FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1998
Commission file number 0-17084
THE SMITHFIELD COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1167160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
311 County Street, Portsmouth, VA 23704
(Address of principal executive offices) (Zip Code)
(757) 399-3100
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par or stated value--2,343,375 shares as of November 6, 1998
INDEX
THE SMITHFIELD COMPANIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 1998
and March 31, 1998
Condensed consolidated statements of income--Three months
ended September 30, 1998 and 1997; Six months ended
September 30, 1998 and 1997
Condensed consolidated statements of cash flows--Six
months ended September 30, 1998 and 1997
Notes to condensed consolidated financial statements--
September 30, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
THE SMITHFIELD COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 March 31
1998 1998
(unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,037,886 $ 7,679,907
Receivables, less allowances
of $63,000 and $71,000 1,659,927 1,258,593
Inventories 3,765,347 2,900,668
Prepaid expenses and other 165,203 50,460
Deferred income taxes 100,000 100,000
----------- -----------
TOTAL CURRENT ASSETS 11,728,363 11,989,628
PROPERTY, PLANT AND EQUIPMENT 7,342,991 6,456,964
less accumulated depreciation 3,387,934 3,231,045
----------- -----------
3,955,057 3,225,919
OTHER ASSETS 1,084,568 615,060
----------- -----------
$16,767,988 $15,830,607
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 742,997 $ 532,720
Other current liabilities 929,400 699,117
----------- -----------
TOTAL CURRENT LIABILITIES 1,672,397 1,231,837
SHAREHOLDERS' EQUITY
Common stock, no par or stated
value--authorized 5,000,000 shares;
issued and outstanding 2,343,411
shares and 2,343,428 shares 2,503,767 2,503,869
Retained earnings 12,591,824 12,094,901
----------- -----------
15,095,591 14,598,770
----------- -----------
$16,767,988 $15,830,607
=========== ===========
Note: The balance sheet at March 31, 1998 has been derived
from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
THE SMITHFIELD COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended
September 30 September 30
1998 1997 1998 1997
Net sales $6,122,059 $4,770,991 $9,908,573 $9,257,822
Cost of goods sold 4,177,472 3,359,726 6,595,003 6,311,712
---------- ---------- ---------- ----------
GROSS PROFIT 1,944,587 1,411,265 3,313,570 2,946,110
Other operating revenue 19,978 52,137 41,955 70,286
---------- ---------- ---------- ----------
1,964,565 1,463,402 3,355,525 3,016,396
Selling, general and
administrative expenses 1,381,698 1,235,805 2,551,385 2,571,692
---------- ---------- ---------- ----------
OPERATING INCOME 582,867 227,597 804,140 444,704
Interest income, net 55,331 52,430 125,387 114,996
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 638,198 280,027 929,527 559,700
Income taxes 211,000 86,000 292,000 168,000
---------- ---------- ---------- ----------
NET INCOME $ 427,198 $ 194,027 $ 637,527 $ 391,700
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ .18 $ .08 $ .27 $ .16
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ .18 $ .08 $ .27 $ .16
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING--BASIC 2,343,411 2,361,804 2,343,412 2,384,016
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING--DILUTED 2,364,719 2,374,724 2,363,910 2,396,785
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
THE SMITHFIELD COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended September 30
1998 1997
OPERATING ACTIVITIES
Net income $ 637,527 $ 391,700
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 211,020 232,783
Gain on disposal of property
and equipment (4,358) (3,972)
Change in assets and liabilities:
Trade receivables (401,334) (71,459)
Inventories (864,679) (1,641,225)
Prepaid expenses and other (114,743) (56,264)
Accounts payable and other
current liabilities 440,510 217,770
---------- ----------
NET CASH USED IN
OPERATING ACTIVITIES (96,057) (930,667)
INVESTING ACTIVITIES
Proceeds from the sale of New Orleans 205,332
Acquisition:
Intangible assets (22,235)
Inventories (127,752)
Equipment (50,050)
Purchase of property and equipment (929,968) (154,987)
Purchase of marketable securities (495,840)
Proceeds from sale of property and
equipment 20,500 232,917
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,405,308) 83,225
FINANCING ACTIVITIES
Cash dividends paid (140,604) (142,985)
Repurchase of common stock (102) (429,562)
NET CASH USED IN ---------- ----------
FINANCING ACTIVITIES (140,706) (572,547)
---------- ----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (1,642,071) (1,419,989)
Cash and cash equivalents at
beginning of period 7,679,907 6,660,759
---------- ----------
CASH AND CASH
EQUIVALENTS AT END OF PERIOD $6,037,886 $5,240,770
========== ==========
See notes to condensed consolidated financial statements.
THE SMITHFIELD COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and six month periods ended September 30, 1998 are not necessarily indicitive
of the results that may be expected for the year ending March 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended March 31, 1998.
NOTE B--INVENTORIES
The components of inventory consist of the following:
September 30, 1998 March 31, 1998
Finished Goods $1,985,330 $1,265,440
Production Materials:
Meats 1,119,725 1,101,861
Other Ingredients 190,516 161,597
Packing Materials 469,776 371,770
---------- ----------
$3,765,347 $2,900,668
========== ==========
NOTE C--ACQUISITION
On April 22, 1998 the Company purchased the E. M. Todd Co. brand. Founded in
1779, Todd is America's oldest meatpacker and the original producer of the
Smithfield Ham. The purchase price for the brand, equipment and inventories
was nominal and is not disclosed separately.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company produces and markets a wide range of branded food products
primarily to the retail grocery, food service and gourmet food industries.
The Company also markets its products through direct mail and its own retail
outlets. The Company's business is somewhat seasonal with its direct mail
and gourmet food operations having disproportionate sales during the
Christmas season. This traditionally makes the Company's third quarter sales
and income the highest of the fiscal year.
Results of Continuing Operations
Net sales for the three months ended September 30, 1998 increased 28.3% to
$6,122,059 compared to $4,770,991 for the three months ended September 30,
1997. Net sales for the six months ended September 30, 1998 increased 7.0%
to $9,908,573 compared to $9,257,822 for the six months ended September 30,
1997. The improvement in sales during the three months ended September 30,
1998 is due to solid increases in unit sales across most of the Company's
product lines coupled with a significant seasonal sale to a national club
store chain.
Gross profit margin for the three months ended September 30, 1998 increased
to 31.8% compared to 29.6% for the three months ended September 30, 1997.
The higher margins were due to lower pork prices. Second quarter margins are
lower than first quarter margins due to the product mix. Second quarter
sales include a greater percentage of wholesale business, which carries lower
margins than retail sales.
Selling, general and administrative (S,G&A) expenses increased 11.8% during
the three months ended September 30, 1998 compared to the prior year. The
increase was primarily attributable to increased selling expenses as a result
of the increased sales. S,G&A expenses decreased 0.8% during the six months
ended September 30, 1998 compared to the prior year. 1997 first quarter
S,G&A expenses includes amounts from The New Orleans School of Cooking which
was sold on July 22, 1997.
Income tax rates are lower than statutory rates primarily because of interest
from tax-exempt municipal bond funds.
Liquidity and Capital Resources
During May 1998 the Company began construction on a 19,000 square foot frozen
food processing plant in Smithfield to support barbecue, stews and chili
product lines. Construction is expected to be completed by January 1999 at a
total cost of approximately $2.4 million of which $1.8 million is committed
under contract. The Company intends to use its short-term investments or
obtain special use financing to fund the construction.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources--Continued
At September 30, 1998, the Company had approximately $5.8 million invested in
short-term highly liquid debt instruments compared to approximately $7.6
million at March 31, 1998. The decrease is primarily the result of increased
inventories, which is typical during this time of year. Another significant
use of cash was approximately $800,000 for the building construction
mentioned above. In addition, the Company has an unused $10 million line of
credit loan with a bank bearing interest at the LIBOR market plus .50% which
expires on March 19, 1999.
The Company believes its liquidity and capital resources to be excellent.
Current cash flows and available funds are sufficient to satisfy existing
cash requirements. At September 30, 1998 and March 31, 1998, the Company's
only debt consisted of accounts payable and accrued expenses.
The Company will continue its strategy of looking for growth through
acquisitions in higher margin segments of the food industry. Having a
significant amount of cash on hand as well as available funds on its line of
credit, the Company believes it is in an excellent position to invest in
assets, which will increase shareholder value over time.
The Company traditionally increases inventory during the first six months of
its fiscal year to meet the increased demand for its products during the
Christmas season. The Company is financing the increase in inventory through
its operating cash flow and the use of some of its short-term securities.
Year 2000 Compliance
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to recognize a date using "00" as
the year 1900 rather than the year 2000. If a computer system or software
application (referred to as "IT 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. In addition, many
systems and equipment that are not typically thought of as "computer-related"
(referred to as "non-IT systems") contain imbedded hardware or software that
may have a time element which could cause system failures.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The Company has, and
intends to continue to utilize internal personnel, contract programmers and
third-party vendors to identify, prioritize and access Year 2000
noncompliance concerns. The Company has identified some non-compliant
software and hardware which will be modified or replaced. These
modifications and replacements to both IT and non-IT systems are currently
being done and are expected to be completed in early 1999. The total cost of
these Year 2000 compliance activities is expected to be less than $100,000
and will not have a material impact on the Company's financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Year 2000 Compliance (continued)
The Company relies on third party suppliers for raw materials, water,
utilities and other key services. Interruption of supplier operations due to
Year 2000 issues could affect Company operations. The Company is also
dependent upon its customers for sales and cash flow. Year 2000
interruptions in customer operations could effect sales and receivable levels
as well as cash flow reductions. The Company believes its customer base is
broad enough to minimize the affects of a simple occurrence. The Company has
initiated efforts to evaluate the status of third party party efforts and to
determine alternatives and contingency plan requirements. The reduction of
risk due to noncompliance with Year 2000 issues include the identification of
alternate suppliers and the accumulations of inventory to assure production
capability. These activities are intended to provide a means of managing
risk but cannot eliminate the potential for disruption due to third party
failure.
Edward Acree
On August 23, 1998, Edward Acree, an original member of the Company's Board
of Directors passed away. Mr. Acree contributed greatly to the Company's
success and will not only be missed as a business associate, but also as a
very good friend. He has not been replaced on the Board of Directors.
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a.) 27. Financial Data Schedule
b.) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SMITHFIELD COMPANIES, INC.
(registrant)
DATE: November 11, 1998 /s/ Richard S. Fuller
______________________________
Richard S. Fuller
President and Chief Executive
Officer
DATE: November 11, 1998 /s/ Mark D. Bedard
______________________________
Mark D. Bedard
Treasurer and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Unaudited Consolidated Financial Statements of The Smithfield Companies,
Inc. for the six months ended September 30, 1998, and is qualified in its
entirety by reference to such Unaudited Consolidated Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 6,037,886
<SECURITIES> 495,840
<RECEIVABLES> 1,722,927
<ALLOWANCES> 63,000
<INVENTORY> 3,765,347
<CURRENT-ASSETS> 11,728,363
<PP&E> 7,342,991
<DEPRECIATION> 3,387,934
<TOTAL-ASSETS> 16,767,988
<CURRENT-LIABILITIES> 1,672,397
<BONDS> 0
0
0
<COMMON> 2,503,767
<OTHER-SE> 12,591,824
<TOTAL-LIABILITY-AND-EQUITY> 16,767,988
<SALES> 9,908,573
<TOTAL-REVENUES> 9,950,528
<CGS> 6,595,003
<TOTAL-COSTS> 9,146,388
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 929,527
<INCOME-TAX> 292,000
<INCOME-CONTINUING> 637,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 637,527
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
