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 31, 1999
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 14, 1999
- ----------------------------- ---------------------------------------
Common Stock, $.50 par value 44,137,329
1-18
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SMITHFIELD FOODS, INC.
CONTENTS
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<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - October 31, 1999 and May 2, 1999 3-4
Consolidated Condensed Statements of Income - 13 Weeks Ended October 31, 1999
and November 1, 1998 and 26 Weeks Ended October 31, 1999 and November 1, 1998 5
Consolidated Condensed Statements of Cash Flows - 26 Weeks Ended October 31, 1999
and November 1, 1998 6
Notes to Consolidated Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 11-16
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
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2-18
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PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) October 31, 1999 May 2, 1999
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<S> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 26,878 $ 30,590
Accounts receivable, net 353,677 252,332
Inventories 533,240 348,856
Prepaid expenses and other current assets 49,935 50,302
---------- ----------
Total current assets 963,730 682,080
---------- ----------
Property, plant and equipment 1,382,821 1,083,416
Less accumulated depreciation (337,998) (292,640)
---------- ----------
Net property, plant and equipment 1,044,823 790,776
---------- ----------
Other assets:
Investments in partnerships 99,313 80,182
Goodwill 137,823 103,017
Other 193,754 115,559
---------- ----------
Total other assets 430,890 298,758
---------- ----------
$2,439,443 $1,771,614
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3-18
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SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) October 31, 1999 May 2, 1999
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LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Current liabilities:
Notes payable $ 41,535 $ 63,900
Current portion of long-term debt and capital lease obligations 40,654 25,828
Accounts payable 291,295 207,703
Accrued expenses and other current liabilities 182,567 168,784
---------- ----------
Total current liabilities 556,051 466,215
---------- ----------
Long-term debt and capital lease obligations 964,793 594,241
---------- ----------
Other noncurrent liabilities:
Pension and postretirement benefits 77,054 62,276
Other 154,765 49,161
---------- ----------
Total other noncurrent liabilities 231,819 111,437
---------- ----------
Minority interests 38,115 57,475
---------- ----------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares Common stock,
$.50 par value, 100,000,000
authorized shares; 45,051,129 and 41,847,359 issued 22,525 20,924
Additional paid-in capital 258,967 180,020
Retained earnings 369,298 340,154
Accumulated other comprehensive income (2,125) 1,148
---------- ----------
Total shareholders' equity 648,665 542,246
---------- ----------
$2,439,443 $1,771,614
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4-18
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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) October 31, 1999 November 1, 1998 October 31, 1999 November 1, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Sales $1,230,129 $874,378 $2,372,544 $1,740,201
Cost of sales 1,057,525 759,246 2,052,408 1,552,891
---------- -------- ---------- ----------
Gross profit 172,604 115,132 320,136 187,310
Selling, general and administrative expenses 96,721 65,974 191,306 123,971
Depreciation expense 25,815 14,015 50,674 26,954
Interest expense 16,760 10,916 31,293 20,622
Minority interests (875) (2,332) 1,886 (2,931)
---------- -------- ---------- ----------
Income before income taxes 34,183 26,559 44,977 18,694
Income taxes 11,969 8,078 15,833 5,538
---------- -------- ---------- ----------
Net income $ 22,214 $ 18,481 $ 29,144 $ 13,156
========== ======== ========== ==========
Net income per common share:
Basic $ .49 $ .48 $ .64 $ .35
========== ======== ========== ==========
Diluted $ .48 $ .47 $ .62 $ .33
========== ======== ========== ==========
Average common shares outstanding:
Basic 45,585 38,273 45,722 37,905
========== ======== ========== ==========
Diluted 46,433 39,599 46,772 39,807
========== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5-18
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SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
October 31, 1999 November 1, 1998
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<S> <C>
Cash flows from operating activities:
Net income $ 29,144 $ 13,156
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 54,328 29,039
(Gain) loss on sale of property, plant and equipment (182) 428
Changes in operating assets and liabilities, net of effect of
acquisitions (75,589) (30,162)
--------- ---------
Net cash provided by operating activities 7,701 12,461
--------- ---------
Cash flows from investing activities:
Capital expenditures (52,917) (40,665)
Business acquisitions, net of cash (25,478) (89,176)
Proceeds from sale of property, plant and equipment 2,335 61
Investments in partnerships and other assets (14,175) 577
--------- ---------
Net cash used in investing activities (90,235) (129,203)
--------- ---------
Cash flows from financing activities:
Net (repayments) borrowings on notes payable (164,613) 11,660
Proceeds from issuance of long-term debt 249,523 3,536
Net borrowings on long-term credit facility 173,000 81,000
Principal payments on long-term debt and capital lease obligations (149,983) (15,414)
Repurchase of common stock (31,667) -
Exercise of common stock options 2,946 11,160
--------- ---------
Net cash provided by financing activities 79,206 91,942
--------- ---------
Net decrease in cash and cash equivalents (3,328) (24,800)
Effect of currency exchange rates (384) 523
Cash and cash equivalents at beginning of period 30,590 60,522
--------- ---------
Cash and cash equivalents at end of period $ 26,878 $ 36,245
========= =========
Supplemental disclosures of cash flow information: Cash payments during period:
Interest (net of amount capitalized) $ 28,088 $ 15,071
========= =========
Income taxes $ 12,362 $ 2,195
========= =========
</TABLE>
Noncash investing and financing activities:
As discussed in Note 7, effective May 3, 1999, the Company completed the
acquisition of Carroll's Foods, Inc. ("CFI") and its affiliated companies and
partnership interests in exchange for 4.2 million shares of the Company's
common stock and the assumption of approximately $231.0 million in debt, plus
other liabilities.
See accompanying notes to consolidated condensed financial statements.
6-18
<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 2, 1999.
(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:
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<CAPTION>
(In thousands) October 31, 1999 May 2, 1999
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Fresh and processed meats $ 279,984 $ 219,647
Hogs on farms 195,508 83,352
Manufacturing supplies 41,419 30,201
Other 16,329 15,656
--------- ---------
$ 533,240 $ 348,856
========= =========
</TABLE>
(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 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
(In thousands, except per share data) October 31,1999 November 1, 1998 October 31. 1999 November 1, 1998
---------------------------------------- ---------------- ---------------- ----------------- ----------------
<S> <C>
Net income $ 22,214 $18,481 $29,144 $13,156
======== ======= ======= =======
Average common shares outstanding:
Basic 45,585 38,273 45,722 37,905
Dilutive stock options 848 1,209 1,050 1,785
Contingently issuable shares - 117 - 117
-------- ------- ------- -------
Diluted 46,433 39,599 46,772 39,807
======== ======= ======= =======
Net income per common share:
Basic $ .49 $ .48 $ .64 $ .35
======== ======= ======= =======
Diluted $ .48 $ .47 $ .62 $ .33
======== ======= ======= =======
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7-18
<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.
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<CAPTION>
13 Weeks Ended 26 Weeks Ended
-------------- --------------
October 31, 1999 November 1, 1998 October 31, 1999 November 1, 1998
---------------- ---------------- ---------------- ----------------
<S> <C>
Stock option shares excluded 370,000 415,000 180,000 415,000
Average option price per share $28.92 $27.88 $30.16 $27.88
</TABLE>
(5) The Company 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) October 31, 1999 November 1, 1998 October 31, 1999 November 1, 1998
-------------- ---------------- ---------------- ---------------- ----------------
<S> <C>
Net income $22,214 $18,481 $ 29,144 $13,156
Other comprehensive income:
Foreign currency translation
adjustment (1,485) 3,489 (2,985) 3,489
Unrealized (loss) gain on securities (471) 687 (288) 937
------- ------- -------- -------
Comprehensive income $20,258 $22,657 $ 25,871 $17,582
======= ======= ======== =======
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(6) The Company adopted Statement of Financial Accounting Standard No. 131,
"Disclosure about Segments of an Enterprise and Related Information," in
fiscal 1999. The segments identified include the Meat Processing Group
("MPG") and the Hog Production Group ("HPG"). The underlying factors used
to identify the reportable segments include differences in products
produced and sold. The following table presents information about the
results of operations for each of the Company's reportable segments for
the 13 and 26 weeks ended October 31, 1999 and November 1, 1998,
respectively. In connection with the acquisition of CFI in the first
quarter of fiscal 2000, total assets for the HPG increased by
approximately $372.4 million to $715.4 million. For purposes of the
following presentation, operating profit (loss) is defined as income
(loss) before interest expense and income taxes.
8-18
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<TABLE>
<CAPTION>
Meat Hog General
(In thousands) Processing Production Corporate Total
------------------------ --------------------------------------------------------------
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13 Weeks Ended
October 31, 1999
------------------------
Sales $1,208,974 $ 123,627 $ - $1,332,601
Intersegment sales - (102,472) - (157,433)
Operating profit (loss) 44,320 13,279 (6,656) 50,943
13 Weeks Ended
November 1, 1998
------------------------
Sales $862,450 $ 42,941 $ - $ 905,391
Intersegment sales - (31,013) - (55,096)
Operating profit (loss) 52,707 (11,238) (3,994) 37,475
26 Weeks Ended
October 31, 1999
------------------------
Sales $2,330,594 $ 243,998 $ - $2,574,592
Intersegment sales - (202,048) - (302,100)
Operating profit (loss) 59,220 29,764 (12,714) 76,270
26 Weeks Ended
November 1, 1998
------------------------
Sales $1,718,538 $ 85,739 $ - $1,804,277
Intersegment sales (44,519) (64,076) - (108,595)
Operating profit (loss) 59,498 (11,986) (8,196) 39,316
</TABLE>
(7) Effective May 3, 1999, the Company completed the acquisition of Carroll's
Foods, Inc. ("CFI") and its affiliated companies and partnership
interests for 4.2 million shares of the Company's common stock (subject
to post-closing adjustments) and the assumption of approximately $231.0
million in debt, plus other liabilities. The acquisition included 100% of
the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's,
CFI's 16% interest in Circle Four, CFI's 50% interest in Tar Heel Turkey
Hatchery, 100% of CFI's turkey grow-out operations, CFI's 49% interest in
Carolina Turkeys, and certain hog production interests in Brazil and
Mexico. The acquisition of CFI was accounted for using the purchase
method of accounting. Had the acquisition of CFI occurred at the
beginning of fiscal 1999, it would not have had a material effect on pro
forma combined sales as most of CFI's sales would have been intercompany.
Pro forma combined net income and net income per diluted share would have
been $11.4 million and $.26, respectively, in the 13 weeks ended November
1, 1998 and $5.8 million and $.13, respectively, in the 26 weeks ended
November 1, 1998.
(8) In August 1999, the Company acquired all of the capital stock of Societe
Financiere de Gestion et de Participation S.A. ("SFGP"). SFGP had sales
of approximately $100.0 million in calendar year 1998. The acquisition
was accounted for using the purchase method of accounting and,
accordingly, the accompanying financial statements include the financial
position and results of operations from the date of acquisition.
(9) In September 1999, the Company invested approximately $22.0 million for a
49% interest in the joint venture Agroindustrial del Noroeste
("Agroindustrial"). Agroindustrial consists of Grupo Alpro, a fresh and
processed meats operation based in Hermosillo Mexico. Additionally,
Agroindustrial owns and operates Agrofarms, a hog production operation,
which will be the primary source of hogs for Grupo Alpro's fresh and
processed meats operation. The joint venture is accounted for using the
equity method of accounting.
9-18
<PAGE>
(10) In the third quarter of fiscal 1999, the Company acquired 100% of the
voting common shares of Schneider Corporation ("Schneider") 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 had sales in its fiscal year ended
October 1998 of $548.1 million.
In April 1999, the Company acquired, in a tender offer, 67% of the total
equity and 51% of the voting control of Animex S.A. ("Animex"). During
the 26-week period ended October 31, 1999, the Company increased its
ownership in Animex to 85% of total equity. Animex had calendar year 1998
sales of approximately $400.0 million.
In September 1998, the Company acquired all of the capital stock of
Societe Bretonne de Salaisons ("SBS"). SBS had calendar year 1998 sales
of $100.0 million.
In October 1998, the Company acquired all the assets and business of
North Side Foods Corp. ("North Side"). North Side had calendar year 1998
sales of $58.0 million.
Each of these acquisitions was 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.
(11) On November 15, 1999, the Company signed a definitive acquisition
agreement to acquire all of the capital stock of the corporate entities
known as Murphy Farms, Inc. and its affiliated companies (collectively
"Murphy Family Farms") for 10.7 million shares of the Company's stock and
the assumption of approximately $180.1 million of debt, plus other
liabilities. The transaction is expected to be completed in the third
quarter of fiscal 2000.
10-18
<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 six wholly-owned
domestic 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"), and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), and five international pork processing entities,
Schneider Corporation ("Schneider"), a 63%-owned Canadian subsidiary of the
Company, Animex S.A. ("Animex") an 85%-owned Polish Company, Societe Bretonne de
Salaisons ("SBS") and Societe Financiere de Gestion et de Participation S.A.
("SFGP"), two wholly-owned French subsidiaries, and Agroindustrial del Noroeste
("Agroindustrial"), a joint venture in Mexico. The HPG consists of Brown's of
Carolina, Inc. ("Brown's"), an 86%-owned subsidiary of the Company; Carroll's
Foods, Inc. ("CFI"), a wholly-owned subsidiary of the Company, Carrolls Foods of
Virginia ("CFV") (formerly Smithfield-Carroll's), a hog production operation
based in Virginia, and Circle Four, a hog production operation based in Utah,
and the hog production operations of Agroindustrial. As a result of the
acquisition of CFI effective May 3, 1999, CFV and Circle Four are wholly-owned
operations of the Company.
RESULTS OF OPERATIONS
- ---------------------
Several acquisitions affect the comparability of the results of operations for
the 13 week and 26 week periods ended October 31, 1999 and November 1, 1998,
including the following:
In May 1999, the Company completed the acquisition of CFI and its
affiliated companies and partnership interests for 4.2 million shares of the
Company's common stock (subject to post-closing adjustments) and the assumption
of approximately $231.0 million in debt, plus other liabilities. CFI had sales
of $348.0 million in calendar year 1998. A significant portion of these sales
were to the MPG.
On August 12, 1999, the Company acquired the capital stock of SFGP a
private-label processed meats manufacturer in France. SFGP had sales of
approximately $100.0 million in calendar 1998.
In the third quarter of fiscal 1999, the Company acquired 100% of the
voting common shares of Schneider 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 had sales in its fiscal year
ended October 1998 of $548.1 million.
In April 1999, the Company acquired, in a tender offer, 67% of the
total equity and 51% of the voting control of Animex. During the 26 week period
ended October 31, 1999, the Company increased its ownership in Animex to 85% of
total equity. Animex had calendar year 1998 sales of approximately $400.0
million.
In September 1998, the Company acquired all of the capital stock of
SBS. SBS had calendar year 1998 sales of $100.0 million.
In October 1998, the Company acquired all of the assets and business of
North Side. North Side had calendar year 1998 sales of $58.0 million.
Each of these acquisitions was accounted for using the purchase method
of accounting and, accordingly, the accompanying financial statements include
the results of operations from the dates of acquisition.
11-18
<PAGE>
CONSOLIDATED
13 WEEKS ENDED OCTOBER 31, 1999 -
13 WEEKS ENDED NOVEMBER 1, 1998
Sales in the second quarter of fiscal 2000 increased $355.8 million, or 40.7%,
from the comparable period in fiscal 1999. The increase in sales was primarily
attributable to the inclusion of sales of acquired businesses and higher
processed meats volume and unit sales prices of meat products in the base
business. See the following sections for comments on sales changes by business
segment.
Gross profit in the current quarter increased $57.5 million, or 49.9%,
on the inclusion of acquired businesses. However, the Company experienced higher
raw material costs in the base business which was not recovered by higher
pricing in the MPG. The current quarter's gross profit was also favorably
impacted by commodity hedging gains recognized in the HPG.
Selling, general and administrative expenses increased $30.7 million,
or 46.6%, due to the inclusion of the selling, general and administrative
expenses of acquired businesses, increased marketing costs associated with
efforts to market branded fresh pork and processed meats and expenses associated
with the Year 2000.
Depreciation expense increased $11.8 million, or 84.2%, in the second
quarter of fiscal 2000 from the comparable period in fiscal 1999, primarily
related to the inclusion of the depreciation expense of acquired businesses and
higher depreciation expense in the base business related to higher capital
spending in the MPG.
Interest expense increased $5.8 million, or 53.5%, in the second
quarter of fiscal 2000 from the comparable period in fiscal 1999, reflecting the
inclusion of the interest expense of the acquired businesses and the cost of
borrowings to finance the acquisitions of Animex, SBS, SFGP and North Side.
The effective income tax rate for the second quarter of fiscal 2000
increased to 35.0% compared to 30.4% in the corresponding period of fiscal 1999,
primarily related to the increase in profits and the inclusion of foreign
earnings at higher tax rates.
Reflecting the factors previously discussed, net income increased to
$22.2 million, or $.48 per diluted share, in the second quarter of fiscal 2000,
up from $18.5 million, or $.47 per diluted share, in the second quarter of
fiscal 1999.
26 WEEKS ENDED OCTOBER 31, 1999 -
26 WEEKS ENDED NOVEMBER 1, 1998
Sales in the first half of fiscal 2000 increased $632.3 million, or 36.3%, from
the comparable period in fiscal 1999. The increase in sales was primarily
attributable to the inclusion of sales of acquired businesses and higher
processed meats volume and unit sales prices of meat products in the base
business. See the following sections for comments on sales changes by business
segment.
Gross profit in the first half of fiscal 2000 increased $132.8 million,
or 70.9%, on the inclusion of acquired businesses, increased volumes and pricing
in the base business in the MPG, and lower feed costs and increased production
efficiencies in the HPG. Gross profit in the first half of fiscal 2000 was also
favorably impacted by commodity hedging gains recognized in the HPG. In the
prior year, the MPG recognized losses from its commodity positions.
Selling, general and administrative expenses increased $67.3 million,
or 54.3%, primarily related to the inclusion of acquired businesses, increased
marketing costs associated with efforts to market branded fresh pork and
processed meats and expenses associated with the Year 2000.
Depreciation expense increased $23.7 million, or 88.0%, in the first
half of fiscal 2000 from the comparable period in fiscal 1999, primarily related
to the inclusion of acquired businesses.
12-18
<PAGE>
Interest expense increased $10.7 million, or 51.7%, in the first half
of fiscal 2000 from the comparable period in fiscal 1999, reflecting the
inclusion of the interest expense of the acquired businesses and the cost of
borrowings to finance the acquisitions of Animex, SBS, SFGP and North Side.
The effective income tax rate for the first half of fiscal 2000
increased to 35.2% compared to 29.6% in the corresponding period of fiscal 1999,
primarily on increased profits and the inclusion of foreign earnings at higher
marginal tax rates.
Reflecting the factors previously discussed, net income increased to
$29.1 million, or $.62 per diluted share, in the first half of fiscal 2000, up
from $13.2 million, or $.33 per diluted share, in the first half of fiscal 1999.
MEAT PROCESSING GROUP
13 WEEKS ENDED OCTOBER 31, 1999 -
13 WEEKS ENDED NOVEMBER 1, 1998
MPG sales in the second quarter of fiscal 2000 increased $346.5 million, or
40.2%, from the comparable period in fiscal 1999 due primarily to incremental
processed meats volume on the inclusion of the sales of acquired businesses. In
addition, unit-selling prices increased 12.1% on higher live hog prices passed
through to the customer and a greater proportion of value-added processed meats
in the sales mix. Excluding the acquired businesses, processed meats volume
increased 13.0% partially offset by a 10.4% decline in fresh meats volume.
Operating profit in the MPG decreased to $44.3 million from $52.7
million in the prior year. The MPG's U.S. operations experienced lower margins
on sales of both fresh and processed meats as a 14.6% increase in live hog
prices was only partially offset by higher unit-selling prices. Operating profit
was negatively impacted by higher selling and marketing expenses on continued
efforts to expand distribution, the implementation of food safety programs at
Company facilities and increased spending on information systems related to Year
2000. In addition, the MPG was adversely effected by lost production at several
eastern locations due to Hurricane Floyd. With the exception of Animex, which
continues to incur operating losses, international acquisitions made strong
positive contributions in the quarter.
26 WEEKS ENDED OCTOBER 31, 1999 -
26 WEEKS ENDED NOVEMBER 1, 1998
MPG sales in the first half of fiscal 2000 increased $612.1 million, or 35.6%,
due primarily to incremental volumes on the inclusion of acquired businesses.
Processed meats volume increased 59.6% and fresh meats volume increased 8.9%.
Excluding acquired businesses, processed meats volume increased 8.6% and
fresh meats volume declined 6.1%. In addition, unit-selling prices increased
5.5% on higher live hog prices passed through to the customer and a greater
proportion of value-added processed meats in the sales mix.
Operating profit in the MPG decreased slightly to $59.2 million in the first
half of fiscal 2000 from $59.5 million on increased volumes and profits of
acquired businesses. The increase in volumes and profits of acquired businesses
was offset by increased spending in the base business on the market expansion of
fresh and processed meats brands, the implementation of food safety programs at
Company facilities and increased spending on information systems related to Year
2000 projects.
13-18
<PAGE>
HOG PRODUCTION GROUP
13 WEEKS ENDED OCTOBER 31, 1999 -
13 WEEKS ENDED NOVEMBER 1, 1998
The majority of the sales in the HPG are to the MPG and, therefore, are
eliminated in the Company's consolidated condensed statements of income. HPG
sales in the second quarter of fiscal 2000 increased sharply compared to the
same period in fiscal 1999 as a result of the inclusion of the sales of CFI and
a 14.6% increase in live hog prices.
Operating profit in the HPG improved to $13.3 million in the second quarter
of fiscal 2000 compared to a loss of $11.2 million in the comparable period in
fiscal 1999 as a result of the inclusion of CFI, an increase in hog prices and
lower feed costs coupled with the impact of gains recognized on favorable
commodity hedging contracts.
26 WEEKS ENDED OCTOBER 31, 1999 -
26 WEEKS ENDED NOVEMBER 1, 1998
For the first half of fiscal 2000, HPG sales increased sharply compared to the
period in fiscal 1999 as a result of the inclusion of the sales of CFI. For the
first half of the fiscal year, average hog prices remained flat compared to the
corresponding period in the prior year as lower hog prices in the first quarter
were offset by higher hog prices in the second quarter. With the acquisition of
CFI, hogs sold in the first half of fiscal 2000 increased to 2.5 million from
1.0 million in the comparable period in fiscal 1999.
Operating profit in the HPG improved to $29.8 million compared to a loss of
$12.0 million in the comparable period of fiscal 1999 as a result of the
inclusion of CFI, lower feed costs and improved production efficiencies coupled
with the impact of gains recognized on favorable commodity hedging contracts.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operations totaled $7.7 million for the twenty-six weeks ended
October 31, 1999 compared to $12.5 million in the comparable period in fiscal
1999. Increases in income and non-cash charges were more than offset by cash
required to meet working capital needs. Traditionally, the Company builds large
inventories of hams in the summer months that are sold during the holiday
season. Non-cash charges increased to $54.3 million from $29.0 million due
primarily to the incremental depreciation and amortization of acquired
businesses.
Cash used in investing activities declined to $90.2 million in the
current year from $129.2 million from the comparable period in fiscal 1999 as a
result of a substantial decrease in acquisitions paid using cash during the
first half of the current year compared with the prior year. Capital
expenditures totaled $52.9 million in the first half of fiscal 2000 which was
slightly more than depreciation charges for the period. These capital
expenditures included processed meats expansion and improvement projects,
additional hog production facilities at Circle Four and replacement systems
associated with the Year 2000. In addition, during the first half of fiscal year
2000, the Company invested $22.0 million in Agroindustrial and $28.7 million to
acquire additional capital stock of Animex increasing the Company's ownership
percentage in Animex to 85% of total equity. These capital expenditures and
investments were funded with cash provided by operations and borrowings under
the Company's long-term revolving credit facility. As of October 31, 1999, the
Company had definitive commitments of $35.3 million for capital expenditures
primarily to increase its value-added fresh pork capacity at several of its
processing plants and for additional hog production facilities at Circle Four.
These expenditures are expected to be funded with cash provided by operations.
Financing activities provided $79.2 million in the first half of fiscal
year 2000 as additional borrowings on revolving credit facilities were used
primarily for the repayment of notes payable and the Company's repurchase of
approximately 1.2 million shares of the Company's common stock. The Company has
been authorized to repurchase a total of 3.0 million shares. The outstanding
remaining authorization totals 1.8 million shares. During the current quarter,
the Company refinanced a substantial portion of the debt assumed in connection
with the CFI acquisition. The refinancing included the placement of $225.0
million 10-year senior secured notes with institutional lenders and an increase
in the existing revolving credit facility borrowing capacity from $300.0 million
to $400.0 million. The $225 million in debt includes, $75.0 million is variable
rate debt, $100.0 million of notes at 7.89% and $50.0 million of notes at 8.44%.
As of December 10, 1999, the Company increased its borrowing capacity on the
revolving credit facility from $400.0 million to $650.0 million to meet
anticipated needs associated with the pending Murphy Family Farms acquisition
and potential additional working capital needs associated with expected increase
in live hog prices in fiscal 2000.
14-18
<PAGE>
RECENT DEVELOPMENTS
- -------------------
On November 15, 1999, the Company signed a definitive acquisition agreement to
acquire all of the capital stock of the corporate entities known as Murphy
Farms, Inc. and its affiliated companies (collectively, "Murphy Family Farms")
for 10.7 million shares of the Company's stock and the assumption of
approximately $180.1 million of debt, plus other liabilities. Murphy Family
Farms is the second largest hog production company in the U.S. with 325.0
thousand sows and markets approximately 5.5 million hogs annually. The
acquisition is expected to be effective in January 2000. Sales for Murphy Farms
for its fiscal year ended October 1998 were approximately $500.0 million. A
significant portion of those sales were to the Company's MPG.
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 had 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 that 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. All critical IT projects
identified have been remediated and are Year 2000 compliant. The non-IT (plant)
projects identified include system components that have a potential issue with
rolling dates into the Year 2000. Of these components, substantially all are
fully compliant and the few that remain are in the final testing stage.
Following their acquisition in the fourth quarter of fiscal year 1999 and the
first quarter of fiscal 2000, respectively, the Company completed its assessment
and is well into the remediation phase for Animex and CFI. The overall Year 2000
compliance status of Animex subsidiaries at December 10, 1999 is 89%. Compliance
efforts at CFI are nearing completion. Additionally, the Company has closely
monitored the compliance efforts at Murphy Family Farms which are approximately
93% complete.
The forecasted cost of the Year 2000 solution, including hardware and
software replacement, is expected to be approximately $34.9 million, of which
$32.5 million has been expended to date. The Company has expensed a total of
$12.9 million, including $1.9 million in the second quarter of fiscal 2000. The
Company estimates $19.6 million of the total will be capitalized in accordance
with generally accepted accounting principles. These expenditures are
anticipated to be incurred through December 1999.
Third party risk has been assessed through inquiries and questionnaires.
Significant vendors, electronic commerce customers and financial institutions
have replied on questionnaires and inquiries sent related to the status of their
compliance for the Year 2000. The Company has identified and contacted critical
third parties, all of which have responded, and confirmed their Year 2000
readiness. The Company cannot predict how many of the responses received may
later prove to be inaccurate or overly optimistic. At this point, management is
not aware of any Year 2000 noncompliance problems that would indicate
interuptions or downtime with third parties' systems or services. Management
believes it has adequately assessed third party risk, however there are no
guarantees due to the unknown nature of the events that may occur.
15-18
<PAGE>
The Company believes its planning and remediation efforts have been and
continue to be adequate to address Year 2000 concerns. The Company has evaluated
each manufacturing process and has developed worse case scenarios. The Company
has developed contingency plans for each critical manufacturing process by
evaluating manual alternatives, including the purchase of additional inventory
and related storage for production supplies. As of December 10, 1999,
contingency plans have been written and documented for 94% of the critical IT
(plant) systems.
While the Company believes it has taken the appropriate steps to
address its readiness for the Year 2000, there can be no guarantee that these
efforts will achieve the desired results, 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.
16-18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
1. A Current Report on Form 8-K for September 2, 1999, was filed
with the Securities and Exchange Commission on September 9,
1999 to report, under Item 5, the announcement of an agreement
in principle to acquire Murphy Farms, Inc. and its affiliated
companies.
17-18
<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/ C. LARRY POPE
------------------------------------------
C. Larry Pope
Vice President and Chief Financial Officer
/s/ DANIEL G. STEVENS
------------------------------------------
Daniel G. Stevens
Corporate Controller
Date: December 15, 1999
18-18
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