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 October 26, 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 December 5, 1997
- ------------------ -------------------
Common Stock, $.50 37,537,352
par value per share
SMITHFIELD FOODS, INC.
CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets - October 26, 1997 and April 27, 1997 3-4
Consolidated Statements of Income - 13 Weeks Ended October 26, 1997 and October 27, 1996 and 26 Weeks
Ended October 26, 1997 and October 27, 1996 5
Consolidated Statements of Cash Flows - 26 Weeks Ended October 26, 1997 and October 27, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 11-12
Item 6. Exhibits and Reports on Form 8-K. 12
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) October 26, 1997 April 27, 1997
- -------------- ---------------- --------------
ASSETS (Unaudited)
<S> <C>
Current assets:
Cash $ 35,453 $ 25,791
Accounts receivable less allowances of $1,661 and $1,499 190,604 166,094
Inventories 296,220 253,276
Prepaid expenses and other current assets 55,153 43,217
---------- ---------
Total current assets 577,430 488,378
---------- ---------
Property, plant and equipment 664,926 614,393
Less accumulated depreciation (212,954) (187,518)
---------- ---------
Net property, plant and equipment 451,972 426,875
---------- ---------
Other assets:
Investments in partnerships 52,148 44,582
Other 36,751 35,419
---------- ---------
Total other assets 88,899 80,001
---------- ---------
$1,118,301 $ 995,254
========== =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) October 26, 1997 April 27, 1997
- -------------- ---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C>
Current liabilities:
Notes payable $ - $ 77,500
Current portion of long-term debt and capital lease obligations 9,521 7,800
Accounts payable 182,872 132,268
Accrued expenses and other current liabilities 127,478 106,498
---------- --------
Total current liabilities 319,871 324,066
---------- --------
Long-term debt and capital lease obligations 418,762 288,486
---------- --------
Other noncurrent liabilities:
Pension and postretirement benefits 47,925 55,320
Other 15,166 19,896
---------- --------
Total other noncurrent liabilities 63,091 75,216
---------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares
Common stock, $.50 par value, 100,000,000 and 25,000,000
authorized shares; 37,527,362 and 19,196,681 issued 18,764 9,598
Additional paid-in capital 96,936 113,661
Retained earnings 200,877 191,870
Treasury stock, at cost, 437,000 shares - (7,643)
---------- --------
Total stockholders' equity 316,577 307,486
---------- --------
$1,118,301 $995,254
========== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
(In thousands, except per share data) October 26, 1997 October 27, 1996 October 26, 1997 October 27, 1996
- ------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C>
Sales $982,699 $969,226 $1,897,662 $1,862,096
Cost of sales 888,729 895,649 1,728,508 1,729,757
-------- -------- --------- ----------
Gross Profit 93,970 73,577 169,154 132,339
Selling, general and administrative expenses 53,177 44,017 102,369 86,873
Depreciation expense 10,353 8,350 20,068 17,105
Interest expense 8,036 7,110 15,403 13,100
Nonrecurring charge - - 12,600 -
-------- -------- --------- ----------
Income before income taxes 22,404 14,100 18,714 15,261
Income taxes 6,856 5,083 9,707 5,498
-------- -------- --------- ----------
Net income $ 15,548 $ 9,017 $ 9,007 $ 9,763
======== ======== ========= ==========
Net income available to common stockholders $ 15,548 $ 8,680 $ 9,007 $ 9,088
======== ========= ========= ==========
Net income per common share $ .39 $ .23 $ .23 $ .24
======== ======== ========= ==========
Average common shares outstanding 39,666 37,391 39,639 37,286
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Ended Ended
(In thousands) October 26, 1997 October 27, 1996
- --------------- ---------------- ----------------
<S> <C>
Cash flows from operating activities:
Net income $ 9,007 $ 9,763
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 21,649 18,632
Increase in accounts receivable (21,542) (36,573)
Increase in inventories (36,873) (68,911)
Increase in prepaid expenses and other current assets (10,457) (7,491)
Decrease (increase) in other assets 3,768 (11,636)
Increase in other liabilities 57,454 44,325
Gain on sale of property, plant and equipment (310) (278)
-------- --------
Net cash provided by (used in) operating activities 22,696 (52,169)
-------- --------
Cash flows from investing activities:
Capital expenditures (51,069) (36,366)
Business acquisitions, net of cash (10,123) -
Proceeds from sale of property, plant and equipment 1,142 2,746
Investments in partnerships (7,565) (7,832)
Other - (54)
-------- --------
Net cash used in investing activities (67,615) (41,506)
-------- --------
Cash flows from financing activities:
Net (repayments) borrowings on notes payable (75,000) 11,937
Proceeds from issuance of long-term debt 2,900 146,250
Proceeds from long-term credit facility 207,000 -
Principal payments on long-term debt and capital lease obligations (80,403) (70,647)
Dividends on preferred stock - (675)
Exercise of common stock options 84 14
-------- --------
Net cash provided by financing activities 54,581 86,879
-------- --------
Net increase (decrease) in cash 9,662 (6,796)
Cash at beginning of period 25,791 28,529
-------- --------
Cash at end of period $ 35,453 $ 21,733
======== ========
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized $ 14,476 $ 11,702
======== ========
Income taxes paid, net $ 3,847 $ 3,412
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<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 Company's
Annual Report for the fiscal year ended April 27, 1997.
(2) The interim consolidated 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. These results are not
necessarily indicative of the results to be expected for the full fiscal
year.
(3) Inventories consist of the following:
(In thousands) October 26, 1997 April 27, 1997
-------------- ---------------- --------------
(Unaudited)
Fresh and processed meats $218,590 $183,480
Hogs on farms 49,490 44,563
Manufacturing supplies 17,786 15,732
Other 10,354 9,501
-------- --------
$296,220 $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 Company in a
civil action brought by the U.S. Environmental Protection Agency. This
amount is reflected as a nonrecurring charge in the first twenty-six weeks
of fiscal 1998. On December 5, 1997, the Company filed an appeal of the
Court's judgment with the U.S. Court of Appeals for the Fourth Circuit.
(5) On August 28, 1997, the Board of Directors of the Company declared a 2-for-1
stock split of the Company's common stock effective September 26, 1997.
Common share outstanding and treasury share numbers and net income per share
amounts have been adjusted to reflect the stock split. In addition, on
August 28, 1997 the Company's stockholders approved an increase in the
number of authorized common shares from 25,000,000 to 100,000,000 and
approved the reincorporation of the Company in Virginia from Delaware. The
reincorporation does not affect the manner in which the Company operates.
Since Virginia law does not recognize treasury stock, the shares previously
classified as treasury stock were returned to unissued resulting in a
reduction in common stock and additional paid-in capital for the cost basis
of the shares.
(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 Company expects the adoption of this statement will not
materially impact computed results or comparative presentation of net income
per common share.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company, as a holding company, conducts its pork processing
operations through five principal subsidiaries: Gwaltney of Smithfield, Ltd.
("Gwaltney") and The Smithfield Packing Company, Incorporated ("Smithfield
Packing"), both based in Smithfield, Virginia; John Morrell & Co. ("John
Morrell"), based in Cincinnati, Ohio; Patrick Cudahy Incorporated ("Patrick
Cudahy"), based in Cudahy, Wisconsin; and Lykes Meat Group, Inc. ("Lykes"),
based in Plant City, Florida. The Company also conducts hog production
operations through its 86-percent owned subsidiary, Brown's of Carolina, Inc.
("Brown's"), and through a 50-percent interest in Smithfield-Carroll's
("Smithfield-Carroll's"), a joint hog production arrangement between the Company
and Carroll's Foods of Virginia, Inc., an affiliate of Carroll's Foods, Inc.,
one of the largest hog producers in the United States. Both Brown's and
Smithfield-Carroll's produce hogs for the Company's pork processing plants in
Bladen County, North Carolina and Smithfield, Virginia. The Company is also a
33-percent participant in the Circle Four joint hog production arrangement
("Circle Four") with Carroll's Foods, Inc., Murphy Family Farms, Inc. and
Prestage Farms, Inc., three of the largest hog producers in the United States,
which conducts hog production operations in Milford, Utah. The hogs produced by
Circle Four are sold to an unrelated party.
In November 1996, the Company acquired the assets and business of Lykes
from Lykes Bros. Inc. In February 1997, as a result of a shortage of market hogs
and excess industry slaughter capacity, the Company shut down the second shift
at its Sioux City, Iowa slaughter facility for six months. The impact of the
Lykes acquisition and the shutdown of the Sioux City second shift are reflected
in sales, cost of sales, gross profit, selling, general and administrative
expenses, depreciation expense and interest expense for the 13 weeks and 26
weeks ended October 26, 1997.
13 Weeks Ended October 26, 1997 -
13 Weeks Ended October 27, 1996
Sales in the second quarter of fiscal 1998 increased $13.5 million, or
1.4%, from the comparable period in fiscal 1997. The increase in sales reflected
a 5.7% increase in sales tonnage, offset by a 4.1% decrease in unit sales prices
reflecting the impact of lower live hog costs. The increase in sales tonnage
reflected a 20.7% increase in processed meats tonnage and a 2.4% increase in
fresh pork tonnage.
Gross profit in the second quarter of fiscal 1998 increased $20.4
million, or 27.7%, from the comparable period in fiscal 1997. The increase in
gross profit was primarily due to significantly improved margins on fresh pork
sales. Gross profit also benefited from profits at the Company's hog production
group, totaling $5.2 million in the second quarter of fiscal 1998 compared to
$4.8 million in the same quarter a year ago. The Company's hog production group
consists of the Company's ownership interests in Brown's, Smithfield-Carroll's
and Circle Four. During the 13 weeks ended October 26, 1997, the Company
obtained 10.4% of the hogs it processed from Brown's and Smithfield-Carroll's.
Selling, general and administrative expenses in the second quarter of
fiscal 1998 increased $9.2 million, or 20.8%, from the comparable period in
fiscal 1997. The increase was primarily due to the inclusion of the operations
of Lykes and higher selling and marketing costs associated with the increase in
sales tonnage.
Depreciation expense increased $2.0 million, or 24.0%, in the second
quarter of fiscal 1998 from the comparable period in fiscal 1997. The increase
was related to the inclusion of the operations of Lykes and completed capital
projects at certain of the Company's processing plants.
Interest expense increased $0.9 million, or 13.0%, in the second
quarter of fiscal 1998 from the comparable period in fiscal 1997, primarily
reflecting borrowings to finance the acquisition of Lykes.
The effective income tax rate for the second quarter of fiscal 1998
decreased to 30.6% from 36.0% in the corresponding period in fiscal 1997,
reflecting a lower tax rate on increased foreign sales, benefits related to
certain insurance contracts and the use of employment related tax credits.
Reflecting the factors discussed above, net income increased to $15.5
million, or $.39 per share, in the second quarter of fiscal 1998 compared to
net income of $9.0 million, or $.23 per share, in the comparable period of
fiscal 1997.
26 Weeks Ended October 26, 1997 -
26 Weeks Ended October 27, 1996
Sales in the first half of fiscal 1998 increased $35.6 million, or
1.9%, from the comparable period in fiscal 1997. The increase in sales reflected
a 3.3% increase in sales tonnage, offset by a 1.4% decrease in unit sales prices
reflecting the impact of lower live hog costs. The increase in sales tonnage
reflected a 19.6% increase in processed meats tonnage, offset by an 0.8%
decrease in fresh pork tonnage. The decrease in fresh pork tonnage reflected the
impact of the shutdown of the second shift at the Sioux City, Iowa facility for
the full first quarter of fiscal 1998.
Gross profit in the first half of fiscal 1998 increased $36.8 million,
or 27.8%, from the comparable period in fiscal 1997. The increase in gross
profit reflected improved margins on higher sales tonnage of processed meats and
improved margins on sales of fresh pork. Gross profit also benefited from
profits at the Company's hog production group, totaling $15.6 million in the
first half of fiscal 1998 compared to $11.3 million in the same period of fiscal
1997. During the 26 weeks ended October 26, 1997, the Company obtained 10.8% of
the hogs it processed from Brown's and Smithfield-Carroll's.
Selling, general and administrative expenses increased $15.5 million,
or 17.8%, in the first half of fiscal 1998 from the comparable period in fiscal
1997. 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 $3.0 million, or 17.3%, in the first
half of fiscal 1998 from the comparable period in fiscal 1997. The increase was
related to the inclusion of the operations of Lykes and completed capital
projects at certain of the Company's processing plants.
Interest expense increased $2.3 million, or 17.6%, in the first half of
fiscal 1998 from the comparable period in fiscal 1997, primarily reflecting
borrowings to finance the acquisition of Lykes and increased borrowing costs
related to the placement of long-term debt placed during the second quarter of
fiscal 1997, a portion of the proceeds of which were used to repay short-term
borrowings at lower interest rates.
A nonrecurring charge of $12.6 million reflected the imposition of
civil penalties against the Company 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 Company has appealed the Court's judgment to the U.S.
Court of Appeals for the Fourth Circuit.
The effective income tax rate for the first half of fiscal 1998,
excluding the nonrecurring charge, decreased to 31.0% from 36.0% in the
corresponding period in fiscal 1997, reflecting a lower tax rate on increased
foreign sales, benefits related to certain insurance contracts and employment
related tax credits.
Excluding the nonrecurring charge, net income was $21.6 million, or
$.55 per share, for the first half of fiscal 1998. Including the nonrecurring
charge, net income in the first half of fiscal 1998 was $9.0 million, or $.23
per share, compared to net income of $9.1 million, or $.24 per share, in the
comparable period of fiscal 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the first half of fiscal 1998, the Company's cash provided by
operations totaled $22.7 million. This increase in cash was the result of
profitable operations and noncash charges. An increase in the levels of
inventories and accounts receivable associated with a build-up of ham
inventories for the fall holiday season was offset by an increase in current
liabilities. Traditionally, the Company builds large inventories of hams in the
summer months which are sold during the fall holiday season. These sales are
converted to cash and used to reduce credit facility borrowings in the Company's
fiscal third quarter.
The Company's capital expenditures totaled $51.1 million in the first
half of fiscal 1998. These capital expenditures included plant renovations as
well as the acquisition of an idle slaughter facility in South Dakota and the
acquisition of substantially all of the assets and business of Curly's Foods,
Inc., a Sioux City, Iowa-based further processor of fresh pork products
primarily for the food service trade, for $10.9 million in cash plus $7.7
million of assumed liabilities.
The capital expenditures were funded with cash from operations and
borrowings under the Company's bank credit facilities. Prior to July 1997, the
Company maintained $300 million in credit facilities, consisting of a 364-day
$225 million revolver and a two-year $75 million revolver (the "Old Credit
Facilities"). In July 1997, the Company and certain of its subsidiaries entered
into a loan agreement with a bank syndicate led by The Chase Manhattan Bank
providing for $350 million in senior secured revolving credit facilities,
consisting of a five-year $300 million revolving credit facility and a 364-day
$50 million revolving credit facility (together the "Revolving Credit
Facilities"). In connection with this refinancing, the Company repaid all
borrowings under the Old Credit Facilities, which were terminated. All
borrowings outstanding at October 26, 1997 were borrowed under the five-year
revolving credit facility and are reflected as long-term in the Company's
financial statements.
As of October 26, 1997, the Company had definitive commitments of $18.3
million for capital expenditures for the remainder of fiscal 1998, primarily to
increase its processed meats capacity at several of its processing plants. The
Company plans to make additional capital expenditures in fiscal 1998 and
beyond to expand its hog production operations and to increase its processed
meats business through strategic acquisitions and joint ventures. These capital
expenditures will be financed with cash from operations, additional borrowings
under the Revolving Credit Facilities and additional long-term debt.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Regulation Generally. Like other participants in the meat processing
industry, the Company is subject to various laws and regulations administered by
federal, state and other government entities, including the Environmental
Protection Agency ("EPA") and corresponding state agencies such as the Virginia
State Water Control Board ("VSWCB"), the Virginia Department of Environmental
Quality ("VDEQ"), the North Carolina Division of Environmental Management, the
Iowa Department of Natural Resources and the South Dakota Department of
Environment and Natural Resources, as well as the United States Department of
Agriculture, the United States Food and Drug Administration and the Occupational
Safety and Health Administration. Management believes that the Company presently
is in compliance with all such laws and regulations in all material respects,
and that continued compliance with these standards will not have a material
adverse effect on the Company's financial position or results of operations.
Furthermore, with respect to the suits discussed below, the Company believes
that the ultimate resolution of these suits will not have a material adverse
effect on the Company's financial position or annual results of operations.
Permit Violations at Smithfield Packing And Gwaltney Plants;
Administrative Consent Orders; Connection TO HRSD System. The National Pollutant
Discharge Elimination System permit (the "discharge permit") for the Company's
Smithfield Packing and Gwaltney plants in Smithfield, Virginia, as modified by
the VSWCB in 1990, imposed more stringent effluent limitations on phosphorus and
two species of nitrogen (ammonia and Total Kjeldahl Nitrogen) than the
wastewater treatment facilities at those plants were designed to meet. To
achieve compliance with these new limitations, the Company agreed to discontinue
wastewater discharges into the Pagan River and connect its wastewater treatment
facilities to the regional sewage collection and treatment system operated by
the Hampton Roads Sanitation District ("HRSD"), when available. This agreement
was embodied in an administrative consent order issued by the VSWCB in 1991 (the
"1991 Order"). The VSWCB issued a second consent order (the "1994 Order") which
concerned compliance with other discharge permit terms pending connection to the
HRSD system.
The Company connected its Gwaltney and Smithfield Packing wastewater
treatment facilities to the HRSD system in June 1996 and July 1997,
respectively, which were the earliest dates that the HRSD could serve those
individual plants. To prepare for making these connections, the Company made
more than $2.7 million in capital expenditures to upgrade its existing
wastewater treatment facilities. The Company must continue to operate these
facilities to produce a wastewater suitable for treatment in the HRSD system
and, in addition, pay the HRSD approximately $1.8 million per year for
wastewater treatment. The Company will account for these wastewater treatment
costs as current period charges in the periods in which such costs are incurred.
These wastewater treatment facilities no longer make any discharges
that are subject to regulation under the discharge permit. However, before being
connected to the HRSD system, these facilities exceeded applicable discharge
permit and consent orders limitations as discussed below.
Record-Keeping Violations. Under its discharge permit, the Company
regularly tested wastewater to determine compliance with applicable effluent
limitations. Federal and state laws require that records of such tests be
maintained for three years. Failure to maintain these records may result in the
imposition of civil penalties, and criminal sanctions may be imposed in the
event of false reporting or destruction of records. In July 1994, the Company
learned that records of many tests conducted from 1991 through early 1994 could
not be found. Despite a careful search, most of these records were never found
and are believed to have been destroyed. The employee responsible for the
supervision of the tests and the maintenance of the test records was replaced
and subsequently terminated. In October 1996, that former employee entered a
guilty plea and was convicted in the United States District Court for the
Eastern District of Virginia of 23 violations of the federal Clean Water Act,
including records destruction and making false reports. Eight of these
violations related to his duties as the Company's employee, while 15 violations
were committed during his outside consulting activities for public and private
entities unrelated to the Company. Neither the Company nor any of its other
present or former employees has been charged with any criminal violation arising
from this matter.
<PAGE>
EPA Suit. On August 8, 1997, in United States of America v. Smithfield
Foods, Inc. et al. (Civil Case No. 2:96:cv1204), a federal judge for the United
States District Court for the Eastern District of Virginia imposed a $12.6
million civil penalty on the Company and its Smithfield Packing and Gwaltney
subsidiaries. The Company recognized a nonrecurring charge of $12.6 million
during the first quarter of fiscal 1998 with respect to this penalty. This suit
was brought by the EPA for violations of the federal Clean Water Act before the
Company's wastewater treatment facilities were connected to the HRSD system. The
court found 6,982 days of violation. The Company asserted in its defense that
approximately 5,500 of these violations were excused by the 1991 and 1994
Orders, which were issued by VSWCB in its role as primary enforcement authority
under the federal-state Clean Water Act program. The Court held that the EPA was
not bound by its awareness of, and failure to object to, those orders. The
Company has appealed this and other aspects of the court's decision to the
United States Court of Appeals for the Fourth Circuit in Richmond, Virginia.
There can be no assurance as to the outcome of such appeal or any subsequent
proceedings regarding this matter.
Suit by Commonwealth of Virginia. On August 30, 1996, VDEQ filed a
civil suit under the laws of the Commonwealth of Virginia against the Company in
the Circuit Court of the County of Isle of Wight, Virginia. This suit alleged a
total of 22,517 discharge permit violations at the Gwaltney and Smithfield
Packing facilities during the period from 1986 until such facilities were
connected to the HRSD system in 1996 and 1997, respectively. The difference in
the number of total violations charged by the EPA and the Commonwealth is mainly
attributable to their different methods of counting violations. The same
categories of violations were involved in both suits, except that the
Commonwealth did not charge the Company with any permit violation excused by the
1991 and 1994 Orders. The Commonwealth's total was larger in part because the
Commonwealth counted every missing record as a separate violation, and the EPA
counted the number of days records were missing. In addition, the Commonwealth's
suit alleged a separate violation for each failure to test chlorine levels every
hour, failure to make certain required reports, and failure on certain days to
properly staff the Company's facilities. While each violation is subject to a
maximum penalty of $25,000, the Commonwealth's civil penalties policy is
designed to recapture any economic benefit which accrued to the violator as a
result of the noncompliance, and to impose a surcharge penalty for having
committed such violations. In addition, the policy would increase the amount of
penalties based upon the extent of environmental damage caused by the
violations.
At the beginning of July 1997 trial of its case, the Commonwealth
contended that the Company should pay a total of $6 million for the violations
alleged, which included an alleged economic benefit of $4 million. In the middle
of the trial, however, the Commonwealth voluntarily dismissed its suit. One week
later, the Commonwealth refiled the same suit in Isle of Wight County Circuit
Court. The Company has asked the Court to dismiss this second suit on double
jeopardy and res judicata grounds. If the Commonwealth's charges go to trial
again, the Company will argue that no economic benefit accrued to the Company
and that no environmental damage was caused by the violations. There can be no
assurance as to the outcome of any such proceeding.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
1. Current Report on Form 8-K for August 8, 1997 was filed
with the Securities and Exchange Commission on August 11,
1997, to report, under Item 5, a judgment against the
Company in the U. S. District Court for the Eastern
District of Virginia imposing $12.6 million in civil
penalties in a civil action brought by the U.S.
Environmental Protection Agency for alleged violations of
the federal Clean Water Act.
<PAGE>
2. A Current Report on Form 8-K for September 2, 1997 was
filed with the Securities and Exchange Commission on
September 5, 1997, to report, under Item 5, that (i) the
Company had changed its state of incorporation from
Delaware to Virginia, (ii) the Company had effected an
amendment to its Articles of Incorporation to increase its
authorized common stock from 25,000,000 to 100,000,000,
and (iii) the Company's Board of Directors had approved a
2-for-1 stock split of its common stock.
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: December 5, 1997
SMITHFIELD FOODS, INC.
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
Net income and the number of common shares and common equivalent shares used to
present net income per common share were computed as follows:
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
Income (in thousands) October 26, 1997 October 27, 1996 October 26, 1997 October 27, 1996
- -------------------- ---------------- ---------------- ---------------- ----------------
<S> <C>
Net income $15,548 $9,017 $9,007 $9,763
Dividends accumulated for Series C
preferred stock - (337) - (675)
------- ------ ------ ------
Net income available to common stockholders $15,548 $8,680 $9,007 $9,088
======= ====== ====== ======
Common shares (in thousands)
Weighted average common shares:
Outstanding 37,527 36,034(1) 37,527 36,034(1)
Net effect of dilutive stock options 2,139 1,357(1) 2,112 1,252(1)
------- ------ ------ ------
Common shares for computation 39,666 37,391(1) 39,639 37,286(1)
======= ====== ====== ======
Net income per common share $ .39 $ .23(1) $ .23 $ .24(1)
======= ====== ====== ======
</TABLE>
(1) Restated for 2-for-1 stock split effective September 26, 1997.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-03-1998
<PERIOD-END> OCT-26-1997
<CASH> 35,453
<SECURITIES> 0
<RECEIVABLES> 192,265
<ALLOWANCES> 1,661
<INVENTORY> 296,220
<CURRENT-ASSETS> 577,430
<PP&E> 664,926
<DEPRECIATION> 212,954
<TOTAL-ASSETS> 1,118,301
<CURRENT-LIABILITIES> 319,871
<BONDS> 418,762
0
0
<COMMON> 18,764
<OTHER-SE> 297,813
<TOTAL-LIABILITY-AND-EQUITY> 1,118,301
<SALES> 982,699
<TOTAL-REVENUES> 982,699
<CGS> 888,729
<TOTAL-COSTS> 888,729
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 8,036
<INCOME-PRETAX> 22,404
<INCOME-TAX> 6,856
<INCOME-CONTINUING> 15,548
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,548
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0
</TABLE>
