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 November 1, 1998
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.
200 Commerce Street
Smithfield, Virginia 23430
(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
Class Shares outstanding at December 11, 1998
- ---------------------------- ---------------------------------------
Common Stock, $.50 par value 41,298,014
1-15
<PAGE>
SMITHFIELD FOODS, INC.
CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - November 1, 1998 and May 3, 1998 3-4
Consolidated Condensed Statements of Income - 13 Weeks Ended November 1, 1998
and October 26, 1997 and 26 Weeks Ended November 1, 1998 and October 26, 1997 5
Consolidated Condensed Statements of Cash Flows - 26 Weeks Ended November 1, 1998
and October 26, 1997 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9-13
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2-15
<PAGE>
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) November 1, 1998 May 3,1998
- -------------- ---------------- ----------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash $ 36,245 $ 60,522
Accounts receivable, net 216,267 156,091
Inventories 320,350 249,511
Prepaid expenses and other current assets 35,015 44,999
---------- ----------
Total current assets 607,877 511,123
---------- ----------
Property, plant and equipment 910,154 705,872
Less accumulated depreciation (258,873) (233,652)
---------- ----------
Net property, plant and equipment 651,281 472,220
---------- ----------
Other assets:
Investments in partnerships 33,360 49,940
Goodwill 33,780 12,360
Other 46,184 38,002
---------- ----------
Total other assets 113,324 100,302
---------- ----------
$1,372,482 $1,083,645
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3-15
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands) November 1, 1998 May 3, 1998
- -------------- ---------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Current liabilities:
<S> <C> <C>
Notes payable $ 12,639 $ -
Current portion of long-term debt and capital lease obligations 17,295 8,511
Accounts payable 195,926 118,909
Accrued expenses and other current liabilities 135,395 124,515
---------- ----------
Total current liabilities 361,255 251,935
---------- ----------
Long-term debt and capital lease obligations 552,206 407,272
---------- ----------
Other noncurrent liabilities:
Pension and postretirement benefits 32,633 38,486
Other 36,636 24,942
---------- ----------
Total other noncurrent liabilities 69,269 63,428
---------- ----------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000
authorized shares Common stock,
$.50 par value, 100,000,000 authorized shares;
38,806,862 and 37,527,362 issued 19,403 18,769
Additional paid-in capital 107,497 96,971
Retained earnings 258,426 245,270
Accumulated other comprehensive income 4,426 -
---------- ----------
Total shareholders' equity 389,752 361,010
---------- ----------
$1,372,482 $1,083,645
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4-15
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
(In thousands, except per share data) November 1, 1998 October 26, 1997 November 1, 1998 October 26, 1997
- ------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales $874,378 $982,699 $1,740,201 $1,897,662
Cost of sales 756,914 888,729 1,549,960 1,728,508
-------- -------- ---------- ----------
Gross profit 117,464 93,970 190,241 169,154
Selling, general and administrative expenses 65,974 53,177 123,971 102,369
Depreciation expense 14,015 10,353 26,954 20,068
Interest expense 10,916 8,036 20,622 15,403
Nonrecurring charge - - - 12,600
-------- -------- ---------- ----------
Income before income taxes 26,559 22,404 18,694 18,714
Income taxes 8,078 6,856 5,538 9,707
-------- -------- ---------- ----------
Net income $ 18,481 $ 15,548 $ 13,156 $ 9,007
======== ======== ========== ==========
Net income per common share:
Basic $ .48 $ .41 $ .35 $ .24
======== ======== ========== ==========
Diluted $ .47 $ .39 $ .33 $ .23
======== ======== ========== ==========
Average common shares outstanding:
Basic 38,273 37,527 37,905 37,527
======== ======== ========== ==========
Diluted 39,599 39,666 39,807 39,639
======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5-15
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
November 1, 1998 October 26, 1997
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 13,156 $ 9,007
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 29,039 21,649
(Gain) loss on sale of property, plant and equipment 428 (310)
Changes in operating assets and liabilities, net
of effect of acquisitions:
Accounts receivable (42,414) (21,542)
Inventories (41,592) (36,873)
Prepaid expenses and other current assets 11,481 (10,457)
Other assets (5,722) 3,768
Accounts payable, accrued expenses and other liabilities 48,085 57,454
--------- ---------
Net cash provided by operating activities 12,461 22,696
--------- ---------
Cash flows from investing activities:
Capital expenditures (40,665) (51,069)
Business acquisitions, net of cash (89,176) (10,123)
Proceeds from sale of property, plant and equipment 61 1,142
Investments in partnerships and other assets 577 (7,565)
--------- ---------
Net cash used in investing activities (129,203) (67,615)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable 11,660 (75,000)
Proceeds from issuance of long-term debt 3,536 2,900
Net borrowings on long-term credit facility 81,000 207,000
Principal payments on long-term debt and capital lease obligations (15,414) (80,403)
Exercise of common stock options 11,160 84
--------- ---------
Net cash provided by financing activities 91,942 54,581
--------- ---------
Net increase (decrease) in cash and cash equivalents (24,800) 9,662
Effect of currency exchange rates 523 --
Cash and cash equivalents at beginning of period 60,522 25,791
--------- ---------
Cash and cash equivalents at end of period $ 36,245 $ 35,453
========= =========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 15,071 $ 14,476
========= =========
Income taxes $ 2,195 $ 3,847
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6-15
<PAGE>
SMITHFIELD FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED 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 May 3, 1998.
(2) The interim consolidated condensed 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 results of
operations for the periods included in this report.
(3) Inventories consist of the following:
(In thousands) Nov. 1, 1998 May 3, 1998
-------------- ------------ -----------
Fresh and processed meats $218,487 $171,090
Hogs on farms 67,001 49,263
Manufacturing supplies 23,009 18,538
Other 11,853 10,620
-------- --------
$320,350 $249,511
======== ========
(4) Income per basic share is computed based on the average common shares
outstanding during the period. Income per diluted share is computed based
on the average common shares outstanding during the period adjusted for the
effect of potential common shares, such as stock options and contingently
issuable shares. The computation for basic and diluted income per share is
as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------- --------------
(In thousands, except per share amounts) Nov. 1, 1998 Oct. 26, 1997 Nov. 1, 1998 Oct. 26, 1997
---------------------------------------- ------------ ------------- ------------ -------------
Numerator for basic and diluted income per share:
<S> <C> <C> <C> <C>
Net income $18,481 $15,548 $13,156 $ 9,007
======= ======= ======= =======
Denominator for basic income per share:
Average number of shares outstanding 38,273 37,527 37,905 37,527
Effect of dilutive securities:
Stock options 1,209 2,139 1,785 2,112
Contingently issuable shares 117 -- 117 --
------- ------- ------- -------
Denominator for diluted income per share 39,599 39,666 39,807 39,639
======= ======= ======= =======
Net income per share:
Basic $ .48 $ .41 $ .35 $ .24
======= ======= ======= =======
Diluted $ .47 $ .39 $ .33 $ .23
======= ======= ======= =======
</TABLE>
7-15
<PAGE>
Summarized below are stock option shares outstanding at the end of each
fiscal period which were not included in the computation of income per
diluted share because the average exercise price of the options was greater
than the average market price of the common shares.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------- --------------
Nov. 1, 1998 Oct. 26, 1997 Nov. 1, 1998 Oct. 26, 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Stock option shares excluded 415,000 25,000 415,000 25,000
Average option price per share $27.88 $32.75 $27.88 $32.75
</TABLE>
Under the purchase agreement with North Side Foods Corp. ("North
Side"), the Company has a contingent payment in which a maximum of 469,000
shares of the Company's common stock could be issued if the market price
equals or exceeds $32.00 per share.
(5) The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," in fiscal 1999. The components of
comprehensive income, net of related tax, consist of:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------- --------------
(In thousands) Nov. 1, 1998 Oct. 26, 1997 Nov. 1, 1998 Oct. 26, 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income $18,481 $15,548 $13,156 $9,007
Other comprehensive income:
Foreign currency translation
adjustment 3,489 - 3,489 -
Unrealized gain on securities 687 - 937 -
------- ------- ------- ------
Comprehensive income $22,657 $15,548 $17,582 $9,007
======= ======= ======= ======
</TABLE>
(6) In September 1998, the Company acquired all of the capital stock of Societe
Bretonne de Salaisons, the largest private label manufacturer of ham, pork
shoulder and bacon products in France. In October 1998, the Company
acquired all of the assets and business of North Side Foods Corp., a
leading producer of precooked pork products in North America. Both
acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the accompanying financial statements include
the financial position and results of operations from the dates of
acquisition.
During the 26 weeks ended November 1, 1998, the Company increased its
ownership in the Circle Four hog production operation to 77% from 37%,
requiring the Company to consolidate the accounts of Circle Four and to
discontinue using the equity method of accounting for this operation. From
June 1, 1998, the date on which the Company acquired a majority ownership
of Circle Four, the financial position and results of operations of Circle
Four have been reported on a consolidated basis. During fiscal 1998, Circle
Four was accounted for using the equity method of accounting.
(7) In August 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 26 weeks ended October
26, 1997. The Company has appealed this decision to the U.S. Court of
Appeals for the Fourth Circuit.
8-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group
("MPG") and a Hog Production Group ("HPG"). The MPG consists of seven pork
processing subsidiaries, Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell
& Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), North Side Foods Corp.
("North Side"), Patrick Cudahy Incorporated ("Patrick Cudahy"), Societe Bretonne
de Salaisons ("SBS"), and The Smithfield Packing Company, Incorporated
("Smithfield Packing"). The HPG consists of Brown's of Carolina, Inc.
("Brown's"), an 86%-owned subsidiary of the Company; a 50% interest in
Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production
arrangement between the Company and an affiliate of Carroll's Foods, Inc., and a
77% interest in Circle Four ("Circle Four"), a joint hog production arrangement
with certain of the principal hog suppliers for the Company's Eastern
operations. Brown's and Smithfield-Carroll's produce hogs in North Carolina and
Virginia which are sold to the MPG. Circle Four produces hogs in Utah which are
sold to an unrelated party.
RECENT DEVELOPMENTS
On December 1, 1998, the Company completed its tender offer to acquire all of
the outstanding capital stock of Schneider Corporation ("Schneider"). The
Company acquired approximately 94% of Schneider's voting common shares and
approximately 59% of its Class A non-voting shares, which in the aggregate
represents approximately 63% of the total equity of Schneider, in exchange for
approximately 2.5 million Exchangeable Shares of Smithfield Canada Limited, a
wholly-owned subsidiary of the Company. Each Exchangeable Share is exchangeable
by the holder at any time for one common share of the Company. Schneider
produces and markets a full line of processed meats and is one of the largest
food companies in Canada. Schneider had revenues in its fiscal year ended
October 1997 of US$512.7 million.
RESULTS OF OPERATIONS
During the quarter ended November 1, 1998, the Company acquired all of the
capital stock of SBS and all the assets and business of North Side. SBS is the
largest private-label manufacturer of ham, pork shoulder and bacon products in
France. North Side is a major domestic supplier of pre-cooked sausage to
McDonald's Corporation. Both acquisitions are accounted for using the purchase
method of accounting.
In the first half of fiscal 1999, the Company increased its ownership
in Circle Four from 37% to 77%, requiring the Company to consolidate the
accounts of Circle Four and to discontinue using the equity method of accounting
for this operation. The impact of this consolidation on the consolidated
condensed balance sheet as of November 1, 1998 was to increase total assets by
$82.4 million and long-term debt by $52.3 million. While the Company has
consolidated the accounts of Circle Four in the accompanying consolidated
condensed financial statements, it continues to pursue ventures which could
reduce its investment in Circle Four to 50% or less.
The Company's operating results for the 13 weeks ended November 1, 1998
include those of Circle Four for the full fiscal period, SBS for four weeks and
North Side for two weeks. The Company's fiscal 1999 first-half operating results
include those of Circle Four for 22 weeks, SBS for four weeks and North Side for
two weeks.
The comparative results of operations for the 13 weeks and the 26 weeks
ended November 1, 1998 were favorably affected by a significant decrease in live
hog prices, the lowest in nearly three decades. These prices were the primary
reason for the substantially improved profits at the Company's MPG and the
losses incurred at the HPG.
9-15
<PAGE>
13 Weeks Ended November 1, 1998 -
13 Weeks Ended October 26, 1997
Sales in the second quarter of fiscal 1999 decreased $108.3 million, or 11.0%,
from the comparable period in fiscal 1998. The decrease in sales reflected a
17.1% decrease in unit sales prices at the MPG, reflecting significantly lower
live hog costs passed through to customers in the form of lower unit selling
prices, which was not totally offset by a 6.0% increase in sales tonnage which
included the sales tonnage of Circle Four, SBS and North Side. The increase in
sales tonnage reflected a 6.0% increase in fresh pork tonnage, a 0.8% decrease
in processed meats tonnage and a 12.1% increase in the tonnage of by-products.
The increase in fresh pork tonnage reflected increased slaughter levels that
took advantage of increased margins on fresh pork related to the increased
supply of hogs and corresponding lower live hog prices. In addition, the
increase in fresh pork tonnage reflected a full quarter of second shift
operations at John Morrell's Sioux City, Iowa plant compared to less than a full
quarter of second shift operations in the second quarter of fiscal 1998. The
decrease in processed meats tonnage was primarily related to a sharp drop in
exports of hot dogs to Russia, which was partially offset by increased processed
meats tonnage at existing operations as well as at newly acquired companies.
Cost of sales decreased $131.8 million, or 14.8%, in the second quarter
of fiscal 1999, reflecting a 39.3% decrease in live hog costs from the
comparable period in fiscal 1998, which was partially offset by increased sales
tonnage at existing operations and the inclusion of the sales of Circle Four,
SBS and North Side.
Gross profit in the second quarter of fiscal 1999 increased $23.5
million, or 25.0%, from the comparable period in fiscal 1998. The increase in
gross profit was primarily due to substantially higher margins at the MPG. Fresh
pork margins improved substantially, reflecting the lower cost of raw materials
(live hogs) and increased sales tonnage. Margins on processed meats also
increased, reflecting the lower raw material costs. MPG gross profits were
partially offset by substantial losses at the HPG due to the lower live hog
prices.
Selling, general and administrative expenses increased $12.8 million,
or 24.1%, in the second quarter of fiscal 1999 from the comparable period in
fiscal 1998. The increase was primarily due to higher selling, marketing and
product promotion costs associated with intensive efforts to market branded
fresh pork and processed meats, expenses associated with the Year 2000 and
selling, general and administrative expenses at Circle Four, SBS and North Side.
Depreciation expense increased $3.7 million, or 35.4%, in the second
quarter of fiscal 1999 from the comparable period in fiscal 1998. The increase
was related to completed capital projects at several of the Company's processing
plants and the inclusion of the depreciation expense at Circle Four, SBS and
North Side.
Interest expense increased $2.9 million, or 35.9%, in the second
quarter of fiscal 1999 from the comparable period in fiscal 1998, reflecting the
inclusion of the interest expense of Circle Four, the cost of borrowings to
finance the additional investment in Circle Four, the acquisitions of SBS and
North Side, and the higher cost of long-term debt placed in the fourth quarter
of fiscal 1998.
Income before taxes in the second quarter of fiscal 1999 was adversely
affected by a loss of $14.6 million at the HPG compared to a profit of $5.2
million in the same period of fiscal 1998.
The effective income tax rate for the second quarter of fiscal 1999 was
30.4% compared to 30.6% in the corresponding period of fiscal 1998.
Reflecting the factors previously discussed, net income increased to
$18.5 million, or $.47 per diluted share, in the second quarter of fiscal 1999,
up from net income of $15.5 million, or $.39 per diluted share, in the second
quarter of fiscal 1998.
The operating results of the MPG and the HPG are influenced by several
factors, including the supply and price levels of hogs, and, as a result, are
largely counter-cyclical in nature. While the Company expects to incur losses at
the HPG for the remainder of fiscal 1999, these losses should be offset by
improved margins at the MPG.
10-15
<PAGE>
26 Weeks Ended November 1, 1998 -
26 Weeks Ended October 26, 1997
Sales in the first half of fiscal 1999 decreased $157.5 million, or 8.3%, from
the comparable period in fiscal 1998. The decrease in sales reflected a 16.8%
decrease in unit sales prices at the MPG, reflecting significantly lower live
hog costs passed through to customers in the form of lower unit selling prices
which was not totally offset by a 9.0% increase in sales tonnage which included
the sales tonnage of Circle Four, SBS and North Side. The increase in sales
tonnage reflected an 8.8% increase in fresh pork tonnage, a 4.8% increase in
processed meats tonnage and a 14.0% increase in the tonnage of by-products. The
increase in fresh pork tonnage reflected increased slaughter levels that took
advantage of increased margins on fresh pork related to the increased supply of
hogs and corresponding lower live hog prices. In addition, the increase in fresh
pork tonnage reflected a full 26 weeks of second shift operations at John
Morrell's Sioux City, Iowa plant compared to less than a full quarter of second
shift operations in the first half of fiscal 1998. The increase in processed
meats tonnage was primarily related to increased tonnage at existing operations
as well as at newly acquired companies. This increase in tonnage was partially
offset by a sharp drop in exports of hot dogs to Russia in the second quarter of
fiscal 1999.
Cost of sales decreased $178.5 million, or 10.3%, in the first half of
fiscal 1999, reflecting a 34.7% decrease in live hog costs from the comparable
period in fiscal 1998, which was partially offset by increased sales tonnage at
existing operations and the inclusion of the sales of Circle Four, SBS and North
Side.
Gross profit in the first half of fiscal 1999 increased $21.1 million,
or 12.5%, from the comparable period in fiscal 1998. The increase in gross
profit was primarily due to substantially higher margins at the MPG. Fresh pork
margins improved substantially, reflecting the lower cost of raw materials (live
hogs) and increased sales tonnage. Margins on processed meats also increased,
reflecting the lower raw material costs. MPG gross profits were partially offset
by substantial losses at the HPG due to the lower live hog prices.
Selling, general and administrative expenses increased $21.6 million,
or 21.1%, in the first half of fiscal 1999 from the comparable period in fiscal
1998. The increase was primarily due to higher selling, marketing and product
promotion costs associated with intensive efforts to market branded fresh pork
and processed meats, expenses associated with the Year 2000 and selling, general
and administrative expenses at Circle Four, SBS and North Side.
Depreciation expense increased $6.9 million, or 34.3%, in the first
half of fiscal 1999 from the comparable period in fiscal 1998. The increase was
related to completed capital projects at several of the Company's processing
plants and the inclusion of the depreciation expense at Circle Four, SBS and
North Side.
Interest expense increased $5.2 million, or 33.9%, in the first half of
fiscal 1999 from the comparable period in fiscal 1998, reflecting the inclusion
of the interest expense of Circle Four, the cost of borrowings to finance the
additional investments in Circle Four, the acquisitions of SBS and North Side,
and the higher cost of long-term debt placed in the fourth quarter of fiscal
1998.
A nonrecurring charge of $12.6 million in the first half of fiscal 1998
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
judgement to the U. S. Court of Appeals for the Fourth Circuit.
Income before taxes in the first half of fiscal 1999 was adversely affected
by a loss of $18.3 million at the HPG compared to a profit of $15.6 million in
the same period of fiscal 1998.
The effective income tax rate for the first half of fiscal 1999 was
29.6% compared to 31.0% in the corresponding period of fiscal 1998, excluding
the nonrecurring charge, reflecting increased use of tax incentives.
11-15
<PAGE>
Reflecting the factors previously discussed, net income increased to
$13.2 million, or $.33 per diluted share, in the first half of fiscal 1999, up
from net income of $9.0 million, or $.23 per diluted share, in the first half of
fiscal 1998. Excluding the nonrecurring charge, net income was $21.6 million, or
$.55 per diluted share, for the first half of fiscal 1998.
The operating results of the MPG and the HPG are influenced by several
factors, including the supply and price levels of hogs, and, as a result, are
largely counter-cyclical in nature. While the Company expects to incur losses at
the HPG for the remainder of fiscal 1999, these losses should be offset by
improved margins at the MPG.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash provided by operations totaled $12.5 million in the first
half of fiscal 1999. This increase in cash was the result of profitable
operations. The historical seasonal increase in the levels of inventories and
accounts receivable 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 $40.7 million in the first
half of fiscal 1999. These capital expenditures included renovations and
expansion projects at several of the Company's processing plants, additional hog
production facilities at Circle Four and replacement systems associated with the
Year 2000. In addition, the Company invested $23.5 million in Circle Four and
acquired all of the capital stock of SBS and all the assets and business of
North Side. These capital expenditures and acquisitions were funded with
borrowings under the Company's revolving credit facility.
As of November 1, 1998, the Company had definitive commitments of $20.4
million for capital expenditures primarily to increase its value-added fresh
pork capacity at several of its processing plants and to replace and upgrade
portions of its hardware and software in response to the Year 2000. In addition,
the Company had definitive commitments of $17.2 million at Circle Four primarily
for additional hog production facilities. The Company anticipates additional
investments of $24.8 million in Circle Four in fiscal 1999 for the capital
expenditures and working capital needs. These expenditures at Circle Four will
be funded with additional long-term financing or with funds provided by a joint
venture which the Company is actively seeking.
YEAR 2000
The Year 2000 problem relates to computer systems that have date-sensitive
programs that were designed to read years beginning with "19," but may not
recognize the year 2000. Company information technology ("IT") systems
(including non-IT systems) and third party information systems that fail due to
the Year 2000 may have a material adverse effect on the Company. The Year 2000
issue has the potential to effect the Company's supply, production, distribution
and financial chains.
The Company began addressing the potential exposure associated with the
Year 2000 during fiscal 1998. Management has approved the plan necessary to
remediate, upgrade, and replace the affected systems to be Year 2000 compliant.
A corrective five-point action plan has been developed including: 1) analysis
and planning, 2) allocation of resources and commencing correction, 3)
remediation, correction and replacement, 4) testing, and 5) development of
contingency plans.
The Company has identified and defined the critical IT and non-IT
projects. These projects relate to systems which include any necessary
technology used in manufacturing or administration with date-sensitive
information that is critical to the day-to-day operations of the business. Of
the IT projects, 7% have been completed, 17% are being tested, 17% are in
remediation, correction and replacement, and the remaining, less critical
projects are being analyzed and planned. All critical IT system implementations
and remediations are expected to be completed by June 30, 1999. The non-IT
(plant) projects have identified system components which have a potential issue
with rolling dates into the Year 2000. Of these components, 44% are fully
compliant with the others at various stages of progress in the action plan.
Approximately 30% of the non-IT system remediation process has been completed.
All critical non-IT system implementation and remediation is expected to be
completed by June 30, 1999.
12-15
<PAGE>
The forecasted cost of the Year 2000 solution, including hardware and
software replacement, is expected to be approximately $31.7 million, of which
$15.0 million has been expended to date. The Company has expensed approximately
$3.4 million to date, including $2.6 million in the second quarter of fiscal
1999 for the Year 2000, primary related to planning and evaluating system
status. The Company estimates $18.5 million will be capitalized in accordance
with generally accepted accounting principles. These expenditures are
anticipated to be incurred through December 1999.
Third party risk is being proactively assessed through inquiries and
questionnaires. Significant vendors, electronic commerce customers and financial
institutions have been sent inquiries about the status of their compliance for
the Year 2000. Additionally, the Company will follow up the inquiries and
questionnaires with interviews. This process is expected to be an ongoing
evaluation and at this point management cannot determine the level of risk
associated with third parties.
The Company believes its planning efforts are adequate to address its
Year 2000 concerns. The Company is developing a worse case scenario and a
contingency plan which includes an evaluation of the criticality of each
manufacturing process and the determination of possible manual alternatives,
including the purchase of additional inventory and related storage for
production supplies.
While the Company believes it is taking the appropriate steps to
address its readiness for the Year 2000, the costs of the project and expected
completion dates are dependent upon the continued availability of certain
resources and other factors. There can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that could influence the results may include, but are not
limited to, the availability and cost of personnel trained in this area, and the
ability to locate and correct all relevant computer codes and similar
uncertainties.
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain "forward-looking" information within the meaning of
the federal securities laws. The forward-looking information may include, among
other information, statements concerning the Company's outlook for the future.
There may also be other statements of beliefs, future plans and strategies or
anticipated events and similar expressions concerning matters that are not
historical facts. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: availability and prices of raw
materials, product pricing, competitive environment and related market
conditions, operating efficiencies, access to capital, integration of
acquisitions and changes in, or the failure or inability to comply with,
governmental regulation, including without limitation, environmental and health
regulations.
13-15
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 4.5 - Five-Year Credit Agreement dated as of July 10, 1997,
among Smithfield Foods, Inc., the Subsidiary Guarantors party
thereto, the Lenders party thereto, and The Chase Manhattan Bank,
as Administrative Agent, relating to a $300,000,000 secured
five-year revolving credit facility (incorporated by reference to
Exhibit 4.5 of the Company's Annual Report on Form 10-K for its
fiscal year ended April 27, 1997 filed with the Commission on July
25, 1997); and Amendment Number One to the Five-Year Credit
Agreement dated as of November 19, 1997 (incorporated by reference
to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended February 1, 1998 filed with the
Commission on March 17, 1998); Amendment Number Two to the
Five-Year Credit Agreement dated as of August 26, 1998
(incorporated by reference to Exhibit 4.5 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August
2, 1998 filed with the Commission on September 14, 1998); and
Amendment Number Three to the Five-Year Credit Agreement dated as
of November 12, 1998.
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.
14-15
<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, Chief Financial Officer and Secretary
/s/ C. LARRY POPE
----------------------------
C. Larry Pope
Vice President, Finance
Date: December 15, 1998
15-15
EXHIBIT 4.5
CONFORMED COPY
AMENDMENT NO. 3
AMENDMENT NO. 3 dated as of November 12, 1998 among SMITHFIELD
FOODS, INC., a corporation duly organized and validly existing under the laws of
the State of Virginia (the "Borrower"); the SUBSIDIARY GUARANTORS party hereto
(the "Subsidiary Guarantors"); the LENDERS party hereto (the "Lenders"); and THE
CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity, the
"Administrative Agent").
The parties hereto are parties to a Five-Year Credit Agreement
dated as of July 15, 1997 (as amended to and in effect on the date hereof, the
"Credit Agreement"). Capitalized terms used but not otherwise defined herein
have the meanings given them in the Credit Agreement. The parties hereto wish to
amend certain respects, and accordingly, hereby agree as follows:
Section 1. Amendments. Subject to the execution and delivery
hereof by the Borrower, the Subsidiary Guarantors, the Required Lenders and the
Administrative Agent, but effective as of August 3, 1998, the Credit Agreement
is hereby amended as follows:
A. General. All references in the Credit Agreement to the
Credit Agreement (including indirect references) shall be deemed to be
references to the Credit Agreement as amended hereby.
B. Commitments. Section 2.01 of the Credit Agreement shall be
amended to read as follows:
Section 2.01. Commitments. Subject to the terms and conditions
set forth herein, each Lender agrees to make Revolving Loans to the
Borrower from time to time during the Availability Period in an
aggregate principal amount (i) that will not result in such Lender's
Revolving Credit Exposure exceeding such Lender's Commitment and (ii)
that will not result in the sum of the aggregate amount of the
Revolving Credit Exposures of all of the Lenders plus the aggregate
principal amount of all Pari Passu Debt then outstanding plus the
aggregate principal amount (as defined in the definition of "Material
Indebtedness" herein) of the obligations of the Borrower or any of its
Subsidiaries under Hedging Agreements exceeding the Consolidated
Borrowing Base. Within the foregoing limits and subject to the terms
and conditions set forth herein, the Borrower may borrow, prepay and
reborrow Revolving Loans.
C. Investments, Loans, Advances, Guarantees and Acquisitions.
Section 6.04 of the Credit Agreement shall be amended by deleting "and" from the
end of subsection (f) thereof, replacing the period at the end of subsection (g)
thereof with "; and" and adding a new clause, to read as follows:
<PAGE>
(h) other Investments by the Borrower or any of its
Subsidiaries in any Person (other than a Subsidiary) principally
engaged in a business in which the Borrower and its Subsidiaries are
permitted by Section 6.03(b) to be engaged, subject always to the
limitation set forth in Section 6.12(f).
D. Financial Covenants. Section 6.12(f) of the Credit
Agreement shall be amended to read as follows:
(f) (1) Except as permitted by Section 6.12(f)(2) below, the
Borrower will not permit the sum (without duplication) of (i) Capital
Expenditures made by the Borrower and its Subsidiaries in any fiscal
year of the Borrower plus (ii) the Aggregate Consideration for all
Acquisitions made by the Borrower and its Subsidiaries in such fiscal
year plus (iii) an amount (not less than zero) equal to any net
increase from the beginning of such fiscal year through the end of such
fiscal year in the aggregate amount of Investments in Joint Ventures
plus (iv) an amount equal to the aggregate amount of Investments made
under Section 6.04(h) in such fiscal year, to exceed the higher of (x)
the sum of Consolidated Net Income plus depreciation for the Borrower
and its Subsidiaries for such fiscal year or (y) $100,000,000.
(2) The sum (without duplication) of (i) Capital Expenditures
made by the Borrower and its Subsidiaries in any fiscal year of the
Borrower plus (ii) the Aggregate Consideration for all Acquisitions
made by the Borrower and its Subsidiaries in such fiscal year plus
(iii) an amount (not less than zero) equal to any net increase from the
beginning of such fiscal year through the end of such fiscal year in
the aggregate amount of Investments in Joint Ventures plus (iv) an
amount equal to the aggregate amount of Investments made under in
Section 6.04(h) in such fiscal year may exceed the limit established by
Section 6.12(f)(1), provided that the aggregate amount of all such
excesses permitted by this Section 6.12(f)(2) for all fiscal years of
the Borrower shall not exceed the Net Cash Proceeds of the Senior
Subordinated Notes received by the Borrower at or prior to the time of
determination.
Section 2. Representations and Warranties. The Borrower hereby
represents and warrants to the Lenders and the Administrative Agent that the
representations and warranties set forth in Article III of the Credit Agreement
are on the date hereof true and complete as if made on and as of such date and
as if each reference in such representations and warranties to the Credit
Agreement included reference to such agreement as amended by this Amendment No.
3.
Section 3. Miscellaneous. Except as herein provided, the
Credit Agreement shall remain unchanged and in full force and effect. This
Amendment No. 3 may be executed in any number of counterparts, all of which
taken together shall constitute one and the same amendatory instrument and any
of the parties hereto may execute this Amendment No. 3 by signing any such
counterpart and sending the same by telecopier, mail messenger or courier to the
Administrative Agent or counsel to the Administrative Agent. This Amendment No.
3 shall be governed by, and construed in accordance with, the law of the State
of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 3 to be duly executed as of the day and year first above written.
SMITHFIELD FOODS, INC.
By /s/ Aaron D. Trub
--------------------------------
Name: Aaron D. Trub
Title: Vice President Chief Financial
Officer Secretary
THE SMITHFIELD PACKING COMPANY,
INCORPORATED
By /s/ Aaron D. Trub
--------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
GWALTNEY OF SMITHFIELD, LTD.
By /s/ Aaron D. Trub
--------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
PATRICK CUDAHY INCORPORATED
By /s/ Aaron D. Trub
------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
JOHN MORRELL & CO.
By /s/ Aaron D. Trub
------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
LYKES MEAT GROUP, INC.
By /s/ Aaron D. Trub
------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
<PAGE>
BROWN'S OF CAROLINA, INC.
By /s/ Aaron D. Trub
------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
HANCOCK'S OLD FASHIONED COUNTRY
HAMS, INC.
By /s/ Aaron D. Trub
----------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
VALLEYDALE FOODS, INC.
By /s/ Aaron D. Trub
-----------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
COPAZ PACKING CORPORATION
By /s/ Aaron D. Trub
-----------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
SUNNYLAND, INC.
By /s/ Aaron D. Trub
--------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
SMITHFIELD PACKING-LANDOVER, INC.
By /s/ Aaron D. Trub
-------------------------------
Name: Aaron D. Trub
Title: Secretary and Treasurer
<PAGE>
THE CHASE MANHATTAN BANK,
individually and as
Administrative Agent
By /s/ Gary L. Spevak
-------------------------------
Name: Gary L. Spevak
Title: Vice President
COOPERATIEVE CENTRALE RAIFFEISEN -
BOERENLEENBANK B.A. "RABOBANK
NEDERLAND", NEW YORK BRANCH
By /s/ Theodore W. Cox
------------------------------
Name: Theodore W. Cox
Title: Vice President
By /s/ W. Jeffrey Vollack
------------------------------
Name: W. Jeffrey Vollack
Title: Senior Credit Officer
and Senior Vice President
AGRIBANK, FCB
By /s/ J. Hathaway
-----------------------------
Name: J. Hathaway
Title: Director
CREDIT AGRICOLE INDOSUEZ
By /s/ Katherine L. Abbott
----------------------------
Name: Katherine L. Abbott
Title: First Vice President
By /s/ W. Leroy Startz
-----------------------------
Name: W. Leroy Startz
Title: First Vice President
<PAGE>
DG BANK, DEUTSCHE
GENOSSENSCHAFTSBANK,
CAYMAN ISLANDS BRANCH
By /s/ Kurt A. Morris
-----------------------------
Name: Kurt A. Morris
Title: Vice President
By /s/ Eric K. Zimmerman
------------------------------
Name: Eric K. Zimmerman
Title: Assistant Treasurer
NATIONSBANK, N.A.
By /s/ Barry P. Sullivan
-----------------------------
Name: Barry P. Sullivan
Title: Vice President
U.S. BANCORP AG CREDIT, INC.
(f/k/a FBS AG CREDIT, INC.)
By /s/ Douglas S. Hoffner
----------------------------
Name: Douglas S. Hoffner
Title: Vice President
SUNTRUST BANK, ATLANTA
By /s/ Robert V. Honeycutt
-----------------------------
Name: Robert V. Honeycutt
Title: Vice President
By /s/ Hugh E. Brown
-----------------------------
Name: Hugh E. Brown
Title: Banking Officer
THE BANK OF TOKYO-MITSUBISHI, LTD.
By_________________________
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By /s/ Deborah Slusarczyk
----------------------------
Name: Deborah Slusarczyk
Title: Vice President
By /s/ A.R. Morris
---------------------------
Name: A. Richard Morris
Title: First Vice President
FARM CREDIT SERVICES OF THE
MIDLANDS, PCA
By /s/ James R. Knuth
-----------------------------
Name: James R. Knuth
Title: Vice President
HARRIS TRUST AND SAVINGS BANK
By /s/ Greg Hennenfent
----------------------------
Name: Greg Hennenfent
Title: Vice President
SANWA BANK LIMITED
By_________________________
Name:
Title:
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By_________________________
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-02-1999
<PERIOD-END> NOV-01-1998
<CASH> 36,245
<SECURITIES> 0
<RECEIVABLES> 218,488
<ALLOWANCES> 2,221
<INVENTORY> 320,350
<CURRENT-ASSETS> 607,877
<PP&E> 910,154
<DEPRECIATION> 258,873
<TOTAL-ASSETS> 1,372,482
<CURRENT-LIABILITIES> 361,255
<BONDS> 552,206
0
0
<COMMON> 19,403
<OTHER-SE> 370,349
<TOTAL-LIABILITY-AND-EQUITY> 1,372,482
<SALES> 1,740,201
<TOTAL-REVENUES> 1,740,201
<CGS> 1,549,960
<TOTAL-COSTS> 1,549,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,622
<INCOME-PRETAX> 18,694
<INCOME-TAX> 5,538
<INCOME-CONTINUING> 13,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,156
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
</TABLE>
