SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 16, 1999
SMITHFIELD FOODS, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 0-2258 52-0845861
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
200 COMMERCE STREET
SMITHFIELD, VIRGINIA 23430
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (757) 365-3000
<PAGE>
ITEM 5. OTHER EVENTS
Smithfield Foods, Inc. (the "Registrant") is filing with this report its
audited consolidated financial statements and the notes thereto for the fiscal
year ended May 2, 1999.
A copy of this financial information is filed herewith as Exhibit 99.1
<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.
(Registrant)
By: /s/ Aaron D. Trub
------------------
(Signature)
Aaron D. Trub
Vice President, Chief Financial
Officer and Secretary
Dated: July 16, 1999
EXHIBIT 99.1
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<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
May 2, May 3, April 27, April 28, April 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C>
INCOME STATEMENT DATA:
Sales $3,774,989 $3,867,442 $3,870,611 $2,383,893 $1,526,518
Cost of sales 3,235,414 3,479,629 3,546,816 2,202,112 1,380,243
----------- ----------- ----------- ----------- -----------
Gross profit 539,575 387,813 323,795 181,781 146,275
Selling, general and administrative
expenses 295,610 219,861 191,225 103,095 61,723
Depreciation expense 63,524 42,300 35,825 25,979 19,717
Interest expense 40,521 31,891 26,211 20,942 14,054
Minority interests (3,518) 199 2,857 1,514 343
Nonrecurring charge - 12,600 - - -
----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes 143,438 80,962 67,677 30,251 50,438
Income taxes 48,554 27,562 22,740 10,465 18,523
----------- ----------- ----------- ----------- -----------
Income from continuing operations 94,884 53,400 44,937 19,786 31,915
Income (loss) from discontinued
operations - - - (3,900) (4,075)
----------- ----------- ----------- ----------- -----------
Net Income $ 94,884 $ 53,400 $ 44,937 $ 15,886 $ 27,840
=========== =========== =========== =========== ===========
DILUTED INCOME (LOSS) PER SHARE:
Continuing operations $ 2.32 $ 1.34 $ 1.17 $ 0.53 $ 0.92
Discontinued operations - - - (0.11) (0.12)
----------- ----------- ----------- ----------- -----------
Net Income $ 2.32 $ 1.34 $ 1.17 $ 0.42 $ 0.80
=========== =========== =========== =========== ===========
Average diluted shares outstanding 40,962 39,732 38,558 35,000 33,923
BALANCE SHEET DATA:
Working capital $ 215,865 $ 259,188 $ 164,312 $ 88,026 $ 60,911
Total assets 1,771,614 1,083,645 995,254 857,619 550,225
Long term debt and capital lease
obligations 594,241 407,272 288,486 188,618 155,047
Shareholders' equity 542,246 361,010 307,486 242,516 184,015
OPERATING DATA:
Fresh pork sales (pounds) 2,687,412 2,539,221 2,320,477 1,635,300 955,290
Processed meats sales (pounds) 1,606,021 1,370,232 1,218,835 839,341 774,615
Total hogs purchased 19,093 17,952 16,869 12,211 8,678
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
GENERAL
This discussion of management's views on the financial condition and results of
operations of Smithfield Foods, Inc. (the "Company") should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements.
The Company's business is comprised of two segments, 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 three international meat processing subsidiaries, Animex S.A.
("Animex"), a 67%-owned Polish subsidiary, Schneider Corporation ("Schneider"),
a 63%-owned Canadian subsidiary, and Societe Bretonne de Salaisons ("SBS"), a
wholly owned French subsidiary. 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.
("CFI") and an 84% interest in Circle Four ("Circle Four"), a joint hog
production arrangement between the Company and affiliates of CFI. Brown's and
Smithfield-Carroll's produce hogs in Colorado, North Carolina and Virginia,
which are sold primarily to the MPG. Circle Four produces hogs in Utah which are
sold to an unrelated party. Effective May 3, 1999, the Company acquired CFI and
its affiliated companies and partnership interests (See Note 15).
ACQUISITIONS
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 2,527,000 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 fresh pork and a full line
of processed meats and is the second largest meat processing company in Canada.
Schneider had sales in its fiscal year ended October 1998 of $548.1 million.
In April 1999, the Company acquired, in a tender offer, 11,500,000 shares of
the capital stock of Animex, the largest meat and poultry processing company in
Poland. Following the tender offer, the Company's ownership represented 67% of
the total equity and 51% voting control of Animex. Animex had calendar year 1998
sales of approximately $400.0 million.
In September 1998, the Company acquired all of the capital stock of SBS, the
largest private-label manufacturer of ham, pork shoulder and bacon products in
France. SBS had calendar year 1998 sales of approximately $100.0 million.
In October 1998, the Company acquired all of the assets and business of North
Side, a major domestic supplier of precooked sausage to McDonald's Corporation.
North Side had calendar year 1998 sales of approximately $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.
In addition, during fiscal 1999, the Company increased its ownership in the
Circle Four hog production operations from 37% to 84%. Accordingly, the
accompanying financial statements include the financial position and results of
operations from June 1, 1998, the date the Company's ownership interest
<PAGE>
exceeded 50%. Prior to June 1, 1998, Circle Four was accounted for using the
equity method of accounting.
RESULTS OF OPERATIONS
The consolidated results of operations for fiscal 1999 compared to fiscal 1998
were favorably affected by significantly lower live hog and raw material prices.
In fiscal 1999, hog prices fell to their lowest level in five decades. These
prices were the primary reason for the substantially improved profits in the
Company's MPG and the losses incurred in the HPG.
Fiscal 1999 and 1997 included 52 weeks of operations compared to fiscal 1998,
which included 53 weeks of operations. Accordingly, sales and all expense
categories in fiscal 1999 and 1997 reflect the impact of one less week of
operations compared to fiscal 1998.
CONSOLIDATED
FISCAL 1999 COMPARED TO FISCAL 1998
Sales in fiscal 1999 decreased $92.5 million, or 2.4% from fiscal 1998. The
decrease in sales reflected a 12.4% decrease in unit sales prices of meat
products as the result of significantly lower raw material (live hog) prices
passed through to customers in the form of lower unit selling prices. This
decrease was nearly offset by a 10.2% increase in MPG sales tonnage due to the
inclusion of the sales of Schneider, SBS and North Side and increased volumes at
existing operations.
Cost of sales decreased $244.2 million, or 7.0%, in fiscal 1999, reflecting a
33.9% decrease in live hog costs partially offset by the increased sales
tonnage.
Gross profit increased $151.8 million, or 39.1%, in fiscal 1999 compared to
fiscal 1998. The increase in gross profit was primarily due to substantially
higher margins in the MPG. Fresh pork margins improved substantially, reflecting
the impact of the lower cost of raw materials (live hogs) and margins on
increased sales tonnage of both fresh pork and processed meats. MPG gross
profits were partially offset by substantial losses in the HPG due to lower live
hog prices.
Selling, general and administrative expenses increased $75.7 million, or
34.5%, in fiscal 1999 compared to fiscal 1998. The increase was primarily due to
the inclusion of selling, general and administrative expenses of acquired
businesses, higher selling, marketing and product promotion costs associated
with the intensive efforts to market branded fresh pork and processed meats and
expenses associated with preparing the Company's information systems for the
Year 2000.
Depreciation expense increased $21.2 million, or 50.2%, in fiscal 1999
compared to fiscal 1998. This increase was primarily due to the inclusion of the
depreciation of acquired businesses.
Interest expense increased $8.6 million, or 27.1%, in fiscal 1999 compared to
fiscal 1998. This increase reflected the inclusion of the interest expense of
the acquired businesses, the cost of borrowings to finance the additional
investment in Circle Four and the borrowings to finance the acquisitions of SBS
and North Side.
A nonrecurring charge of $12.6 million in 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 ("EPA"). 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 fiscal 1999 was 33.9% compared to 29.5% in
fiscal 1998, excluding the nondeductible nonrecurring charge. This increase
reflected higher profits at higher marginal tax rates. The Company had no
valuation allowance related to income tax assets as of May 2, 1999 and May 3,
1998.
Reflecting the factors previously discussed, net income increased to $94.9
million, or $2.32 per diluted share, in fiscal 1999, up from net income of $66.0
million, or $1.66 per diluted share in fiscal 1998, excluding the nonrecurring
charge. Including the nonrecurring charge, net income was $53.4 million, or
$1.34 per diluted share, in fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a 9.0%
decrease in unit sales prices of meat products, as a result of lower raw
material (live hog) prices passed through to customers in the form of lower unit
selling prices, offset by a 9.4% increase in MPG sales tonnage. The increase in
sales tonnage reflected an increase in the number of hogs slaughtered and the
inclusion of a full year of the sales of Lykes.
Cost of sales decreased $67.2 million, or 1.9%, in fiscal 1998, reflecting a
17.3% decrease in live hog costs offset by the increased sales tonnage.
Gross profit increased $64.0 million, or 19.8%, in fiscal 1998 compared to
fiscal 1997. The increase in gross profit reflected sharply improved margins on
higher sales of both fresh pork and processed meats.
Selling, general and administrative expenses increased $28.6 million, or
15.0%, in fiscal 1998. This increase was primarily due to the inclusion of the
operations of Lykes and to higher selling, marketing and product promotion costs
associated with intensified efforts to market branded fresh pork and processed
meats.
Depreciation expense increased $6.5 million, or 18.1%, in fiscal 1998. The
increase was primarily due to completed capital projects at several of the
Company's processing plants and to the inclusion of the operations of Lykes for
the full fiscal year.
Interest expense increased $5.7 million, or 21.7%, in fiscal 1998, reflecting
the higher cost of long-term debt placed during the past two fiscal years and
higher average borrowing costs related to higher levels of inventory and
accounts receivable in the first half of fiscal 1998.
A nonrecurring charge of $12.6 million in fiscal 1998 reflected the
imposition of civil penalties against the Company by the U.S.
<PAGE>
District Court for the Eastern District of Virginia in a civil action brought
by the EPA. 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 fiscal 1998 decreased to 29.5%, excluding
the nondeductible nonrecurring charge, from 33.6% in fiscal 1997. This decrease
reflected the impact of a lower tax rate on increased export sales and
employment-related tax credits. The Company had no valuation allowance related
to income tax assets as of May 3, 1998 and April 27, 1997.
Excluding the nonrecurring charge, net income increased to $66.0 million, or
$1.66 per diluted share in fiscal 1998 from $44.9 million, or $1.17 per diluted
share in fiscal 1997. Including the nonrecurring charge, net income was $53.4
million in fiscal 1998, or $1.34 per diluted share.
MEAT PROCESSING GROUP
FISCAL 1999 COMPARED TO FISCAL 1998
MPG sales in fiscal 1999 decreased $137.8 million, or 3.6%, from fiscal 1998.
The decrease reflected a 12.4% decrease in unit sales prices as the result of
sharply lower raw material (live hog) prices passed through to customers. This
decrease was partially offset by a 10.2% increase in sales tonnage due to the
inclusion of the sales of Schneider, SBS and North Side and increased volumes at
existing operations. The increase in sales tonnage reflected a 5.8% increase in
fresh pork tonnage, 17.2% increase in processed meats tonnage and 12.8% increase
in the tonnage of other products. Fresh pork tonnage increased as the result of
the inclusion of the sales of Schneider and a full fiscal year of second shift
operations at John Morrell's Sioux City, Iowa plant compared to less than a full
year of second shift operations in fiscal 1998. The increase in processed meats
tonnage resulted from the inclusion of the sales of Schneider, SBS and North
Side and increased tonnage at existing operations despite a sharp drop in hot
dog exports to Russia.
The MPG reported profit before income taxes of $233.4 million in fiscal 1999
compared to profit before income taxes of $121.2 million in fiscal 1998. This
increase reflected sharply lower raw material (live hog) costs and the impact of
acquired businesses and increased volumes from the base business. These
increases were partially offset by increased marketing and distribution expenses
incurred to market branded fresh and processed meat products and expenses
related to preparing the Company's information systems for the Year 2000.
FISCAL 1998 COMPARED TO FISCAL 1997
MPG sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a
9.4% increase in tonnage offset by a 9.0% decrease in unit sales prices as a
result of lower raw material (live hog) prices passed through to customers in
the form of lower unit selling prices. The increase in sales tonnage reflected a
9.4% increase in fresh pork tonnage, 12.4% increase in processed meats tonnage
and 4.5% increase in the tonnage of other products. The fresh pork tonnage
increase was primarily related to an increase in the number of hogs slaughtered
at the Company's Sioux City, Iowa and Bladen County, North Carolina plants. The
increase in processed meats tonnage was primarily related to a full fiscal year
of sales at Lykes compared to six months of sales in fiscal 1997.
The MPG reported a profit before income taxes of $121.2 million in fiscal
1998 compared to profit before income taxes of $66.5 million in fiscal 1997.
This increase reflected sharply improved margins as a result of significantly
lower raw material (live hog) costs, which were partially offset by higher
selling, marketing and product promotion costs associated with intensified
efforts to market branded fresh pork and processed meats.
HOG PRODUCTION GROUP
FISCAL 1999 COMPARED TO FISCAL 1998
HPG sales were relatively flat in fiscal 1999 compared to fiscal 1998, as a
33.0% decrease in the unit selling price of live hogs, due to an oversupply of
hogs in the market, was offset by a 48.5% increase in the number of hogs sold,
primarily the result of including the sales of Circle Four. Intersegment sales
to the MPG are eliminated in the Consolidated Statements of Income.
The HPG reported a pretax loss of $63.6 million in fiscal 1999, compared to a
pretax loss of $9.7 million in fiscal 1998. The substantially higher loss was
primarily the result of the lower unit selling prices of hogs, which were at
their lowest levels in five decades. Despite the near-term weakness in live hog
prices, management expects the HPG to return to profitability in fiscal 2000
through the utilization of hedging and price-risk management techniques and
expected increases in hog prices toward the end of fiscal 2000.
FISCAL 1998 COMPARED TO FISCAL 1997
HPG sales in fiscal 1998 increased by $4.8 million, or 3.1%, from fiscal 1997.
The increase reflected a 19.9% increase in the number of hogs sold as a result
of increased production at Brown's. The increase was partially offset by a 14.0%
decrease in the unit selling price of live hogs, reflecting an overall industry
expansion in hog production. Substantially all HPG sales in fiscal 1998 and 1997
were to the MPG and, accordingly, are intersegment sales which were eliminated
in the Consolidated Statements of Income.
The HPG reported a loss before income taxes of $9.7 million in fiscal 1998
compared to a profit before income taxes of $19.9 million in fiscal 1997. This
is due to significantly lower selling prices for live hogs which were not offset
by lower feed costs.
LIQUIDITY AND CAPITAL RESOURCES
The pork processing industry is characterized by high sales tonnage and rapid
turnover of inventories and accounts receivable. Because of the rapid turnover
rate, the Company considers its inventories and accounts receivable highly
liquid and readily convertible into cash. Borrowings under the Company's credit
facilities are used to finance increases in the levels of inventories and
accounts receivable resulting from seasonal and other market-
<PAGE>
related fluctuations in raw material costs. The demand for seasonal borrowings
usually peaks in early November when inventories are at their highest levels,
and borrowings are repaid in January when accounts receivable are collected.
Net cash provided by operations was $123.4 million in fiscal 1999 compared to
$97.5 million in fiscal 1998. This increase primarily reflected higher earnings
and noncash charges.
Net cash used in investing activities totaled $261.9 million in fiscal 1999
compared to $104.9 million in fiscal 1998. In fiscal 1999, the Company expended
$151.2 million for several business acquisitions (See Note 3) and $95.4 million
for capital expenditures. 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 fiscal 1998, the Company expended $7.8 million for business
acquisitions and $92.9 million for capital expenditures. As of May 2, 1999, the
Company had definitive commitments of $34.8 million for capital expenditures
primarily to increase its processed meats and value-added fresh pork capacities
at several of its processing plants. The Company has continuing plans to
increase its processed meats and hog production businesses through strategic
acquisitions and joint ventures, both in the United States and internationally.
These investing activities will be funded with cash from operations, borrowings
under the Company's revolving credit facilities and the issuance of additional
shares of the Company's common stock. Effective May 3, 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 and the
assumption of approximately $231.0 million in debt, plus other liabilities (See
Note 15).
Net cash provided by financing activities was $108.5 million in fiscal 1999
compared to $42.1 million in fiscal 1998. The Company has aggregate credit
facilities totaling $402.0 million, including a $300.0 million revolving credit
facility with a bank group, which expires July 2002. These credit facilities
include $102.0 million of credit facilities from various U.S. and international
banks assumed in connection with businesses acquired in fiscal 1999. As of May
2, 1999, the Company had unused capacity under these credit facilities of $214.0
million.
Average borrowings under all facilities were $74.8 million in fiscal 1999,
$149.7 million in fiscal 1998 and $165.1 million in fiscal 1997 at average
interest rates of approximately 6%, 7% and 7%, respectively. Maximum borrowings
were $152.5 million in fiscal 1999, $247.0 million in fiscal 1998 and $215.0
million in fiscal 1997. The outstanding borrowings were $134.9 million as of
May 2, 1999, at an average interest rate of 7%. There were no borrowings under
the facilities as of May 3, 1998.
Management believes that through internally generated funds and access to
global credit markets, funds are available to adequately meet the Company's
current and future operating and capital needs.
Long-term debt and capital lease obligations increased to $594.2 million as
of May 2, 1999 from $407.3 million as of May 3, 1998, primarily due to the debt
assumed in business acquisitions. The ratio of long-term debt to total
capitalization decreased to 52.3% as of May 2, 1999 from 53.0% as of May 3,
1998. The decrease reflected increases in equity, resulting from earnings,
common stock issued in connection with business acquisitions and stock option
exercises.
RISK MANAGEMENT
Substantially all of the Company's products are produced from commodity-based
raw materials, corn and soybean meal in the HPG and live hogs in the MPG. The
cost of corn and soybean meal (the principal feed ingredients for hogs) and live
hogs are subject to wide fluctuations due to unpredictable factors such as
weather conditions, economic conditions, government regulation and other
unforeseen circumstances. The pricing of the Company's fresh pork and processed
meats is monitored and adjusted upward and downward in reaction to changes in
the cost of the underlying raw materials. The unpredictability of the raw
material costs limits the Company's ability to forward price fresh pork and
processed meat products without the use of commodity contracts through a program
of price-risk management. The Company uses price-risk management to enhance its
ability to engage in forward sales contracts, where prices for future deliveries
are fixed, by purchasing (or selling) commodity contracts for future periods to
reduce or eliminate the effect of fluctuations in future raw material costs on
the profitability of the related sales. While this may tend to limit the
Company's ability to participate in gains from favorable commodity price
fluctuation, it also tends to reduce the risk of loss from adverse changes in
raw material prices. In addition, the Company utilizes commodity contracts for
live hogs and corn to manage hog production margins when management determines
the conditions are correct for such hedges. The particular hedging methods
employed and the time periods for the contracts depend on a number of factors,
including the availability of adequate contracts for the respective periods for
the hedge. The Company attempts to closely match the commodity contract
expiration periods with the dates for product sale and delivery. As a result,
gains and losses from hedging transactions are recognized when the related sales
and purchases are made. As of May 2, 1999 and May 3, 1998, the Company had
deferred $8.9 million and $1.9 million, respectively, of unrealized hedging
gains on outstanding futures contracts. As of May 2, 1999 and May 3, 1998, the
Company had open futures contracts with contract values of $219.7 million and
$97.1 million, respectively. As of May 2, 1999 and May 3, 1998, the Company had
deposits with brokers for outstanding futures contracts of $15.6 million and
$10.9
<PAGE>
million, respectively, which were included in prepaid expenses and other current
assets.
For open futures contracts, the Company uses a sensitivity analysis technique
to evaluate the effect that changes in the market value of commodities will have
on these commodity derivative instruments. As of May 2, 1999, the potential
change in fair value of open future contracts, assuming a 10% change in the
underlying commodity price, was $10.4 million.
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 affect 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 effected systems to be Year 2000 compliant. A
corrective five-point action plan was 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 critical IT projects, 87%
have been completed, 10% are in 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 substantially completed by
the end of July 1999. The non-IT (plant) projects have identified system
components that have a potential issue with rolling dates into the Year 2000. Of
these components, 98% are fully compliant and the others are at various stages
of progress in the action plan. Substantially all critical non-IT system
implementation and remediation is complete or in final stages.
The cost of the Year 2000 solution, including hardware and software
replacement, is expected to be approximately $33.9 million, of which $26.5
million has been expended to date. The Company has expensed approximately $8.5
million in fiscal 1999. The Company estimates $19.6 million of the $33.9 million
will be capitalized in accordance with generally accepted accounting principles.
These expenditures are anticipated to continue 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. 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 worst-case scenario and contingency
plan that 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.
The Company, while substantially complete on all critical and non-critical IT
and non-IT systems, continues to assess the Year 2000 readiness of Animex (See
Note 3) and CFI (See "Subsequent Events" below and Note 15). The preliminary
review of CFI's Year 2000 readiness is complete. Approximately 53% of the
critical systems are compliant. The remaining systems are targeted to be
compliant by September 30, 1999. Management has not determined the level of
readiness for Animex. The assessment is expected to be completed by the end of
July 1999. The costs of the Year 2000 solution are exclusive of Animex and CFI's
remediation efforts.
While the Company believes that 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.
SUBSEQUENT EVENTS
Effective May 3, 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 and the assumption of approximately $231.0 million in
debt, plus other liabilities (See Note 15). The acquisition includes 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 operation, CFI's 49% interest in Carolina Turkeys, and
certain hog production interests in Brazil and Mexico. The Company will account
for this acquisition using the purchase method of accounting.
Subsequent to the end of fiscal 1999, the Company increased its ownership in
Animex from 67% to 80% of total equity.
<PAGE>
FORWARD-LOOKING INFORMATION
This report may contain "forward-looking" information within the meaning of the
federal securities laws. The forward-looking information may include statements
concerning the Company's outlook for the future, as well as other statements of
beliefs, future plans and strategies or anticipated events, and similar
expressions concerning matters that are not historical facts. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in, or implied by, the
statements. These risks and uncertainties include availability and prices of
live hogs, raw materials and supplies, live hog production costs, product
pricing, the competitive environment and related market conditions, operating
efficiencies, access to capital, and actions of domestic and foreign
governments.
<PAGE>
CONSOLIDATED BALANCE SHEETS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS)
FISCAL YEARS ENDED MAY 2, 1999 MAY 3, 1998
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 30,590 $ 60,522
Accounts receivable less allowances of $2,656 and $1,541 252,332 156,091
Inventories 348,856 249,511
Prepaid expenses and other current assets 50,302 44,999
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 682,080 511,123
- ----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land 29,605 15,157
Buildings and improvements 404,002 240,032
Machinery and equipment 590,139 418,810
Construction in progress 59,670 31,873
- ----------------------------------------------------------------------------------------------------------------------------
1,083,416 705,872
Less accumulated depreciation (292,640) (233,652)
- ----------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 790,776 472,220
- ----------------------------------------------------------------------------------------------------------------------------
Other assets:
Investments in partnerships 80,182 49,940
Goodwill, net of accumulated amortization of $2,871 and $1,964 103,017 12,360
Other 115,559 38,002
- ----------------------------------------------------------------------------------------------------------------------------
Total other assets 298,758 100,302
- ----------------------------------------------------------------------------------------------------------------------------
$1,771,614 $1,083,645
- ----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
MAY 2, 1999 MAY 3, 1998
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 63,900 $ --
Current portion of long-term debt and capital lease obligations 25,828 8,511
Accounts payable 207,703 118,909
Accrued expenses and other current liabilities 168,784 124,515
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 466,215 251,935
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 594,241 407,272
- ----------------------------------------------------------------------------------------------------------------------------
Other noncurrent liabilities:
Pension and postretirement benefits 62,276 38,486
Deferred income taxes 31,523 11,745
Other 17,638 8,120
- ----------------------------------------------------------------------------------------------------------------------------
Total other noncurrent liabilities 111,437 58,351
Minority interests 57,475 5,077
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares -- --
Common stock, $.50 par value, 100,000,000 shares authorized;
41,847,359 and 37,537,362 issued shares 20,924 18,769
Paid-in capital 180,020 96,971
Retained earnings 340,154 245,270
Accumulated other comprehensive income 1,148 --
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 542,246 361,010
- ----------------------------------------------------------------------------------------------------------------------------
$1,771,614 $1,083,645
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $3,774,989 $3,867,442 $3,870,611
Cost of sales 3,235,414 3,479,629 3,546,816
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 539,575 387,813 323,795
Selling, general and administrative expenses 295,610 219,861 191,225
Depreciation expense 63,524 42,300 35,825
Interest expense 40,521 31,891 26,211
Minority interests (3,518) 199 2,857
Nonrecurring charge (See Note 12) -- 12,600 --
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 143,438 80,962 67,677
Income taxes 48,554 27,562 22,740
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 94,884 $ 53,400 $ 44,937
- ----------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 94,884 $ 53,400 $ 43,699
- ----------------------------------------------------------------------------------------------------------------------------
Net income per basic common share $ 2.39 $ 1.42 $ 1.21
- ----------------------------------------------------------------------------------------------------------------------------
Net income per diluted common share $ 2.32 $ 1.34 $ 1.17
- ----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
FISCAL YEARS 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 94,884 $ 53,400 $ 44,937
Depreciation and amortization 68,566 45,872 39,057
Deferred income taxes 20,737 14,752 7,810
(Gain) loss on sale of property and equipment (138) 216 (3,288)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable 954 15,115 (12,606)
Inventories (17,680) 11,672 (30,008)
Prepaid expenses and other current assets (2,225) (10,550) (1,605)
Other assets (55,563) (7,746) (10,410)
Accounts payable, accrued expenses and other liabilities 13,849 (25,194) 9,377
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 123,384 97,537 43,264
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures (95,447) (92,913) (69,147)
Business acquisitions, net of cash acquired (151,223) (7,810) (34,835)
Investments in partnerships (16,206) (5,357) (7,293)
Proceeds from sale of property and equipment 991 1,153 4,141
Other investing activities -- -- (113)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (261,885) (104,927) (107,247)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net (repayments) borrowings on notes payable 24,182 (75,000) (33,063)
Proceeds from issuance of long-term debt 22,948 450,050 171,250
Net borrowings on long-term credit facility 71,000 -- --
Principal payments on long-term debt and capital lease obligations (21,754) (333,053) (76,974)
Exercise of common stock options 12,155 124 1,270
Dividends on preferred stock -- -- (1,238)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 108,531 42,121 61,245
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (29,970) 34,731 (2,738)
Effect of foreign exchange rate changes on cash 38 -- --
Cash and cash equivalents at beginning of year 60,522 25,791 28,529
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,590 $ 60,522 $ 25,791
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized $ 37,696 $ 31,428 $ 25,751
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 15,306 $ 10,179 $ 15,043
- ----------------------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Refinancing of long-term debt $ -- $ -- $ 59,707
- ----------------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock to common stock $ -- $ -- $ 20,000
- ----------------------------------------------------------------------------------------------------------------------------
Common stock issued for acquisitions $ 73,049 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------
Conversion of advances to investments in partnerships $ -- $ -- $ 7,691
- ----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK COMMON STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY
(IN THOUSANDS) SHARES PAR VALUE CAPITAL EARNINGS INCOME STOCK TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 28, 1996 18,453 $ 9,227 $ 92,762 $148,171 $ -- $(7,643) $242,517
Comprehensive income:
Net income -- -- -- 44,937 -- -- 44,937
--------
Total comprehensive income -- -- -- -- -- -- 44,937
--------
Conversion of preferred stock 667 333 19,667 -- -- -- 20,000
Exercise of stock options 77 38 1,232 -- -- -- 1,270
Dividends on preferred stock -- -- -- (1,238) -- -- (1,238)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, April 27, 1997 19,197 9,598 113,661 191,870 -- (7,643) 307,486
Comprehensive income:
Net income -- -- -- 53,400 -- -- 53,400
--------
Total comprehensive income -- -- -- -- -- -- 53,400
--------
Two-for-one stock split 19,200 9,600 (9,600) -- -- -- --
Exercise of stock options 14 8 116 -- -- -- 124
Reclassification of treasury stock (874) (437) (7,206) -- -- 7,643 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, May 3, 1998 37,537 18,769 96,971 245,270 -- -- 361,010
Comprehensive income:
Net income -- -- -- 94,884 -- -- 94,884
Other comprehensive income -- -- -- -- 1,148 -- 1,148
--------
Total comprehensive income -- -- -- -- -- -- 96,032
--------
Common stock issued 2,986 1,493 71,556 -- -- -- 73,049
Exercise of stock options 1,324 662 11,493 -- -- -- 12,155
- ------------------------------------------------------------------------------------------------------------------------------
Balance, May 2, 1999 41,847 $20,924 $180,020 $340,154 $1,148 $ -- $542,246
- ------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF BUSINESS
Smithfield Foods, Inc. and subsidiaries (the "Company") operates as a producer,
manufacturer, marketer, seller and distributor of fresh and processed meats. The
Company's principal slaughtering and further processing operations are conducted
through the Meat Processing Group ("MPG") which 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 three international meat processing subsidiaries, Animex S.A.
("Animex"), a 67%-owned Polish subsidiary, Schneider Corporation ("Schneider"),
a 63%-owned Canadian subsidiary, and Societe Bretonne de Salaisons ("SBS"), a
wholly owned French subsidiary. The Company's hog production operations are
conducted through the Hog Production Group ("HPG") which 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. ("CFI") and an 84% interest in Circle Four ("Circle Four"), a joint hog
production arrangement between the Company and affiliates of CFI. Effective May
3, 1999, the Company acquired CFI and its affiliated companies and partnership
interests (See Note 15).
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company after elimination of all material intercompany balances and
transactions. Investments in partnerships are recorded using the equity method
of accounting.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates.
Fiscal 1999 and 1997 included 52 weeks of operations compared to fiscal
1998 which included 53 weeks of operations.
FOREIGN CURRENCY TRANSLATION
Financial statements of foreign operations, where the local currency is the
functional currency, are translated using exchange rates in effect at period
end for assets and liabilities, and average exchange rates during the period
for results of operation. Related translation adjustments are reported as a
component of other comprehensive income in shareholders equity. All amounts
presented in the consolidated financial statements are in US dollars.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying value of cash
equivalents approximates market value. As of May 2, 1999 and May 3, 1998, cash
and cash equivalents include $3,400 and $30,100, respectively, in short-term
marketable securities.
INVENTORIES
The Company's inventories are valued at the lower of first-in, first-out cost or
market. Cost includes direct materials, labor and applicable manufacturing and
production overhead. Inventories consist of the following:
MAY 2, 1999 MAY 3, 1998
- --------------------------------------------------------------------------------
Fresh and processed meats $219,647 $171,090
Hogs on farms 83,352 49,263
Manufacturing supplies 30,201 18,538
Other 15,656 10,620
- --------------------------------------------------------------------------------
$348,856 $249,511
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS
The Company uses commodity hedging instruments, including futures and options,
to reduce the risk of price fluctuations related to future raw material
requirements and product sales. The terms of such instruments generally do not
exceed twelve months and
<PAGE>
depend on the commodity and other market factors. The Company attempts to
closely match the commodity contract expiration periods with the dates for
product sale and delivery. Gains and losses from hedging transactions are
recognized when the related sales and purchases are made.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated over the
estimated useful lives of the assets. Buildings and improvements are depreciated
over periods from 20 to 40 years. Machinery and equipment is depreciated over
periods from two to 20 years. Breeding stock is depreciated over two and
one-half years. Repair and maintenance charges are expensed as incurred.
Improvements that materially extend the life of the asset are capitalized. Gains
and losses from dispositions or retirements of property, plant and equipment are
recognized currently.
Interest on capital projects is capitalized during the construction period.
Total interest capitalized was $2,377 in fiscal 1999, $2,530 in fiscal 1998 and
$2,640 in fiscal 1997. Repair and maintenance expenses totaled $120,833,
$106,481 and $89,670 in fiscal 1999, 1998 and 1997, respectively.
OTHER ASSETS
Goodwill is amortized over no more than 40 years. Deferred debt issuance costs
are amortized over the terms of the related loan agreements.
REVENUE RECOGNITION
Revenues from product sales are recorded upon shipment to customers.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current or future operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and cleanups are probable and the cost can be reasonably estimated.
Generally, the timing of these accruals coincides with the Company's commitment
to a formal plan of action (See Note 12).
SELF-INSURANCE PROGRAMS
The Company is self-insured for certain levels of general and vehicle liability,
workers' compensation and health care coverage. The cost of these self-insurance
programs is accrued based upon estimated settlements for known and anticipated
claims. Any resulting adjustments to previously recorded reserves are reflected
in current operating results.
NET INCOME PER SHARE
The Company presents a dual computation of net income per share (See Note 13).
The basic computation is based on weighted-average common shares outstanding
during the period. The diluted computation reflects the potentially dilutive
effect of common stock equivalents such as options and convertible preferred
stock during the period.
RECENTLY ISSUED ACCOUNTING STANDARDS
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new
rules for reporting and display of comprehensive income and its components. The
adoption of SFAS 130 had no impact on the Company's net income.
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 established
standards for determining an entity's operating segments and for disclosure of
financial information on such segments. The adoption of SFAS 131 had no impact
on the Company's financial position or results of operations (See Note 14).
In fiscal 1999, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits--an amendment of statements No.
87, 88 and 106" ("SFAS 132"). SFAS 132 standardized the disclosure requirement
for pensions and other postretirement benefits and, to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. The adoption of
SFAS 132 had no impact on the Company's financial position or results of
operations (See Note 9).
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established
accounting and reporting standards for derivative instruments and hedging
activities and requires, among other things, that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS 133 is not required to be adopted until
fiscal 2001. The Company has not completed the analysis required to estimate the
impact of the standard.
RECLASSIFICATIONS
Certain prior year amounts have been restated to conform to fiscal 1999
presentations.
NOTE 2 -- RISK MANAGEMENT
Substantially all of the Company's products are produced from commodity-based
raw materials, corn and soybean meal in the HPG and live hogs in the MPG. The
cost of corn and soybean
<PAGE>
meal (the principal feed ingredients for hogs) and live hogs are subject to wide
fluctuations due to unpredictable factors such as weather conditions, economic
conditions, government regulation and other unforeseen circumstances. The
pricing of the Company's fresh pork and processed meats is monitored and
adjusted upward and downward in reaction to changes in the cost of the
underlying raw materials. The unpredictability of the raw material costs limits
the Company's ability to forward price fresh pork and processed meat products
without the use of commodity contracts through a program of price-risk
management. The Company uses price-risk management to enhance its ability to
engage in forward sales contracts, where prices for future deliveries are fixed,
by purchasing (or selling) commodity contracts for future periods to reduce or
eliminate the effect of fluctuations in future raw material costs on the
profitability of the related sales. While this may tend to limit the Company's
ability to participate in gains from favorable commodity price fluctuation, it
also tends to reduce the risk of loss from adverse changes in raw material
prices. In addition, the Company utilizes commodity contracts for live hogs and
grains to manage hog production margins when management determines the
conditions are correct for such hedges. The particular hedging methods employed
and the time periods for the contracts depend on a number of factors, including
the availability of adequate contracts for the respective periods for the hedge.
The Company attempts to closely match the commodity contract expiration periods
with the dates for product sale and delivery. As of May 2, 1999 and May 3, 1998,
the Company had deferred $8,895 and $1,867, respectively, of unrealized hedging
gains on outstanding futures contracts. As of May 2, 1999 and May 3, 1998, the
Company had open futures contracts with contract values of $219,748 and $97,072,
respectively. As of May 2, 1999 and May 3, 1998, the Company had deposits with
brokers for outstanding futures contracts of $15,591 and $10,888, respectively,
included in prepaid expenses and other current assets.
For open futures contracts, the Company uses a sensitivity analysis technique
to evaluate the effect that changes in the market value of commodities will have
on these commodity derivative instruments. As of May 2, 1999, the potential
change in fair value of open future contracts, assuming a 10% change in the
underlying commodity price, was $10,418.
NOTE 3 -- ACQUISITIONS
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 2,527,000 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 fresh pork and a full line
of processed meats and is the second largest meat processing company in Canada.
The total purchase price of $69,700 was allocated to assets acquired and
liabilities assumed based on fair values at the date of the acquisition. The
balance of the purchase price in excess of the fair value of assets acquired and
liabilities assumed at the date of acquisition was recorded as an intangible
asset totaling $36,900. Had the acquisition of Schneider occurred at the
beginning of fiscal 1998, sales, net income and net income per diluted share
would have been $4,053,798, $98,146 and $2.33 for fiscal 1999 and $4,405,239,
$59,447 and $1.40 for fiscal 1998.
In April 1999 the Company acquired, in a tender offer, 11,500,000 shares of
the capital stock of Animex, the largest meat and poultry processing company in
Poland. Following the tender offer, the Company's ownership represented 67% of
the total equity and 51% voting control of Animex. A preliminary allocation of
the purchase price was made to assets acquired and liabilities assumed based on
their estimated fair values. The final purchase price allocation will be
determined during fiscal 2000 when appraisals, other studies and additional
information become available. Had the acquisition of Animex occurred at the
beginning of the fiscal 1999, sales would have been approximately $4,175,000,
and it would not have had a material effect on net income or net income per
diluted share.
In September 1998, the Company acquired all of the capital stock of SBS, 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, a major domestic supplier of precooked sausage to McDonald's Corporation.
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. Had
the acquisitions of North Side and SBS occurred at the beginning of fiscal 1999,
it would not have had a material effect on sales, net income or net income per
diluted share for the year ended May 2, 1999.
In addition, during fiscal 1999, the Company increased its ownership in the
Circle Four hog production operation from 37% to 84%, requiring the Company to
consolidate the accounts of Circle Four and to discontinue using the equity
method of accounting. During fiscal 1998 and 1997, Circle Four was accounted for
using the equity method of accounting.
NOTE 4 -- SMITHFIELD-CARROLL'S
The Company has an arrangement with certain affiliates of CFI to produce hogs
for the Company's meat processing plants in North Carolina and Virginia. The
arrangement ("Smithfield-Carroll's") involves: (1) Smithfield-Carroll's Farms, a
partnership owned jointly by the Company and Carroll's Farms of Virginia, Inc.
("CFAV"), which owns the hog raising facilities, and (2) a long-term purchase
contract between the Company and Carroll's
<PAGE>
Foods of Virginia, Inc. ("CFOV"), which leases and operates the facilities,
obligating the Company to purchase all the hogs produced by CFOV at prices
equivalent to market at the time of delivery. In addition, the Company has a
long-term agreement to purchase hogs from CFI at prices which, in the opinion of
management, are equivalent to market. A director of the Company is the president
and a director of CFI, CFAV and CFOV.
As of May 2, 1999 and May 3, 1998, the Company had investments of $30,031 and
$29,357, respectively, in the Smithfield-Carroll's partnership. Profits and
losses are shared equally under the arrangement.
Substantially all revenues of the partnership consist of lease
payments from CFOV which cover debt service, depreciation charges and other
operating expenses. For the fiscal years 1999, 1998 and 1997, revenues were
$7,680, $7,386 and $8,227, respectively.
Pursuant to the long-term purchase contract, the Company
purchased $53,282, $79,087 and $93,049 of live hogs from CFOV in fiscal 1999,
1998 and 1997, respectively. The contract resulted in increased raw material
costs (as compared to market costs) of $12,465 in fiscal 1999 and decreased raw
material costs of $359 and $5,245 in fiscal 1998 and 1997, respectively.
Pursuant to the agreement with CFI, the Company purchased $161,965, $246,371 and
$269,499 of hogs in fiscal 1999, 1998 and 1997, respectively.
Effective May 3, 1999, the Company purchased CFI in a business combination
(See Note 15).
NOTE 5 -- DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MAY 2, 1999 MAY 3, 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.625% senior subordinated notes, due February 2008 $200,000 $200,000
8.52% senior notes, due August 2006 100,000 100,000
Long-term credit facility, expiring July 2002 71,000 -
Libor + 1.50% notes, payable through December 2005 42,534 -
8.34% senior notes, due August 2003 40,000 40,000
Euribor 3 mos. + .50% French Franc notes, payable through April 2004 19,355 -
8.41% senior notes, payable through August 2004 14,779 14,779
9.70% Canadian dollar notes, payable through September 2010 13,114 -
Libor + 1.50% notes, payable through December 2006 13,000 -
9.85% senior notes, payable through November 2006 10,333 11,333
8.41% senior notes, payable through August 2006 9,853 9,853
8.56% Canadian dollar notes, payable through November 2003 9,749 -
8.03% weighted average notes, payable July 1999 through October 2017 41,113 -
Other Euribor weighted average 3 mos. + .72% notes, due December 2000 through November 2003 11,865 20,876
Miscellaneous 5,841 -
- ----------------------------------------------------------------------------------------------------------------------------
602,536 396,841
Less current portion (24,102) (7,020)
- ----------------------------------------------------------------------------------------------------------------------------
$578,434 $389,821
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Scheduled maturities of long-term debt are as follows:
- --------------------------------------------------------------------------------
Fiscal year
2000 $ 24,102
2001 25,487
2002 24,371
2003 94,711
2004 89,804
Thereafter 344,061
- --------------------------------------------------------------------------------
$602,536
- --------------------------------------------------------------------------------
In fiscal 1998, the Company issued $200,000 in aggregate principal amount of
10-year 7.625% senior subordinated notes. The net proceeds from the sale of the
notes were used to repay indebtedness under the Company's revolving credit
facility with the balance invested in short-term marketable securities.
In fiscal 1997, the Company privately placed $140,000 of senior secured notes
with a group of institutional lenders. The placement consisted of $40,000 of
seven-year 8.34% notes and $100,000 of 10-year 8.52% notes secured by four of
the Company's major processing plants. The proceeds of the financing were used
to repay $65,200 of long-term bank debt and to reduce short-term borrowings. In
conjunction with the placement of the senior secured notes, the Company
refinanced $59,707 of existing institutional long-term debt with the same
institutional lenders. The refinancing resulted in revised maturity dates and
repayment schedules for the refinanced debt; however, no additional proceeds
resulted from this refinancing.
In fiscal 1998, the Company entered into a loan agreement with a bank group
for a five-year $300,000 revolving credit facility. In connection with this
refinancing, the Company repaid all borrowings under its previous $300,000
credit facilities, which were terminated. The borrowings are prepayable and bear
interest, at the Company's option, at various rates based on margins over the
federal funds rate or Eurodollar rate. The Company has aggregate credit
facilities totaling $402,000 including a $300,000 revolving credit facility with
a bank group which expires July 2002. As of May 2, 1999, the Company had unused
capacity under these credit facilities of $214,000. Included in the aggregate
credit facilities are $102,000 of short-term credit facilities with various U.S.
and international banks assumed in connection with businesses acquired during
fiscal 1999. These short-term credit facilities are classified as notes payable
in the Consolidated Balance Sheet. These facilities are generally at prevailing
market rates. The Company pays a commitment fee on the unused portion of the
$300,000 revolving credit facility.
Average borrowings under credit facilities were $74,820 in fiscal 1999,
$149,723 in fiscal 1998 and $165,071 in fiscal 1997 at average interest rates of
approximately 6%, 7% and 7%, respectively. Maximum borrowings were $152,510 in
fiscal 1999, $247,000 in fiscal 1998 and $215,000 in fiscal 1997. Total
outstanding borrowings were $134,900 as of May 2, 1999, at an average interest
rate of 7%. There were no borrowings under the facility as of May 3, 1998.
The senior subordinated notes are unsecured. Senior notes are secured by four
of the Company's major processing plants and certain other property, plant and
equipment. The $300,000 credit facility is secured by substantially all of the
Company's U.S. inventories and accounts receivable.
The Company determines the fair value of public debt using quoted market
prices and values all other debt using discounted cash flow techniques at
estimated market prices for similar issues. As of May 2, 1999, the fair value of
long-term debt, based on the market value of debt with similar maturities and
covenants, was approximately $599,015.
The Company's various debt agreements contain financial covenants that
require the maintenance of certain levels and ratios for working capital, net
worth, current ratio, fixed charges, capital expenditures and, among other
restrictions, limit additional borrowings, the acquisition, disposition and
leasing of assets, and payments of dividends to shareholders.
NOTE 6 -- INCOME TAXES
Income tax expense consists of the following:
1999 1998 1997
- --------------------------------------------------------------------------------
Current tax expense:
Federal $20,445 $11,315 $12,765
State 5,409 2,043 2,805
Foreign 1,963 -- --
- --------------------------------------------------------------------------------
27,817 13,358 15,570
- --------------------------------------------------------------------------------
Deferred tax expense
(benefit):
Federal 19,924 15,684 9,424
State (2,082) (1,480) (2,254)
Foreign 2,895 -- --
- --------------------------------------------------------------------------------
20,737 14,204 7,170
- --------------------------------------------------------------------------------
$48,554 $27,562 $22,740
- --------------------------------------------------------------------------------
<PAGE>
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Federal income taxes
at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 2.5 1.0 1.7
Nondeductible settlements -- 4.5 1.6
Foreign sales corporation
benefit (1.4) (2.0) (1.4)
Benefits of certain
insurance contracts (1.1) (3.3) (3.6)
Other (1.1) (1.2) 0.3
- --------------------------------------------------------------------------------
33.9% 34.0% 33.6%
- --------------------------------------------------------------------------------
The tax effects of temporary differences consist of the following:
MAY 2, 1999 MAY 3, 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Employee benefits $17,748 $23,264
Alternative minimum tax credit 5,283 5,781
Tax credits, carryforwards and
net operating losses 14,308 12,773
Inventories 1,627 1,286
Accrued expenses 5,398 12,867
- --------------------------------------------------------------------------------
$44,364 $55,971
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $47,876 $36,488
Investments in subsidiaries 3,293 719
Other assets 4,167 6,875
- --------------------------------------------------------------------------------
$55,336 $44,082
- --------------------------------------------------------------------------------
As of May 2, 1999 and May 3, 1998, the Company had $20,551 and $23,634,
respectively, of net current deferred tax assets included in prepaid expenses
and other current assets. The Company had no valuation allowance related to
income tax assets as of May 2, 1999 or May 3, 1998, and there was no change in
the valuation allowance during fiscal 1999 and 1998.
The tax credits, carryforwards and net operating losses expire from fiscal
2000 to 2013. The alternative minimum tax credits do not expire.
As of May 2, 1999, foreign subsidiary net earnings of $7,195 were considered
permanently reinvested in those businesses. Accordingly, federal income taxes
have not been provided for such earnings. It is not practicable to determine the
amount of unrecognized deferred tax liabilities associated with such earnings.
NOTE 7 -- ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
MAY 2, 1999 MAY 3, 1998
- --------------------------------------------------------------------------------
Payroll and related benefits $ 60,079 $ 46,834
Self-insurance reserves 33,870 24,794
Pension and postretirement benefits 12,671 23,931
Other 62,164 28,956
- --------------------------------------------------------------------------------
$168,784 $124,515
- --------------------------------------------------------------------------------
NOTE 8 -- SHAREHOLDERS' EQUITY
AND PREFERRED STOCK
REINCORPORATION AND TREASURY STOCK
In fiscal 1998, the Company's shareholders approved the reincorporation of the
Company in Virginia from Delaware. The purpose of the reincorporation was to
reduce annual franchise taxes and does not affect the Company's capitalization
or the manner in which it operates. Since Virginia law does not recognize
treasury stock, the shares previously classified as treasury stock reverted to
unissued shares resulting in a reduction in common stock and additional paid-in
capital for the cost basis of the shares.
STOCK SPLIT
On September 26, 1997, the Company effected a two-for-one split of its common
stock. Stock option agreements provide for the issuance of additional shares for
the stock split. All stock options outstanding and per share amounts for all
periods reflect the effect of this split.
ISSUANCE OF COMMON STOCK
In fiscal 1999, the Company issued 2,527,000 Exchangeable Shares of Smithfield
Canada Limited, a wholly owned subsidiary of the Company, in exchange for the
voting common shares and the Class A non-voting shares of Schneider Corporation.
Each Exchangeable Share is exchangeable by the holder at any time for one common
share of the Company. The Company considers each Exchangeable Share as
equivalent to a share of its common stock and therefore these shares are
included in common stock issued on the consolidated balance sheets and in the
computation of net income per share.
Also in fiscal 1999, the Company issued 459,000 shares of its common stock
as part of the purchase price for North Side.
<PAGE>
PREFERRED STOCK
The Company has 1,000,000 shares of $1.00 par value preferred stock authorized,
none of which are issued. The board of directors is authorized to issue
preferred stock in series and to fix, by resolution, the designation, dividend
rate, redemption provisions, liquidation rights, sinking fund provisions,
conversion rights and voting rights of each series of preferred stock.
In fiscal 1997, all of the Series C 6.75% cumulative convertible redeemable
preferred stock, totaling $20,000, was converted into 1,333,332 split-adjusted
shares of the Company's common stock at $15.00 per share.
STOCK OPTIONS
Under the Company's 1984 Stock Option Plan (the "1984 Plan"), officers and
certain key employees were granted incentive and nonstatutory stock options to
purchase shares of the Company's common stock for periods not exceeding 10 years
at prices that were not less than the fair market value of the common stock on
the date of grant. Stock appreciation rights which are exercisable upon a change
in control of the Company are attached to the options granted pursuant to the
1984 Plan. The 1984 Plan expired in fiscal 1999 with the final exercise of
options.
Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"), management
and other key employees may be granted nonstatutory stock options to purchase
shares of the Company's common stock exercisable five years after grant for
periods not exceeding 10 years. The exercise price for options granted prior to
August 31, 1994 was not less than 150% of the fair market value of the common
stock on the date of grant. On August 31, 1994 the Company amended and restated
the 1992 Plan, changing the exercise price of options granted on or after that
date to not less than the fair market value of the common stock on the date of
grant. The Company reserved 2,500,000 shares of common stock under the 1992
Plan. As of May 2, 1999, there were 294,000 options available for grant under
the 1992 Plan.
Under the Company's 1998 Stock Incentive Plan (the "1998 Plan"), management
and other key employees may be granted nonstatutory stock options to purchase
shares of the Company's common stock exercisable five years after grant for
periods not exceeding 10 years. The Company reserved 1,500,000 shares under the
1998 Plan. As of May 2, 1999, there were no options granted under this plan.
The following is a summary of transactions for the 1984 Plan and the 1992
Plan during fiscal 1997, 1998 and 1999.
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
- --------------------------------------------------------------------------------
Outstanding at April 28, 1996 3,603,000 $ 8.86
Granted 160,000 15.67
Exercised (154,000) 3.11
Cancelled (540,000) 12.29
- --------------------------------------------------------------------------------
Outstanding at April 27, 1997 3,069,000 8.90
Granted 314,000 25.39
Exercised (17,000) 4.06
- --------------------------------------------------------------------------------
Outstanding at May 3, 1998 3,366,000 10.47
Granted 260,000 27.96
Exercised (1,323,500) 4.42
Cancelled (160,000) 15.56
- --------------------------------------------------------------------------------
Outstanding at May 2, 1999 2,142,500 $15.95
- --------------------------------------------------------------------------------
As of May 2, 1999, May 3, 1998 and April 27, 1997, the number of option
shares exercisable was 1,127,500, 1,260,000 and 1,278,000, respectively, at
weighted average exercise prices of $11.53, $4.06 and $4.06, respectively.
The following table summarizes information about stock options outstanding as
of May 2, 1999.
WEIGHTED
OPTION AVERAGE WEIGHTED
SHARES REMAINING AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE
PRICE RANGE MAY 2, 1999 LIFE PRICE
- --------------------------------------------------------------------------------
$10.72 to 11.75 1,227,500 4.6 $11.51
13.63 to 15.31 310,000 6.7 13.74
16.47 to 18.78 110,000 7.8 17.05
26.25 to 29.19 440,000 8.8 27.56
31.63 to 32.75 55,000 8.6 32.38
- --------------------------------------------------------------------------------
Stock options with an exercise price of $11.53 per share are the only options
exercisable as of May 2, 1999.
<PAGE>
The Company does not recognize compensation costs for its stock option plans.
Had the Company determined compensation costs based on the fair value at the
grant date for its stock options granted subsequent to fiscal 1995, the
Company's net income and net income per common share would have been reduced to
the pro forma amounts as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Net income, as reported $94,884 $53,400 $44,937
Pro forma net income 93,705 52,571 44,553
Net income per common
share, as reported:
Basic $ 2.39 $ 1.42 $ 1.21
Diluted 2.32 1.34 1.17
Pro forma net income per
common share:
Basic $ 2.36 $ 1.40 $ 1.20
Diluted 2.29 1.32 1.16
- --------------------------------------------------------------------------------
The weighted-average fair values of option shares granted were $13.40, $11.88
and $7.62 for fiscal 1999, 1998 and 1997, respectively. The fair value of each
stock option share granted is estimated at date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------
Expected option life 7.0 years 6.0 years 6.0 years
Expected annual volatility 35.0% 35.0% 35.0%
Risk-free interest rate 5.3% 6.3% 6.2%
Dividend yield 0.0% 0.0% 0.0%
- --------------------------------------------------------------------------------
PREFERRED SHARE PURCHASE RIGHTS
As part of the reincorporation, the Company adopted a preferred share purchase
rights plan (the "Rights Plan") and declared a dividend of one preferred share
purchase right (a "Right") on each outstanding share of common stock. Under the
terms of the Rights Plan, if the Company is acquired in a merger or other
business combination transaction, each Right will entitle its holder to
purchase, at the Right's then current exercise price, a number of the acquiring
company's common shares having a market value of twice such price. In addition,
if a person or group acquires 20% (or other applicable percentage, as summarized
in the Rights Plan) or more of the outstanding common stock, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right's then current exercise price, a number of shares of
common stock having a market value of twice such price.
Each Right will entitle its holder to buy one one-thousandth of a Series A
junior participating preferred share ("Preferred Share"), par value $1.00 per
share, at an exercise price of $37.50 subject to adjustment. Each Preferred
Share will entitle its holder to 1,000 votes and will have an aggregate dividend
rate of 1,000 times the amount, if any, paid to holders of common stock. The
Rights will expire on May 31, 2001, unless the date is extended or unless the
Rights are earlier redeemed or exchanged at the option of the board of directors
for $.0001 per Right. Generally, each share of common stock issued after May 31,
1991 will have one Right attached.
NOTE 9 -- PENSION AND OTHER
RETIREMENT PLANS
The Company sponsors several defined benefit pension plans covering
substantially all U.S. and Canadian employees. Pension plans covering salaried
employees provide benefits based on years of service and average salary levels.
Pension plans covering hourly employees provide benefits of stated amounts for
each year of service. In general, the Company's funding policy for pension plans
is to contribute annually the minimum amount required under government
regulations. The pension plan assets are invested primarily in equities, debt
securities, insurance contracts and money market funds.
The Company provides health care and life insurance benefits for certain
retired employees. These plans are unfunded and generally pay covered costs
reduced by retiree premium contributions, co-payments and deductibles.
The Company retains the right to modify or eliminate these benefits.
The changes in the status of the Company's pension and postretirement plans,
the related components of pension and postretirement expense and the amounts
recognized in the Consolidated Balance Sheets are as follows:
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
MAY 2, 1999 MAY 3, 1998 MAY 2, 1999 MAY 3, 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $242,554 $215,919 $ 10,817 $ 9,630
Service cost 6,626 4,104 397 58
Interest cost 22,007 16,730 1,416 741
Plan amendments 15,681 -- -- --
Acquisitions 156,343 -- 18,843 --
Benefits paid (22,285) (16,590) (1,055) (895)
Foreign currency changes 10,676 -- 1,138 --
Actuarial (gain) loss 11,150 22,391 (1,262) 1,283
- ----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 442,752 242,554 30,294 10,817
- ----------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 203,392 170,596 -- --
Actual return on plan assets 12,979 35,052 -- --
Acquisitions 172,116 -- -- --
Employer contributions 19,049 14,334 984 895
Foreign currency changes 11,474 -- -- --
Benefits paid (22,285) (16,590) (984) (895)
- ----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 396,725 203,392 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Reconciliation of accrued cost
Funded status (46,027) (39,162) (30,294) (10,817)
Unrecognized actuarial (gain) or loss 11,303 (12,995) (490) 1,060
Unrecognized prior service cost 15,728 797 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Accrued cost at end of year $ (18,996) $ (51,360) $(30,784) $(9,757)
- ----------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of
financial position consist of
Prepaid benefit cost $ 19,546 $ 1,300 $-- $--
Accrued benefit liability (44,163) (52,660) (30,784) (9,757)
Intangible asset 410 -- -- --
Accumulated other comprehensive income 5,211 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of year $ (18,996) $ (51,360) $(30,784) $(9,757)
- ----------------------------------------------------------------------------------------------------------------------------
Components of net periodic cost
Service cost $ 6,626 $ 4,104 $ 397 $ 58
Interest cost 22,007 16,730 1,416 767
Expected return on plan assets (25,834) (15,309) -- --
Net amortization 86 (1,137) 95 69
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic cost $ 2,885 $ 4,388 $ 1,908 $ 894
- ----------------------------------------------------------------------------------------------------------------------------
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $204,648, $193,010 and $139,027, respectively, as
of May 2, 1999, and $193,890, $185,420 and $139,945, respectively, as of May 3,
1998.
In determining the projected benefit obligation and the accumulated
postretirement benefit obligation in fiscal 1999 and 1998, the following
assumptions were made:
PENSION BENEFITS POSTRETIREMENT BENEFITS
MAY 2, 1999 MAY 3, 1998 MAY 2, 1999 MAY 3, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average assumptions:
Discounted rate 6.8% 7.0% 6.7% 7.0%
Expected return on assets 9.0% 9.0% -- --
Compensation increase 3.9% 4.5% -- --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
In determining the accumulated postretirement benefit obligation in fiscal
1999 and 1998, the assumed annual rate of increase in per capita cost of covered
health care benefits was 6.5% for fiscal 1999, 6.0% for fiscal 2000 and 5.5%
thereafter for U.S. plans. For non-U.S. plans the assumed annual rate of
increase was 8.5% for fiscal 1999 and decreased by 0.5% each year until leveling
at 5.0%.
The assumed health care cost trend rate has an effect on the amounts
reported. A one percentage point change in the assumed per capita cost of
covered health care benefits would have the following effect:
ONE ONE
PERCENTAGE PERCENTAGE
POINT POINT
INCREASE DECREASE
- --------------------------------------------------------------------------------
Effect on postretirement benefit
obligation as of May 2, 1999 $2,106 $(2,247)
Effect on annual benefit cost
in fiscal 1999 $ 178 $ (155)
- --------------------------------------------------------------------------------
NOTE 10 -- LEASE OBLIGATIONS
AND COMMITMENTS
The Company leases transportation equipment under operating leases ranging from
one to 10 years with options to cancel at earlier dates. In addition, the
Company has a long-term maintenance agreement related to this equipment.
Maintenance fees are based upon fixed monthly charges for each vehicle, as well
as the maintenance facility itself and contingent fees based upon transportation
equipment usage. The amounts shown below as minimum rental commitments do not
include contingent maintenance fees.
The Company has agreements, expiring in fiscal 2004 and 2008, to use two cold
storage warehouses owned by a partnership, 50% of which is owned by the Company.
The Company has agreed to pay prevailing competitive rates for use of the
facilities, subject to aggregate guaranteed minimum annual fees of $3,600. In
fiscal 1999, 1998 and 1997, the Company paid $5,807, $6,228 and $5,372,
respectively, in fees for use of the facilities. As of May 2, 1999 and May 3,
1998, the Company had investments of $1,108 and $1,411, respectively, in the
partnership.
In fiscal 1998, the Company entered into a 15-year agreement, expiring in
2013, to use a cold storage warehouse owned by a partnership, 50% of which is
owned by the Company. The Company began leasing the facility in fiscal 1999 for
an amount covering debt service costs plus a minimum guaranteed annual fee
totaling $2,174. As of May 2, 1999 and May 3, 1998, the Company had investments
of $1,028 and $1,826, respectively, in the partnership.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements are as follows:
- --------------------------------------------------------------------------------
Fiscal year
2000 $ 23,053
2001 17,695
2002 21,127
2003 10,152
2004 8,546
Thereafter 30,487
- --------------------------------------------------------------------------------
$111,060
- --------------------------------------------------------------------------------
Rental expense was $24,535 in fiscal 1999, $24,839 in fiscal 1998 and $24,270
in fiscal 1997. Rental expense in fiscal 1999, 1998 and 1997 included $2,787,
$3,231 and $3,593 of contingent maintenance fees, respectively.
The Company has a sale and leaseback arrangement for certain hog production
facilities at Brown's. The arrangement provides for an early termination at
predetermined amounts in fiscal 2004.
Future minimum lease payments for assets under capital leases and the present
value of the net minimum lease payments are as follows:
- --------------------------------------------------------------------------------
Fiscal year
2000 $ 3,126
2001 3,248
2002 3,195
2003 3,190
2004 9,602
- --------------------------------------------------------------------------------
22,361
Less amounts representing interest (4,828)
- --------------------------------------------------------------------------------
Present value of net minimum obligations 17,533
Less current portion (1,726)
- --------------------------------------------------------------------------------
Long-term capital lease obligations $15,807
- --------------------------------------------------------------------------------
As of May 2, 1999, the Company had definitive commitments of $34,841 for
capital expenditures primarily to increase its processed meats and value-added
fresh pork capacities at several of its processing plants and to replace and
upgrade portions of its hardware and software in response to the Year 2000.
<PAGE>
NOTE 11 -- RELATED PARTY TRANSACTIONS
The chairman and chief executive officer and a director of Murphy Family Farms,
Inc. ("MFF") was a director of the Company until May 1998. The Company has a
long-term agreement to purchase hogs from MFF at prices that, in the opinion of
management, are equivalent to market. Pursuant to this agreement with MFF, the
Company purchased $239,974, $366,397 and $433,861 of hogs in fiscal 1999, 1998
and 1997, respectively.
A director of the Company is the chairman, president and chief executive
officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a
long-term agreement to purchase hogs from PFI at prices that, in the opinion of
management, are equivalent to market. Pursuant to this agreement with PFI, the
Company purchased $106,365, $168,829 and $182,576 of hogs in fiscal 1999, 1998
and 1997, respectively.
A director and the owner of 50% of the voting stock of Maxwell Foods, Inc.
("MFI") was a director of the Company until May 1998. The Company has a
long-term agreement to purchase hogs from MFI at prices that, in the opinion of
management, are equivalent to market. Pursuant to this agreement with MFI, the
Company purchased $72,838, $118,041 and $109,470 of hogs in fiscal 1999, 1998
and 1997, respectively.
In fiscal 1999, 1998 and 1997, the Company purchased raw materials totaling
$5,997, $18,524 and $12,772, respectively, from a company which was 48%-owned by
the chairman and chief executive officer's children in fiscal 1998 and fiscal
1997. In the opinion of management, these purchases were made at prices that
were equivalent to market.
The Company is engaged in a hog production arrangement with CFI (See Note 4).
NOTE 12 -- REGULATION AND LITIGATION
Like other participants in the meat processing industry, the Company is
subjected to various laws and regulations administered by federal, state and
other government entities, including the U.S. Environmental Protection Agency
("EPA"), the U.S. Department of Agriculture, the U.S. Food and Drug
Administration, the U.S. Occupational Safety and Health Administration and
corresponding state agencies in states where the Company operates. Management
believes that the Company presently is in compliance with all such laws and
regulations in all material respects and that continued compliance will not have
a material adverse effect on the Company's financial position or results of
operations. The Company believes that the ultimate resolution of the litigation
discussed below will not have a material adverse effect on its financial
position or results of operations.
In 1997, in a civil suit filed by the EPA against the Company, the United
States District Court for the Eastern District of Virginia imposed a $12,600
civil penalty on the Company for Clean Water Act violations at the Company's
Smithfield, Virginia processing plants. The Company recorded a nonrecurring
charge of $12,600 during the first quarter of fiscal 1998 with respect to this
penalty. The Company has appealed this decision and is awaiting a decision by
the United States Court of Appeals for the Fourth Circuit. There can be no
assurance as to the outcome of such appeal or any subsequent proceedings
regarding this matter.
In 1998, the Commonwealth of Virginia filed a civil suit against the Company
in the Circuit Court of the County of Isle of Wight, Virginia under Virginia's
water pollution control laws. Virginia alleges that 22,517 wastewater discharge
permit violations occurred at the Company's Smithfield, Virginia processing
plants between 1986 and 1997. Most of these alleged violations were also
presented in the EPA suit. This action is set for trial on October 18, 1999.
While each violation is subject to a maximum penalty of $25, Virginia follows a
civil penalties policy designed to recapture from the violator any economic
benefit which accrued as a result of its noncompliance, plus a surcharge penalty
for having committed such violations. In addition, the policy may increase the
amount of penalties based upon the extent of civil penalties in this suit. Among
other defenses, the Company will maintain that no economic benefit accrued to
the Company as a result of, and that no environmental damage was caused by, the
violations. There can be no assurance as to the outcome of this proceeding.
<PAGE>
NOTE 13 -- NET INCOME PER SHARE
The computation for basic and diluted net income per share follows:
NET PER
INCOME SHARES SHARE
- --------------------------------------------------------------------------------
Fiscal 1999
Net income per basic share $94,884 39,628 $ 2.39
Effect of dilutive stock options -- 1,334 --
- --------------------------------------------------------------------------------
Net income per diluted share $94,884 40,962 $ 2.32
- --------------------------------------------------------------------------------
Fiscal 1998
Net income per basic share $53,400 37,532 $ 1.42
Effect of dilutive stock options -- 2,200 --
- --------------------------------------------------------------------------------
Net income per diluted share $53,400 39,732 $ 1.34
- --------------------------------------------------------------------------------
Fiscal 1997
Net income per basic share $44,937 -- $ --
Less preferred stock dividends(1,238) -- --
- --------------------------------------------------------------------------------
Net income available to
common shareholders
per basic share 43,699 36,121 1.21
Effect of dilutive stock options -- 1,144 --
Effect of dilutive convertible
preferred stock 1,238 1,293 --
- --------------------------------------------------------------------------------
Net income per diluted share $44,937 38,558 $ 1.17
- --------------------------------------------------------------------------------
The summary below lists stock options outstanding at the end of each fiscal
year which were not included in the computation of net income per diluted share
because the options' exercise prices were greater than the average market price
of the common shares. These options, which have varying expiration dates, were
still outstanding as of May 2, 1999.
1999 1998 1997
- --------------------------------------------------------------------------------
Stock option shares excluded 495,000 65,000 100,000
Average option price per share $ 28.10 $ 32.42 $ 16.88
- --------------------------------------------------------------------------------
NOTE 14 -- SEGMENTS
In fiscal 1999, the Company adopted SFAS 131, which established standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in the interim financial reports.
SFAS 131 also establishes standards for related disclosures about products or
services and geographic areas.
The Company identified two reportable operating segments that met the
quantitative disclosure threshold of SFAS 131. The segments identified include
the MPG and the HPG. The overriding determination of the Company's reportable
segments was based on how the chief operating decision-maker evaluates the
results of operations. The underlying factors used to identify the reportable
segments include the differences in products produced and sold.
The MPG markets its products to food retailers, distributors, wholesalers,
restaurant and hotel chains, other food processors and manufacturers of
pharmaceuticals and animal feeds in both domestic and international markets. The
HPG primarily supplies raw materials (live hogs) to the hog slaughtering
operations of the Company. The following tables present information about the
results of operations and the assets of each of the Company's reportable
segments for the fiscal years ended May 2, 1999, May 3, 1998 and April 27, 1997.
The information contains certain allocations of expenses that the Company deems
reasonable and appropriate for the evaluation of results of operations. Segment
assets do not include intersegment account balances as the Company feels that
such an inclusion would be misleading or not meaningful. Management believes all
intersegment sales are at prices which approximate market.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MEAT HOG GENERAL
PROCESSING PRODUCTION CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Sales $3,729,644 $ 155,796 $ -- $3,885,440
Intersegment sales -- (110,451) -- (110,451)
Interest expense 25,565 12,583 2,373 40,521
Depreciation and amortization 48,814 16,541 3,211 68,566
Profit (loss) before income tax 233,385 (63,625) (26,322) 143,438
Assets 1,292,633 343,069 135,912 1,771,614
Capital expenditures 62,315 28,755 4,377 95,447
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Sales $3,867,442 $ 156,565 $ -- $4,024,007
Intersegment sales -- (156,565) -- (156,565)
Interest expense 22,854 7,390 1,647 31,891
Depreciation and amortization 34,936 9,206 1,730 45,872
Profit (loss) before income tax 121,195 (9,682) (30,551) 80,962
Assets 787,274 178,078 118,293 1,083,645
Capital expenditures 70,329 13,252 9,332 92,913
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
Sales $3,870,611 $ 151,807 $ -- $4,022,418
Intersegment sales -- (151,807) -- (151,807)
Interest expense 23,090 6,128 (3,007) 26,211
Depreciation and amortization 28,842 8,776 1,439 39,057
Profit (loss) before income tax 66,494 19,910 (18,727) 67,677
Assets 738,524 169,209 87,521 995,254
Capital expenditures 42,840 23,099 3,208 69,147
- ----------------------------------------------------------------------------------------------------------------------------
The following table presents the Company's sales and long-lived assets attributed to operations in the U. S.
and international geographic areas.
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Sales:
U.S. $3,470,307 $3,867,442 $3,870,611
Canada 244,121 -- --
France 60,561 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total $3,774,989 $3,867,442 $3,870,611
- ----------------------------------------------------------------------------------------------------------------------------
Long-lived assets at end of year:
U.S. $449,593 $477,375 $448,612
Canada 169,038 -- --
Poland 78,201 -- --
France 43,489 -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 15 -- SUBSEQUENT EVENTS
Effective May 3, 1999, the Company completed the acquisition of Carroll's Foods,
Inc. ("CFI") and its affiliated companies and partnership interests for
4,200,000 shares of the Company's common stock (subject to post closing
adjustments) and the assumption of approximately $231,000 in debt, plus other
liabilities. The acquisition includes 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
operation, CFI's 49% interest in Carolina Turkeys, and certain hog production
interests in Brazil and Mexico. The Company will account for this acquisition
using the purchase method of accounting.
The following unaudited pro forma information combines the operating results
of the Company and CFI, assuming the acquisition had been made as of the
beginning of each of the periods presented:
1999 1998
- --------------------------------------------------------------------------------
Sales $3,892,769 $3,994,674
Net income 66,080 61,075
Net income per basic share $ 1.51 $ 1.46
Net income per diluted share $ 1.46 $ 1.39
- --------------------------------------------------------------------------------
The preceding pro forma amounts are not intended to be projections of future
results or trends and do not purport to be indicative of what actual
consolidated results of operations might have been if the acquisition had been
effective as of the beginning of the periods presented.
Subsequent to the end of fiscal 1999, the Company increased its ownership
in Animex from 67% to 80% of total equity.
NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Sales $865,823 $874,378 $1,035,728 $999,060
Gross profit 72,178 115,132 201,204 151,061
Net (loss) income (5,325) 18,481 54,980 26,748
Net (loss) income per common share
Basic $ (.14) $ .48 $ 1.35 $ .64
Diluted (.14) .47 1.31 .63
1998
Sales $914,963 $982,699 $1,095,999 $873,781
Gross profit 76,445 94,654 116,590 100,124
Net (loss) income (6,541) 15,548 23,719 20,674
Net (loss) income per common share
Basic $ (.17) $ .41 $ .63 $ .55
Diluted (.17) .39 .60 .52
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</TABLE>
<PAGE>
REPORT OF MANAGEMENT
The management of Smithfield Foods, Inc. and its subsidiaries has the
responsibility for preparing the accompanying financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles applied on a consistent basis. The
financial statements include amounts that are based on management's best
estimates and judgements. Management also prepared the other information in this
annual report and is responsible for its accuracy and consistency with the
financial statements.
The Company's financial statements have been audited by Arthur Andersen LLP,
independent public accountants, elected by the shareholders. Management has made
available to Arthur Andersen LLP all of the Company's financial records and
related data as well as the minutes of shareholders' and directors' meetings.
Furthermore, management believes that all representations made to Arthur
Andersen LLP during its audits were valid and appropriate.
Management has established and maintains a system of internal control that
provides reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial reporting.
The system of internal control provides for appropriate division of
responsibilities among employees and is based upon policies and procedures that
are communicated to those with significant roles in the financial reporting
process. Management continually monitors the system of internal control for
compliance and updates this system as it deems necessary.
Management believes that, as of June 10, 1999, the Company's system of
internal control is adequate to accomplish the objectives discussed herein.
/s/JOSEPH W. LUTER, III /s/LEWIS R. LITTLE
- ----------------------- ------------------
JOSEPH W. LUTER, III LEWIS R. LITTLE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER PRESIDENT AND CHIEF OPERATING
OFFICER
AARON D. TRUB C. LARRY POPE
VICE PRESIDENT, CHIEF FINANCIAL OFFICER VICE PRESIDENT, FINANCE
AND SECRETARY
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC.
We have audited the accompanying consolidated balance sheets of Smithfield
Foods, Inc. (a Virginia corporation), and subsidiaries as of May 2, 1999, and
May 3, 1998, and the related consolidated statements of income, cash flows, and
shareholders' equity for each of the three years in the period ended May 2,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smithfield Foods, Inc., and
subsidiaries as of May 2, 1999, and May 3, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
May 2, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
RICHMOND, VIRGINIA
JUNE 10, 1999
Exhibit 99.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into the Company's previously filed
Registration Statement File Numbers 33-51024, 33-14219, 333-34553, and
333-81917.
Richmond, Virginia
July 16, 1999
