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 December 31, 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--2,341,061 shares as of February 5, 1999
INDEX
THE SMITHFIELD COMPANIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 31, 1998
and March 31, 1998
Condensed consolidated statements of income--Three months
ended December 31, 1998 and 1997; Nine months ended
December 31, 1998 and 1997
Condensed consolidated statements of cash flows--Nine
months ended December 31, 1998 and 1997
Notes to condensed consolidated financial statements--
December 31, 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
December 31 March 31
1998 1998
(unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,258,651 $ 7,679,907
Receivables, less allowances
of $82,000 and $71,000 2,638,050 1,258,593
Inventories 2,119,483 2,900,668
Prepaid expenses 51,375 50,460
Deferred income taxes 100,000 100,000
----------- -----------
TOTAL CURRENT ASSETS 12,167,559 11,989,628
PROPERTY AND EQUIPMENT 8,381,250 6,456,964
less accumulated depreciation 3,489,676 3,231,045
----------- -----------
4,891,574 3,225,919
OTHER ASSETS 1,151,402 615,060
----------- -----------
$18,210,535 $15,830,607
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,252,802 $ 532,720
Other current liabilities 1,219,461 699,117
----------- -----------
TOTAL CURRENT LIABILITIES 2,472,263 1,231,837
SHAREHOLDERS' EQUITY
Common stock, no par or stated
value--authorized 5,000,000 shares;
issued and outstanding 2,341,061
shares and 2,343,428 shares 2,488,492 2,503,869
Retained earnings 13,249,780 12,094,901
----------- -----------
15,738,272 14,598,770
----------- -----------
$18,210,535 $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 Nine months ended
December 31 December 31
1998 1997 1998 1997
Net sales $7,992,002 $7,924,109 $17,900,575 $17,181,931
Cost of goods sold 4,974,031 5,299,907 11,569,034 11,611,619
---------- ---------- ----------- -----------
GROSS PROFIT 3,017,971 2,624,202 6,331,541 5,570,312
Other operating revenue 13,160 17,948 55,115 88,234
---------- ---------- ----------- -----------
3,031,131 2,642,150 6,386,656 5,658,546
Selling, general and
administrative expenses 1,971,169 1,776,304 4,522,554 4,347,996
---------- ---------- ----------- -----------
OPERATING INCOME 1,059,962 865,846 1,864,102 1,310,550
Interest income, net 67,014 58,250 192,401 173,246
---------- ---------- ----------- -----------
INCOME BEFORE
INCOME TAXES 1,126,976 924,096 2,056,503 1,483,796
Income taxes 387,000 330,000 679,000 498,000
---------- ---------- ----------- -----------
NET INCOME $ 739,976 $ 594,096 $ 1,377,503 $ 985,796
========== ========== =========== ===========
BASIC EARNINGS PER SHARE $ .32 $ .25 $ .59 $ .41
========== ========== =========== ===========
DILUTED EARNINGS PER SHARE $ .31 $ .25 $ .58 $ .41
========== ========== =========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING--BASIC 2,342,447 2,361,804 2,343,089 2,384,016
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING--DILUTED 2,363,234 2,375,468 2,363,684 2,397,092
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
THE SMITHFIELD COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended December 31
1998 1997
OPERATING ACTIVITIES
Net income $1,377,503 $ 985,796
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 325,928 337,450
Gain on disposal of property
and equipment (4,358) (3,972)
Change in assets and liabilities:
Trade receivables (1,379,457) (843,034)
Inventories 781,185 707,559
Prepaid expenses (915) 9,101
Accounts payable and other
current liabilities 1,240,426 517,818
---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,340,312 1,710,718
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 (1,968,227) (268,768)
Purchase of marketable securities (575,840)
Proceeds from sale of property and
equipment 20,500 235,917
---------- ----------
NET CASH USED IN
INVESTING ACTIVITIES (2,523,567) (27,556)
FINANCING ACTIVITIES
Cash dividends paid (222,624) (213,638)
Repurchase of common stock (15,377) (444,368)
---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (238,001) (658,006)
---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (421,256) 1,025,156
Cash and cash equivalents at
beginning of period 7,679,907 6,660,759
---------- ----------
CASH AND CASH
EQUIVALENTS AT END OF PERIOD $7,258,651 $7,685,915
========== ==========
See notes to condensed consolidated financial statements.
THE SMITHFIELD COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 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 nine month periods ended December 31, 1998 are not necessarily indicative
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:
December 31, 1998 March 31, 1998
Finished Goods $1,226,250 $1,265,440
Production Materials:
Meats 308,312 1,101,861
Other Ingredients 206,011 161,597
Packing Materials 378,910 371,770
---------- ----------
$2,119,483 $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.
NOTE D--SHAREHOLDERS' EQUITY
During the nine months ended December 31, 1998 the Company purchased and
retired 2,367 shares of its Common Stock at a cost of $15,377.
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 December 31, 1998 increased marginally
to $7,992,002 compared to $7,924,109 for the three months ended December 31,
1997. Net sales for the nine months ended December 31, 1998 increased 4.2%
to $17,900,575 compared to $17,181,931 for the nine months ended December 31,
1997. During the three months ended December 31, 1998 increased tonnage
sales were offset by lower selling prices due to lower pork related raw
material costs. The improvement in sales during the nine months ended December
31, 1998 is due to solid increases in unit sales coupled with a significant
seasonal sale to a national club store chain.
Gross profit margins for the three and nine months ended December 31, 1998
increased compared to the prior year. The higher margins were primarily due
to lower costs for pork related products.
Selling, general and administrative expenses increased 4.0% during the nine
months ended December 31, 1998 compared to the nine months ended December 31,
1997. The increase was primarily attributable to increased selling expenses
which correlates to the increased sales. General and administrative expenses
have been relatively constant during the current year compared to the prior
year.
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 during February 1999
at a total cost of approximately $2.8 million. As of December 31, 1998 the
Company has expended approximately $1.8 million using its cash flow and
short-term investments. The Company is expecting to obtain permanent
financing for the project through the issuance of Industrial Development Revenue
Bonds in March 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources--Continued
At December 31, 1998, the Company had approximately $6.6 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 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 December 31, 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 believes it has identified its
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 comleted 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
continues to evaluate the status of third 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.
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 December 31, 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: February 10, 1999 /s/ Richard S. Fuller
______________________________
Richard S. Fuller
President and Chief Executive
Officer
DATE: February 10, 1999 /s/ Mark D. Bedard
______________________________
Mark D. Bedard
Treasurer and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Unaudited Consolidated Financial Statements of The Smithfield Companies,
Inc. for the nine months ended December 31, 1998, and is qualified in its
entirety by reference to such Unaudited Consolidated Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 7,258,651
<SECURITIES> 0
<RECEIVABLES> 2,720,050
<ALLOWANCES> 82,000
<INVENTORY> 2,119,483
<CURRENT-ASSETS> 12,167,559
<PP&E> 8,381,250
<DEPRECIATION> 3,489,676
<TOTAL-ASSETS> 18,210,535
<CURRENT-LIABILITIES> 2,472,263
<BONDS> 0
0
0
<COMMON> 2,488,492
<OTHER-SE> 13,249,780
<TOTAL-LIABILITY-AND-EQUITY> 18,210,535
<SALES> 17,900,575
<TOTAL-REVENUES> 17,955,690
<CGS> 11,569,034
<TOTAL-COSTS> 16,091,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,056,503
<INCOME-TAX> 679,000
<INCOME-CONTINUING> 1,377,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,377,503
<EPS-PRIMARY> .59
<EPS-DILUTED> .58
</TABLE>
