SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from...............to...............................
COMMISSION FILE NUMBER 0-2258
SMITHFIELD FOODS, INC.
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
Virginia 52-0845861
- ----------------------- --------------------
(State of (I.R.S. Employer
Incorporation) Identification
Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Class Shares outstanding at March 5, 1999
- -------------------------------- ---------------------------------------
Common Stock, $.50 par value 41,844,359
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SMITHFIELD FOODS, INC.
CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - January 31, 1999 and May 3, 1998 3-4
Consolidated Condensed Statements of Income - 13 Weeks Ended January 31,
1999 and 14 Weeks Ended February 1, 1998 and 39 Weeks Ended January
31, 1999 and 40 Weeks Ended February 1, 1998 5
Consolidated Condensed Statements of Cash Flows - 39 Weeks Ended January 31, 1999
and 40 Weeks Ended February 1, 1998 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
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PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands) January 31, 1999 May 3, 1998
- -------------- ---------------- -----------
ASSETS (Unaudited)
Current assets:
Cash $ 28,699 $ 60,522
Accounts receivable, net 228,895 156,091
Inventories 293,984 249,511
Prepaid expenses and other current assets 43,142 44,999
----------- -----------
Total current assets 594,720 511,123
----------- -----------
Property, plant and equipment 1,019,666 705,872
Less accumulated depreciation (275,564) (233,652)
----------- -----------
Net property, plant and equipment 744,102 472,220
----------- -----------
Other assets:
Investments in partnership 46,887 49,940
Goodwill 73,664 12,360
Other 93,720 38,002
----------- -----------
Total other assets 214,271 100,302
----------- -----------
$ 1,553,093 $ 1,083,645
=========== ===========
See accompanying notes to consolidated condensed financial statements.
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SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
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(in thousands) January 31, 1999 May 3, 1998
- -------------- ---------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
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Current liabilities:
Notes payable $ 15,586 $ --
Current portion of long-term debt and capital lease obligations 27,356 8,511
Accounts payable 172,117 118,909
Accrued expenses and other current liabilities 182,527 124,515
---------- ----------
Total current liabilities 397,586 251,935
---------- ----------
Long-term debt and capital lease obligations 543,043 407,272
Other noncurrent liabilities:
Pension and postretirement benefits 27,695 38,486
Other 64,435 24,942
---------- ----------
Total other noncurrent liabilities 92,130 63,428
---------- ----------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares
Common stock, $.50 par value, 100,000,000
authorized shares; 41,839,859 and 37,527,362 issued 20,920 18,769
Additional paid-in capital 179,893 96,971
Retained earnings 313,406 245,270
Accumulated other comprehensive income 6,115 --
---------- ----------
Total shareholders' equity 520,334 361,010
---------- ----------
$1,553,093 $1,083,645
========== ==========
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See accompanying notes to consolidated condensed financial statements.
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SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
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13 Weeks Ended 14 Weeks Ended 39 Weeks Ended 40 Weeks Ended
(In thousands, except per share data) January 31, 1999 February 1, 1998 January 31, 1999 February 1, 1998
- ------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 1,035,728 $ 1,095,999 $ 2,775,929 $ 2,993,661
Cost of sales 834,524 979,408 2,387,415 2,705,972
----------- ----------- ----------- -----------
Gross profit 201,204 116,591 388,514 287,689
Selling, general and administrative expenses 88,780 64,157 212,751 166,526
Depreciation expense 17,740 11,018 44,694 31,086
Interest expense 10,553 8,424 31,175 23,827
Minority interest (765) (72) (3,696) 1,872
Nonrecurring charge -- -- -- 12,600
----------- ----------- ----------- -----------
Income before income taxes 84,896 33,064 103,590 51,778
Income taxes 29,916 9,345 35,454 19,052
----------- ----------- ----------- -----------
Net income $ 54,890 $ 23,719 $ 68,136 $ 32,726
=========== =========== =========== ===========
Net income per common share:
Basic $ 1.35 $ .63 $ 1.75 $ .87
=========== =========== =========== ===========
Diluted $ 1.31 $ .60 $ 1.69 $ .82
=========== =========== =========== ===========
Average common shares outstanding:
Basic 40,856 37,537 38,889 37,531
=========== =========== =========== ===========
Diluted 41,836 39,781 40,376 39,687
=========== =========== =========== ===========
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See accompanying notes to consolidated condensed financial statements.
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SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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39 Weeks Ended 40 Weeks Ended
Jan. 31, 1999 Feb. 1, 1998
------------- ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 68,136 $ 32,726
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 48,843 33,592
(Gain) loss on sale of property, plant and equipment 282 (764)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (15,172) 9,813
Inventories 16,097 8,820
Prepaid expenses and other current assets 6,573 (10,405)
Other assets (47,008) 4,313
Accounts payable, accrued expenses and other liabilities 28,190 (1,227)
--------- ---------
Net cash provided by operating activities 105,941 76,868
--------- ---------
Cash flows from investing activities:
Capital expenditures (63,400) (73,287)
Business acquisitions, net of cash (109,942) (6,997)
Proceeds from sale of property, plant and equipment 575 1,161
Investments in partnerships and other assets 703 (8,705)
--------- ---------
Net cash used in investing activities (172,064) (87,828)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable 1,965 (75,000)
Proceeds from issuance of long-term debt 3,536 2,900
Net borrowings on long-term credit facility 35,000 177,000
Principal payments on long-term debt and capital lease obligations (18,560) (83,439)
Exercise of common stock options 12,023 124
--------- ---------
Net cash provided by financing activities 33,964 21,585
--------- ---------
Net increase (decrease) in cash and cash equivalents (32,159) 10,625
Effect of currencey exchange rates 336 --
Cash and cash equivalents at beginning of period 60,522 25,791
--------- ---------
Cash and cash equivalents at end of period $ 28,699 $ 36,416
========= =========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 20,892 $ 22,337
========= =========
Income taxes $ 4,476 $ 3,886
========= =========
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See accompanying notes to consolidated condensed financial statements.
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SMITHFIELD FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) These statements should be read in conjunction with the Consolidated
Financial Statements and related notes which are included in the Company's
Annual Report for the fiscal year ended May 3, 1998.
(2) The interim consolidated condensed financial information furnished herein is
unaudited. The information reflects all adjustments (which include only
normal recurring adjustments) which are, in the opinion of management,
necessary to a fair statement of the financial position and results of
operations for the periods included in this report.
(3) Inventories consist of the following:
(In thousands) Jan. 31, 1999 May 3, 1998
-------------- ------------- -----------
Fresh and processed meats $ 182,415 $ 171,090
Hogs on farms 69,969 49,263
Manufacturing supplies 30,176 18,538
Other 11,424 10,620
--------- ---------
$ 293,984 $ 249,511
========= =========
(4) Income per basic share is computed based on the average common shares
outstanding during the period. Income per diluted share is computed based on
the average common shares outstanding during the period adjusted for the
effect of potential common shares, such as stock options. The computation
for basic and diluted income per share is as follows:
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13 Weeks 14 Weeks 39 Weeks 40 Weeks
(In thousands, Ended Ended Ended Ended
except per share amounts) Jan. 31, 1999 Feb. 1, 1998 Jan. 31, 1999 Feb. 1, 1998
- ------------------------- ------------- ------------ ------------- ------------
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Numerator for basic and
diluted income per share:
Net income $ 54,980 $ 23,719 $ 68,136 $ 32,726
========= ========= ========= ========
Denominator for basic income per share:
Average number of shares outstanding 40,856 37,537 38,889 37,531
Effect of dilutive stock options 980 2,244 1,487 2,156
------- ------- ------- ------
Denominator for diluted income per share 41,836 39,781 40,376 39,687
======= ======= ======= ======
Net income per share:
Basic $ 1.35 $ .63 $ 1.75 $ .87
======= ====== ======= =====
Diluted $ 1.31 $ .60 $ 1.69 $ .82
======= ====== ======= =====
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Summarized below are stock option shares outstanding at the end of each
fiscal period which were not included in the computation of income per
diluted share because the exercise price of the options was greater than the
average market price of the common shares.
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13 Weeks 14 Weeks 39 Weeks 40 Weeks
Ended Ended Ended Ended
Jan. 31, 1999 Feb. 1, 1998 Jan. 31, 1999 Feb. 1, 1998
------------- ------------ ------------- ------------
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Stock option shares excluded 55,000 25,000 405,000 35,000
Average option price per share $32.38 $32.75 $25.31 $32.50
</TABLE>
(5) The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," in fiscal 1999. The components of
comprehensive income, net of related tax, consist of:
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13 Weeks 14 Weeks 39 Weeks 40 Weeks
Ended Ended Ended Ended
(In thousands) Jan. 31, 1999 Feb. 1, 1998 Jan. 31, 1999 Feb 1, 1998
- -------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net income $54,980 $23,719 $68,136 $32,726
Other comprehensive income:
Foreign currency translation
adjustment (115) - 3,374 -
Unrealized gain on securities 1,804 - 2,741 -
------- ------- ------- -------
Comprehensive income $56,669 $23,719 $74,251 $32,726
======= ======= ======= =======
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(6) In the third quarter ended January 31, 1999, the Company acquired 100% of
the voting common shares of Schneider Corporation ("Schneider") and
approximately 59% of its Class A non-voting shares, which in the aggregate
represents approximately 63% of the total equity of Schneider, in exchange
for approximately 2,527,000 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 revenues in its fiscal year ended October 1998 of US$548.1
million. In September 1998, the Company acquired all of the capital stock of
Societe Bretonne de Salaisons, the largest private label manufacturer of
ham, pork shoulder and bacon products in France. In October 1998, the
Company acquired all of the assets and business of North Side Foods Corp., a
major domestic supplier of precooked sausage to McDonald's Corporation. All
three of these acquisitions have been accounted for using the purchase
method of accounting, and, accordingly, the accompanying financial
statements include the financial position and results of operations from the
dates of acquisition.
During the first nine months of fiscal 1999, the Company increased its
ownership in the Circle Four hog production operation to 82% from 37%,
requiring the Company to consolidate the accounts of Circle Four and to
discontinue using the equity method of accounting for this operation. From
June 1, 1998, the date on which the Company acquired a majority ownership
interest in Circle Four, the financial position and results of operations of
Circle Four have been reported on a consolidated basis. During fiscal 1998,
Circle Four was accounted for using the equity method of accounting.
(7) In August 1997, the U.S. District Court for the Eastern District of Virginia
imposed $12.6 million in civil penalties against the Company in a civil
action brought by the U.S. Environmental Protection Agency. This amount is
reflected as a nonrecurring charge in the 39 weeks ended February 1, 1998.
The Company has appealed this decision to the U.S. Court of Appeals for the
Fourth Circuit.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group
("MPG") and a Hog Production Group ("HPG"). The MPG consists of six wholly-owned
domestic pork processing subsidiaries, Gwaltney of Smithfield, Ltd.
("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc.
("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated
("Patrick Cudahy"), and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), and two international pork processing subsidiaries,
Schneider Corporation ("Schneider"), a 63%-owned Canadian subsidiary of the
Company and Societe Bretonne de Salaisons ("SBS"), a wholly-owned French
subsidiary of the Company. The HPG consists of Brown's of Carolina, Inc.
("Brown's"), an 86%-owned subsidiary of the Company; a 50% interest in
Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production
arrangement between the Company and an affiliate of Carroll's Foods, Inc., and
an 82% interest in Circle Four ("Circle Four"), a joint hog production
arrangement between the Company and affiliates of Carroll's Foods, Inc. Brown's
and Smithfield-Carroll's produce hogs in North Carolina, Virginia and Colorado
which are sold to the MPG. Circle Four produces hogs in Utah which are sold to
an unrelated party.
RECENT DEVELOPMENTS
On February 25, 1999, the Company reached an agreement in principle to acquire
all of the capital stock of Carroll's Foods, Inc. and its affiliated companies
(collectively "Carroll's Foods"), which include its ownership interests in
Smithfield-Carroll's and Circle Four, for approximately $500.0 million,
consisting of 3.3 million shares of the Company's common stock, $178.0 million
in cash, and the assumption of approximately $216.0 million of debt. The cash
portion of the purchase price will be funded with additional long-term
financing.
Carroll's Foods is the second largest hog production company in the U.S.
and is headquartered in Warsaw, North Carolina. The acquisition of Carroll's
Foods will make Smithfield-Carroll's and Circle Four wholly-owned operations of
the Company and will increase the Company's level of vertical integration to
approximately 27 percent from its present level of approximately 11 percent and
make the Company the largest hog production company in the world. The Company is
the largest pork processing company in the world, processing approximately 19
million hogs per year.
The acquisition is subject to, among other things, the successful
negotiation of a definitive acquisition agreement, the satisfactory completion
of an ongoing due diligence investigation of Carroll's Foods' businesses, any
applicable regulatory filings and reviews, and the approval of the Company's
Board of Directors. The Company expects to close this transaction in May.
The Company has acquired a 19.9% equity interest in Animex, S. A., the
largest meat processing company in Poland, headquartered in Warsaw.
RESULTS OF OPERATIONS
During the quarter ended January 31, 1999, the Company acquired approximately
63% of the equity of Schneider. Schneider produces and markets fresh pork and a
full line of processed meats and is the second largest meat processing company
in Canada. Also, in the first nine months of fiscal 1999, the Company acquired
all of the capital stock of SBS and all of the assets and business of North
Side. SBS is the largest private-label manufacturer of ham, pork shoulder and
bacon products in France. North Side is a major domestic supplier of
9-16
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precooked sausage to McDonald's Corporation. All of these acquisitions have been
accounted for using the purchase method of accounting.
In the first nine months of fiscal 1999, the Company increased its
ownership in Circle Four from 37% to 82%. Accordingly, the Company consolidated
the accounts of Circle Four and discontinued using the equity method of
accounting for this operation. The impact of this consolidation on the
consolidated condensed balance sheet as of January 31, 1999 was to increase
total assets by $78.5 million and long-term debt by $50.6 million.
The Company's operating results for the 13 weeks ended and the 39 weeks
ended January 31, 1999 include those of Circle Four, SBS, North Side and
Schneider (collectively the "acquired businesses") from their respective dates
of acquisition.
The comparative results of operations for the third quarter and first
nine months of fiscal 1999 were favorably affected by significantly lower live
hog and raw material prices. Live hog prices were at the lowest levels in over
50 years. These prices were the primary reason for the substantially improved
profits in the Company's MPG and the losses incurred in the HPG.
The fiscal quarter ended January 31, 1999 represented 13 weeks of
operations compared to 14 weeks in the fiscal quarter ended February 1, 1998.
Accordingly, sales and all expense categories in the 13 weeks and the 39 weeks
ended January 31, 1999 reflect the impact of one less week of operations in
comparison to the corresponding periods in fiscal 1998.
13 WEEKS ENDED JANUARY 31, 1999 -
14 WEEKS ENDED FEBRUARY 1, 1998
Sales in the third quarter of fiscal 1999 decreased $60.3 million, or 5.5%, from
the comparable period in fiscal 1998. The decrease in sales reflected an 11.9 %
decrease in unit sales prices in the MPG as the result of significantly lower
live hog costs passed through to customers in the form of lower unit selling
prices, which was not totally offset by a 6.4% increase in MPG sales tonnage and
the inclusion of the sales tonnage of Circle Four. This increase in sales
tonnage in the third quarter of fiscal 1999 reflected flat fresh pork tonnage
and a 21.4% increase in processed meats tonnage, primarily the result of the
inclusion of the operations of Schneider, SBS and North Side, as well as
increased processed meats tonnage at existing operations, which were partially
offset by a sharp drop in exports of hot dogs to Russia.
Cost of sales decreased $144.9 million, or 14.8%, in the third quarter
of fiscal 1999, reflecting the decrease in live hog costs from the comparable
period in fiscal 1998, which was partially offset by the inclusion of the sales
of the acquired businesses.
Gross profit in the third quarter of fiscal 1999 increased $84.6
million, or 72.6%, from the comparable period in 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 lower cost of raw
materials (live hogs). Margins on processed meats were flat on increased sales
tonnage. MPG gross profits were partially offset by substantial losses in the
HPG due to the lower live hog prices.
Selling, general and administrative expenses increased $24.6 million, or
38.4%, in the third quarter of fiscal 1999 from the comparable period in fiscal
1998. The increase was primarily due to the inclusion of the selling, general
and administrative expenses of the acquired businesses, higher selling,
marketing and product promotion costs associated with efforts to market branded
fresh pork and processed meats, and expenses associated with the Year 2000.
Depreciation expense increased $6.7 million, or 61.0%, in the third
quarter of fiscal 1999 from the comparable period in fiscal 1998. The increase
reflected the inclusion of the depreciation expense of the acquired businesses.
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Interest expense increased $2.1 million, or 25.3%, in the third quarter
of fiscal 1999 from the comparable period in fiscal 1998, reflecting the
inclusion of the interest expense of the acquired businesses, the cost of
borrowings to finance the additional investment in Circle Four, the acquisitions
of SBS and North Side, and the higher cost of long-term debt placed in the
fourth quarter of fiscal 1998. These increases were partially offset by
decreased interest charges on substantially lower borrowings under the Company's
long-term revolving credit facility.
Income before taxes in the third quarter of fiscal 1999 was adversely
affected by a loss of $28.3 million in the HPG compared to a loss of $3.1
million in the same period of fiscal 1998.
The effective income tax rate for the third quarter of fiscal 1999 was
35.2% compared to 28.3% in the corresponding period of fiscal 1998, reflecting
increased profits at higher marginal tax rates.
Reflecting the factors previously discussed, net income increased to
$55.0 million, or $1.31 per diluted share, in the third quarter of fiscal 1999,
up from net income of $23.7 million, or $.60 per diluted share, in the third
quarter of fiscal 1998.
The operating results of the MPG and the HPG are influenced by several
factors, including the supply and price levels of hogs and, as a result, are
largely counter-cyclical in nature. While the Company expects to incur losses in
the HPG for the remainder of fiscal 1999, these losses should be offset by
improved margins in the MPG.
39 WEEKS ENDED JANUARY 31, 1999 -
40 WEEKS ENDED FEBRUARY 1, 1998
Sales in the first nine months of fiscal 1999 decreased $217.7 million, or 7.3%,
from the comparable period in fiscal 1998. The decrease in sales reflected a
15.6% decrease in unit sales prices in the MPG as the result of significantly
lower live hog costs passed through to customers in the form of lower unit
selling prices which was not totally offset by an 8.8% increase in MPG sales
tonnage and the inclusion of the sales tonnage of Circle Four. This increase in
sales tonnage in the first nine months of fiscal 1999 reflected a 5.6% increase
in fresh pork tonnage and a 14.2% increase in processed meats tonnage. The
increase in fresh pork tonnage reflected the inclusion of the sales of Schneider
and nine months of second shift operations at John Morrell's Sioux City, Iowa
plant compared to less than two full quarters of second shift operations in the
first nine months of fiscal 1998. The increase in processed meats tonnage was
primarily related to the inclusion of the sales of Schneider, SBS and North Side
and increased tonnage at existing operations. This increase in processed meats
tonnage was partially offset by a sharp drop in exports of hot dogs to Russia in
the second and third quarters of fiscal 1999.
Cost of sales decreased $318.6 million, or 11.8%, in the first nine
months of fiscal 1999, reflecting the decrease in live hog costs from the
comparable period in fiscal 1998, which was partially offset by the inclusion of
the sales of the acquired businesses.
Gross profit in the first nine months of fiscal 1999 increased $100.8
million, or 35.0%, from the comparable period in 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 lower cost of raw
materials (live hogs) and increased sales tonnage, while margins on processed
meats were flat. MPG gross profits were partially offset by substantial losses
in the HPG due to the lower live hog prices.
Selling, general and administrative expenses increased $46.2 million, or
27.8%, in the first nine months of fiscal 1999 from the comparable period in
fiscal 1998. The increase was primarily due to selling, general and
administrative expenses of acquired businesses, higher selling, marketing and
product promotion costs associated with intensive efforts to market branded
fresh pork and processed meats, and expenses associated with the Year 2000.
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Depreciation expense increased $13.6 million, or 43.8%, in the first
nine months of fiscal 1999 from the comparable period in fiscal 1998. The
increase reflected the inclusion of the depreciation expense of the acquired
businesses.
Interest expense increased $7.3 million, or 30.8%, in the first nine
months of fiscal 1999 from the comparable period in fiscal 1998, reflecting the
inclusion of the interest expense of the acquired businesses, the cost of
borrowings to finance the additional investments in Circle Four, the
acquisitions of SBS and North Side, and the higher cost of long-term debt placed
in the fourth quarter of fiscal 1998.
A nonrecurring charge of $12.6 million in the first nine months of
fiscal 1998 reflected the imposition of civil penalties against the Company by
the U. S. District Court for the Eastern District of Virginia in a civil action
brought by the U. S. Environmental Protection Agency. The Company has appealed
the Court's judgement to the U. S. Court of Appeals for the Fourth Circuit.
Income before taxes in the first nine months of fiscal 1999 was
adversely affected by a loss of $46.6 million in the HPG compared to a profit of
$12.4 million in the same period of fiscal 1998.
The effective income tax rate for the first nine months of fiscal 1999
was 34.2% compared to 29.6% in the corresponding period of fiscal 1998,
excluding the nonrecurring charge, reflecting increased profits at higher
marginal tax rates.
Reflecting the factors previously discussed, net income increased to
$68.1 million, or $1.69 per diluted share, in the first nine months of fiscal
1999, up from net income of $32.7 million, or $.82 per diluted share, in the
first nine months of fiscal 1998. Excluding the nonrecurring charge, net income
was $45.3 million, or $1.14 per diluted share, for the first half of fiscal
1998.
The operating results of the MPG and the HPG are influenced by several
factors, including the supply and price levels of hogs and, as a result, are
largely counter-cyclical in nature. While the Company expects to incur losses in
the HPG for the remainder of fiscal 1999, these losses should be offset by
improved margins in the MPG.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $105.9 million in the first nine months of
fiscal 1999, primarily from operating earnings and noncash charges.
Capital expenditures totaled $63.4 million in the first nine months of
fiscal 1999. These capital expenditures included renovations and expansion
projects at several of the Company's processing plants, additional hog
production facilities at Circle Four and replacement systems associated with the
Year 2000. In addition, the Company invested $18.2 million in Circle Four, and
acquired all of the capital stock of SBS and all of the assets and business of
North Side for an aggregate $69.3 million in cash plus the assumption of debt.
These capital expenditures and business acquisitions were funded with cash
provided by operations and borrowings under the Company's long-term revolving
credit facility.
As of January 31, 1999, the Company had definitive commitments of $38.7
million for capital expenditures primarily to increase its value-added fresh
pork capacity at several of its processing plants and for additional hog
production facilities at Circle Four. These expenditures will be funded with
cash provided by operations.
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YEAR 2000
The Year 2000 problem relates to computer systems that have date-sensitive
programs that were designed to read years beginning with "19," but may not
recognize the year 2000. Company information technology ("IT") systems
(including non-IT systems) and third party information systems that fail due to
the Year 2000 may have a material adverse effect on the Company. The Year 2000
issue has the potential to effect the Company's supply, production, distribution
and financial chains.
The Company began addressing the potential exposure associated with the
Year 2000 during fiscal 1998. Management has approved the plan necessary to
remediate, upgrade, and replace the affected systems to be Year 2000 compliant.
A corrective five-point action plan has been developed including: 1) analysis
and planning, 2) allocation of resources and commencing correction, 3)
remediation, correction and replacement, 4) testing, and 5) development of
contingency plans.
The Company has identified and defined the critical IT and non-IT
projects. These projects relate to systems which include any necessary
technology used in manufacturing or administration with date-sensitive
information that is critical to the day-to-day operations of the business. Of
the IT projects, 43% have been completed, 40% are being tested, 9% 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 completed by June 30, 1999. The non-IT (plant) projects have
identified system components which have a potential issue with rolling dates
into the Year 2000. Of these components, 76% are fully compliant with the others
at various stages of progress in the action plan. Approximately 76% of the
non-IT system remediation process has been completed. All critical non-IT system
implementation and remediation is expected to be completed by June 30, 1999.
The forecasted cost of the Year 2000 solution, including hardware and
software replacement, is expected to be approximately $32.6 million, of which
$20.5 million has been expended to date. The Company has expensed approximately
$6.0 million to date, including $2.6 million in the third quarter of fiscal
1999. The Company estimates $18.5 million of the $32.6 million will be
capitalized in accordance with generally accepted accounting principles. These
expenditures are anticipated to be incurred through December 1999.
Third party risk is being proactively assessed through inquiries and
questionnaires. Significant vendors, electronic commerce customers and financial
institutions have been sent inquiries about the status of their compliance for
the Year 2000. Additionally, the Company will follow up the inquiries and
questionnaires with interviews. This process is expected to be an ongoing
evaluation and at this point management cannot determine the level of risk
associated with third parties.
The Company believes its planning efforts are adequate to address its
Year 2000 concerns. The Company is developing a worse case scenario and a
contingency plan which includes an evaluation of the criticality of each
manufacturing process and the determination of possible manual alternatives,
including the purchase of additional inventory and related storage for
production supplies.
While the Company believes it is taking the appropriate steps to address
its readiness for the Year 2000, the costs of the project and expected
completion dates are dependent upon the continued availability of certain
resources and other factors. There can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that could influence the results may include, but are not
limited to, the availability and cost of personnel trained in this area, and the
ability to locate and correct all relevant computer codes and similar
uncertainties.
13-16
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain "forward-looking" information within the meaning of
the federal securities laws. The forward-looking information may include, among
other information, statements concerning the Company's outlook for the future.
There may also be other statements of beliefs, future plans and strategies or
anticipated events and similar expressions concerning matters that are not
historical facts. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: availability and prices of live
hogs and other raw materials, product pricing, competitive environment and
related market conditions, operating efficiencies, access to capital,
integration of acquisitions and changes in, or the failure or inability to
comply with, domestic and foreign governmental regulations, including without
limitation, environmental and health regulations.
14-16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
1. A Current Report on Form 8-K for November 18, 1998, was filed with
the Securities and Exchange Commission on November 20, 1998 to
report, under Item 5, intermediate results of the Company's offer
for all of the shares of Schneider Corporation.
2. A Current Report on Form 8-K for November 23, 1998, was filed with
the Securities and Exchange Commission on November 24, 1998 to
report, under Item 5, the Company's earnings for its second fiscal
quarter (including a summary consolidated statement of operations).
3. A Current Report on Form 8-K for December 1, 1998, was filed with
the Securities and Exchange Commission on December 2, 1998 to
report, under Item 5, final results of the Company's offer for all
of the shares of Schneider Corporation.
15-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SMITHFIELD FOODS, INC.
/s/ AARON D. TRUB
-------------------------------
Aaron D. Trub
Vice President, Chief Financial Officer and Secretary
/s/ C. LARRY POPE
-------------------------------
C. Larry Pope
Vice President, Finance
Date: March 12, 1999
16-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SMITHFIELD FOODS, INC.
-------------------------------
Aaron D. Trub
Vice President, Chief Financial Officer and Secretary
-------------------------------
C. Larry Pope
Vice President, Finance
Date: March 12, 1999
16-16
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