SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 27, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER 0-2258
SMITHFIELD FOODS, INC.
999 Waterside Drive, Suite 900
Norfolk, Virginia 23510
(757) 365-3000
Virginia 52-0845861
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Shares outstanding
Class at September 5, 1997
- ------------------- --------------------
Common Stock, $.50 18,763,681
par value per share
1-12
<PAGE>
SMITHFIELD FOODS, INC.
CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets - July 27, 1997 and
April 27, 1997 3-4
Consolidated Statements of Operations - 13 Weeks Ended
July 27, 1997 and July 28, 1996 5
Consolidated Statements of Cash Flows - 13 Weeks Ended
July 27, 1997 and July 28, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of Security Holders. 10-11
Item 6. Exhibits and Reports on Form 8-K. 11
2-12
<PAGE>
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED BALANCE SHEETS
July 27, April 27,
(In thousands) 1997 1997
- -------------- --------- ---------
ASSETS (Unaudited)
Current assets:
Cash $ 26,439 $ 25,791
Accounts receivable less allowances
of $1,692 and $1,499 182,142 166,094
Inventories 272,596 253,276
Prepaid expenses and other current assets 47,276 43,217
---------- ---------
Total current assets 528,453 488,378
---------- ---------
Property, plant and equipment 634,065 614,393
Less accumulated depreciation (196,404) (187,518)
---------- ---------
Net property, plant and equipment 437,661 426,875
---------- ---------
Other assets:
Investments in partnerships 51,314 44,582
Other 40,296 35,419
---------- ---------
Total other assets 91,610 80,001
---------- ---------
$1,057,724 $ 995,254
========== =========
See accompanying notes to consolidated financial statements.
3-12
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED BALANCE SHEETS
July 27, April 27,
(In thousands) 1997 1997
- -------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Notes payable $ - $ 77,500
Current portion of long-term debt
and capital lease obligations 9,547 7,800
Accounts payable 128,298 132,268
Accrued expenses and other current
liabilities 117,655 106,498
---------- --------
Total current liabilities 255,500 324,066
---------- --------
Long-term debt and capital lease
obligations 425,959 288,486
---------- --------
Other noncurrent liabilities:
Pension and postretirement benefits 52,870 55,320
Other 22,367 19,896
---------- --------
Total other noncurrent liabilities 75,237 75,216
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 authorized shares - -
Common stock, $.50 par value,
25,000,000 authorized shares;
19,200,681 and 19,196,681 issued 9,600 9,598
Additional paid-in capital 113,742 113,661
Retained earnings 185,329 191,870
Treasury stock, at cost, 437,000 shares (7,643) (7,643)
---------- --------
Total stockholders' equity 301,028 307,486
---------- --------
$1,057,724 $995,254
========== ========
See accompanying notes to consolidated financial statements.
4-12
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks 13 Weeks
Ended Ended
(In thousands, except per share data) July 27, 1997 July 28, 1996
- ------------------------------------- ------------- -------------
Sales $914,963 $892,870
Cost of sales 839,779 834,108
-------- --------
Gross profit 75,184 58,762
Selling, general and administrative expenses 49,192 42,856
Depreciation expense 9,715 8,755
Interest expense 7,367 5,990
Nonrecurring charge 12,600 -
-------- --------
Income (loss) before income taxes (3,690) 1,161
Income taxes 2,851 415
-------- --------
Net income (loss) $ (6,541) $ 746
======== ========
Net income (loss) available to common
stockholders $ (6,541) $ 408
======== ========
Net income (loss) per common share $ (.33) $ .02
======== ========
Average common shares outstanding 19,792 18,604
======== ========
See accompanying notes to consolidated financial statements.
5-12
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
(In thousands) July 27, 1997 July 28, 1996
- -------------- ------------- -------------
<S> <C>
Cash flows from operating activities:
Net income (loss) $ (6,541) $ 746
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,471 9,528
Increase in accounts receivable (13,080) (23,892)
Increase in inventories (13,250) (12,680)
Increase in prepaid expenses
and other current assets (2,579) (6,582)
Decrease (increase) in other assets 1,565 (1,174)
(Decrease) increase in other liabilities (2,057) 7,902
(Gain) loss on sale of property, plant
and equipment (460) 4
-------- --------
Net cash used in operating activities (25,931) (26,148)
-------- --------
Cash flows from investing activities:
Capital expenditures (18,518) (17,076)
Business acquisition, net of cash (10,123) -
Proceeds from sale of property, plant
and equipment 148 -
Investments in partnerships (6,731) (7,890)
Other - (30)
-------- --------
Net cash used in investing activities (35,224) (24,996)
-------- --------
Cash flows from financing activities:
Net repayments on notes payable (75,000) (32,363)
Proceeds from issuance of long-term debt - 146,250
Proceeds from long-term credit facility 215,000 -
Principal repayments on long-term debt
and capital lease obligations (78,280) (68,272)
Dividends on preferred stock - (338)
Exercise of common stock options 83 -
-------- --------
Net cash provided by financing activities 61,803 45,277
-------- --------
Net increase (decrease) in cash 648 (5,867)
Cash at beginning of period 25,791 28,529
-------- --------
Cash at end of period $ 26,439 $ 22,662
======== ========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest paid (net of amount capitalized) $ 7,298 $ 5,386
======== ========
Income taxes paid, net $ 1,409 $ 2,744
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6-12
<PAGE>
SMITHFIELD FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) These statements should be read in conjunction with the Consolidated
Financial Statements and related notes which are included in the
Registrant's Annual Report for the fiscal year ended April 27, 1997.
(2) The interim financial information furnished herein is unaudited. The
information reflects all adjustments (which include only normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the financial position and the results of operations for the
periods included in this report.
(3) Inventories consist of the following:
July 27, April 27,
(In thousands) 1997 1997
-------------- ----------- ---------
Fresh and processed meats $196,659 $183,480
Hogs on farms 49,235 44,563
Manufacturing supplies 16,838 15,732
Other 9,864 9,501
------- --------
$272,596 $253,276
======== ========
(4) On August 8, 1997, the U.S. District Court for the Eastern District of
Virginia imposed $12.6 million in civil penalties against the Registrant in
a civil action brought by the U.S. Environmental Protection Agency. This
amount is reflected as a nonrecurring charge in the current period. The
Registrant will appeal the Court's judgment to the U.S. Court of Appeals
for the Fourth Circuit.
(5) On July 15, 1997, the Registrant entered into loan agreements providing for
$350 million of senior secured revolving credit facilities with a bank
group which replaced its existing $300 million credit facilities. The new
facilities consist of a 5-year $300 million revolving credit facility and a
364-day $50 million revolving credit facility. As of July 27, 1997, all
borrowings were under the long-term facility and are reflected as long-term
debt in the consolidated balance sheets.
(6) In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is effective for the third quarter of
fiscal 1998. The Registrant expects the adoption of this statement will not
materially impact computed results or comparative presentation of net
income per common share.
7-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
13 Weeks Ended July 27, 1997 -
13 Weeks Ended July 28, 1996
- ----------------------------
In November 1996, the Registrant acquired the assets and business of the Lykes
Meat Group, Inc. ("Lykes") from Lykes Bros. Inc. In February 1997, as a result
of a shortage of market hogs and excess industry slaughter capacity, the
Registrant temporarily shut down the second shift at its Sioux City, Iowa
plant. Accordingly, the impact of these two events are reflected in sales, cost
of sales, gross profit, selling, general and administrative expenses,
depreciation expense and interest expense in the first quarter of fiscal 1998.
Sales in the first quarter of fiscal 1998 increased $22.1 million, or 2.5%,
from the same quarter a year ago. The increase in sales reflected an 18.5%
increase in processed meats tonnage offset by a 4.3% decrease in fresh pork
tonnage.
Cost of sales increased $5.7 million, or 0.7%, in the first quarter of
fiscal 1998.
Gross profit in the first quarter of fiscal 1998 increased $16.4 million,
or 27.9%. The increase in gross profit reflected improved margins on higher
sales tonnage of processed meats which were somewhat offset by lower margins on
lower sales tonnage of fresh pork compared to the first quarter of fiscal 1997.
Gross profit also benefited from a reduction in cost of sales related to profits
at the Registrant's hog production group totaling $10.4 million in the first
quarter of fiscal 1998 compared to $6.5 million in the same quarter a year ago.
Selling, general and administrative expenses increased $6.3 million, or
14.8%, in the first quarter of fiscal 1998. The increase was primarily due to
the inclusion of the operations of Lykes and higher selling and marketing costs
associated with the increase in processed meats tonnage.
Depreciation expense increased $1.0 million, or 11.0%, in the first quarter
of fiscal 1998 from the same quarter a year ago. The increase was related to the
inclusion of the operations of Lykes and completed capital projects at the
Bladen County, North Carolina plant.
Interest expense increased $1.4 million, or 23.0%, in the first quarter of
fiscal 1998, reflecting borrowings to finance the acquisition of Lykes and
increased carrying costs on higher levels of inventories and accounts
receivable.
The nonrecurring charge reflects the imposition of $12.6 million in civil
penalties against the Registrant by the U.S. District Court for the Eastern
District of Virginia in a civil action brought by the U.S. Environmental
Protection Agency. The Registrant will appeal the Court's judgment to the U.S.
Court of Appeals for the Fourth Circuit.
The effective income tax rate for the first quarter of fiscal 1998,
excluding the nonrecurring charge, decreased to 32.0% from 35.7% in the
corresponding period a year ago, reflecting a lower tax rate on foreign sales
and tax benefits related to certain insurance contracts.
8-12
<PAGE>
Excluding the nonrecurring charge, net income was $6.1 million, or $.31 per
share for the first quarter of fiscal 1998. Including the nonrecurring charge,
the net loss in the first quarter of fiscal 1998 was $6.5 million compared to
net income of $0.7 million in the same quarter of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In the first quarter of fiscal 1998, the Registrant's cash used in operations
was $25.9 million, largely used to finance an increase in the level of accounts
receivable and inventories.
The Registrant expended $18.5 million in the first quarter of fiscal 1998
on capital projects, primarily for hog production facilities at Brown's of
Carolina, Inc. and for plant renovation and expansion projects at certain of its
processing plants. In June 1997, the Registrant acquired substantially all of
the assets and business of Curly's Foods, Inc. ("Curly's") for $10.8 million in
cash plus $7.6 million of assumed liabilities.
The cash used in operations, the capital expenditures, and the acquisition
of Curly's were funded with net borrowings under the Registrant's bank credit
facilities. On July 15, 1997, the Registrant privately entered into loan
agreements providing for $350 million of senior secured revolving credit
facilities with a bank group which replaced credit facilities totaling $300
million. The new facilities consist of a 5-year $300 million revolving credit
facility and a 364-day $50 million revolving credit facility. This refinancing
resulted in the repayment of borrowings under the old credit facilities with
proceeds from the new 5-year revolving credit facility. All borrowings
outstanding at July 27, 1997 were borrowed under the 5-year credit facility and
are reflected as long-term on the accompanying consolidated balance sheets.
As of July 27, 1997, the Registrant had definitive commitments of $30.1
million for capital expenditures for the remainder of fiscal 1998, related
primarily to plant renovations and expansion projects at certain of its
processing facilities.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the disclosure appearing in Part I, Item 1 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended April 27,
1997, under the caption "BUSINESS - Regulation."
As previously disclosed in a Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 11, 1997, the U.S. District Court
for the Eastern District of Virginia, on August 8, 1997, imposed $12.6 million
in civil penalties on the Registrant and two of its operating subsidiaries, The
Smithfield Packing Company, Incorporated ("Smithfield Packing") and Gwaltney of
Smithfield, Ltd. ("Gwaltney"), in a case brought by the U.S. Environmental
Protection Agency for violations of the federal Clean Water Act at
Smithfield Packing's and Gwaltney's plants in Isle of Wight County, Virginia. As
discussed in previous filings, most of the violations for which the Court
imposed the civil penalties were based upon permit exceedences by Smithfield
Packing and Gwaltney which the Registrant asserts were expressly excused for
both state and federal purposes by an administrative consent order issued in
1991 by the Virginia State Water Control Board. The Registrant will appeal the
Court's decision promptly to the U.S. Court of Appeals for the Fourth Circuit in
Richmond, Virginia.
9-12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Annual Meeting of Stockholders held August 28, 1997.
(b) Not applicable.
(c) There were 18,763,681 shares of Registrant's Common Stock
outstanding as of July 11, 1997, the record date for the 1997
Annual Meeting of Stockholders. A total of 17,185,847 shares were
voted. All of management's nominees for directors of the
corporation were elected with the following vote:
Votes Broker
Director Nominee Votes For Withheld Non-Votes
---------------- --------- -------- ---------
Robert L. Burrus, Jr. 16,621,617 564,230 0
F. J. Faison, Jr. 16,997,247 188,600 0
Joel W. Greenberg 16,995,257 190,590 0
Cecil W. Gwaltney 16,999,585 186,262 0
George E. Hamilton, Jr. 16,999,735 186,112 0
Richard J. Holland 16,999,419 186,428 0
Roger R. Kapella 17,005,649 180,198 0
Lewis R. Little 17,005,637 180,210 0
Joseph W. Luter, III 17,002,327 183,520 0
H. Gordon Maxwell, III 16,688,607 497,240 0
Wendell H. Murphy 16,999,057 186,790 0
William H. Prestage 16,998,997 186,850 0
Joseph B. Sebring 16,691,565 494,282 0
Aaron D. Trub 16,995,667 190,180 0
A proposal to approve the 1998 Incentive Bonus Plan applicable to the
Registrant's Chief Operating Officer was approved by the stockholders
with the following vote:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
15,763,321 508,155 28,136 886,235
A proposal to approve an amendment to the corporation's certificate of
incorporation to increase the number of shares of common stock which
the corporation is authorized to issue to 100 million was approved by
the stockholders with the following vote:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
12,832,586 4,330,897 22,364 0
10-12
<PAGE>
A proposal to approve an Agreement and Plan of Reincorporation and
Merger dated as of July 28, 1997, pursuant to which the Registrant's
state of incorporation would change from Delaware to Virginia, was
approved by the stockholders with the following vote:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
10,533,229 4,116,092 29,235 2,507,291
The appointment of Arthur Andersen LLP as independent public
accountants to audit and report on the Registrant's financial
statements for the fiscal year ending May 3, 1998 was ratified by the
stockholders with the following vote:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
17,155,012 20,628 10,207 0
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 11 - Computation of Net Income (Loss) Per Share
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the
quarter for which this report is filed.
11-12
<PAGE>
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.
SMITHFIELD FOODS, INC.
/s/ Aaron D. Trub
--------------------------------
Aaron D. Trub
Vice President, Secretary and Treasurer
/s/ C. Larry Pope
--------------------------------
C. Larry Pope
Vice President and Controller
Date: September 5, 1997
12-12
SMITHFIELD FOODS, INC.
EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) and the number of shares and common equivalent shares used to
present net income (loss) per common share were computed as follows:
13 Weeks 13 Weeks
Ended Ended
Income (loss) (in thousands) July 27, 1997 July 28, 1996
- ---------------------------- ------------- -------------
Net income (loss) $ (6,541) $ 746
Dividends for Series C
preferred stock - (338)
-------- --------
Net income (loss) available to
common stockholders $ (6,541) $ 408
======== ========
Shares (in thousands)
- ---------------------
Weighted average common shares:
Outstanding 18,764 18,016
Net effect of stock options 1,028 588
-------- --------
Common shares for computation 19,792 18,604
======== ========
Net income (loss) per common share $ (.33) $ .02
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-03-1998
<PERIOD-END> JUL-27-1997
<CASH> 26,439
<SECURITIES> 0
<RECEIVABLES> 183,834
<ALLOWANCES> 1,692
<INVENTORY> 272,596
<CURRENT-ASSETS> 528,453
<PP&E> 634,065
<DEPRECIATION> 196,404
<TOTAL-ASSETS> 1,057,724
<CURRENT-LIABILITIES> 255,500
<BONDS> 425,959
0
0
<COMMON> 9,600
<OTHER-SE> 291,428
<TOTAL-LIABILITY-AND-EQUITY> 1,057,724
<SALES> 914,963
<TOTAL-REVENUES> 914,963
<CGS> 839,779
<TOTAL-COSTS> 839,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,367
<INCOME-PRETAX> (3,690)
<INCOME-TAX> 2,851
<INCOME-CONTINUING> (6,541)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,541)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0
</TABLE>
