
assets, which are included with owned property in the consolidated
balance sheets, at cost totaled $31 million; accumulated amortization on
these assets totaled $9 million.
Aggregate maturities of long-term obligations for each of the five
fiscal years subsequent to 1998 are (in millions) $3.1; $177.7; $3.8;
$2.1 and $51.1.
G. STOCK PLANS:
Officer Long-Term Stock Plans:
IBP has officer long-term stock plans which provide for awards to
key officers of IBP which, subject to certain restrictions, will vest
generally after five years resulting in the delivery of shares of common
stock over the one-year period following such vesting. At December 26,
1998, there were approximately 720,000 shares available for future awards
under the plans. For approximately 125,000 shares (average grant price
of $18.86) granted under the plans, the company is obligated to pay the
mandatory federal withholding and Medicare taxes upon delivery of the
shares. The company recognized compensation expense for these plans
totaling $2.3 million, $3.3 million and $3.0 million, respectively, in
1998, 1997 and 1996.
The status of shares under the officer long-term stock plans is
summarized as follows:
Number of Weighted Average
Shares Price per Share
--------- -----------------
Balance, December 30, 1995 1,274.8 $10.57
Granted 55.6 25.10
Delivered (9.5) 8.28
Forfeited - -
-------------------------
Balance, December 28, 1996 1,320.9 11.07
Granted 260.1 21.14
Delivered (1,020.0) 8.41
Forfeited (10.2) 18.36
-------------------------
Balance, December 27, 1997 550.8 20.48
Granted 48.7 23.94
Delivered - -
Forfeited (9.3) 21.48
-------------------------
Balance, December 26, 1998 590.2 $20.54
======= =====
Stock Option Plans:
IBP has stock option plans under which incentive and non-qualified
stock options may be granted to key employees and directors of IBP and
its subsidiaries. As of December 26, 1998, the plans provided for the
delivery of up to 7.4 million shares of common stock upon exercise of
options granted at no less than the market value of the shares on the
effective date of grant. An additional 0.4 million options granted in
1998 were non-qualified ("non-qualifying options") based upon differences
in market price on the effective date and issuance date. The 1998
expense recorded for the non-qualifying options was not material.
All options may be granted for terms up to but not exceeding ten
years and are generally fully vested after five years from the date
granted. At December 26, 1998 and December 27, 1997, there were 3.2
million and 3.6 million options, respectively, reserved for future
grants.
The company follows the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has
been recognized for the stock option plans under that standard. Had
compensation cost for IBP's stock option plans been determined based on
the fair value at the grant date for awards in 1998, 1997, and 1996
consistent with the provisions of SFAS No. 123, IBP's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below :
1998 1997 1996
------- ------- -------
Net earnings - as reported $190,007 $117,014 $198,735
Net earnings - pro forma 187,088 114,236 196,518
Earnings per share - as reported 2.05 1.26 2.10
Earnings per share - pro forma 2.02 1.23 2.08
Diluted earnings per share -
as reported 2.03 1.25 2.07
Diluted earnings per share -
pro forma 2.00 1.22 2.05
The weighted average fair values at date of grant for options
granted at market value during 1998, 1997 and 1996 were $7.29, $7.91 and
$9.89 per option respectively. The weighted-average fair value for the
non-qualifying options granted in 1998 was $13.15 per option. The fair
value of each option was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average
assumptions for options granted in 1998, 1997 and 1996:
1998 1997 1996
------- ------- -------
Expected option life 6 years 6 years 6 years
Expected annual
volatility 26% 26% 30%
Risk-free interest
rate 4.7% 5.8% 6.5%
Dividend yield 0.4% 0.4% 0.4%
The status of stock options under the plans is summarized as follows:
Number of Weighted Average Options
Shares Price Per Share Exercisable
--------- ---------------- -----------
Balance at
December 30, 1995 4,583.6 $14.93 1,256.4
Granted 675.4 24.25
Exercised (464.4) 10.04
Canceled (244.7) 19.88
- -----------------------------------------------------------------
Balance at
December 28, 1996 4,549.9 16.09 1,721.0
Granted 658.2 21.63
Exercised (738.5) 8.78
Canceled (344.4) 21.25
- -----------------------------------------------------------------
Balance at
December 27, 1997 4,125.2 17.85 1,846.3
Granted at market
value 208.7 21.37
Granted at a price
below market value 434.2 16.56
Exercised (320.1) 11.44
Canceled (199.4) 21.64
- -----------------------------------------------------------------
Balance at
December 26, 1998 4,248.6 $18.20 2,230.9
The following table summarizes information about stock options
outstanding at December 26, 1998:
Number Weighted Average
Range of Outstanding Remaining Weighted Average
Exercisable prices At 12/26/98 Contractual Life Exercise Price
- ------------------ ----------- ---------------- ----------------
$ 6.75 to 15.99 1,211.9 4.0 Years $10.53
16.00 to 25.99 2,933.1 7.7 Years 21.16
26.00 to 33.00 103.6 8.1 Years 28.10
- ---------------------------------------------------------------
$ 6.75 to 33.00 4,248.6 6.6 Years $18.20
Number
Range of Exercisable Weighted Average
Exercisable prices At 12/26/98 Exercise Price
------------------ ----------- ----------------
$ 6.75 to 15.99 1,174.7 $10.27
16.00 to 25.99 1,020.3 21.69
26.00 to 33.00 35.9 28.34
-----------------------------------------------
$ 6.75 to 33.00 2,230.9 $15.78
Share Delivery Restrictions:
Shares of common stock to be delivered for approximately 0.8 million
options under the stock option plans must come from previously issued
shares. All other shares of stock to be delivered pursuant to the stock
option plans and the officer long-term stock plans may alternatively come
from previously authorized but unissued common stock.
H. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental information on cash payments is presented as follows:
1998 1997 1996
-------- -------- -------
Interest, net of amounts
capitalized $47,775 $ 37,670 $ 2,045
Income taxes 74,343 39,017 108,625
I. FINANCIAL INSTRUMENTS:
Interest and Currency Rate Derivatives:
The company's policy is to manage interest cost using a mix of fixed
and variable rate debt. To manage this mix in a cost-effective manner,
the company may enter into interest rate swaps in which the company
agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. These interest rate swaps effectively convert
a portion of the company's fixed-rate debt to variable-rate debt, or vice
versa.
The notional amounts of these swap agreements were $50 million at
year-end 1998 and $75 million at year-end 1997. The notional amounts of
these and other derivative instruments do not represent assets or
liabilities of the company but, rather, are the basis for the settlements
under the contract terms.
The company's Canadian subsidiary enters into currency futures
contracts to hedge its exposures on live cattle and purchase commitments
in foreign currencies. At December 26, 1998, the company had outstanding
contracts to buy Canadian dollars totaling CDN$130 million at various
dates through 1999. Comparable outstanding contracts at year-end 1997
totaled CDN$34 million.
There were no material realized or unrealized gains or losses for
any derivative financial instruments in any of the fiscal years
presented. The company monitors the risk of default by its financial
instrument counterparties, all of which are major financial institutions,
and does not anticipate nonperformance.
Fair Value of Financial Instruments:
The following methods and assumptions are used in estimating the
fair value of each class of the company's financial instruments at
December 26, 1998:
For cash equivalents, marketable securities, accounts receivable,
notes payable and accounts payable, the carrying amount is a reasonable
estimate of fair value because of the short-term nature of these
instruments.
For securities included in other assets, fair value is based upon
quoted market prices for these or similar securities. The carrying
amount approximates fair value for these securities.
For long-term debt, fair value was determined using valuation
techniques that considered cash flows discounted at current market rates
and management's best estimate for instruments without quoted market
prices. At year-end 1998, the fair value exceeded the carrying value by
$6 million. At year-end 1997, the fair value exceeded the carrying value
by $22 million. The company's long-term debt is generally not callable
until maturity, except for the 7.125% Senior Notes due 2026.
For derivatives, the fair value was estimated using termination cash
values. The fair values of IBP's derivatives at year-ends 1998 and 1997
were not material.
J. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:
IBP's subsidiary, Foodbrands America, Inc. ("Foodbrands"), has
defined benefit pension plans at three of its facilities. Foodbrands
also provides life insurance and medical benefits for substantially all
retired hourly and salaried employees of one of its subsidiaries under
various defined benefit plans.
Pension Benefits Other Benefits
---------------- ---------------
1998 1997 1998 1997
----- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning
of year $68,933 $66,368 $ 69,410 $ 69,322
Service cost 473 411 229 197
Interest cost 4,787 4,956 4,799 5,018
Actuarial loss 3,117 3,599 666 902
Benefits paid (6,389) (6,401) (6,253) (6,029)
------ ------ ------ ------
Benefit obligation at end of year 70,921 68,933 68,851 69,410
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets at
beginning of year 65,110 59,529 9 264
Actual return on plan assets 5,165 7,477 - 1
Employer contribution 2,851 4,505 6,249 5,773
Benefits paid (6,389) (6,401) (6,253) (6,029)
------ ------ ------ ------
Fair value of plan assets at
end of year 66,737 65,110 5 9
------ ------ ------ -----
Funded status (4,184) (3,823) (68,846) (69,401)
Unrecognized net actuarial loss 3,812 317 1,587 904
------ ------ ------- -------
Net amount recognized $ (372) $(3,506) $(67,259) $(68,497)
====== ====== ======= =======
Amounts recognized in the statement
of financial position consist of:
Prepaid benefit cost $ 1,046 $ 846 $ - $ -
Accrued benefit liability (1,418) (4,352) (67,259) (68,497)
------ ------ ------- -------
Net amount recognized $ (372) $(3,506) $(67,259) $(68,497)
====== ====== ======= =======
Weighted-average assumptions as of
year end:
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% n/a n/a
For measurement purposes, a 9.9% annual rate of increase in the per
capita claims cost of covered health care benefits was assumed for 1998.
The rate was assumed to decrease gradually to 8.9% by 2000, 7.7% by 2005,
and 6.5% by 2010 and remain at that level thereafter.
Components of net periodic benefit cost:
Service cost $ 473 $ 411 $ 229 $ 197
Interest cost 4,787 4,956 4,799 5,018
Expected return on plan assets (5,501) (4,993) (1) (2)
------ ------ ----- -----
Net periodic benefit cost $ (241) $ 374 $ 5,027 $ 5,213
====== ====== ====== ======
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one-percentage-point
change in assumed health care cost trend rates would have the following
effects:
1-percentage- 1-percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and
interest cost components for 1998 $ 82 $ (79)
Effect on year-end postretirement
benefit obligation $1,099 $(1,066)
K. EARNINGS PER SHARE:
For the Year Ended December 26, 1998
---------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Basic EPS
Earnings before extraordinary
item $204,822 92,485 $2.21
====
Effect of Dilutive Securities
Employee stock plans - 910
------- ------
Diluted EPS $204,822 93,395 $2.19
======= ====== ====
For the Year Ended December 27, 1997
-------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ----------
Basic EPS
Net earnings $117,014 92,651 $1.26
Effect of Dilutive Securities
Employee stock plans - 1,141
------- ------ ----
Diluted EPS $117,014 93,792 $1.25
======= ====== ====
For the Year Ended December 28, 1996
--------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Basic EPS
Earnings before extraordinary
item $198,735 94,688 $2.10
====
Effect of Dilutive Securities
Employee stock plans - 1,402
------- ------
Diluted EPS $198,735 96,090 $2.07
======= ====== ====
The summary below lists stock options outstanding at the end of the
fiscal years which were not included in the computations of diluted EPS
because the options' exercise price was greater than the average market
price of the common shares. These options had varying expiration dates.
1998 1997 1996
------ ------ ------
Stock options excluded from
Diluted EPS computation 120 1,406 978
Average option price per share $27.28 $24.95 $25.70
L. ACQUISITION:
On May 7, 1997, the company, through a subsidiary, completed a
merger with Foodbrands America, Inc. ("Foodbrands") for approximately
$287 million, excluding transaction costs, and assumed liabilities of
approximately $528 million. Foodbrands is a leading U.S. producer,
marketer and distributor of frozen and refrigerated products to the
"away from home" food preparation market. The acquisition was
accounted for by the purchase method of accounting. The excess of the
aggregate purchase price over fair value of identifiable assets and
liabilities acquired of approximately $463 million was recognized as
goodwill and is being amortized over 40 years. Foodbrands' historical
goodwill of approximately $182 million was eliminated.
The operating results of Foodbrands are included in IBP's
consolidated results of operations from the date of acquisition. The
following pro forma financial information assumes the acquisition
occurred at the beginning of 1996. These results have been prepared
for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made at the
beginning of 1996, or of the results which may occur in the future (in
thousands except per share data).
52 Weeks Ended
---------------------------
Dec. 27, Dec. 28,
1997 1996
----------- -----------
Net sales $13,508,370 $13,283,587
Earnings from operations 240,080 364,379
Earnings before
extraordinary item 116,035 202,756
Net earnings 116,035 197,705
Earning per share:
Earnings before
extraordinary item $1.25 $2.14
Net earnings 1.25 2.09
Earnings per share -
assuming dilution: 1.24 2.11
Earnings before
extraordinary item 1.24 2.06
Net earnings
The company made other acquisitions in 1997 and 1998 for which pro
forma results were not included above because the impact was not
material.
M. BUSINESS SEGMENTS:
The company is managed and operated as two divisions, Fresh Meats
and Enterprises, and, accordingly, has two business segments. IBP's
Fresh Meats operation relates principally to the meat processing industry
and primarily involves cattle and hog slaughter, beef and pork
fabrication and related allied product processing activities. This
segment markets its products to food retailers, distributors,
wholesalers, restaurant and hotel chains, other food processors and
leather makers, as well as manufacturers of pharmaceuticals and animal
feeds. The Enterprises segment consists of IBP subsidiaries Foodbrands
and The Bruss Company, as well as three former IBP cooked meats plants
transferred to Foodbrands in 1997. The Enterprises group produces,
markets and distributes a variety of frozen and refrigerated products to
the "away from home" food preparation market, including pizza toppings
and crusts, value-added pork-based products, ethnic specialty foods,
appetizers, soups, sauces and side dishes as well as deli meats and
processed beef, pork and poultry products. Enterprises also produces
portion-controlled premium beef and pork products for sale to restaurants
and foodservice customers in domestic and international markets. The
company operates principally in the United States.
Intersegment sales have been recorded at amounts approximating
market. Earnings from operations are comprised of net sales less all
identifiable operating expenses, allocated corporate selling, general and
administrative expenses, and goodwill amortization. Net interest expense
and income taxes have been excluded from segment operations.
NET SALES 1998 1997 1996
---------- ----------- ----------
Sales to unaffiliated customers:
Fresh Meats $11,696,190 $12,421,902 $12,412,071
Enterprises 1,152,445 836,882 126,682
---------- ---------- ----------
$12,848,635 $13,258,784 $12,538,753
========== ========== ==========
Intersegment sales:
Fresh Meats $ 185,459 $ 148,224 $ 48,084
Intersegment elimination (185,459) (148,224) (48,084)
---------- ---------- ----------
$ - $ - $ -
========== ========== ==========
Net sales:
Fresh Meats $11,881,649 $12,570,126 $12,460,155
Enterprises 1,152,445 836,882 126,682
Intersegment elimination (185,459) (148,224) (48,084)
---------- ---------- ----------
$12,848,635 $13,258,784 $12,538,753
========== ========== ==========
EARNINGS FROM OPERATIONS
Fresh Meats $291,211 $195,493 $324,934
Enterprises 82,524 31,223 (2,026)
--------- ---------- ---------
Total earnings from operations 373,735 226,716 322,908
Net interest expense (43,213) (38,002) (3,373)
--------- ---------- ---------
Pre-tax earnings $330,522 $188,714 $319,535
========= ======== =========
TOTAL ASSETS
Fresh Meats $1,989,674 $1,923,517 $2,122,176
Enterprises 1,018,422 915,424 52,319
--------- --------- ---------
$3,008,096 $2,838,941 $2,174,495
========= ========= =========
ADDITIONS TO PROPERTY, PLANT
AND EQUIPMENT,INCLUDING ACQUISITIONS
Fresh Meats $123,179 $107,503 $148,082
Enterprises 122,513 351,313 22,582
------- ------- -------
$245,692 $458,816 $170,664
======= ======= =======
DEPRECIATION AND AMORTIZATION
Of fixed assets:
Fresh Meats $ 74,034 $ 74,282 $ 71,711
Enterprises 26,787 18,010 2,199
------- ------- -------
$100,821 $ 92,292 $ 73,910
======= ======= =======
Of intangible assets:
Fresh Meats $ 12,295 $ 8,944 $ 8,780
Enterprises 13,110 8,694 -
------- ------- -------
$ 25,405 $ 17,638 $ 8,780
======= ======= =======
NET SALES BY GEOGRAPHIC LOCATION OF CUSTOMERS
1998 1997 1996
---------- ---------- ----------
United States $10,952,780 $11,167,708 $10,416,883
Japan 784,624 909,855 1,058,630
Korea 134,271 224,272 190,164
Canada 421,701 508,568 505,012
Mexico 173,074 125,533 75,492
Other foreign countries 382,185 322,848 292,572
---------- ---------- ----------
$12,848,635 13,258,784 $12,538,753
========== ========== ==========
N. COMMITMENTS:
The company leases various facilities and equipment under
noncancelable operating lease arrangements which expire at various dates
through the year 2012. Future minimum payments under noncancelable
operating leases with lease terms in excess of one year at December 26,
1998 totaled approximately $63 million. Aggregate maturities for each of
the five fiscal years subsequent to 1998 are (in millions) $15.2; $14.5;
$8.0; $5.1; and $3.5. The company's rental expense for all operating
leases was (in millions) $21.9; $15.9; and $11.0 for fiscal years 1998,
1997 and 1996.
The company had livestock and other purchase commitments, letters of
credit, and other commitments and guarantees at December 26, 1998
aggregating approximately $260 million. Livestock purchase commitments
were at a market or market-derived price at the time of delivery or were
fully hedged if the price was determined at an earlier date.
In addition to the livestock purchase commitments above, the company
is committed to purchase approximately 12 million market hogs between
1999 and 2009 at market-derived prices under Cash Flow Assistance ("CFA")
contracts with producers. Commitments for the next five years average
approximately 1.8 million hogs annually, which represents less than 10%
of IBP's current annual production capacity.
O. CONTINGENCIES:
IBP is involved in numerous disputes incident to the ordinary course
of its business. In the opinion of management, any liability for which
provision has not been made relative to the various lawsuits, claims and
administrative proceedings pending against IBP, including that described
below, will not have a material adverse effect on its future consolidated
results of operations, financial position or liquidity.
In July 1996, a lawsuit was filed against IBP by certain cattle
producers in the U.S. District Court, Middle District of Alabama, seeking
certification of a class of all cattle producers. The complaint alleges,
inter alia, that IBP has used its market power and alleged "captive
supply" agreements to reduce the prices paid to producers for cattle.
Plaintiffs initially disclosed that, in addition to declaratory relief
and punitive damages, they sought disgorgement of all profits earned in
1994, 1995 and 1996 in excess of what they deem a "fair" return. On
September 15, 1998, the District Court rendered a decision denying class
certification. Plaintiffs have filed a motion requesting reconsideration
of this decision, attempting to limit the class in a manner necessary to
avoid conflicts between class members, and attempting to present a
damage analysis which the District Court will accept. Based upon IBP's
review of this information, management still believes that class
certification is unlikely. As previously stated, IBP believes it has
acted properly and lawfully in its dealings with cattle producers.
P. QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly results are summarized as follows:
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Annual
---- ------- ------- ------- ------- ------
Net sales $3,224,944 $3,334,340 $3,210,689 $3,078,662 $12,848,635
Gross profit 103,829 126,141 193,251 238,987 662,208
Earnings before
extraordinary item 13,599 33,853 65,581 91,789 204,822
Net earnings (loss) (1,216) 33,853 65,581 91,789 190,007
Earnings per share:
Earnings before
extraordinary item .15 .37 .71 .99 2.21
Net earnings (loss) (.01) .37 .71 .99 2.05
Earnings per share -
assuming dilution:
Earnings before
extraordinary item .15 .36 .70 .98 2.19
Net earnings (loss) (.01) .36 .70 .98 2.03
Dividends per share .025 .025 .025 .025 .10
Market price:
High 24 1/2 23 1/8 21 1/8 29 7/16
Low 19 15/16 18 3/8 16 9/16 20
1997
-----
Net sales $3,134,591 $3,448,337 $3,416,706 $3,259,150 $13,258,784
Gross profit 82,856 119,959 125,441 114,636 442,892
Net earnings 32,310 33,864 29,121 21,719 117,014
Earnings per share .34 .37 .32 .23 1.26
Earnings per share -
assuming dilution .34 .36 .31 .23 1.25
Dividends per share .025 .025 .025 .025 .10
Market price:
High 26 25 1/2 24 1/4 25 1/2
Low 22 3/4 22 3/8 22 1/8 20 3/8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IBP, inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, changes in stockholders' equity and
comprehensive income, and of cash flows present fairly, in all material
respects, the consolidated financial position of IBP, inc. and subsidiaries at
December 26, 1998 and December 27, 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 26, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Omaha, Nebraska
January 22, 1999
REPORT ON FINANCIAL STATEMENT INTEGRITY BY MANAGEMENT
To our Stockholders:
IBP's consolidated financial statements have been prepared by management and
we are responsible for their integrity and objectivity. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). We believe these statements
present fairly the company's financial position and results of operations.
Our independent auditors, PricewaterhouseCoopers LLP, have audited these
consolidated financial statements. Their audit was conducted using generally
accepted auditing standards, which included consideration of our internal
controls in order to form an independent opinion on the financial statements.We
have made available to PricewaterhouseCoopers LLP, all the company's financial
records, as well as the minutes of meetings of stockholders and directors.
IBP relies on a system of internal accounting controls to provide assurance
that assets are safeguarded and transactions are properly authorized and
recorded. We continually monitor these controls, modifying and improving themas
business operations change. IBP maintains a strong internal auditing departmnt
that independently reviews and evaluates these controls as well.
The Audit Committee of the Board of Directors provides oversight to ensure
the integrity and objectivity of the company's financial reporting process and
the independence of our internal and external auditors. Both internal audit
and PricewaterhouseCoopers LLP, have complete access to the Board's Audit
Committee with or without the presence of management personnel.
Our management team is responsible for proactively fostering a strong
climate of ethical conduct so that the company's affairs are carried out
according to the highest standards of personal and corporate behavior. This
responsibility is specifically demonstrated in IBP's conflict of interest
policy which requires annual written acknowledgment by each and every officer
and those management personnel so designated.
We are pleased to present this annual report and the accompanying
consolidated financial statements for your review and consideration.
Most sincerely,
/s/ Robert L. Peterson /s/ Larry Shipley
____________________________________ ______________________________
Robert L. Peterson Larry Shipley
Chairman and Chief Executive Officer President, IBP Enterprises and
IBP, inc. Chief Financial Officer
IBP, inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The matters discussed herein contain forward-looking statements.
Specifically, these forward-looking statements include risks and
uncertainties. Thus, actual results may differ materially from those
expressed or implied in those statements. Those risks and uncertainties
include, without limitation, risks of changing market conditions with regard
to livestock supplies and demand for the company's products, domestic and
international legal and regulatory risks, the costs of environmental
compliance, the impact of governmental regulations, operating efficiencies,
as well as competitive and other risks over which IBP has little or no
control. Moreover, past financial performance should not be considered a
reliable indicator of future performance. The company makes no commitment to
update any forward-looking statement, or to disclose any facts, events or
circumstances after the date hereof that may affect the accuracy of any
forward-looking statement.
RESULTS OF OPERATIONS
This section presents analysis of IBP's consolidated operating
results displayed in the Consolidated Statements of Earnings and should be
read together with the business segments information in Note M to the
consolidated financial statements.
STRATEGIC GROWTH
Acquisitions of Foodbrands America, Inc. ("Foodbrands") and the Bruss
Company ("Bruss") were completed in the second quarter of 1997. The
Foodbrands purchase, effective as of May 7, 1997, extended the company's
product base into value-added, branded food products. Foodbrands is a
leading U.S. producer, marketer, and distributor of frozen and refrigerated
products to the "away from home" food preparation market, which is a fast-
growing segment of the food industry. An industry leader in pizza topping
sales, Foodbrands is also a major provider of value-added, pork-based
products to the food service industry. Foodbrands produces over 1,600
branded and custom products, including pizza toppings and crusts, ethnic
specialty foods, breaded appetizers, soups, sauces, and side dishes as well
as deli meats and processed beef, pork, and poultry products. The Bruss
purchase, effective as of May 30, 1997, brought to IBP a processor of
individual cuts of premium quality beef and pork for sale to restaurants
and foodservice providers both domestically and internationally.
IBP purchased a bacon topping manufacturer, Winchester Food
Processing, Inc., ("Winchester") in Hutchinson, Kansas, in the third
quarter of 1997. Winchester produces bacon toppings and bacon bits for the
foodservice industry and has expanded its operations in 1998 to include
additional cooked meat products. IBP also purchased one of the nation's
leading producers of high quality appetizers in the fourth quarter of 1998.
The company purchased the appetizer division of Diversified Foods Group
("DFG") which has plants in Chicago, Illinois, and Newark, New Jersey. DFG
produces and markets a variety of hors d'oeuvres, appetizers, desserts and
prepared meals for foodservice companies, club stores and retail grocery
chains. Winchester and DFG will both be part of IBP's Foodbrands
subsidiary.
COMPARISON OF 1998 TO 1997
Operating earnings in 1998 measured 2.9% of net sales versus 1.7% in
1997. The Fresh Meats 1998 operating margin measured 2.5% of net sales
compared to 1.6% in 1997. The higher 1998 figure reflected much-improved
pork margins offset by lower beef margins caused by competing domestic meat
supplies and weaker export demand resulting from economic problems in the
Far East. Meanwhile, Enterprises' operations performed above expectations
as product demand increased and raw material prices decreased.
Net Sales
1998 1997 % Change
----------- ----------- --------
Fresh Meats $11,696,190 $12,421,902 -5.8%
Enterprises 1,152,445 836,882 37.7%
---------- ---------- ----
Total $12,848,635 $13,258,784 -3.1%
========== ========== ====
Earnings from Operations
Fresh Meats $ 291,211 $ 195,493 49.0%
Enterprises 82,524 31,223 164.3%
---------- ---------- -----
Total $ 373,735 $ 226,716 64.8%
========== ========== =====
SALES
The 6% decrease in Fresh Meats' net sales was due to lower average
prices of beef and pork products sold. Average 1998 pork prices in
particular fell 26% from 1997. These lower average prices were partially
offset by increases in pounds of beef and pork products sold. Enterprises'
net sales in 1997 included 35 weeks for Foodbrands and 31 weeks for Bruss.
Meanwhile, Enterprises' comparable period sales also decreased in 1998 from
1997 due to lower selling prices resulting from lower raw material costs
passed through to customers, which offset an increase in pounds sold.
Net export sales in 1998 decreased 6% from 1997. Export tonnage in
1998 increased 21% over 1997 but was offset by overall lower prices and a
sales mix with a higher percentage of lower valued products. Exports
accounted for approximately 12.3% of consolidated net sales in 1998 versus
12.7% in 1997.
The Asian region accounted for 67% of total net export sales in 1998
compared to 73% in 1997. The decline was due to much-publicized economic
difficulties. The Far East shortfall was partially offset by increased
exports to Mexico and South America destinations.
The USDA has predicted that 1999 U.S. red meat exports will increase
slightly over 1998. They foresee relatively weak world economic growth but
some improvement in sales to the Pacific Rim, especially Japan. The
company's 1998 net export sales to Japan, IBP's most significant export
market, were 14% lower than in 1997, although sales volume in 1998
increased 7% over 1997.
COST OF PRODUCTS SOLD
The cost of products sold in 1998 decreased 5% from the same 1997
period. Fresh Meats experienced a 7% decrease in 1998 costs versus the
prior year. This decrease was primarily due to reduced average prices paid
for live hogs and cattle, which overrode the effect of increases in pounds
of pork and beef products sold. Fresh Meats' plant costs increased due
primarily to higher labor costs and increased pork volume. Enterprises
also experienced lower comparable cost of products sold due primarily to
the lower pork raw material prices.
Industry experts predict that fed cattle supplies will remain strong
into the first half of 1999 before tightening somewhat. Meanwhile,
favorable hog supplies are expected throughout 1999 despite the recent
price decline due to an increase in hog production facilities in recent
years and relatively low feed grain prices. This factor bodes well for
Enterprises as well as Fresh Meats due to the significance of pork as a raw
material in Enterprises' product base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
1998 expense was 33% higher than in 1997. Excluding the effect of
new subsidiaries, 1998 expense was 10% higher than in 1997. Generally,
higher incentive compensation and amortization of intangibles was partially
offset by accrual of refunds of U.S. harbor maintenance taxes paid in prior
years, based upon a U.S. Supreme Court decision which ruled their
collection unconstitutional, as well as cessation of current year harbor
tax expense.
Enterprises' selling expense is much higher as a percentage of net
sales compared to Fresh Meats due to the value-added nature of their
respective product lines which require increased levels of customer
contact, brand name development and promotional costs. The company expects
that selling expense will continue to be significantly higher than in
periods prior to the Foodbrands and Bruss acquisitions.
INTEREST EXPENSE
The 14% higher net interest expense in 1998 versus 1997 was primarily
attributable to 29% higher average borrowings brought about by the
purchases of Foodbrands and Bruss in the second quarter 1997. IBP's
effective interest rate in 1998 was lower by 53 basis points from the
average in 1997, which somewhat offset the higher average borrowings. The
lower effective interest rate was attributable in part to lower short-term
market rates in 1998, the retirement of Foodbrands' 10.75% Senior
Subordinated Notes in the first quarter 1998, and a favorable market
position with IBP's interest rate swap contract.
COMPARISON OF 1997 TO 1996
Earnings from operations, measured as a percentage of net sales,
decreased to 1.7% in 1997 from 2.6% in 1996. Excluding results of new
acquisitions Foodbrands and Bruss, operating earnings fell to 1.5% in 1997.
Fresh Meats margins were squeezed by increasing supplies of competing meats
and new plant start up losses at the company's beef processing facility in
Canada and pork complex in Logansport, Indiana. In addition, export demand
in important Asian markets was slowed in the latter part of 1997 by food
safety scares and a stronger U.S. dollar versus Asian currencies.
Net Sales
1997 1996 % Change
----------- ----------- --------
Fresh Meats $12,421,902 $12,412,071 0.1%
Enterprises 836,882 126,682 560.6%
---------- ---------- -----
Total $13,258,784 $12,538,753 5.7%
========== ========== =====
Earnings from Operations
Fresh Meats $ 195,493 $ 324,934 -39.8%
Enterprises 31,223 (2,026) n/a
---------- ---------- -----
Total $ 226,716 $ 322,908 -29.8%
========== ========== =====
SALES
Net sales in 1997 rose 6% compared to 1996, with Enterprises
accounting for most of the increase. In IBP's comparative Fresh Meats
operations, 1997 net sales were up slightly from 1996 due primarily to
increased pounds of beef products sold.
Net export sales in 1997 were also slightly higher in comparison to
1996. Except for Japan, the company achieved positive year-over-year
comparisons in all significant export markets. Exports to Japan improved
throughout most of 1997 from the second half of 1996. A food safety scare
had sharply curtailed U.S. red meat sales into Japan in 1996. The Asian
financial crisis began to adversely impact exports late in 1997 as the
strengthening U.S. dollar made American products more expensive for
Japanese customers. Total net exports accounted for 12.7% of consolidated
net sales in 1997 versus 13.4% in 1996.
COST OF PRODUCTS SOLD
The 6% increase in cost of products sold from 1996 to 1997 was due
largely to the impact of Enterprises. Excluding the impact of these
entities, IBP's Fresh Meats operations in 1997 compared to 1996 increased
modestly due primarily to the new plant start ups in Alberta, Canada, and
Logansport, Indiana. A higher average price paid for live cattle also
contributed to higher cost of products sold. Plant costs in 1997 for
comparable operations increased over 1996 primarily as a result of higher
labor costs. Additionally, 1996 cost of products sold was reduced $13
million (after bonus impact) by reduction of a workers' compensation
lawsuit reserve.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense in 1997 was 79% higher
than in 1996 due primarily to expenses incurred by Enterprises.
Enterprises' selling expense is much higher as a percentage of net sales
compared to Fresh Meats due to the incrementally higher value-added nature
of its product lines.
Fresh Meats 1997 expenses were slightly higher than in the prior year
due in part to higher personnel-related costs, outside contract services
and international selling expense. These higher costs were partially
offset by reduced incentive compensation resulting from lower operating
earnings.
INTEREST EXPENSE
Net interest expense rose significantly in 1997 versus 1996 due
mainly to the Foodbrands and Bruss acquisitions. Incremental borrowings
were necessary to acquire these companies and Foodbrands had existing debt
of $341 million at the purchase date. Total consolidated outstanding
borrowings averaged $654 million in 1997 compared to $265 million in 1996.
The company's effective average interest rate increased also, due primarily
to the addition of Foodbrands' $112 million of 10.75% Senior Subordinated
Notes.
LIQUIDITY AND CAPITAL RESOURCES
The meat processing industry is characterized by significant working
capital requirements. This is due largely to statutory provisions that
generally provide for immediate payment for livestock, while it takes IBP
on average about eight days to turn its product inventories and sixteen
days to convert its trade receivables to cash. These factors, combined
with fluctuations in production levels, selling prices and prices paid for
livestock, can impact cash requirements substantially on a day-to-day
basis. To provide cash for its working capital requirements, the company's
credit facilities (more fully described in Note C to the consolidated
financial statements) provide IBP with same-day access to an aggregate of
$600 million in potential committed borrowings. The unused portion of the
committed credit lines was $375 million at December 26, 1998.
Although IBP has significant working capital requirements, its
accounts receivable and inventories are highly liquid, characterized by
rapid turnover. The following are key indicators relating to IBP's working
capital, asset-based liquidity, and leverage ratios:
December 26, December 27,
1998 1997
----------- -----------
Working capital (in millions) $231 $207
Current ratio 1.3:1 1.2:1
Quick ratio 0.7:1 0.7:1
Number of days' sales in
accounts receivable 15.8 15.3
Inventory turnover 30.0 35.2
Earnings to fixed charges 6.1 4.3
Positive 1998 operating cash flows contributed to improvement in the
company's working capital and associated ratios. However, differences in
the nature of the Enterprises businesses (e.g., more numerous product
lines, distribution channels, customers and credit terms) caused slower
consolidated receivables and inventory turnover rates. Meanwhile,
receivables and inventory turnover rates for comparable Fresh Meats
operations in 1998 were similar to those in 1997.
Total consolidated outstanding borrowings averaged $843 million in
1998 compared to $654 million in 1997. Borrowings outstanding at December
26, 1998 under committed facilities totaled $225 million, and available
unused credit capacity under committed facilities was $375 million.
The purchase of the Foodbrands 10.75% Notes in the first quarter 1998
by IBP, inc. was funded with available credit facilities and will likely be
refinanced at a later date under the company's $300 million Medium-Term
Notes program registered with the Securities and Exchange Commission. The
portion of borrowings under IBP's revolving credit facilities considered
long-term increased to $175 million at December 26, 1998 from $113 million
at year-end 1997.
In January 1998, the company settled and closed its public offering
of $50 million aggregate principal amount of 6.0% Remarketable or
Redeemable Securities, due January 15, 2011 (the "6.0% Securities"). The
net proceeds from the 6.0% Securities were added to the company's working
capital. The 6.0% Securities were a series of notes issued under the
company's Medium-Term Notes program.
The company invested $38 million in 1998 and $4 million during the
fourth quarter 1997 in life insurance contracts for key employees. Among
other advantages, expected changes in the cash value of these contracts are
intended to effectively act as a hedge against changes in the company's
deferred compensation liabilities.
Capital expenditures in 1998 totaled $246 million compared to $134
million in 1997. Current year spending included purchases of the appetizer
division of Diversified Food Group, with plants in Chicago, Illinois, and
Newark, New Jersey, and a closed beef manufacturing facility in Norfolk,
Nebraska. The appetizer business will operate as a separate division
within Enterprises while the beef manufacturing facility is part of Fresh
Meats. Additional 1998 spending went toward pork and foodservice plant
expansions, construction of the company's new world headquarters, and
ongoing replacements and modifications to existing facilities. The company
used positive operating cash flows and available debt facilities to fund
its 1998 capital expenditures.
Management's estimate of 1999 capital spending is in the range of
$175 million, the majority of which has been designated for revenue
enhancement and capacity expansion. The company intends to fund these
expenditures with operating cash flows and available debt facilities.
MARKET RISK
Interest Rates - The company manages interest cost using a mix of
fixed and variable rate debt. To manage this mix in a cost-effective
manner, the company may enter into interest rate swaps in which the company
agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. These interest rate swaps effectively convert a
portion of the company's fixed-rate debt to variable-rate debt or vice
versa. A sensitivity analysis indicates that with respect to interest rate
derivative instruments in place at December 26, 1998, a 100-basis point
increase in market interest rates would not have a material impact on the
company's financial position, results of operations or cash flows.
Foreign Operations - Transactions denominated in a currency other
than the entity's functional currency are generally hedged using currency
forward contracts to reduce this market risk. These transactions primarily
involve the company's Canadian subsidiary, which enters into currency
futures contracts to hedge its exposures on live cattle and purchase
commitments in foreign currencies. A sensitivity analysis indicates that a
10% change in currency exchange rates would not have a material impact on
the company's financial position, results of operations or cash flows.
Commodities - The company uses commodity futures contracts to hedge
its forward livestock purchases which, in 1998, accounted for approximately
2% of its livestock purchases. The contract lives ranged from one to
twelve months. Any change in the value of the futures contracts is
generally balanced by an offsetting change in the cash market price of the
delivered livestock. Additionally, a sensitivity analysis indicates that a
10% change in livestock market prices would not have a material impact on
the company's financial position, results of operations or cash flows.
YEAR 2000
The "Year 2000" problem relates to computer systems that have time
and date-sensitive programs that were designed to read years beginning with
"19," but may not properly recognize the year 2000. If a computer system
or other equipment with embedded chips or processors (collectively,
"Business Systems") used by the company or a third party dealing with the
company fails because of the inability of the system or application to
properly read the year "2000," the results could conceivably have a
material adverse effect on the company. This Year 2000 issue can arise at
any point in the company's supply, manufacturing, processing, distribution,
and financial chains.
The company has an internal team responsible for assessing the impact
of Year 2000 and leading and monitoring the company's state of readiness
with respect to this issue. The assessment and planning phase is 95%
complete, the implementation phase is approximately 90% complete, and the
testing phase is approximately 60% complete. All phases are expected to be
completed during 1999.
A significant portion of the company's Business Systems is internally
developed and has been or is in the process of being remediated. The
Business Systems considered most critical to continuing operations are
being given the highest priority. None of the company's other information
technology projects have been delayed due to the implementation of the Year
2000 readiness program.
As part of the Year 2000 readiness program, significant service
providers, vendors, suppliers, customers, and governmental entities ("Key
Business Partners") that are considered critical to business operations
around January 1, 2000, have been identified and steps are being undertaken
in an attempt to reasonably ascertain their stage of Year 2000 readiness as
it relates directly or indirectly to the company.
The possible consequences of the company or its Key Business Partners
not being fully Year 2000 compliant by January 1, 2000 include, among other
things, temporary plant closings, delays in the delivery of products and/or
receipt of supplies, invoice and collection errors and inventory and supply
obsolescence. However, the company believes that its Year 2000 readiness
program, including the contingency planning discussed below, should
significantly reduce the adverse effect any such disruptions may have.
The company currently has no formal contingency plan in place.
However, the progress of the Year 2000 readiness program is being closely
monitored and additional measures will be taken as risks arise. These
measures may include stockpiling critical supplies and packaging materials,
securing alternate sources of supplies or services, and other appropriate
measures.
It is currently estimated that the aggregate cost of the company's
Year 2000 efforts will be approximately $14 million, of which $7 million
has been spent. The budgeted $14 million includes approximately $8
million, of which $3 million has been spent, for computer hardware,
substantially all of which will be capitalized. The remaining $6 million
is primarily for computer software modifications, all of which will be
expensed as incurred and funded with operating cash flows. Approximately
$4 million has been expensed to date.
The company's Year 2000 readiness program is an ongoing process and
the estimates of costs and completion dates for various components of the
Year 2000 readiness program described above are subject to change.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF IBP, inc.
December 26, 1998
Foodbrands America, Inc., Delaware
IBP Foodservice, L.L.C., Delaware*
----------------------------
* Owns 100% interest in Foodbrands America, Inc.
Consent of Independent Accountants
We consent to the incorporation by reference in the
registration statement of IBP, inc. on Form S-3
(File No. 33-64459) and on Form S-8 (File No. 33-
19441) of our report dated January 22, 1999, on our
audits of the consolidated financial statements and
financial statement schedule of IBP, inc. as of
December 26, 1998 and December 27, 1997 and for each
of the three years ended December 26, 1998, which
report is incorporated by reference in the Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- -----------------------------------
PricewaterhouseCoopers LLP
Omaha, Nebraska
March 25, 1999
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<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> DEC-26-1998
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0
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