SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
____________________________
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 39 weeks ended September 23, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6085
____________________________
IBP, inc.
a Delaware Corporation
I.R.S. Employer Identification No. 42-0838666
800 Stevens Port Drive
Dakota Dunes, South Dakota 57049
Telephone 605-235-2061
____________________________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES [X] NO [ ]
As of November 1, 2000, the registrant had outstanding
105,610,334 shares of its common stock ($.05 par value).
PART I. FINANCIAL INFORMATION
IBP, inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 23, December 25,
2000 1999
------------- ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 35,193 $ 33,294
Accounts receivable, less allowance for
doubtful accounts of $23,079 and $17,797 795,422 853,234
Inventories 721,451 619,977
Deferred income tax benefits and
prepaid expenses 95,007 81,958
--------- ---------
TOTAL CURRENT ASSETS 1,647,073 1,588,463
Property, plant and equipment
less accumulated depreciation
of $1,055,140 and $960,391 1,551,062 1,362,765
Goodwill, net of accumulated
amortization of $212,771 and $189,395 1,046,571 1,054,839
Other assets 150,541 145,225
--------- ---------
$4,395,247 $4,151,292
========= =========
LIABILITIES, REDEEMABLE STOCK, AND
STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Notes payable to banks 746,348 542,060
Accounts payable 416,574 422,942
Deferred income taxes and other
current liabilities 449,665 452,704
Current portion of long-term debt 54,271 13,125
--------- ---------
TOTAL CURRENT LIABILITIES 1,666,858 1,430,831
Long-term debt and capital lease
obligations 663,181 789,861
Deferred income taxes and other
liabilities 176,822 168,934
--------- ---------
TOTAL LIABILITIES 2,506,861 2,389,626
REDEEMABLE STOCK - 44,564
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock at par value 5,434 4,964
Additional paid-in capital 442,640 404,463
Retained earnings 1,521,694 1,375,590
Accumulated other comprehensive income (10,267) (8,600)
Treasury stock (71,115) (59,315)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,888,386 1,717,102
--------- ---------
$4,395,247 $4,151,292
========= =========
See accompanying notes to condensed consolidated financial statements.
IBP, inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
13 Weeks Ended 39 Weeks Ended
----------------------- -------------------------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
----------- ----------- ----------- ------------
Net sales $4,154,262 $3,798,687 $12,201,829 $10,625,973
Cost of products sold 3,864,848 3,508,658 11,414,435 9,900,789
--------- --------- ---------- ----------
Gross profit 289,414 290,029 787,394 725,184
Selling, general and
administrative expense 141,760 116,088 415,158 317,996
Nonrecurring merger-related
expense - - 31,299 -
--------- --------- ---------- ----------
EARNINGS FROM OPERATIONS 147,654 173,941 340,937 407,188
Interest expense, net 21,121 17,543 64,071 48,710
--------- --------- ---------- ----------
Earnings before income
taxes and extraordinary item 126,533 156,398 276,866 358,478
Income tax expense 48,100 46,003 105,200 123,708
--------- --------- ---------- ----------
Earnings before extraordinary
item 78,433 110,395 171,666 234,770
Extraordinary loss on early
extinguishment of debt, less
applicable taxes - - (15,037) -
--------- --------- ---------- ----------
NET EARNINGS $ 78,433 $ 110,395 $ 156,629 $ 234,770
========= ========= ========== ==========
Earnings per common share:
Earnings before extraordinary
item $ .74 $1.14 $1.60 $2.41
Extraordinary item - - (.14) -
---- ---- ---- ----
Net earnings $ .74 $1.14 $1.46 $2.41
==== ==== ==== ====
Earnings per common share -
assuming dilution:
Earnings before extraordinary
item $ .73 $1.03 $1.58 $2.19
Extraordinary item - - (.14) -
---- ---- ---- ----
Net earnings $ .73 $1.03 $1.44 $2.19
==== ==== ==== ====
Dividends per share $.025 $.025 $.075 $.075
==== ==== ==== ====
Weighted average common shares
Outstanding 105,575 96,573 105,877 96,573
======= ======= ======= =======
Diluted EPS denominator 106,785 106,729 107,162 106,509
======= ======= ======= =======
Preferred stock dividends
and accretion $ - $ 462 $ 2,566 $ 1,569
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
IBP, inc. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
39 Weeks Ended
--------------------------
Sept. 23, Sept. 25,
2000 1999
----------- -----------
Inflows (outflows)
NET CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES $ 215,293 $ 59,766
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (301,001) (152,470)
Purchases of marketable securities (25,000) (19,400)
Proceeds from disposals of marketable
securities 25,000 20,800
Acquisitions, net of cash acquired (15,934) (394,599)
Other investing activities, net 2,247 6,895
--------- ---------
Net cash flows used by
investing activities (314,688) (538,774)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
obligations (484,912) (9,860)
Increase in short-term debt 298,388 456,441
Proceeds from issuance of long-term debt 300,063 3,020
Net change in checks in process of
clearance 36,807 39,725
Redemption of preferred stock (28,512) -
Purchases of treasury stock (14,281) (3,099)
Other financing activities, net (6,270) (7,983)
--------- ---------
Net cash flows provided by
financing activities 101,283 478,244
--------- ---------
Effect of exchange rate on cash
and cash equivalents 11 (217)
--------- ---------
Net change in cash and cash equivalents 1,899 (981)
Cash and cash equivalents at beginning
of period 33,294 29,295
--------- ---------
Cash and cash equivalents at end of
period $ 35,193 $ 28,314
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest, net of amounts capitalized $ 67,646 $ 48,998
Income taxes, net of refunds received 115,536 126,813
Depreciation and amortization expense 106,766 89,975
Amortization of intangible assets 26,478 22,856
See accompanying notes to condensed consolidated financial statements.
IBP, inc. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Columnar amounts in thousands, except per share amounts
A. GENERAL
The condensed consolidated balance sheet of IBP, inc. and
subsidiaries ("IBP" or "the company") at December 25, 1999
has been taken from audited financial statements at that date
and condensed. All other condensed consolidated financial
statements contained herein have been prepared by IBP and are
unaudited. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto included in IBP's Annual
Report on Form 10-K for the year ended December 25, 1999, as
well as the consolidated financial statements included in
IBP's 8-K filed on November 7, 2000, restated to give
retroactive effect to the merger with Corporate Brand Foods
America, Inc.
On February 7, 2000, the company completed a merger with
Corporate Brand Foods America, Inc. ("CBFA") (see Note G).
The merger has been accounted for as a pooling of interests
and, accordingly, all prior period consolidated financial
statements have been restated to include the combined results
of operations, financial position and cash flows of CBFA.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial
position of IBP at September 23, 2000 and the results of its
operations and its cash flows for the periods presented
herein.
Certain reclassifications have been made to prior
financial statements to conform to the current year
presentation.
B. MERGER AGREEMENT
On October 1, 2000, DLJ Merchant Banking Partners III,
L.P., ("DLJMBP"), a private equity fund affiliated with
Donaldson, Lufkin & Jenrette, Inc., reached an agreement with
the IBP, inc. ("IBP") Board of Directors to acquire the stock
of IBP. The agreement is subject to shareholder and
regulatory approvals. If approved, IBP will be merged with
Rawhide Acquisition Corporation ("Merger"), and each share of
IBP common stock outstanding immediately prior to the Merger
will be converted into a right to receive $22.25 in cash.
After completion of the Merger, DLJMBP and affiliated funds
will be the majority owner of IBP. Other investors will
include Archer Daniels Midland Company, Inc. and certain IBP
management employees, among others. The company filed a
Current Report on Form 8-K on October 2, 2000 with respect to
this proposed merger.
C. OTHER
IBP's interim operating results may be subject to
substantial fluctuations which do not necessarily occur or
recur on a seasonal basis. Such fluctuations are normally
caused by competitive and other conditions in the cattle and
hog markets over which IBP has little or no control.
Therefore, the results of operations for the interim periods
presented are not necessarily indicative of the results to be
attained for the full fiscal year.
D. INVENTORIES
Inventories, valued at the lower of first-in, first-out
cost or market, are comprised of the following:
September 23, December 25,
2000 1999
------------- ------------
Product inventories:
Raw materials $ 75,548 $ 57,385
Work in process 96,016 84,505
Finished goods 307,810 243,495
------- -------
479,374 385,385
Livestock 147,321 137,300
Supplies 94,756 97,292
------- -------
$721,451 $619,977
======= =======
E. EARNINGS PER SHARE
13 Weeks Ended
----------------------
Sept.23, Sept. 25,
2000 1999
-------- ---------
Numerator:
Net earnings $ 78,433 $110,395
Preferred stock dividends and accretion - (462)
------- -------
Earnings available for common shares $ 78,433 $109,933
======= =======
Denominator:
Weighted average common shares
outstanding 105,575 96,573
Dilutive effect of employee stock plans 1,210 10,156
------- -------
Diluted average common shares
outstanding 106,785 106,729
======= =======
Basic earnings per common share $ .74 $1.14
==== ====
Diluted earnings per common share $ .73 $1.03
==== ====
39 Weeks Ended
Sept. 23, Sept. 25,
2000 1999
-------- ---------
Numerator:
Earnings before extraordinary item $171,666 $234,770
Preferred stock dividends and accretion (2,566) (1,569)
------- -------
Earnings available for common shares $169,100 $233,201
======= =======
Denominator:
Weighted average common shares
outstanding 105,877 96,573
Dilutive effect of employee stock plans 1,285 9,936
------- -------
Diluted average common shares
outstanding 107,162 106,509
======= =======
Basic earnings before extraordinary
item per common share $1.60 $2.41
==== ====
Diluted earnings before extraordinary
item per common share $1.58 $2.19
==== ====
The summary below lists stock options outstanding at the end
of the fiscal quarters 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.
2000 1999
-------- --------
Stock options excluded from
diluted EPS computation 3,291 937
Average option price per share $21.03 $25.55
F. 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. Comprehensive income for the 39 weeks
ended September 23, 2000 and September 25, 1999 was as
follows:
39 Weeks Ended
-------------------------
Sept. 23, Sept. 25,
2000 1999
----------- -----------
NET EARNINGS $156,629 $234,770
Other comprehensive income:
Foreign currency translation
adjustments (1,667) 5,927
------- -------
COMPREHENSIVE INCOME $154,962 $240,697
======= =======
G. ACQUISITION
On February 7, 2000, the company acquired the outstanding
common stock of Corporate Brand Foods America, Inc. ("CBFA"),
a privately held processor and marketer of meat and poultry
products for the retail and foodservice markets. In the
transaction, which was accounted for as a pooling of
interests, IBP issued approximately 14.4 million common
shares for all of the outstanding common stock of CBFA. The
company also assumed $344 million of CBFA's debt and
preferred stock obligations. At the acquisition date, all of
the debt obligations were refinanced (see Note H) and the
preferred stock was redeemed. The companies incurred $31
million of nonrecurring merger-related expenses, related
primarily to a $21 million non-cash increase in the valuation
of CBFA's restricted redeemable stock, and transaction-
related fees.
The company, by virtue of its acquisition of CBFA,
has a restricted stock plan. During the third quarter 2000,
the participants of this plan voluntarily relinquished their
rights to put the stock back to the company. Prior to the
relinquishments, the plan was accounted for as a "variable
plan" in accordance with APB Opinion #25 and classified as
redeemable stock in the accompanying consolidated balance
sheet. Following the relinquishments, the plan became a
"fixed plan" and the redeemable stock was reclassified to
equity and deferred compensation liability in the
accompanying balance sheet.
Prior to the merger, CBFA's fiscal year ended on the
Sunday closest to the last day of February. The following
information presents certain statement of earnings data for
the separate companies corresponding to IBP's fiscal quarter
and nine months ended September 25, 1999:
13 Weeks Ended 39 Weeks Ended
September 25, September 25,
1999 1999
---------------- ----------------
Net sales:
IBP, as previously
reported $3,648,390 $10,224,509
Intercompany sales to CBFA (16,076) (44,953)
--------- ----------
Net IBP sales 3,632,314 10,179,556
CBFA 166,373 446,417
--------- ----------
$3,798,687 $10,625,973
========= ==========
Net earnings:
IBP $ 108,606 $ 231,747
CBFA 1,789 3,023
--------- ----------
$ 110,395 $ 234,770
========= ==========
H. LONG-TERM OBLIGATIONS:
Long-term obligations are summarized as follows:
September 23, December 25,
2000 1999
------------- ------------
7.95% Senior Notes due 2010 $300,000 $ -
7.45% Senior Notes due 2007 125,000 125,000
6.125% Senior Notes due 2006 100,000 100,000
7.125% Senior Notes due 2026 100,000 100,000
6.0% Securities due 2001 50,000 50,000
CBFA long-term obligations - 171,589
Revolving credit facilities - 218,327
Present value of minimum
Capital lease obligations 21,838 26,878
Other 20,614 11,192
------- -------
717,452 802,986
Less amounts due within one year 54,271 13,125
------- -------
$663,181 $789,861
======= =======
On January 31, 2000, the company issued $300 million of
7.95% 10-year notes under its $550 million Debt Securities
program originally registered with the Securities and
Exchange Commission ("SEC") in 1996. This Debt Securities
program was subsequently amended and filed with the SEC on
January 27, 2000. The net proceeds, issued at a slight
discount to par, were used to reduce outstanding borrowings
under IBP's revolving credit facilities, $175 million of
which had been classified as non-current at December 25,
1999. Interest is payable semiannually.
On February 7, 2000, the company completed its merger
with CBFA and, at the same time, refinanced all of CBFA's
various existing debt obligations, using available IBP credit
facilities which were at more favorable terms. Prepayment
premiums, accelerated amortization of unamortized deferred
financing costs, and transaction expenses totaled $22
million, before applicable income tax benefit of $7 million,
and was accounted for as an extraordinary loss in the
condensed consolidated statement of earnings.
I. CONTINGENCIES:
IBP is involved in numerous disputes incident to the
ordinary course of its business. While the outcome of any
litigation is not predictable, or subject to the Company's
control, and the impact on future financial results is not
subject to reasonable estimation because considerable
uncertainty exists both as to such outcome and as to the
future financial results, management believes that any
liability for which provision has not been made relative to
the various lawsuits, claims and administrative proceedings
pending against IBP, including those described below, is not
likely to have a material adverse effect on its future
consolidated results, 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 that IBP has used its
market power and alleged "captive supply" agreements to
reduce the prices paid to producers for cattle. Plaintiffs
have disclosed that, in addition to declaratory relief, they
seek actual and punitive damages. The original motion for
class certification was denied by the District Court;
plaintiffs then amended their motion, defining a narrower
class consisting of only those cattle producers who sold
cattle directly to IBP from 1994 through the date of
certification. The District Court approved this narrower
class in April 1999. The 11th Circuit Court of Appeals
reversed the District Court decision to certify a class, on
the basis that there were inherent conflicts amongst class
members preventing the named plaintiffs from providing
adequate representation to the class. The plaintiffs then
filed pleadings seeking to certify an amended class. The
Court denied the plaintiffs' motion on October 17, 2000.
Management continues to believe that the company has acted
properly and lawfully in its dealings with cattle producers.
On January 12, 2000, The United States Department of
Justice, on behalf of the Environmental Protection Agency
("EPA"), filed a lawsuit against IBP in U. S. District Court
for the District of Nebraska, alleging violations of various
environmental laws at IBP's Dakota City facility. This
action alleges, among other things, violations of: (1) the
Clean Air Act; (2) the Clean Water Act; (3) the Resource,
Conservation and Recovery Act; (4) the Comprehensive
Environmental Response Compensation and Liability Act
("CERCLA"); and (5) the Emergency Planning and Community
Right to Know Act ("EPCRA"). The action seeks injunctive
relief to remedy alleged violations and damages of $25,000
per violation per day for alleged violations which occurred
prior to January 30, 1997, and $27,500 per violation per day
for alleged violations after that date. The Complaint alleges
that some violations began to occur as early as 1989,
although the great majority of the violations are alleged to
have occurred much later, and allegedly continue into the
present. IBP believes that the company has meritorious
defenses on each of these allegations and intends to
aggressively defend these claims.
On May 19, 2000, IBP signed a Partial Consent Decree with
the EPA that makes environmental improvements that were
already underway at IBP's Dakota City, Nebraska facility
federally enforceable. Although this Partial Consent Decree
does not purport to resolve all of the allegations in the
Complaint, if EPA were to prevail in court on certain of its
factual allegations, these improvements may satisfy part of
the injunctive relief sought by EPA under the Complaint. EPA
has acknowledged that final injunctive relief under CAA
claims may incorporate some or all of the work agreed to
under the Partial Consent Decree.
In February 2000, several lawsuits were filed against IBP
by certain shareholders in the United States District Court
for the District of Nebraska seeking to certify a class of
all persons who purchased IBP stock between March 25, 1999 to
January 12, 2000. The complaints, seeking unspecified
damages, allege that IBP violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5
thereunder, and claims IBP issued materially false statements
about the company's compliance with environmental laws in
order to inflate the company's stock price. The lawsuits
have been consolidated and the Court has appointed three lead
plaintiffs and has appointed lead and liaison counsel. An
amended consolidated complaint with respect to all the
actions was filed, and the company is preparing its response.
Management believes it has accurately reported the company's
compliance with environmental laws, and the company intends
to vigorously contest these claims.
On January 15, 1997, the Illinois EPA brought suit
against IBP at its Joslin, Illinois facility alleging that
IBP's operations at its Joslin, Illinois facility are
violating the "odor nuisance" regulations enacted in the
State of Illinois. IBP has already commenced additional
improvements at its Joslin facility to further reduce odors
from this operation, but denies Illinois EPA's contention
that such conditions amount to a "nuisance". IBP is in the
midst of discussions aimed at a complete resolution of these
issues, and reports this issue solely because of a recent
determination that the penalties have the potential to exceed
$100,000.
In October 2000, fourteen lawsuits were filed against
IBP by certain shareholders in Delaware, seeking to certify a
class of all IBP shareholders. The complaints seek
unspecified damages and seek to enjoin the company's proposed
acquisition of IBP's stock by DLJMBP.
J. BUSINESS SEGMENTS
The company is managed and operated as two divisions,
Fresh Meats and Foodbrands America, and, accordingly, has two
business segments. IBP's Fresh Meats operation relates
principally to the meat processing industry and primarily
involves cattle and hog carcass production, 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 Foodbrands America
segment consists of several IBP subsidiaries, principally
Foodbrands America, Inc. ("Foodbrands"), The Bruss Company,
IBP Foods, Inc., and CBFA. The Foodbrands America group
produces, markets and distributes a variety of frozen and
refrigerated products to the "away from home" food
preparation market, other food processors and to the retail
grocery market. Products include pizza toppings and crusts,
value-added beef and pork-based products, ethnic specialty
foods, appetizers, soups, sauces and side dishes as well as
deli meats and processed beef, pork and poultry products.
Foodbrands America 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.
13 Weeks Ended 39 Weeks Ended
---------------------- -----------------------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
----------- ----------- ----------- -----------
NET SALES
---------
Sales to unaffiliated
customers:
Fresh Meats $3,337,906 $3,139,855 $ 9,904,186 $ 8,963,699
Foodbrands America 816,356 658,832 2,297,643 1,662,274
--------- --------- ---------- ----------
$4,154,262 $3,798,687 $12,201,829 $10,625,973
========= ========= ========== ==========
Intersegment sales:
Fresh Meats $ 150,588 $ 70,504 $ 437,486 $ 251,226
Intersegment elimination (150,588) (70,504) (437,486) (251,226)
--------- --------- ---------- ----------
- - - -
========= ========= ========== ==========
Net sales:
Fresh Meats $3,488,494 $3,210,359 $10,341,672 $ 9,214,925
Foodbrands America 816,356 658,832 2,297,643 1,662,274
Intersegment elimination (150,588) (70,504) (437,486) (251,226)
--------- --------- ---------- ----------
$4,154,262 $3,798,687 $12,201,829 $10,625,973
========= ========= ========== ==========
EARNINGS FROM OPERATIONS
------------------------
Fresh Meats $ 132,492 $ 143,668 $ 333,134 $ 320,066
Foodbrands America 15,162 30,273 7,803 87,122
--------- --------- ---------- ----------
Total earnings from
operations 147,654 173,941 340,937 407,188
Net interest expense (21,121) (17,543) (64,071) (48,710)
--------- --------- ---------- ----------
Pre-tax earnings $ 126,533 $ 156,398 $ 276,866 $ 358,478
========= ========= ========== ==========
NET SALES BY LOCATION
OF CUSTOMERS
---------------------
United States $3,528,448 $3,239,739 $10,358,440 $ 9,062,900
Japan 249,042 209,635 737,155 618,781
Canada 137,021 132,272 422,966 380,634
Korea 78,335 63,109 222,518 152,918
Mexico 64,194 52,698 177,763 136,365
Other foreign countries 97,222 101,234 282,987 274,375
--------- --------- ---------- ----------
$4,154,262 $3,798,687 $12,201,829 $10,625,973
========= ========= ========== ==========
K. INCOME TAXES
During the third quarter 1999, the company reached a settlement
with the Internal Revenue Service ("IRS") on all audit issues related
to tax years 1989 through 1991. As a result of that settlement, the
company reduced income taxes payable and income tax expense by $14
million, or $0.15 per diluted share.
During the third quarter 2000, the company filed amended tax
returns for the years 1992 through 1997, claiming additional deductions
plus interest. The IRS has challenged and continues to challenge certain
tax credits claimed by the company on tax returns filed for fiscal years
1992 to date, aggregating approximately $100 million. While the company
believes it has a basis for claiming such credits, no benefit has been
reflected for financial reporting purposes given the uncertainty of
ultimate sustainability. The outcome of this matter remains uncertain.
L. SUBSEQUENT EVENT
In late October 2000, management discovered inaccuracies in a
Foodbrands subsidiary's financial statements, resulting in a $9 million
reduction in pre-tax earnings and inventories. The third quarter 2000
financial statements included herein include this reduction from amounts
previously reported in IBP's earnings press release on October 16, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
This quarterly report on Form 10-Q contains forward-looking statements
which reflect management's current view with respect to future events and
financial performance. 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.
SUBSEQUENT EVENT
----------------
In late October 2000, management discovered inaccuracies in a Foodbrands
subsidiary's financial statements, resulting in a $9 million reduction in
pre-tax earnings and inventories. The segment information and analysis included
herein include this reduction from amounts previously reported in IBP's
earnings press release on October 16, 2000.
MERGER AGREEMENT
----------------
On October 1, 2000, DLJ Merchant Banking Partners III, L.P., ("DLJMBP"),
a private equity fund affiliated with Donaldson, Lufkin & Jenrette, Inc.,
reached an agreement with the IBP, inc. ("IBP") Board of Directors to acquire
the stock of IBP. The agreement is subject to shareholder and regulatory
approvals. If approved, IBP will be merged with Rawhide Acquisition Corpora-
tion ("Merger"), and each share of IBP common stock outstanding immediately
prior to the Merger will be converted into a right to receive $22.25 in cash.
After completion of the Merger, DLJMBP and affiliated funds will be the majori-
ty owner of IBP. Other investors will include Archer Daniels Midland Company,
Inc. and certain IBP management employees, among others. The company filed a
Current Report on Form 8-K on October 2, 2000 with respect to this proposed
merger.
ACQUISITION
-----------
On February 7, 2000, the company acquired Corporate Brand Foods America,
Inc. ("CBFA"), a privately held processor and marketer of meat and poultry
products for the retail and foodservice markets. In the transaction, which
was accounted for as a pooling of interests, IBP issued 14.4 million common
shares for all of the outstanding stock of CBFA. The company also assumed $344
million of CBFA's debt and preferred stock obligations. At the acquisition
date, all of the debt obligations were refinanced (see Note G) and the
preferred stock was redeemed. The companies incurred $31 million of nonrecur-
ring merger-related expenses, related primarily to a non-cash increase in the
valuation of CBFA's restricted redeemable stock and to transaction-related
fees.
RECENT ACCOUNTING DEVELOPMENTS
------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosures of
revenue in the financial statements effective for all transactions on or after
January 1, 2000. The company does not believe that the adoption of SAB 101 in
the fourth quarter 2000 will have a material affect on the Company's financial
results.
RESULTS OF OPERATIONS
---------------------
Fresh Meats' operating earnings decreased to 4.0% of net sales in the third
quarter 2000 versus 4.6% in the third quarter 1999. Through nine months,
operating earnings as a percentage of net sales in 2000 measured 3.4% versus
3.8% in 1999, before a $17 million nonrecurring pre-tax charge in 1999 for
cow facility asset write-downs. Beef operations performed well on strong
demand and higher capacity utilization. However, pork division performance was
hampered by higher live hog costs and lower capacity utilization.
In the Foodbrands America segment, third quarter 2000 operating earnings
decreased to 1.9% of net sales compared to 4.6% in the third quarter 1999.
Year-to-date 2000 operating earnings, before nonrecurring and unusual items,
measured 2.2% of net sales versus 5.2% in 1999. The lower 2000 results
reflected margin pressure from increased raw material costs, especially fresh
pork. Additionally, the IBP Foods, Inc. operation, consisting of former Thorn
Apple Valley, Inc. facilities purchased in the third quarter 1999, lost $4
million in the third quarter and $22 million in the first nine months of 2000.
Foodbrands America's year-to-date 2000 operating earnings were reduced by
two unusual items. The most significant item was $31 million in pre-tax,
nonrecurring CBFA merger-related expense described above. The second unusual
item was an $11 million pre-tax bad debt provision increase due to a signifi-
cant customer's bankruptcy. Excluding the unusual items and the IBP Foods,
Inc. losses, the Foodbrands America segment earned $72 million from operations
through September 2000 compared to $90 million in the first three quarters of
1999.
The latest estimates by livestock industry analysts predict that beef
production in 2000 will be slightly higher than in 1999 and will remain strong
into the first half of 2001. However, analysts believe beef production for the
full year 2001 will be down in the three-to-five percentage point range from
2000. Meanwhile, analysts anticipate pork production in 2000 to be down 1% to
2% from the record production in 1999 and up approximately 2.5% in 2001.
COMPARATIVE SEGMENT RESULTS
---------------------------
(in thousands)
13 Weeks Ended 39 Weeks Ended
---------------------- ----------------------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales:
Fresh Meats $3,337,906 $3,139,855 $ 9,904,186 $ 8,963,699
Foodbrands America 816,356 658,832 2,297,643 1,662,274
--------- --------- ---------- ----------
$4,154,262 $3,798,687 $12,201,829 $10,625,973
========= ========= ========== ==========
Earnings from operations:
Before nonrecurring
and unusual items:
Fresh Meats $ 132,492 $ 143,668 $ 333,817 $ 336,761
Foodbrands America 15,162 30,273 49,637 87,122
--------- --------- ---------- ----------
$ 147,654 $ 173,941 $ 383,454 $ 423,883
========= ========= ========== ==========
After nonrecurring
and unusual items:
Fresh Meats $ 132,492 $ 143,668 $ 333,134 $ 320,066
Foodbrands America 15,162 30,273 7,803 87,122
--------- --------- ---------- ----------
$ 147,654 $ 173,941 $ 340,937 $ 407,188
========= ========= ========== ==========
SALES
Fresh Meats' net sales increased 6% and 10% in the 13-week and
39-week periods ended September 2000 from the comparable prior year
periods. The increases were due primarily to higher average selling
prices of beef and pork offset somewhat by decreases in total pounds
of beef and pork products sold. The higher selling prices reflected
continued strong demand for red meat in the United States and
international markets, and to tightened available supplies of fresh
pork.
Foodbrands America's net sales for the third quarter of 2000
increased 24% over the third quarter of 1999, primarily due to
acquisitions in the second half of 1999. These second half 1999
additions (IBP Foods, Inc. and Wilton Foods, Inc. during the third
quarter and Wright Brand Foods, Inc. (by CBFA) in the fourth quarter)
increased net sales by approximately $100 million, or 15%, for the
quarter. Excluding the effect of acquisitions, net sales for existing
operations increased approximately 9%, of which 7% is due to increased
prices driven by higher raw material costs and 2% is due to higher
sales volume.
Foodbrands America's year-to-date net sales for 2000 increased
38% over 1999. The 1999 additions (Russer Foods and H&M Foods in
the second quarter, IBP Foods and Wilton Foods in the third quarter
and Wright Brand Foods, Inc. in the fourth quarter) increased year-
to-date net sales by approximately $435 million, or 26%. Excluding
the effect of acquisitions, year-to-date net sales for existing
operations increased approximately 12%, of which 8% is due to
increased prices driven by higher raw material costs and 4% is due
to volume.
Net export sales increased 15% in the third quarter 2000 from
the year earlier and 19% for the nine months ended September 2000
versus a year ago. While the volume of pounds sold increased 10% in
the third quarter and 5% on a year-to-date basis from the prior
year, improved pricing and product mix factors contributed most to
the sales increases. As the Far East economies have improved, the
product mix sold to the region has shifted to higher-value products.
Net sales into Asia, which accounted for 75% of total export
dollars, increased 23% on a year-to-date basis from the prior year.
Sales into Mexico also improved 30% year-to-date through September
on a volume increase of 23%. Net export sales accounted for 12% of
total net sales in the first nine months of 2000 and 1999.
COST OF PRODUCTS SOLD
In the Fresh Meats segment, the cost of products sold in the
third quarter and nine months ended September 2000 increased 7% and
11% from the comparable 1999 periods. Higher average live cattle
and hog prices were the principal reasons for the higher 2000 costs.
Plant costs increased 5% and 4% in the 2000 quarterly and year-to-
date comparison periods as higher labor costs and increased case-
ready production were mostly offset by cessation of cow processing
in 2000.
Foodbrands America's third quarter 2000 cost of products sold
increased 27% from the third quarter 1999, of which 16% is the
result of acquisitions mentioned above. Year-to-date cost of
products sold in 2000 increased 44% over 1999, 29% of which is the
result of acquisitions. Excluding the effect of acquisitions, cost
of products sold for the third quarter increased 11%, 9% of which is
due to higher raw material costs and 2% resulted from increased
sales volume. Year-to-date cost of products sold before acquisitions
increased 14% over 1999, 10% of which is due to higher raw material
costs and 4% resulted from increased sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fresh Meats' third quarter and year-to-date 2000 expenses
increased 8% and 10% over the comparable 1999 periods. Higher
personnel-related expenses, computer-related expense and
international selling expense were major factors in the increases.
In the Foodbrands America segment, third quarter 2000 expenses
increased 30% over the third quarter 1999, 12% of which is related
to acquisitions. Year-to-date expenses in 2000 increased 58% over
year-to-date expenses in 1999, of which 22% is related to
acquisitions. Higher bad debt expense ($11 million in the first
quarter) related to a customer bankruptcy and year-to-date merger-
related costs of $31 million accounted for an additional 21% of the
increase. Higher volume-related selling expenses and increased
personnel-related expenses were the principal factors driving the
remaining 18% increase in the third quarter and the remaining 15%
increase year-to-date.
INTEREST EXPENSE
The 32% increase in net interest expense in 2000 versus the
nine months ended September 1999 was due primarily to a 24% increase
in average borrowings in 2000 but also to a higher average effective
interest rate.
INCOME TAXES
IBP's higher 2000 effective income tax rates in the third
quarter and year-to-date periods versus 1999 resulted from a third
quarter 1999 settlement with the Internal Revenue Service on all
audit issues related to fiscal years 1989 through 1991. The
settlement decreased 1999 income tax expense by $14 million or $0.13
per diluted share. Excluding the audit settlement impact, the 2000
effective tax rates were comparable to the 1999 rates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Total outstanding borrowings averaged $1,449 million in the
first nine months of 2000 compared to $1,165 million in the
comparable 1999 period. The higher 2000 average outstanding
borrowings versus 1999 were the result of acquisitions (IBP Foods,
Wilton Foods and Wright Brand Foods all acquired in the second half
of 1999) and increased capital expenditures. Borrowings outstanding
under committed and uncommitted credit facilities at September 23,
2000 totaled $746 million compared to $623 million (excluding CBFA)
at December 25, 1999, and available unused credit capacity under
committed facilities at September 23, 2000 was $187 million.
On January 31, 2000, the company issued $300 million of 7.95%
10-year notes under its $550 million Debt Securities program
originally registered with the Securities and Exchange Commission
("SEC") in 1996. This Debt Securities program was subsequently
amended and filed with the SEC on January 27, 2000. The net
proceeds, issued at a slight discount to par, were used to reduce
borrowings under IBP's revolving credit facilities. Interest on the
7.95% notes is payable semiannually.
In January 2000, the company put in place $300 million of
additional revolving credit capacity via a 364-day facility with two
major financial institutions. Credit terms were similar to those in
existing credit facilities. Meanwhile, IBP's $100 million
Promissory Note expired in February 2000 and was replaced by a $100
million short-term facility maturing in December 2000, giving the
company $900 million in borrowing capacity under committed
facilities.
On February 7, 2000, the company completed its merger with CBFA
and, at the same time, refinanced all of CBFA's various existing debt
obligations, using available IBP credit facilities that were at more
favorable terms.
Year-to-date capital expenditures through September 23, 2000
totaled $301 million compared to $152 million in the first nine
months of 1999. Major projects included purchases of forward
warehousing and case-ready facilities, renovations of the Norfolk,
Nebraska, beef processing plant, and various plant and distribution
facility expansions. Approximately 77% of the year-to-date 2000
spending was for revenue enhancement or cost-saving projects, while
the remainder went toward upgrades and replacements of existing
equipment and facilities.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
(a) The annual meeting of stockholders of IBP, inc. was held on April
20, 2000, in Dakota Dunes, South Dakota.
(c) The following matters were voted upon at the annual meeting:
(i) The election of the members of the Board of Directors:
Richard L. Bond
Votes for: 80,528,104
Votes withheld: 1,113,531
John S. Chalsty
Votes for: 80,512,578
Votes withheld: 1,129,057
Dr. Wendy L. Gramm
Votes for: 80,507,404
Votes withheld: 1,134,231
John J. Jacobson, Jr.
Votes for: 80,528,621
Votes withheld: 1,113,014
Eugene D. Leman
Votes for: 80,532,361
Votes withheld: 1,109,274
Martin A. Massengale
Votes for: 80,510,630
Votes withheld 1,131,005
Robert L. Peterson
Votes for: 80,510,815
Votes withheld: 1,130,820
Michael L. Sanem
Votes for: 80,534,159
Votes withheld: 1,107,476
JoAnn R. Smith
Votes for: 80,512,265
Votes withheld: 1,129,370
(ii) Approval of the performance-based bonus of the Chairman of
the Board and Chief Executive Officer, the President and
Chief Operating Officer, and the Chief Executive Officer of
Foodbrands America, Inc.
For: 74,440,358
Against: 6,962,816
Abstain: 238,560
Item 5. Other Information
--------------------------
In connection with its Medium-Term Notes program, the company
hereby reports the following computations:
39 Weeks Ended
------------------------
Sept. 23, Sept. 25,
2000 1999
----------- -----------
Earnings before income taxes
and extraordinary item $276,866 $358,478
Total fixed charges 86,164 66,648
Capitalized interest (6,229) (6,687)
------- -------
Earnings before fixed charges,
income taxes and extraordinary
item $356,801 $418,439
======= =======
Ratio of earnings to fixed charges 4.1 6.3
=== ===
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the company during the
quarter ended September 23, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBP, inc.
-------------------------
(Registrant)
November 7, 2000 /s/ Robert L. Peterson
---------------------- -------------------------
(date) Robert L. Peterson
Chairman of the Board and
Chief Executive Officer
/s/ Larry Shipley
--------------------------
Larry Shipley
Chief Financial Officer
/s/ Craig J. Hart
--------------------------
Craig J. Hart
Vice President
and Controller
