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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-K
_______________________
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2000
[_] 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.
(Exact name of registrant as specified in its charter)
Virginia 52-0845861
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Commerce Street 23430
Smithfield, Virginia (Zip Code)
(Address of principal executive offices)
(757) 365-3000
(Registrant's telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
Common Stock, $.50 par value per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 [_]
The aggregate market value of the shares of Registrant's Common Stock held
by non-affiliates as of July 12, 2000 was approximately $1,123,815,666. This
figure was calculated by multiplying (i) the $27.19 last sales price of
Registrant's Common Stock as reported on the New York Stock Exchange on July 12,
2000 by (ii) the number of shares of Registrant's Common Stock not held by any
officer or director of the Registrant or any person known to the Registrant to
own more than five percent of the outstanding Common Stock of the Registrant.
Such calculation does not constitute an admission or determination that any such
officer, director or holder of more than five percent of the outstanding shares
of Common Stock of the Registrant is in fact an affiliate of the Registrant.
At July 12, 2000, 54,731,570 shares of the Registrant's Common Stock were
outstanding (including for this purpose 691,636 Exchangeable Shares issued by
the Registrant's subsidiary Smithfield Canada Limited).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference is Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 29, 2000.
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TABLE OF CONTENTS
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Item
Number Page
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Part I
ITEM 1. BUSINESS.............................................................................. 1
General........................................................................................ 1
Business Strategy.............................................................................. 2
Historical Expansion and Acquisitions.......................................................... 2
Meat Processing Group.......................................................................... 3
Hog Production Group........................................................................... 7
Environmental Stewardship...................................................................... 8
Regulation..................................................................................... 8
Employees...................................................................................... 9
ITEM 2. PROPERTIES............................................................................ 10
ITEM 3. LEGAL PROCEEDINGS..................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 11
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY..................................................... 11
Part II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 12
ITEM 6. SELECTED FINANCIAL DATA............................................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 20
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................................... 21
ITEM 11. EXECUTIVE COMPENSATION................................................................ 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 21
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................... 21
SIGNATURES...................................................................................... 26
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.................................. 27
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PART I
Item 1. Business
General
Smithfield Foods, Inc. is the world's largest pork processor and hog
producer. As a holding company, Smithfield Foods conducts its business through
two groups, the Meat Processing Group and the Hog Production Group, each
comprised of a number of subsidiaries. In this discussion, the terms
"Smithfield Foods" and "the Company" include subsidiaries, unless otherwise
indicated.
Meat Processing Group
The Meat Processing Group produces domestically and internationally a wide
variety of fresh pork and processed meat products and markets them nationwide
and to over 25 foreign markets, including Canada, Poland, France, Japan and
Mexico. The Meat Processing Group consists primarily of six domestic processing
subsidiaries and four international pork processing entities. All these
subsidiaries are wholly-owned except as indicated below. Collectively, these
subsidiaries currently operate 48 slaughtering and further processing plants.
Meat Processing Group
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Subsidiary Headquarters Fiscal 2000 Sales
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John Morrell & Co. Cincinnati, Ohio $1.5 billion
The Smithfield Packing Company, Incorporated Smithfield, Virginia $1.5 billion
Schneider Corporation (63%-owned) Kitchener, Ontario, Canada $640 million
Gwaltney of Smithfield, Ltd. Smithfield, Virginia $540 million
Animex (85%-owned) Warsaw, Poland $345 million
Lykes Meat Group, Inc. Plant City, Florida $183 million
Patrick Cudahy Incorporated Cudahy, Wisconsin $179 million
Societe Bretonne de Salaisons Lampaul Guimiliau, France $87 million
North Side Foods Corp. Arnold, Pennsylvania $71 million
Societe Financiere de Gestion et de Participation Quimper and Lyon, France $70 million*
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*Estimated annualized sales
Hog Production Group
To complement its processing operations, the Company has vertically
integrated into hog production through its Hog Production Group, which currently
provides the Meat Processing Group with approximately 50% of its live hog
requirements. The Hog Production Group operates numerous production facilities
through three wholly-owned subsidiaries headquartered in North Carolina as
indicated below.
Hog Production Group
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Annualized Market Hog
Subsidiary Principal Locations Number of Sows Production
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Carroll's Foods, Inc. North Carolina and Virginia 180,000 2.9 million
Brown's of Carolina, North Carolina, Utah, Colorado and 170,000 2.7 million
Inc.* South Carolina
Murphy Farms, Inc. North Carolina, Missouri, Oklahoma, 345,000 6.0 million
Illinois, South Dakota and Texas
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* Numbers include 100% of the sows and market hogs produced by Circle Four
Farms, LLC, a wholly-owned subsidiary of Smithfield Foods.
1
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The discussion below of the Company's business first summarizes the
Company's strategic initiatives and its historical expansion through a
combination of internal growth and acquisitions. We will next discuss the Meat
Processing Group's United States processing operations and international
processing operations, then the Hog Production Group.
Business Strategy
The Company's business is based around four strategic initiatives:
. vertical integration into hog production through Company-owned hog
production operations and long-term partnerships and alliances with
other large and efficient hog producers;
. use of genetics which produce hogs that are among the leanest
commercially available to enable the Company to market highly
differentiated pork products;
. continued growth through opportunistic strategic acquisitions, both
domestically and internationally; and
. balancing fresh pork and processed meats to maximize the value from
all fresh pork cuts.
Historical Expansion and Acquisitions
Since 1975, when current management assumed control, Smithfield Foods has
expanded both its production capacity and its markets through a combination of
strong internal growth and the acquisition of regional and multi-regional
companies with well-recognized brand identities. Beginning in fiscal 1999, the
Company also expanded its operations internationally through acquisitions in
France, Canada and Poland. In fiscal 2000, the Company made another acquisition
in France and entered into a joint venture in Mexico.
United States Meat Processing Acquisitions
In fiscal 1982, the Company acquired Gwaltney, then Smithfield Packing's
principal Mid-Atlantic competitor. This acquisition doubled the Company's sale
and slaughter capacity and added several popular lines of branded products along
with a highly efficient hot dog and luncheon meats production facility. The
proximity of Gwaltney to Smithfield Packing allowed for synergies and cost
savings in manufacturing, purchasing, engineering and transportation. This
combination set the stage for a series of acquisitions of smaller regional
processors with widely recognized brands, including Patrick Cudahy, Esskay,
Mash's and Valleydale.
In December 1995, the Company acquired John Morrell, a major Midwestern
pork processor with primary markets in the Midwest, Northeast and Western United
States. This acquisition changed the Company's character from a large multi-
regional pork processor to one with national distribution. It also doubled the
Company's sales and slaughter capacity, added several popular lines of branded
processed meat products along with four efficient processing facilities and more
than doubled the Company's international sales. The Company believes that John
Morrell's strength in smoked sausage, hot dogs, luncheon meats, bacon and smoked
hams complements the strong smoked meats, hot dog and bacon business of the
Company's Eastern operations. The acquisition of John Morrell also presented
substantial opportunities for cost savings in the areas of processing,
marketing, purchasing and distribution.
In November 1996, the Company acquired the assets and businesses of Lykes.
Lykes is a pork processor with primary markets in the South and Southeast.
Lykes produces branded processed meats, including bacon, hot dogs and breakfast
and dinner sausages under the Lykes and Sunnyland brands.
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.
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International Meat Processing Acquisitions
In September 1998, the Company acquired all of the capital stock of Societe
Bretonne de Salaisons, one of the largest private label manufacturers of ham,
pork shoulder and bacon products in France.
In November 1998, the Company acquired a 63% stake in Schneider Corporation
of Canada. The Schneiders brand is the number one Canadian brand in hot dogs,
luncheon meats and premium hams.
Between September 1998 and June 1999, the Company acquired an 85% stake in
Animex, the largest meat and poultry processing company in Poland. Animex
produces a very broad line of fresh and processed meats and poultry.
In August 1999, the Company acquired the capital stock of Societe
Financiere de Gestion et de Participation, a private label processed meats
manufacturer in France.
In September 1999, the Company acquired a 50% stake in Agroindustrial del
Noroeste, a Mexican meat processing and hog production venture.
Hog Production Acquisitions
In January 1999, Brown's acquired a 12,000 sow operation in Colorado to
supply hogs to John Morrell.
In May 1999, the Company acquired Carroll's Foods and related companies and
assets, including approximately 180,000 sows. Carroll's Foods was a longtime
hog production partner of the Company. Through a 49%-owned joint venture,
Carroll's Foods is also among the nation's largest turkey processors.
In January 2000, the Company acquired Murphy Family Farms and certain
related companies and assets, including approximately 345,000 sows. Murphy
Farms was a longtime hog production partner of the Company.
Meat Processing Group
This discussion of the Meat Processing Group first provides an overview of
the Group's proportionate revenues from fresh pork, processed meats and other
items. Next, the discussion describes the Meat Processing Group's United States
processing operations and then its international processing operations.
Revenues by Source
The following table shows for the fiscal periods indicated the percentages
of Meat Processing Group revenues derived from fresh pork, processed meats and
other products. The meat industry is generally characterized by narrow margins;
however, profit margins on processed meats are greater than profit margins on
fresh pork and on other products.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Processed Meats 50% 46% 40% 37% 37%
Fresh Pork 44% 49% 56% 59% 59%
Other Products 6% 5% 4% 4% 4%
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
The increase for processed meats since fiscal 1997 reflect s the Company's
acquisitions of processing operations and, prior to fiscal 2000, the impact of
lower fresh pork prices.
United States Processing Operations
Fresh Pork Products. The Company is the largest fresh pork processor in
the world, producing in fiscal 2000 approximately 2.8 billion pounds of which
2.4 billion pounds were produced in the United States. The Meat Processing
Group's domestic operations slaughter hogs at five plants (three in the
Southeast and two in the
3
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Midwest), with a current aggregate slaughter capacity of 78,300 hogs per day. A
substantial portion of the Meat Processing Group's fresh pork is sold to retail
customers as unprocessed, trimmed cuts such as loins (including roasts and
chops), butts, picnics and ribs. The Meat Processing Group also sells hams,
bellies and trimmings to other further processors. The Meat Processing Group is
putting greater emphasis on the sale of value-added, higher margin fresh pork
products, such as boneless loins, hams, butts and picnics. In addition, the
Company's Hog Production Group provides the Meat Processing Group with raw
material of much higher quality than that generally available through open
market purchases.
The Company is marketing on a national basis an extensive product line of
NPD fresh pork cuts (including boneless loins, shoulder cuts, chops, ribs and
processed and cubed pork) under the Smithfield Lean Generation Pork brand to
selected retail chains and institutional foodservice customers. Several of the
subsidiaries have also developed a case-ready pork program designed to supply
supermarket chains with pre-packaged, weighed, labeled and pre-priced fresh pork
ready for immediate sale to the consumer. Management believes that these
initiatives, over time, will result in greater brand identification and higher
margins for the Company's fresh pork products. In fiscal 2000, case-ready
volumes reached 23 million pounds which is up 139% from fiscal 1999. Management
expects case-ready volumes to reach 75 million pounds in fiscal 2001. The
Company has prepared to increase case-ready volumes by opening four new case-
ready facilities in fiscal 2000, one located in the North, two in the South and
another in the Midwest. For more on NPD pork, see "Business--Hog Production
Group" below.
Processed Meats Products. The Company manufactures a wide variety of
processed meats, including smoked and boiled hams, bacon, sausage, hot dogs
(pork, beef and chicken), deli and luncheon meats and specialty products such as
pepperoni and dry salami. In fiscal 2000, the Company's U.S. operations
produced 1.6 billion pounds of processed meat products. The Company markets its
domestic processed meat products under labels that include Smithfield Premium,
Gwaltney, Patrick Cudahy and John Morrell, as well as Dinner Bell, Ember Farms,
Esskay, Great, Kretschmar, Lykes, Patrick's Pride, Rath and Valleydale. The
Company also sells a substantial quantity of processed meats as private label
products. The Company believes it is one of the largest producers of smoked
hams and picnics in the United States.
In recent years, as consumers have become more health conscious, the
Company has broadened its product line to include leaner fresh pork products as
well as fat-free, lower fat and lower salt processed meats. The Company also
markets a lower-fat line of value-priced luncheon meats, smoked sausage and hot
dogs, as well as fat-free hot dogs, fat-free deli hams and 40-percent-lower-fat
bacon. Management believes that leaner pork products combined with the
industry's efforts to heighten public awareness of pork as an attractive protein
source have led to increased consumer demand.
Raw Materials. The Meat Processing Group's primary raw material is live
hogs. Historically, hog prices have been subject to substantial fluctuations.
In addition, hog prices tend to rise seasonally as hog supplies decrease during
the hot summer months and tend to decline as supplies increase during the fall.
This is due to lower farrowing performance during the winter months and slower
animal growth rates during the hot summer months. Hog supplies, and
consequently prices, are also affected by factors such as corn and soybean meal
prices, weather and farmers' access to capital.
The Meat Processing Group purchases approximately 50% of its live hog
requirements from the Hog Production Group. In addition, the Company has
established multi-year agreements with Maxwell Foods, Inc. and Prestage Farms,
Inc. which provide the Company with a stable supply of high-quality hogs at
market-indexed prices. These producers supply approximately 14% of the hogs
currently processed by the Company.
The Meat Processing Group also purchases hogs on a daily basis at
Southeastern and Midwestern slaughter plants, at Company-owned buying stations
in three Southeastern and five Midwestern states and from certain Canadian
sources. The Company also purchases fresh pork from other meat processors to
supplement its processing requirements. Additional purchases include raw beef,
poultry and other meat products to add to the Company's sausage, hot dogs and
luncheon meats. Such meat products and other materials and supplies, including
seasonings, smoking and curing agents, sausage casings and packaging materials
are readily available from numerous sources at competitive prices.
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Customers and Marketing. The Meat Processing Group has significant market
presence nationwide, and strong market positions in the Mid-Atlantic, Southeast,
South and Midwest. The Company's fundamental marketing strategy is to sell
large quantities of value-priced processed meat products as well as fresh pork
to national and regional supermarket chains, wholesale distributors, the
foodservice industry (fast food, restaurant and hotel chains, hospitals and
other institutional customers) and export markets. Management believes that
this marketing approach reaches the largest number of value-conscious consumers
without requiring large advertising and promotional campaigns. The Company uses
both in-house salespersons as well as independent commission brokers to sell its
products. In fiscal 2000, the Company sold its products to more than 3,500
customers, none of whom accounted for as much as 10% of the Company's revenues.
The Company has no significant or seasonally variable backlog because most
customers prefer to order products shortly before shipment, and therefore, do
not enter into formal long-term contracts. Management believes that its
registered trademarks have been important to the success of its branded fresh
pork processed meats products. In a number of markets, the Company's brands are
among the leaders in selected product categories.
The Meat Processing Group in recent years has emphasized growth in export
sales. In fiscal 2000, export sales comprised approximately 5% of the Company's
total sales. The Company provides Japanese markets with a line of unique,
branded fresh pork products, as well as other chilled and frozen unbranded fresh
pork products. In connection with export sales to Japan, the Company maintains
a distributorship arrangement with Sumitomo Corporation of America. The Company
also had export sales to Mexico and to more than two dozen other foreign
countries in fiscal 2000. The Company expects continued growth in its export
sales for the foreseeable future. Export sales are subject to factors beyond
the Company's control, such as tariffs, exchange rate fluctuations and changes
in governmental policies. The Company conducts all of its export sales in U.S.
dollars and therefore bears no currency exchange risk.
The Company's processed meats business is somewhat seasonal in that,
traditionally, the periods of higher sales for hams are the holiday seasons such
as Thanksgiving, Christmas and Easter, and the periods of higher sales of smoked
sausage, hot dogs and luncheon meats are the summer months. The Company
typically builds substantial inventories of hams in anticipation of its seasonal
holiday business.
The Company uses recognized price risk management and hedging techniques to
enhance sales and to reduce the effect of adverse price changes on the Company's
profitability. The Company's price risk management and hedging activities
currently are utilized in the areas of forward sales, hog production margin
management, procurement of raw materials (ham and bacon) for seasonal demand
peaks, inventory hedging, hog contracting and truck fleet fuel purchases. For
further information see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Management."
In April 2000, the Company announced a plan to form a joint venture with
IBP, inc., Cargill, Incorporated and its red meat business Excel, Tyson Foods,
Inc., GoldKist, Inc. and Farmland Industries Inc.'s red meat business (Farmland
National Beef and Farmland Foods) to establish an online business-to-business
marketplace for meat and poultry products and related services and information.
The marketplace will be a neutral web-based exchange providing a single,
convenient place for buyers and sellers of meat and poultry products to connect
with one another. The exchange is expected to promote efficiencies in the market
by facilitating faster and more direct product comparison and price negotiation,
reducing paperwork and other duplicative work.
Trademarks. The Company owns and uses numerous marks. These marks are
registered trademarks of the Company or are otherwise subject to protection
under applicable intellectual property laws. The Company considers these marks
and the accompanying goodwill and customer recognition valuable and material to
its business.
Distribution. The Meat Processing Group uses a private fleet of leased
tractors and trailers and independent common carriers to distribute both fresh
pork and processed meats to its customers, as well as to move raw material
between plants for further processing. The Company coordinates deliveries and
uses backhauling to reduce overall transportation costs. The Company
distributes its products directly from certain of its plants and from leased
distribution centers in California, Connecticut, Indiana, Kansas, Missouri,
North Carolina and Texas. The Company also operates distribution centers
adjacent to its plants in Bladen County, North Carolina, and Sioux Falls, South
Dakota.
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Competition. The protein industry generally, and the pork processing
industry in particular, are highly competitive. The Company's products compete
with a large number of other protein sources, including beef, chicken, turkey
and seafood, but the Company's principal competition comes from other pork
processors.
Management believes that the principal competitive factors in the pork
processing industry are price, quality, product distribution and brand loyalty.
Some of the Company's competitors are larger, have correspondingly greater
financial and other resources and enjoy wider recognition for their branded
products. Some of these competitors are also more diverse than the Company. To
the extent that their other operations generate profits, such companies may be
able to subsidize their pork processing operations for a time.
International Processing Operations
In fiscal 1999, the Meat Processing Group made its first international
acquisitions by acquiring operations in Canada, Poland and France. In fiscal
2000, the Company made another acquisition in France and entered into a joint
venture in Mexico. Such acquisitions reflect the Company's heightened emphasis
on expansion into international markets.
Schneider. In November 1998, Smithfield Foods acquired a 63% stake in
Schneider Corporation of Canada. Schneider, based in Kitchener, Ontario, is one
of Canada's largest producers of premium quality food products, with brands
including Schneiders and Fleetwood. Schneider has annual production volume of
approximately 475 million pounds and manages its various subsidiaries and joint
ventures through two operating groups, consumer foods and agribusiness. The
consumer foods group, comprised of the processed meat and grocery operations,
produces more than 1,000 products, including hams, sausage, wieners, bacon,
luncheon meats, specialty meats and savory bakery products for sale through
traditional grocery stores, delicatessens and foodservice establishments.
Schneider has consumer foods operations in Kitchener, Ayr, St. Mary's, Guelph,
Port Perry and Mississauga, Ontario; Winnipeg, Manitoba; Surry, British
Columbia; and St.-Anselme, Quebec. In addition, Schneider participates in the
consumer foods sector through joint ventures with the Prince Group of
Drummondville, Quebec; Cappola Food of Toronto, Ontario; National Meats of
Toronto; and Luigino's of Duluth, Minnesota. The agribusiness group, comprised
of the fresh pork and live poultry operations, focuses on identifying and
meeting the needs of retail, foodservice and export customers. Its plants in
Winnipeg produce fresh pork products for sale in Canada, the United States,
Japan and other international markets. Schneider markets its products in the
poultry sector under the Schneiders brand and private labels to retail and
foodservice customers. In March 1999, Schneider acquired a 32% stake in
Mitchell's Gourmet Foods, a Western Canadian pork processor which will grow to a
majority stake in fiscal 2001 as a result of additional capital contributions.
Animex. Between September 1998 and June 1999, Smithfield Foods acquired an
85% stake in Animex, the largest meat and poultry processing company in Poland.
Animex produces a very broad line of fresh and processed meats and poultry
products, with approximately 400 million pounds of annual volume. Animex's
brands include Krakus and Pek. Animex has 10 plants, six for red meat and four
for poultry, located across Poland. Three of such plants are being closed. The
Company plans to expand Animex's network of distributions centers to include
several additional areas in Poland.
Societe Bretonne de Salaisons. In September 1998, the Company acquired
Societe Bretonne de Salaisons, one of the largest private label manufacturers of
ham, pork shoulder and bacon products in France. SBS has annual production
volume of approximately 70 million pounds.
Societe Financiere de Gestion et de Participation. In August 1999, the
Company acquired the capital stock of Societe Financiere de Gestion et de
Participation, a private label processed meats manufacturer in France. SFGP has
annual production volume of approximately 60 million pounds.
Agroindustrial del Noroeste. In September 1999, the Company and two
Mexican partners formed a joint venture, Agroindustrial del Noroeste. The
Company has a 50% interest in this joint venture, which for the 1999 calendar
year had approximately $100 million in sales.
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Hog Production Group
General
As a complement to the Company's hog processing operations, the Company has
vertically integrated into highly efficient hog production through Brown's,
Carroll's Foods and Murphy Farms, which operate numerous hog production
facilities with approximately 695,000 sows producing about 11.6 million market
hogs annually. The Company obtains approximately 50% of the live hogs it
currently processes from the Hog Production Group. Including adjusting for
sales to unrelated parties, the Company believes it is 60% vertically
integrated. The profitability of hog production is directly related to the
market price of live hogs and the cost of corn and soybean meal. The Hog
Production Group generates higher profits when hog prices are high and corn and
soybean meal prices are low, and lower profits (or losses) when hog prices are
low and corn and soybean meal prices are high. Management believes that the Hog
Production Group furthers the Company's strategic initiative of vertical
integration and reduces the Company's exposure to fluctuations in profitability
historically experienced by the pork processing industry.
In May 1991, the Company acquired from National Pig Development Company
("NPD"), a British firm, the exclusive United States franchise rights for
genetic lines of specialized breeding stock. The Hog Production Group makes
extensive use of these genetic lines, with approximately 320,000 NPD breeding
sows. In addition, the Company has sub-licensed some of these rights to certain
of the Company's strategic hog production partners. All NPD hogs produced under
these sub-licenses are supplied to the Company. The Company believes the hogs
produced by these genetic lines are the leanest hogs commercially available and
enable the Company to market highly differentiated pork products. Management
believes that the leanness and increased meat yields of these hogs will, over
time, improve the Company's profitability with respect to both fresh pork and
processed meat. In fiscal 2000, the Company processed 3.7 million NPD hogs.
Hog Production Operations
The Hog Production Group is the world's largest hog producer. The Group
uses advanced management techniques to produce premium quality hogs on a large
scale as a low cost producer. The Company develops breeding stock, optimizes
diets for its hogs at each stage of the growth process, processes feed for its
hogs and designs and builds hog confinement facilities. The Company believes
its economies of scale and production methods, together with its use of the
advanced NPD genetics in approximately 47% of its breeding sows, make it a
uniquely integrated low cost producer.
The Hog Production Group uses a three-site production process consisting of
sow, nursery and finishing sites. Production of market hogs begins in a
facility known as a sow site. The Group's average commercial sow site is
designed to house approximately 2,400 sows. The sow's purpose is to conceive,
give birth to and nurse piglets which will be raised to become market hogs.
Approximately 18 days after birth, the piglets are separated from the sows and
transported to a separate nursery site. At each nursery site, the piglets are
fed a closely monitored diet and grow to approximately 45 pounds, a process
which takes approximately seven weeks. Once the hogs reach the desired weight,
the Hog Production Group transports them to a finishing site where they are
maintained and fed until reaching a market weight of approximately 250 pounds, a
process which takes approximately 20 weeks. When the hogs reach market weight,
they are transported to the Meat Processing Group's plants, principally those in
Virginia and North Carolina (or, in the case of market hogs produced in Utah,
sold to an unrelated third party).
The Hog Production Group also utilizes independent farmers and their
facilities to raise hogs produced from the Group's breeding stock. Under multi-
year contracts, the farmer provides the initial facility investment, labor and
front line management in exchange for a service fee. This contract farming is
utilized primarily in the nursery and finishing stages where animal growth, feed
and survival rates are most critical and are easily adapted to an incentive-
based contract payment. Currently, approximately 76% of the Hog Production
Group's market hogs come from contract farms.
As of July 2000, the Hog Production Group operated farm sites in North
Carolina, Virginia, Utah, South Carolina and Colorado. Except for some start-up
activity in Utah and Colorado, the Hog Production Group's farm sites are mature
operations with static production volume.
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Nutrient Management and Other Environmental Issues
All of the Hog Production Group's hog production facilities have been
designed to meet or exceed all applicable zoning and other government
regulations. These requirements include the maintenance of certain separation
distances between farms and nearby residences, schools, churches, public use
areas and businesses, the maintenance of certain separation distances from
rivers, streams and wells and adherence to certain required construction
standards.
Hog production facilities generate significant quantities of manure, which
must be managed properly to protect public health and the environment.
Currently, the best available technology for the management of swine manure is
the lagoon and sprayfield system. This system utilizes earthen lagoons to treat
the waste before it is applied to agricultural fields by spray application. The
nitrogen and phosphorus in the treated manure serves as a crop fertilizer.
These systems require permits under state, and in some instances federal, law.
The permits impose standards and conditions on the design and operation of these
systems to ensure that they protect public health and the environment.
The Hog Production Group follows a number of other protocols to minimize
impact to the environment, including: ongoing employee training regarding
environmental controls; walk-around inspections at all sites by trained
personnel; a formal emergency response plan that is regularly updated; and a
collaboration with manufacturers regarding testing and developing new equipment.
Environmental Stewardship
During the past year, the Company undertook several significant initiatives
in furtherance of its continued commitment to responsible environmental
stewardship throughout the Company and each operating subsidiary, with an
emphasis on the operations of its pork production subsidiaries in the state of
North Carolina, particularly areas devastated by recent hurricanes. One such
initiative is identification of those farms owned by, or under contract to,
operating subsidiaries with buildings or lagoons located in the flood plain and
implementation of measures to protect water quality should these structures
experience flooding in the future. This initiative is well underway and should
be completed by the fall of 2000. Longer term, the Company is working with its
operating subsidiaries to develop and implement an Environmental Management
System ("EMS"). The Company intends to expand the EMS program throughout its
operating subsidiaries over the next three years, with initial focus on North
Carolina pork production operations. Once it is fully implemented, the EMS will
be a model program, not only in the pork production industry, but among
agribusinesses nationally. The Company has also assumed a leadership role in
the development of environmentally superior swine waste management technologies
by committing up to $15 million toward an intensive technology development
program. An initiative by the Company and its North Carolina pork production
subsidiaries to identify and preserve large areas of wetlands and natural areas
in eastern North Carolina is also in furtherance of the Company's commitment to
environmental stewardship. In this regard, the Company has recently committed
up to $2 million a year for 25 years to the State of North Carolina to advance
this initiative. These initiatives are proceeding under the direction and
oversight of the Company's Environmental Compliance Committee, which was
established by the Board of Directors in January 2000. Members of the Committee
include the Company's General Counsel, Vice President Engineering, and the
presidents of the pork production subsidiaries.
Regulation
Regulation Generally
Like other participants in the meat processing industry, the Company is
subject to various laws and regulations administered by federal, state and other
government entities, including the Environmental Protection Agency ("EPA") and
corresponding state agencies as well as the United States Department of
Agriculture, the United States Food and Drug Administration and the United
States Occupational Safety and Health Administration. Management believes that
Smithfield Foods presently is in compliance with all such laws and regulations
in all material respects, and that continued compliance with these standards
will not have a material adverse effect on the Company's financial position or
results of operations. Furthermore, with respect to the suits discussed below,
the Company believes that their ultimate resolution will not have a material
adverse effect on the Company's financial position or annual results of
operations.
8
<PAGE>
EPA Suit
In United States of America v. Smithfield Foods, Inc. et al., the United
States District Court for the Eastern District of Virginia imposed a $12.6
million civil penalty on the Company and its Smithfield Packing and Gwaltney
subsidiaries for Clean Water Act violations at the Company's Smithfield,
Virginia processing plants. The Company recorded a nonrecurring charge of $12.6
million during fiscal 1998 with respect to this penalty. In September 1999, the
United States Court of Appeals for the Fourth Circuit affirmed the District
Court's determination of liability but remanded the penalty determination to the
District Court with instructions to recalculate the civil penalty solely to
correct a 4% error made by the government's expert. In May 2000, the Company
filed a certiorari petition seeking review of the Fourth Circuit's ruling by the
United States Supreme Court. There can be no assurance as to the outcome of
such petition or any subsequent proceedings regarding this matter.
Suit by the Commonwealth of Virginia
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 federal EPA suit described above. In October 1999, the
Circuit Court dismissed the Commonwealth's case against the Company, ruling
under the doctrine of res judicata that the subject matter of the case had
already been finally adjudicated against the Company in the EPA suit. The
Commonwealth has appealed the decision of the Circuit Court to the Supreme Court
of Virginia. There can be no assurance as to the outcome of the Commonwealth's
appeal or any subsequent proceedings regarding this matter.
Riverkeeper Litigation
In June 2000, Neuse River Foundation, Inc., Richard J. Dove, d/b/a The
Neuse Riverkeeper, D. Boulton Baldridge, d/b/a The Cape Fear Riverkeeper, New
River Foundation, Inc., Tom Mattison, d/b/a The New Riverkeeper, and The Water
Keeper Alliance filed a lawsuit in the General Court of Justice, Superior Court
Division, of the State of North Carolina against the Company, Carroll's Foods,
Inc., Brown's of Carolina, Inc., Murphy Farms, Inc., Wendell H. Murphy, Sr.,
Wendell H. Murphy, Jr., and Joseph W. Luter, III. The lawsuit alleges, among
other things, claims based on negligence, trespass, strict liability and unfair
trade practices related to the operation of swine waste disposal lagoons in
North Carolina. The lawsuit seeks numerous and costly remedies, including
injunctive relief to end all use of hog waste disposal lagoons in North
Carolina, unspecified but costly remediation efforts and other damages. The
Company believes that none of the plaintiffs' claims has merit and furthermore
that the plaintiffs lack standing to bring such a suit. The Company intends to
defend this action vigorously.
Employees
As of April 30, 2000, the Meat Processing Group had approximately 32,500
employees, approximately 15,500 of whom are covered by collective bargaining
agreements expiring between September 30, 2000 and June 30, 2005, and the Hog
Production Group had approximately 4,000 employees, none of whom are covered by
collective bargaining agreements. The Company believes that its relationship
with its employees is good.
9
<PAGE>
Item 2. Properties
The following table lists the Company's material plants and other physical
properties. These properties are suitable for the Company's needs.
<TABLE>
<CAPTION>
Location Operation
-------- ---------
<S> <C>
Smithfield Packing Plant* Slaughtering and cutting hogs; manufacture of bacon
Smithfield, Virginia products, smoked meats, and dry salt meats; production
of hams and picnics
Smithfield Packing Plant* Slaughtering and cutting hogs; production of boneless
Bladen County, North Carolina hams and loins
Gwaltney Plant* Slaughtering and cutting hogs; production of boneless
Smithfield, Virginia loins, bacon, sausage, bone-in and boneless cooked and
smoked hams and picnics
John Morrell Plant* Slaughtering and cutting hogs; production of boneless
Sioux Falls, South Dakota loins, bacon, hot dogs, luncheon meats, smoked and
canned hams, and packaged lard
Lykes Meat Group Plant* Production of hot dogs, luncheon meats and sausage
Plant City, Florida products
Patrick Cudahy Plant Manufacture of bacon, dry sausage, boneless cooked
Cudahy, Wisconsin hams and refinery products
Schneider Plant Production of processed and prepared meats, including
Kitchener, Ontario, Canada wieners, luncheon meats, hams and specialty and dry
sausages
John Morrell Plant* Slaughtering and cutting hogs; production of boneless
Sioux City, Iowa loins
=============================================================================================
</TABLE>
* Pledged as collateral under various loan agreements.
The Hog Production Group owns and leases numerous hog production
facilities, primarily in North Carolina, Utah and Virginia, with additional hog
production facilities in Colorado, South Carolina, Illinois, Texas and Oklahoma.
A substantial number of these owned facilities are pledged under related loan
agreements.
Item 3. Legal Proceedings
Smithfield Foods and certain of its subsidiaries are parties to several
environmental litigation matters discussed under "Business ---Regulation" above.
Apart from those matters, Smithfield Foods and its subsidiaries and affiliates
are parties in various lawsuits arising in the ordinary course of business. In
the opinion of management, any ultimate liability with respect to these ordinary
course matters will not have a material adverse effect on the Company's
financial position or results of operations.
In April 2000, the Company and its subsidiary Smithfield Packing were named
as defendants, along with IBP, inc., in a civil action filed in the United
States District Court for the Middle District of Georgia. The case was filed by
four named plaintiffs on behalf of a putative nationwide class of hog producers
who from 1994 to the present produced and sold finished hogs to defendants on a
spot, auction or cash market basis. The plaintiffs contend that the defendants
violated the Packers and Stockyards Act of 1921 (the "PSA") by reason of the
defendants' engaging in various captive supply arrangements for the procurement
of hogs for slaughter. The
10
<PAGE>
Company believes that it has valid defenses to this action, that it has acted
properly in its dealings with hog producers and that it has not violated the PSA
or any other applicable law. The Company further believes that the action does
not qualify for certification as a class action. Accordingly, the Company
intends to defend this action vigorously, and the Company believes that its
ultimate resolution will not have a material adverse effect on the Company's
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 4A. Executive Officers of the Company
The following table sets forth the name and age, position with the Company
and business experience during the past five years of each of the executive
officers of the Company. The Board of Directors elects executive officers to
hold office until the next annual meeting of the Board of Directors or until
their successors are elected, or until their resignation or removal.
<TABLE>
<CAPTION>
Name and Age Position with the Company Business Experience During Past Five Years
------------ ------------------------- ------------------------------------------
<S> <C> <C>
Joseph W. Luter, III (61) Chairman of the Board, President Mr. Luter has served as Chairman of the Board and
and Chief Executive Officer of the Chief Executive Officer since 1975. Prior to May
Company 1995, and since June, 2000, he has also served as
President of the Company.
Lewis R. Little (56) President and Chief Operating Mr. Little was elected President and Chief
Officer of Smithfield Packing and Operating Officer of the Company and Smithfield
Lykes Packing in November 1996 and President and Chief
Operating Officer of Lykes in June 1998. Mr.
Little served as Chief Operating Officer of the
Company until June, 2000. From May 1993 until
November 1996, he was President and Chief Operating
Officer of Gwaltney.
Joseph B. Sebring (53) President and Chief Operating Mr. Sebring has served as President and Chief
Officer of John Morrell Operating Officer of John Morrell since May 1994.
C. Larry Pope (45) Vice President and Chief Financial Mr. Pope served as Vice President, Finance of the
Officer Company from July 1998 until September 1999. He
served as Vice President and Controller from August
1995 to July 1998, and prior to that time as
Controller.
Richard J. M. Poulson (61) Vice President, General Counsel Mr. Poulson joined the Company as Vice President
and Senior Advisor to the Chairman and Senior Advisor to the Chairman in July 1998.
Between 1994 and 1998, he was a senior managing
director of the Appian Group, a private merchant
bank with offices in Washington, D.C. and Paris.
Prior to 1994, Mr. Poulson was a senior corporate
partner with the law firm Hogan & Hartson in
Washington, D.C. and London.
</TABLE>
11
<PAGE>
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Market Information
The Common Stock of the Company has traded on The New York Stock Exchange
under the symbol "SFD" since September 28, 1999. Prior to that the Common Stock
traded on The Nasdaq National Market under the symbol "SFDS." The following
table shows the high and low sales price of the Common Stock of the Company for
each quarter of fiscal 2000 and 1999.
<TABLE>
<CAPTION>
Range of Sales Price
---------------------------------------
High Low
------------------- ------------------
<S> <C> <C>
Fiscal year ended May 2, 1999
First quarter 31.00 22.62
Second quarter 27.00 14.69
Third quarter 36.12 19.62
Fourth quarter 30.00 20.00
Fiscal year ended April 30, 2000
First quarter 34.06 23.50
Second quarter 31.88 21.38
Third quarter 26.00 16.69
Fourth quarter 22.75 14.88
</TABLE>
Holders
As of July 12, 2000, there were 1,253 record holders of the Common Stock.
In addition, there were on such date 244 record holders of the Exchangeable
Shares issued by Smithfield Foods' subsidiary Smithfield Canada Limited, an
Ontario corporation. The terms of such Exchangeable Shares are incorporated by
reference as an exhibit to this Annual Report on Form 10-K.
Dividends
The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
In addition, the terms of certain of the Company's debt agreements prohibit the
payment of cash dividends on the Common Stock. The payment of cash dividends,
if any, would be made only from assets legally available for that purpose and
would depend on the Company's financial condition, results of operations,
current and anticipated capital requirements, restrictions under then existing
debt instruments and other factors then deemed relevant by the board of
directors.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below for the fiscal
years indicated were derived from the Company's audited consolidated financial
statements. The information should be read in conjunction with the Company's
consolidated financial statements (including the notes thereto) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in, or incorporated by reference into this
report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
April 30, May 2, May 3, April 27, April 28,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $5,150,469 $3,774,989 $3,867,442 $3,870,611 $2,383,893
Costs of sales 4,456,403 3,235,414 3,479,629 3,546,816 2,202,112
----------- ----------- ----------- ----------- -----------
Gross profit 694,066 539,575 387,813 323,795 181,781
Selling, general and administrative
expenses 390,634 295,610 219,861 191,225 103,095
Depreciation expense 109,893 63,524 42,300 35,825 25,979
Interest expense 71,944 40,521 31,891 26,211 20,942
Minority interests 1,608 (3,518) 199 2,857 1,514
Nonrecurring charge - - 12,600 - -
----------- ----------- ----------- ----------- -----------
Income from continuing operations before
income taxes 119,987 143,438 80,962 67,677 30,251
Income taxes 44,875 48,554 27,562 22,740 10,465
----------- ----------- ----------- ----------- -----------
Income from continuing operations 75,112 94,884 53,400 44,937 19,786
Income (loss) from discontinued operations - - - - (3,900)
----------- ----------- ----------- ----------- -----------
Net Income $ 75,112 $ 94,884 $ 53,400 $ 44,937 $ 15,886
=========== =========== =========== =========== ===========
DILUTED INCOME (LOSS) PER SHARE:
Continuing operations $ 1.52 $ 2.32 $ 1.34 $ 1.17 $ 0.53
Discontinued operations - - - (0.11)
----------- ----------- ----------- ----------- -----------
Net income $ 1.52 $ 2.32 $ 1.34 $ 1.17 $ 0.42
=========== =========== =========== =========== ===========
Average diluted shares outstanding 49,386 40,962 39,732 38,558 35,000
BALANCE SHEET DATA:
Working capital $ 609,857 $ 215,865 $ 259,188 $ 164,312 $ 88,026
Total assets 3,129,613 1,771,614 1,083,645 995,254 857,619
Long term debt and capital lease
obligations 1,187,770 594,241 407,272 288,486 188,618
Shareholders' equity 902,909 542,246 361,010 307,486 242,516
OPERATING DATA:
Fresh pork sales (pounds) 2,786,400 2,687,412 2,539,221 2,320,477 1,635,300
Processed meats sales (pounds) 2,192,100 1,606,021 1,370,232 1,218,835 839,341
Total hogs purchased 19,358 19,093 17,952 16,869 12,211
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
12
<PAGE>
This discussion of management's views on the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements
appearing elsewhere in this Form 10-K.
Introduction
Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group
("MPG") and a Hog Production Group ("HPG"). The MPG consists primarily of six
wholly owned domestic pork processing subsidiaries and four international pork
processing entities. The HPG consists primarily of three hog production
operations located in the United States and certain joint venture investments
outside the United States.
Acquisitions
Several acquisitions affect the comparability of the results of operations for
fiscal year 2000, 1999 and 1998 including the following:
In January of fiscal 2000, the Company completed the acquisition of Murphy
Farms, Inc. ("MFI") and its affiliated companies for 11.1 million shares of the
Company's common stock (subject to post-closing adjustments) and the assumption
of approximately $203.0 million in debt, plus other liabilities. MFI is a hog
producer that has approximately 345,000 sows which produce approximately 6.0
million market hogs annually. MFI had sales of $453.9 million in the fiscal year
ended October 1999. A significant portion of these sales were to the Company's
MPG.
In May of fiscal 2000, the Company completed the acquisition of Carroll's
Foods, Inc. ("CFI") and its affiliated companies and partnership interests for
4.3 million shares of the Company's common stock and the assumption of
approximately $231.0 million in debt, plus other liabilities. CFI's U.S. hog
production operation includes approximately 180,000 sows which produce
approximately 2.9 million market hogs annually. The acquisition included 100% of
the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16%
interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100% of
CFI's turkey grow-out operations, CFI's 49% interest in Carolina Turkeys and
certain hog production interests in Brazil and Mexico. CFI had sales of $348.0
million in calendar year 1998. A significant portion of these sales were to the
Company's MPG.
In August of fiscal 2000, the Company acquired the capital stock of Societe
Financiere de Gestion et de Participation S.A. ("SFGP"), a private-label
processed meats manufacturer in France. SFGP had sales of approximately $100.0
million in calendar year 1998.
In November of fiscal 1999, the Company acquired 63% of the total equity of
Schneider Corporation ("Schneider"), in exchange for approximately 2.5 million
Exchangeable Shares of Smithfield Canada Limited, a wholly owned subsidiary 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 of fiscal 1999, the Company acquired a 67% interest in Animex S.A.
("Animex"), a major meat and poultry processing company in Poland. During fiscal
2000, the Company increased its ownership in Animex to 85% of total equity.
Animex had calendar year 1998 sales of approximately $400.0 million.
In September of fiscal 1999, the Company acquired all of the capital stock of
Societe Bretonne de Salaisons ("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.
13
<PAGE>
In June of 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. Prior to fiscal 1999, the investment in Circle Four was accounted
for using the equity method of accounting. As a result of the acquisition of CFI
in May of fiscal 2000, Circle Four became a wholly owned subsidiary of the
Company.
In October of fiscal 1999, the Company acquired all of the assets and business
of North Side Foods Corp. ("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.
Results of Operations
Fiscal 2000 and 1999 included 52 weeks of operations compared to fiscal 1998,
which included 53 weeks of operations. Accordingly, sales and all expense
categories in fiscal 2000 and 1999 reflect the impact of one less week of
operations compared to fiscal 1998.
Consolidated
Fiscal 2000 Compared To Fiscal 1999
Sales in fiscal 2000 increased $1.4 billion, or 36.4%, from fiscal 1999. The
increase in sales was primarily attributable to a full year of sales from
businesses acquired in fiscal 1999 as well as acquisitions in the current year
and an increase in both average unit selling prices and processed meats volume
in the base business. See the following sections for comments on sales changes
by business segment.
Gross profit in fiscal 2000 increased $154.5 million, or 28.6%, primarily on
the inclusion of acquired businesses in the HPG where margins improved sharply
due to higher live hog prices which were partially offset by expenses related to
the implementation of food safety programs at Company facilities in the MPG and
lost production due to the aftereffects of Hurricane Floyd. Fiscal 2000 margins
were also favorably impacted by commodity hedging gains in the HPG. Excluding
acquisitions, gross profit in the base business, which was more heavily weighted
to the MPG, declined as a result of the same higher live hog prices which
reduced fresh pork and processed meats margins.
Selling, general and administrative expenses increased $95.0 million, or
32.1%, primarily on the inclusion of selling, general and administrative
expenses of acquired businesses. In the base business, costs increased primarily
due to higher advertising and promotion expenses to market branded fresh pork
and processed meats.
Depreciation expense increased $46.4 million, or 73.0% in fiscal 2000 compared
to fiscal 1999, primarily related to the inclusion of the depreciation expense
of acquired businesses and increased depreciation expense in the base business
on processed meats expansion and information systems projects.
Interest expense increased $31.4 million, or 77.5%, in fiscal 2000 compared to
fiscal 1999, reflecting the inclusion of the interest expense of the acquired
businesses, the cost of borrowings to finance additional investments and higher
interest rates.
The effective income tax rate for fiscal 2000 increased to 37.4% compared to
33.9% in fiscal 1999, primarily on the inclusion of foreign earnings which are
taxed at higher rates. The Company had a valuation allowance of $5.3 million
related to income tax assets as of April 30, 2000 primarily related to losses in
foreign jurisdictions for which no tax benefit was recognized. At May 2, 1999,
the Company had no valuation allowances for deferred tax assets.
14
<PAGE>
Reflecting the factors previously discussed, net income decreased to $75.1
million, or $1.52 per diluted share, in fiscal 2000 down from $94.9 million, or
$2.32 per diluted share, in fiscal 1999. Earnings per diluted share was also
effected by an increase in average shares outstanding due to shares issued in
connection with business acquisitions in fiscal 2000.
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 average unit selling prices of
meat products as the result of significantly lower raw material (live hog) costs
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 the acquired businesses of Schneider, SBS and North
Side and increased volumes in the base business.
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 expense 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.
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 or 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.
Meat Processing Group
Fiscal 2000 Compared To Fiscal 1999
MPG sales in fiscal 2000 increased $1.3 billion, or 33.6%, from fiscal 1999. The
increase in sales was primarily attributable to a full year of sales from
businesses acquired in fiscal 1999 as well as acquisitions
15
<PAGE>
in the current year and an increase in both average unit selling prices and
processed meats volume in the base business. For fiscal 2000, processed meats
and fresh pork volume increased 36.5% and 3.7%, respectively. In addition, unit
selling prices increased 14.0% due to higher live hog costs and a greater
proportion of value-added processed meats in the sales mix. Excluding acquired
businesses, processed meats volume increased 6.0% which was offset by a 6.2%
decrease in fresh pork volume. Fresh pork volume decreased as the Company
reduced slaughter levels as a result of sharply lower fresh pork margins
compared with the prior year.
Operating profit in the MPG decreased to $122.9 million in fiscal 2000 from
$253.8 million, the result of sharply lower margins on fresh pork partially
offset by the incremental operating profit generated in acquired businesses. In
addition, increased spending in the base business on the market expansion of
fresh pork and processed meats brands, the implementation of food safety
programs at Company facilities and lost production due to the aftereffects of
Hurricane Floyd also contributed to lower operating profit.
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) costs 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, a 17.2% increase in processed meats tonnage and a 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. Excluding acquired businesses, processed
meats and fresh pork volumes increased 3.3% and 1.6%, respectively.
Operating profit in the MPG increased to $253.8 million in fiscal 1999 from
$144.1 in fiscal 1998. This increase resulted from sharply improved margins in
fresh pork 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 pork and processed meat
products and expenses related to preparing the Company's information systems for
the Year 2000.
Hog Production Group
Fiscal 2000 Compared to Fiscal 1999
HPG sales increased sharply in fiscal 2000 compared to fiscal 1999 as a result
of the inclusion of the sales of MFI and CFI and a 27.9% increase in live hog
prices. With the acquisition of CFI and MFI, hogs sold in fiscal 2000 increased
to 5.5 million from 2.1 million in fiscal 1999. Intersegment sales to the MPG
are eliminated in the Consolidated Statements of Income.
Operating profit in the HPG improved to $99.6 million compared to a loss of
$46.1 million in fiscal 1999 primarily as a result of a sharp increase in hog
prices from their historic lows in fiscal 1999 and the impact of selling
significantly more hogs at substantially better margins in the current year. The
operating profit was partially offset by the aftereffects of Hurricane Floyd on
the hog production operations on the East Coast of the U.S. In addition,
operating profit benefited from favorable commodity hedging contracts.
16
<PAGE>
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.
Operating losses in the HPG increased to $46.1 million compared to $2.3
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.
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-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.
Cash provided by operations totaled $125.2 million for fiscal 2000 compared to
$123.4 million in fiscal 1999. The decrease in net income, year to year, was
offset by an increase in non-cash charges. Non-cash charges increased to $132.2
million in the current year from $89.3 million in the prior year primarily as a
result of the incremental depreciation and amortization expense of acquired
businesses.
In fiscal 2000, cash used in investing activities declined to $192.3 million
from $261.9 million in fiscal 1999 primarily as a result of a substantial
decrease in cash acquisitions. Capital expenditures totaled $100.4 million
related to processed meats expansion and plant improvement projects as well as
additional hog production facilities at Circle Four. In addition, during fiscal
2000, the Company made investments in Agroindustrial del Noroeste, a Mexican
meat processing and hog production joint venture, and other long-term
investments. These capital expenditures and investments were funded with cash
provided by operations and borrowings under the Company's long-term revolving
credit facility. As of April 30, 2000, the Company had definitive commitments of
$53.6 million for capital expenditures primarily to increase its processed meats
and value-added fresh pork capacity at several of its processing plants.
Financing activities provided $87.0 million in fiscal 2000 as additional
borrowings on revolving credit facilities were used primarily for the repayment
of notes payable and the repurchase of approximately 3.0 million shares of the
Company's common stock. The Company has been authorized to repurchase a total of
4.0 million shares. During fiscal 2000, the Company repaid a substantial portion
of the debt assumed in connection with the CFI and MFI acquisitions with the
placement of $225.0 million 10-year senior secured notes and an increase in the
existing revolving credit facility borrowing capacity from $300.0 million to
$650.0 million. The $225.0 million in senior secured notes include $75.0 million
of variable rate debt, $100.0 million of notes at 7.89% and $50.0 million of
notes at 8.44%. As of April 30, 2000, the Company has unused availability of
$249.9 million under the long-term credit facility. 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.
17
<PAGE>
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 Company utilizes futures and option contracts for
live hogs and grains to manage hog production margins when management determines
the conditions are appropriate 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. 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. As of April 30, 2000,
the Company had a deferred loss of $41.3 million compared to a deferred gain on
outstanding futures contracts of $8.9 million at May 2, 1999. As of April 30,
2000 and May 2, 1999, the Company had open futures contracts with contract
values of $711.7 million and $219.7 million, respectively. As of April 30, 2000
and May 2, 1999, the Company had deposits with brokers for outstanding futures
contracts of $45.1 million and $15.6 million, 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 April 30, 2000, the potential change in fair value of open future
contracts, assuming a 10% change in the underlying commodity price, was $33.6
million.
Year 2000
The Company completed its Year 2000 project as scheduled. As of April 30, 2000,
the Company's production, computing and communication infrastructure systems
have operated without any significant Year 2000 related problems and appear to
be Year 2000 compliant. The Company is not aware that any major customers or
third-party suppliers have experienced any significant Year 2000 related
problems. The Company believes all critical systems are Year 2000 compliant.
However, there is no guarantee that the Company has discovered all possible Year
2000 failure points including non-compliant third parties whose systems and
operation impact the Company and other uncertainties. Total costs incurred since
the inception of the project to ready the Company for the Year 2000 is $35.8
million of which $20.3 million was capitalized in accordance with generally
accepted accounting principles.
18
<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, the cost of compliance with environmental and
health standards and actions of domestic and foreign governments.
19
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Incorporated by reference to Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
All statements other than historical information incorporated in this Item
7A are forward looking statements. The actual impact of future market changes
could differ materially because of, among others, the factors discussed in this
Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements listed in Item 14(a) hereof are
incorporated herein by reference and are filed as a part of this report
beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
(a) Information required by this Item regarding directors and all persons
nominated or chosen to become directors is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 29, 2000.
(b) Information required by this Item regarding the executive officers of
the company is included in Part I, Item 4A of this Annual Report on Form 10-K.
There is no family relationship between any of the Company's directors and
executive officers.
Item 11. Executive Compensation
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 29, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 29, 2000.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Shareholders to be held on August 29, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-k
(a) 1. and 2. Index to Financial Statements and Financial Statement
-----------------------------------------------------
Schedule
--------
An "Index to Financial Statements and Financial Statement Schedule" has
been filed as a part of this Form 10-K Annual Report on page F-1 hereof.
3. Exhibits
--------
Exhibit 3.1(a) ---- Articles of Incorporation of the Company, as amended
through October 27, 1998 (incorporated by reference to
Exhibit 2 to the Company's Current Report on From 8-K
filed with the Commission on September 5, 1997).
Exhibit 3.1(b) ---- Articles of Amendment filed October 28, 1998 to the
Articles of Incorporation, as amended, authorizing
terms for one Series B Special Voting Preferred Share,
par value $1.00 per share (incorporated by reference
to Exhibit 3.1(b) to the Company's Annual Report on
Form 10-K for its fiscal year ended May 2, 1999 filed
with the Commission August 2, 1999).
Exhibit 3.2 ---- By-Laws of the Company, as amended to date
(incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed with the
Commission on February 14, 2000).
21
<PAGE>
Exhibit 4.1 ---- Articles of Incorporation of the Company, as amended
to date (see Exhibit 3.1 above).
Exhibit 4.2 ---- Form of Certificate representing the Company's Common
Shares, par value $.50 per share (including Rights
legend) (incorporated by reference to Exhibit 6 to the
Company's Current Report on Form 8-K filed with the
Commission on September 5, 1997).
Exhibit 4.3 ---- Form of Certificate representing Rights (incorporated
by reference to Exhibit 4.4 to the Company's Annual
Report on Form 10-K for its fiscal year ended May 3,
1998 filed with the Commission on July 30, 1998).
Exhibit 4.4 ---- Rights Agreement as Amended, dated as of May 1, 1998,
between the Company and Harris Trust and Savings Bank,
Rights Agent (incorporated by reference to Exhibit 4.4
to the Company's Annual Report on Form 10-K for its
fiscal year ended May 3, 1998 filed with the
Commission on July 30, 1998).
Exhibit 4.4(a) ---- Amendment No. 2, dated as of November 15, 1999, to the
Rights Agreement (incorporated by reference to the
Company's Registration Statement on Form 8-A12B/A
filed with the Commission on December 22, 1999).
Exhibit 4.5(a) ---- Form of Certificate representing the Company's single
Series B Special Voting Preferred Share, par value
$1.00 per share (incorporated by reference to Exhibit
4.8 to the Company's Registration Statement on Form
S4, as amended, filed with the Commission on September
25, 1998 (the "Exchange Offer Registration
Statement")).
Exhibit 4.5(b) ---- Form of Certificate representing Smithfield Canada
Limited Exchangeable Shares (incorporated by reference
to Exhibit 4.9 to the Exchange Offer Registration
Statement).
Exhibit 4.5(c) ---- Voting, Support and Exchange Trust Agreement among
Smithfield Foods, Inc., Smithfield Canada Limited and
CIBC Mellon Trust Company, dated as of November 10,
1998 (incorporated by reference to Exhibit 4.5(c) to
the Company's Annual Report on Form 10-K for its
fiscal year ended May 2, 1999 filed with the
Commission on August 2, 1999).
Exhibit 4.5(d) ---- Exchangeable Share Provisions (excerpted from the
Articles of Incorporation, as amended, of Smithfield
Canada Limited) (incorporated by reference to Exhibit
4.5(d) to the Company's Annual Report on Form 10-K for
its fiscal year ended May 2, 1999 filed with the
Commission on August 2, 1999).
Exhibit 4.6(a) * ---- Second Amended and Restated Multi-Year Credit
Agreement dated as of December 3, 1999, among
Smithfield Foods, Inc., the Subsidiary Guarantors
party thereto, the Lenders party thereto, and The
Chase Manhattan Bank, as Administrative Agent,
relating to a $650,000,000 secured multi-year
revolving credit facility.
Exhibit 4.6(b) ---- Collateral Agency, Pledge and Security Agreement dated
as of July
22
<PAGE>
10, 1997, among Smithfield Foods, Inc., the Subsidiary
Guarantors party thereto, The Chase Manhattan Bank, as
Collateral Agent, relating to the Company's multi-year
revolving credit facility (incorporated by reference
to Exhibit 4.5(b) of the Company's Annual Report on
Form 10-K for its fiscal year ended April 27, 1997
filed with the Commission on July 25, 1997).
Exhibit 4.7(a) * ---- Amended and Restated Note Purchase Agreement dated as
of October 31, 1999, among Smithfield Foods, Inc. and
each of the Purchasers listed on Annex 1 thereto,
relating to $196,882,354 in senior secured notes.
Exhibit 4.7(b) ---- Joint and Several Guaranty dated as of July 15, 1996,
by Gwaltney of Smithfield, Ltd., John Morrell & Co.,
The Smithfield Packing Company, Incorporated, SFFC,
Inc., Patrick Cudahy Incorporated, and Brown's of
Carolina, Inc. (incorporated by reference to Exhibit
4.7(a) to the Company's Form 10-Q Quarterly Report for
the fiscal quarter ended July 28, 1996); and Amendment
Number One to the Note Purchase Agreement dated as of
July 15, 1997 (incorporated by reference to Exhibit
4.6(a) to the Company's Annual Report on Form 10-K for
the fiscal year ended April 27, 1997 filed with the
Commission on July 25, 1997).
Exhibit 4.7(c) ---- Joint and Several Guaranty dated as of July 15, 1997,
by Lykes Meat Group, Inc., Sunnyland, Inc., Valleydale
Foods, Inc., Hancock's Old Fashioned Country Hams,
Inc., Copaz Packing Corporation, and Smithfield
Packing - Landover, Inc. (incorporated by reference to
Exhibit 4.6(b) to the Company's Annual Report on Form
10-K for the fiscal year ended April 27, 1997 filed
with the Commission on July 25, 1997).
Exhibit 4.7(d) * ---- Joinder Agreement dated as of March 9, 2000, among
Gwaltney of Smithfield, Ltd., John Morrell & Co., The
Smithfield Packing Company, Incorporated, SFFC, Inc.,
Patrick Cudahy Incorporated, and Brown's of Carolina,
Inc. and each of the Noteholders listed on Annex 1.
Exhibit 4.8(a) * ---- Amended and Restated Note Purchase Agreement dated as
of October 27, 1999, among Smithfield Foods, Inc. and
each of the Purchasers listed on Annex 1 thereto,
relating to $225,000,000 in senior secured notes.
Exhibit 4.8(b) * ---- Joint and Several Guaranty dated as of October 27,
1999, by Gwaltney of Smithfield, Ltd., John Morrell &
Co., The Smithfield Packing Company, Incorporated,
SFFC, Inc., Patrick Cudahy Incorporated, Brown's of
Carolina, Inc., Carroll's Foods, Inc., Carroll's
Realty, Inc., Carroll's Realty Partnership, North Side
Foods Corp., Lykes Meat Group, Circle Four
Corporation, Brown's Farms LLC, Carroll's Foods of
Virginia, Inc., Smithfield-Carroll's Farms, and
Central Plains Farms.
Exhibit 4.8(c) * ---- Joinder Agreement dated as of June 9, 2000, among
Murphy Farms, Inc. and Smithfield Packing Real Estate,
LLC.
Exhibit 4.9(a) * ---- Note Purchase Agreement dated as of March 2, 1999,
among Murphy Farms, Inc. and each of the Purchasers
listed on Annex 1
23
<PAGE>
thereto, relating to $100,000,000 in unsecured notes.
Exhibit 4.9(b) * ---- Guaranty by the Company dated as of January 24, 2000.
Exhibit 4.10 ---- Indenture between the Company and SunTrust Bank,
Atlanta (incorporated by reference to Exhibit 4.8 to
the Company's Current Report on Form 10-Q for the
fiscal quarter ended February 1, 1998 filed with the
Commission on March 17, 1998).
Exhibit 4.11(a) ---- Consolidating Loan Agreement between Cape Fear Farm
Credit, ACA ("Farm Credit") and Carroll's Foods, Inc.,
Carroll's Realty, Inc., and Carroll's Realty
Partnership ("Carroll's Borrower's") dated as of
August 28, 1998 (schedules omitted) (incorporated by
reference to Exhibit 4.10(a) to the Company's Form 10-
K Annual Report for the fiscal year ended May 2, 1999
filed with the Commission on August 2, 1999).
Exhibit 4.11(b) ---- Loan and Loan Document Modification Agreement between
Farm Credit and the Carroll's Borrowers, dated as of
May 7, 1999 (incorporated by reference to Exhibit
4.10(b) to the Company's Form 10-K Annual Report for
the fiscal year ended May 2, 1999 filed with the
Commission on August 2, 1999).
Exhibit 4.11(c) ---- Unconditional Guaranty to Farm Credit from Smithfield
Foods, Inc. dated as of May 7, 1999 (incorporated by
reference to Exhibit 4.10(c) to the Company's Form 10-
K Annual Report for the fiscal year ended May 2, 1999
filed with the Commission on August 2, 1999).
Exhibit 4.11(d) ---- Unconditional Guaranty to Farm Credit from Carroll's
Turkeys, Inc. dated as of May 7, 1999 (incorporated
by reference to Exhibit 4.10(d) to the Company's Form
10-K Annual Report for the fiscal year ended May 2,
1999 filed with the Commission on August 2, 1999).
Exhibit 10.1(a) ---- Agreement with Shareholders dated as of May 7, 1999 by
and between the Company and Jeffrey S. Matthews,
Carroll M. Baggett and James O. Matthews (incorporated
by reference to Exhibit 2.3 to the Company's Current
Report on Form 8-K dated May 7, 1999 and filed with
the Commission on May 12, 1999).
Exhibit 10.1(b) ---- Registration Rights Agreement dated as of May 7, 1999
by and between the Company and Jeffrey S. Matthews,
Carroll M. Baggett and James O. Matthews (incorporated
by reference to Exhibit 2.4 to the Company's Current
Report on Form 8-K dated May 7, 1999 and filed with
the Commission on May 12, 1999).
Exhibit 10.1(c) ---- Registration Rights Agreement between Smithfield
Foods, Inc. and Wendell H. Murphy, Harry D. Murphy,
Joyce M. Norman, Wendell H. Murphy, Jr., Wendy Murphy
Crumpler, Stratton K. Murphy, Marc D. Murphy and
Angela Brown (excluding Smithfield Foods, Inc., the
"Murphy Selling Shareholders") (incorporated by
reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K dated January 20, 2000 and filed
February 14, 2000 (the "February 14, 2000 Form 8-K")).
Exhibit 10.1(d) ---- Agreement with Shareholders between Smithfield Foods,
Inc. and the Murphy Selling Shareholders (incorporated
by reference to Exhibit 2.3 to the February 14, 2000
Form 8-K).
Exhibit 10.2 ---- Smithfield Foods, Inc. 1984 Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.1 to
the Company's Form 10-K Annual Report for the fiscal
year ended April 28, 1991).
Exhibit 10.3 ---- Smithfield Foods, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's Form 10-K Annual Report for the fiscal year
ended May 2, 1993).
24
<PAGE>
Exhibit 10.4 ---- Smithfield Foods, Inc. 1998 Incentive Bonus Plan
applicable to the Company's Chief Operating Officer
(incorporated by reference to Exhibit 10.6 to the
Company's form 10-K annual Report for the fiscal year
ended April 27, 1997 filed with the Commission on July
25, 1997).
Exhibit 10.5 ---- Smithfield Foods, Inc. 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 10.7 to the
company's form 10-K Annual Report for the fiscal year
ended May 3, 1998 filed with the Commission on July
30, 1998).
Exhibit 21 * ---- Subsidiaries of the Registrant.
Exhibit 23 * ---- Consent of Independent Public Accountants.
Exhibit 27 * ---- Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K for January 20, 2000,
with the Commission on February 14, 2000, to report: (i) the Company's
acquisition in January 2000 of Murphy Farms, Inc. and related
transactions; (ii) the reorganization on January 20, 2000 of the
Company's Board of Directors, including the resignation of six
employee directors, the simultaneous election of two non-employee
directors and the downsizing of the Board to nine members; and (iii)
the Board of Directors' approval of an increase, from 3 million to 4
million, in the number of Common Shares which the Company is
authorized to purchase, 2.8 million shares having already been
purchased pursuant to such prior authorization.
2. The Company filed on April 12, 2000 an amendment to the Current Report
on Form 8-K filed February 14, 2000 in order to file certain
historical and pro forma financial information relating to the
Company's acquisition of Murphy Farms, Inc.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant: Smithfield Foods, Inc.
Date: July 28, 2000 By: /s/ Joseph W. Luter, III
-------------------------
Joseph W. Luter, III
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joseph W. Luter, III Chairman of the Board, President and July 28, 2000
----------------------------------------- Chief Executive Officer, and Director
Joseph W. Luter, III (Principal Executive Officer)
/s/ C. Larry Pope Vice President and Chief Financial July 28, 2000
----------------------------------------- Officer (Principal Financial Officer)
C. Larry Pope
/s/ Daniel G. Stevens Vice President and Corporate July 28, 2000
----------------------------------------- Controller (Principal Accounting
Daniel G. Stevens Officer)
/s/ Robert L. Burrus, Jr. Director July 26, 2000
-----------------------------------------
Robert L. Burrus, Jr.
/s/ Carol T. Crawford Director July 21, 2000
-----------------------------------------
Carol T. Crawford
/s/ Ray A. Goldberg Director July 21, 2000
-----------------------------------------
Ray A. Goldberg
/s/ George E. Hamilton, Jr. Director July 28, 2000
-----------------------------------------
George E. Hamilton, Jr.
/s/ William H. Prestage Director July 24, 2000
-----------------------------------------
William H. Prestage
/s/ Melvin O. Wright Director July 21, 2000
-----------------------------------------
Melvin O. Wright
</TABLE>
26
<PAGE>
SMITHFIELD FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Consolidated Balance Sheets for the Fiscal Years Ended April 30, 2000
and May 2, 1999 F-2
Consolidated Statements of Income for the Fiscal Years 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Fiscal Years 2000, 1999 and 1998 F-5
Consolidated Statements of Shareholders' Equity for the Fiscal Years ended May 3,
1998, May 2, 1999 and April 30, 2000 F-6
Notes to Consolidated Financial Statements F-7 to F-23
FINANCIAL STATEMENTS SCHEDULE
Independent Public Accountants' Report on Financial Statement Schedule I F-24
Schedule I - Condensed Financial Information of Registrant F-25 to F-29
</TABLE>
27
<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 April 30, 2000, and
May 2, 1999, and the related consolidated statements of income, cash flows, and
shareholders' equity for each of the three years in the period ended April 30,
2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the 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 April 30, 2000, and May 2, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
Richmond, Virginia
June 7, 2000
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
FISCAL YEARS ENDED (IN THOUSANDS,
EXCEPT SHARE DATA) APRIL 30, 2000 MAY 2, 1999
------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,882 $ 30,590
Accounts receivable less allowances
of $4,899 and $2,656 390,037 252,332
Inventories 665,143 348,856
Prepaid expenses and other current
assets 127,664 50,302
------------------------------------------------------------------------------
Total current assets 1,232,726 682,080
------------------------------------------------------------------------------
Property, plant and equipment:
Land 73,753 29,605
Buildings and improvements 666,428 404,002
Machinery and equipment 732,217 562,745
Breeding stock 100,576 27,394
Construction in progress 39,069 59,670
------------------------------------------------------------------------------
1,612,043 1,083,416
Less accumulated depreciation (398,469) (292,640)
------------------------------------------------------------------------------
Net property, plant and equipment 1,213,574 790,776
------------------------------------------------------------------------------
Other assets:
Goodwill, net of accumulated
amortization of $8,695 and $2,871 320,148 103,017
Investments in partnerships 102,551 80,182
Other 260,614 115,559
------------------------------------------------------------------------------
Total other assets 683,313 298,758
------------------------------------------------------------------------------
$3,129,613 $1,771,614
==============================================================================
See Notes to Consolidated Financial Statements
F-2
<PAGE>
APRIL 30, 2000 MAY 2, 1999
------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 64,924 $ 63,900
Current portion of long-term debt
and capital lease obligations 48,505 25,828
Accounts payable 270,004 207,703
Accrued expenses and other current
liabilities 239,436 168,784
------------------------------------------------------------------------------
Total current liabilities 622,869 466,215
------------------------------------------------------------------------------
Long-term debt and capital lease
obligations 1,187,770 594,241
------------------------------------------------------------------------------
Other noncurrent liabilities:
Deferred income taxes 274,329 31,523
Pension and postretirement benefits 78,656 62,276
Other 30,311 17,638
------------------------------------------------------------------------------
Total other noncurrent liabilities 383,296 111,437
------------------------------------------------------------------------------
Minority interests 32,769 57,475
------------------------------------------------------------------------------
Commitments and contingencies
------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $1.00 par value,
1,000,000 authorized shares -- --
Common stock, $.50 par value,
100,000,000 authorized shares;
54,705,386 and 41,847,359 issued 27,353 20,924
Additional paid-in capital 473,974 180,020
Retained earnings 415,266 340,154
Accumulated other comprehensive
income (13,684) 1,148
------------------------------------------------------------------------------
Total shareholders' equity 902,909 542,246
------------------------------------------------------------------------------
$3,129,613 $1,771,614
==============================================================================
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
FISCAL YEARS (IN THOUSANDS,
EXCEPT PER SHARE DATA) 2000 1999 1998
------------------------------------------------------------------------------
Sales $5,150,469 $3,774,989 $3,867,442
Cost of sales 4,456,403 3,235,414 3,479,629
------------------------------------------------------------------------------
Gross profit 694,066 539,575 387,813
Selling, general and
administrative expenses 390,634 295,610 219,861
Depreciation expense 109,893 63,524 42,300
Interest expense 71,944 40,521 31,891
Minority interests 1,608 (3,518) 199
Nonrecurring charge (See Note 11) -- -- 12,600
------------------------------------------------------------------------------
Income before income taxes 119,987 143,438 80,962
Income taxes 44,875 48,554 27,562
------------------------------------------------------------------------------
Net income $ 75,112 $ 94,884 $ 53,400
==============================================================================
Net income per basic common share $ 1.54 $ 2.39 $ 1.42
==============================================================================
Net income per diluted common share $ 1.52 $ 2.32 $ 1.34
==============================================================================
See Notes to Consolidated Financial Statements
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS (IN THOUSANDS) 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $75,112 $94,884 $53,400
Depreciation and amortization 118,964 68,566 45,872
Deferred income taxes 13,227 20,737 14,752
(Gain) loss on sale of
property, plant and
equipment (2,591) (138) 216
Changes in operating assets
and liabilities, net of
effect of acquisitions:
Accounts receivable (7,192) 954 15,115
Inventories (35,976) (17,680) 11,672
Prepaid expenses and
other current assets (44,501) (2,225) (10,550)
Other assets 2,153 (55,563) (7,746)
Accounts payable, accrued
expenses and other liabilities 6,022 13,849 (25,194)
----------------------------------------------------------------------------------
Net cash provided by operating
activities 125,218 123,384 97,537
----------------------------------------------------------------------------------
Investing activities:
Capital expenditures (100,383) (95,447) (92,913)
Business acquisitions, net of
cash acquired (34,596) (151,223) (7,810)
Investments in partnerships and
other assets (63,289) (16,206) (5,357)
Proceeds from sale of property,
plant and equipment 6,018 991 1,153
----------------------------------------------------------------------------------
Net cash used in investing activities (192,250) (261,885) (104,927)
----------------------------------------------------------------------------------
Financing activities:
Net (repayments) borrowings on
notes payable (249,393) 24,182 (75,000)
Proceeds from issuance of long-
term debt 269,041 22,948 450,050
Net borrowings on long-term
credit facility 324,000 71,000 --
Principal payments on long-term
debt and capital lease
obligations (187,632) (21,754) (333,053)
Repurchase and retirement of
common stock (73,145) -- --
Exercise of common stock options 4,121 12,155 124
----------------------------------------------------------------------------------
Net cash provided by financing
activities 86,992 108,531 42,121
----------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 19,960 (29,970) 34,731
Effect of currency exchange rates
on cash (668) 38 --
Cash and cash equivalents at
beginning of year 30,590 60,522 25,791
----------------------------------------------------------------------------------
Cash and cash equivalents at end
of year $49,882 $30,590 $60,522
==================================================================================
Supplemental disclosures of cash
flow information:
Interest paid, net of amount
capitalized $79,780 $37,696 $31,428
==============================================================================
Income taxes paid $30,315 $15,306 $10,179
==============================================================================
Common stock issued for
acquisitions $369,407 $73,049 $--
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
(IN THOUSANDS) SHARES VALUE CAPITAL EARNINGS INCOME STOCK TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
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
Unrealized gain on securities -- -- -- -- 1,372 -- 1,372
Foreign currency translation -- -- -- -- 2,960 -- 2,960
Minimum pension liability -- -- -- -- (3,184) -- (3,184)
---------
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
Comprehensive income:
Net income -- -- -- 75,112 -- -- 75,112
Unrealized loss on securities -- -- -- -- (3,882) -- (3,882)
Foreign currency translation -- -- -- -- (6,561) -- (6,561)
Minimum pension liability -- -- -- -- (4,389) -- (4,389)
---------
Total comprehensive income 60,280
---------
Common stock issued 15,604 7,802 361,605 -- -- -- 369,407
Exercise of stock options 232 116 4,005 -- -- -- 4,121
Repurchase and retirement of
common stock (2,978) (1,489) (71,656) -- -- -- (73,145)
---------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2000 54,705 $27,353 $473,974 $415,266 $(13,684) $ -- $902,909
=================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Smithfield Foods, Inc. and subsidiaries (the "Company") operates as a hog
producer and a processor, manufacturer, marketer, seller and distributor of
fresh pork and processed meats. The Company's principal slaughtering and further
processing operations are conducted through the Meat Processing Group ("MPG")
which consists primarily of six wholly owned domestic pork processing
subsidiaries and four international meat processing entities. The Company's hog
production operations are conducted through the Hog Production Group ("HPG")
which consists primarily of three hog production operations located in the
United States and certain joint venture investments outside the United States.
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
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fiscal 2000 and 1999 included 52 weeks of operations compared to fiscal
1998 which included 53 weeks of operations.
Foreign Currency Translation
The 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 operations. Related translation adjustments are reported as a
component of other comprehensive income in shareholders' equity. Gains and
losses from foreign currency transactions are included in earnings. All amounts
presented in the consolidated financial statements are in U.S. 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 April 30, 2000 and May 2,
1999, cash and cash equivalents include $200 and $3,400, 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:
APRIL 30, 2000 MAY 2, 1999
------------------------------------------------------------------------------
Hogs on farms $323,639 $ 83,352
Fresh and processed meats 264,479 219,647
Manufacturing supplies 55,937 30,201
Other 21,088 15,656
------------------------------------------------------------------------------
$665,143 $348,856
==============================================================================
F-7
<PAGE>
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 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 $3,293 in fiscal 2000, $2,377 in fiscal 1999 and
$2,530 in fiscal 1998. Repair and maintenance expenses totaled $160,222,
$120,833 and $106,481 in fiscal 2000, 1999 and 1998, 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 11).
Self-Insurance Programs
The Company is self-insured for certain levels of general and vehicle
liability, property, 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
12). 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 stock options during the
period.
F-8
<PAGE>
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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, as amended, is not required to be
adopted until fiscal 2002. 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 2000
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 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 Company utilizes futures and option contracts for
live hogs and grains to manage hog production margins when management determines
the conditions are appropriate 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. 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. As of April 30, 2000,
the Company had a deferred loss of $41,309 compared to a deferred gain on
outstanding futures contracts of $8,895 at May 2, 1999. As of April 30, 2000 and
May 2, 1999, the Company had open futures contracts with contract values of
$711,654 and $219,748, respectively. As of April 30, 2000 and May 2, 1999, the
Company had deposits with brokers for outstanding futures contracts of $45,131
and $15,591, 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 April 30, 2000, the
potential change in fair value of open future contracts, assuming a 10% change
in the underlying commodity price, was $33,624.
NOTE 3 ACQUISITIONS
In January of fiscal 2000, the Company completed the acquisition of Murphy
Farms, Inc. ("MFI") and its affiliated companies for 11.1 million shares of the
Company's common stock (subject to post-closing adjustments) and the assumption
of approximately $203,000 in debt, plus other liabilities. MFI is a hog producer
that has approximately 345,000 sows which produce approximately 6.0 million
market hogs annually. The balance of the purchase price in excess of the fair
value of the assets acquired and the liabilities assumed at the date of
acquisition was recorded as an intangible asset totaling $147,006.
F-9
<PAGE>
In May of fiscal 2000, the Company completed the acquisition of Carroll's
Foods, Inc. ("CFI") and its affiliated companies and partnership interests for
4.3 million shares of the Company's common stock and the assumption of
approximately $231,000 in debt, plus other liabilities. CFI's U.S. hog
production operation includes approximately 180 thousand sows which produce
approximately 2.9 million market hogs annually. The acquisition included 100% of
the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16%
interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100% of
CFI's turkey grow-out operations, CFI's 49% interest in Carolina Turkeys, and
certain hog production interests in Brazil and Mexico. The balance of the
purchase price in excess of the fair value of the assets acquired and the
liabilities assumed at the date of acquisition was recorded as an intangible
asset totaling $45,100.
Had the acquisitions of CFI and MFI occurred at the beginning of fiscal
1999, sales, net income and net income per diluted share would have been
$5,329,074, $77,633 and $1.31, respectively, for fiscal 2000 and $3,892,769,
$66,080 and $1.46, respectively, for fiscal 1999.
In August of fiscal 2000, the Company acquired the capital stock of Societe
Financiere de Gestion et de Participation S.A. ("SFGP") a private-label
processed meats manufacturer in France. SFGP had sales of approximately $100,000
in calendar year 1998.
In November of fiscal 1999, the Company acquired 63% of the total equity of
Schneider Corporation ("Schneider"), in exchange for approximately 2.5 million
Exchangeable Shares of Smithfield Canada Limited, a wholly owned subsidiary 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
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, respectively, for fiscal 1999 and
$4,405,239, $59,447 and $1.40, respectively, for fiscal 1998.
In April of fiscal 1999, the Company acquired a 67% interest in Animex S.A.
("Animex"), a major meat and poultry processing company in Poland. During fiscal
2000, the Company increased its ownership in Animex to 85% of total equity. 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 $55,100. Had the acquisition of Animex occurred at the beginning
of 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 of fiscal 1999, the Company acquired all of the capital stock
of Societe Bretonne de Salaisons ("SBS"), the largest private-label manufacturer
of ham, pork shoulder and bacon products in France. SBS had calendar year 1998
sales of approximately $100,000.
In June of 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. Prior to fiscal 1999, the investment in Circle Four was
accounted for using the equity method of accounting. As a result of the
acquisition of CFI in May of fiscal 2000, Circle Four became a wholly owned
subsidiary of the Company.
In October of fiscal 1999, the Company acquired all of the assets and
business of North Side Foods Corp. ("North Side"), a major domestic supplier of
precooked sausage to McDonald's Corporation. North Side had calendar year 1998
sales of approximately $58,000.
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 SFGP, North Side and SBS occurred at the beginning of April
30, 2000 and May 2, 1999, it would not have had a material effect on sales, net
income or net income per diluted share for the year ended April 30, 2000 and May
2, 1999.
F-10
<PAGE>
NOTE 4 DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, 2000 MAY 2, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term credit facility, expiring July
2002 $ 395,000 $ 71,000
7.625% senior subordinated notes, due February 2008 186,500 200,000
8.52% senior notes, due August 2006 100,000 100,000
7.89% senior note, payable through October 2009 95,000 --
8.25% note, payable through March 2006 75,000 --
Variable rate note, payable through October 2009 72,500 --
8.44% note, payable through October 2009 50,000 --
8.34% senior notes, due August 2003 40,000 40,000
Variable rate note, due March 2002 25,000 --
Euribor 3 mos. + .50% French franc notes, payable through April 2004 16,676 19,355
8.41% senior notes, payable through April 2004 14,779 14,779
9.70% Canadian dollar notes, payable through September 2010 12,228 13,114
6.70% note, payable October 2001 10,134 --
Miscellaneous with interest rates ranging from 3.63% to 10.75% due June 2001 through November 2006 119,506 144,288
-----------------------------------------------------------------------------------------------------------------------------------
1,212,323 602,536
Less current portion (44,941) (24,102)
-----------------------------------------------------------------------------------------------------------------------------------
$1,167,382 $578,434
===================================================================================================================================
</TABLE>
Scheduled maturities of long-term debt are as follows:
FISCAL YEAR
------------------------------------------------------------
2001 $ 44,941
2002 99,634
2003 447,904
2004 113,131
2005 45,866
Thereafter 460,847
------------------------------------------------------------
$1,212,323
============================================================
In fiscal 2000, the Company placed $225,000 ten-year senior secured notes.
The $225,000 in senior secured notes include $75,000 of variable rate debt,
$100,000 of notes at 7.89% and $50,000 of notes at 8.44%. The net proceeds from
the notes were used to repay a substantial portion of debt assumed in connection
with the CFI and MFI acquisitions. In connection with the MFI acquisition, the
Company assumed $100,000 of outstanding long-term debt including $75,000 of
notes at 8.25% and $25,000 of variable rate debt.
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 temporarily invested in short-term marketable
securities.
In fiscal 2000, the Company increased the revolving credit facility
borrowing from $300,000 to $650,000. 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 and expires in July 2002.
Including certain facilities which were acquired in connection with
business acquisitions, the Company has aggregate credit facilities totaling
$735,443. As of April 30, 2000, the Company had unused capacity under these
credit facilities of $249,915. Included in the aggregate credit facilities are
$85,443 of short-term credit facilities with various financial institutions
assumed in connection with business acquisitions in fiscal 1999. These short-
term credit facilities are classified as notes payable in the Consolidated
Balance Sheets. These facilities are generally at prevailing market rates. The
Company pays a commitment fee on the unused portion of the aggregate revolving
credit facilities.
F-11
<PAGE>
Average borrowings under credit facilities were $305,470 in fiscal 2000,
$74,820 in fiscal 1999 and $149,723 in fiscal 1998 at average interest rates of
approximately 7.5%, 6.3%, and 6.7%, respectively. Maximum borrowings were
$458,922 in fiscal 2000, $152,510 in fiscal 1999 and $247,000 in fiscal 1998.
Total outstanding borrowings were $457,200 and $134,900 with average interest
rates of 7.2% and 7.1% as of April 30, 2000 and May 2, 1999, respectively.
The senior subordinated notes are unsecured. Senior notes are secured by
four of the Company's major processing plants and certain hog farm facilities.
The $650,000 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 April 30, 2000, the fair value
of long-term debt, based on the market value of debt with similar maturities and
covenants, was approximately $1,207,134.
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 5 INCOME TAXES
Income tax expense consists of the following:
2000 1999 1998
------------------------------------------------------------------------------
Current tax expense:
Federal $26,994 $20,445 $11,315
State 3,174 5,409 2,043
Foreign 1,480 1,963 --
------------------------------------------------------------------------------
31,648 27,817 13,358
------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal 9,500 19,924 15,684
State 1,073 (2,082) (1,480)
Foreign 2,654 2,895 --
------------------------------------------------------------------------------
13,227 20,737 14,204
------------------------------------------------------------------------------
$44,875 $48,554 $27,562
==============================================================================
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
2000 1999 1998
------------------------------------------------------------------------------
Federal income taxes at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 1.7 2.5 1.0
Earnings in jurisdictions taxed
at rates different from the
statutory U.S. federal rate 2.9 -- --
Foreign sales corporation benefit (2.0) (1.4) (2.0)
Amortization of acquisition costs 1.5 0.7 0.5
Benefits of certain insurance contracts -- (1.1) (3.3)
Nondeductible settlements -- -- 4.5
Other (1.7) (1.8) (1.7)
------------------------------------------------------------------------------
37.4% 33.9% 34.0%
==============================================================================
F-12
<PAGE>
The tax effects of temporary differences consist of the following:
APRIL 30, 2000 MAY 2, 1999
------------------------------------------------------------------------------
Deferred tax assets:
Accrued expenses $ 16,998 $ 5,398
Tax credits, carryforwards and net
operating losses 13,939 14,308
Employee benefits 2,222 17,748
Intangibles 2,210 3,146
Inventories 1,758 1,627
Alternative minimum tax credit 1,407 5,283
Other 572 --
------------------------------------------------------------------------------
$ 39,106 $47,510
==============================================================================
Deferred tax liabilities:
Accounting method change $138,403 $ --
Property, plant and equipment 120,277 47,876
Investments in subsidiaries 39,560 3,293
Other -- 7,313
------------------------------------------------------------------------------
$298,240 $58,482
==============================================================================
As of April 30, 2000 and May 2, 1999, the Company had $15,195 and $20,551,
respectively, of net current deferred tax assets included in prepaid expenses
and other current assets. The Company had a valuation allowance of $5,265
related to income tax assets as of April 30, 2000 primarily related to losses in
foreign jurisdictions for which no tax benefit was recognized. At May 2, 1999,
the Company had no valuation allowances for deferred tax assets.
The tax credits, carryforwards and net operating losses expire from fiscal
2001 to 2020. The alternative minimum tax credits do not expire.
As of April 30, 2000, foreign subsidiary net earnings of $10,065 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 6 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
APRIL 30, 2000 MAY 2, 1999
------------------------------------------------------------------------------
Payroll and related benefits $ 68,611 $ 60,079
Self-insurance reserves 29,248 33,870
Grower fees 21,128 871
Interest 12,801 9,671
Pension and postretirement benefits 12,104 12,671
Other 95,544 51,622
------------------------------------------------------------------------------
$239,436 $168,784
==============================================================================
NOTE 7 SHAREHOLDERS EQUITY
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
In fiscal 1998, 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.
F-13
<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.
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.
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. In fiscal 1999, the 1992 Plan was merged with the 1998 Plan. As of
April 30, 2000, there were 1,854,000 shares available for grant under the 1998
Plan.
The following is a summary of transactions for the various stock option
plans during fiscal 1998, 1999 and 2000:
WEIGHTED
AVERAGE EXERCISE
NUMBER OF SHARES PRICE
------------------------------------------------------------------------------
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
Granted 55,000 23.99
Exercised (232,000) 11.53
Cancelled (115,000) 16.85
------------------------------------------------------------------------------
Outstanding at April 30, 2000 1,850,500 $16.69
==============================================================================
As of April 30, 2000, May 2, 1999 and May 3, 1998, the number of option
shares exercisable was 915,500, 1,127,500 and 1,260,000, respectively, at
weighted average exercise prices of $11.61, $11.53 and $4.06, respectively.
F-14
<PAGE>
The following table summarizes information about stock options outstanding
as of April 30, 2000:
WEIGHTED
OPTION SHARES AVERAGE WEIGHTED
OUTSTANDING REMAINING AVERAGE
EXERCISE APRIL 30, CONTRACTUAL EXERCISE
PRICE RANGE 2000 LIFE PRICE
------------------------------------------------------------------------------
$10.72 to 11.75 955,500 3.6 $11.53
13.63 to 15.31 260,000 5.7 13.76
16.47 to 18.78 135,000 7.3 17.31
25.69 to 29.19 470,000 7.9 27.63
31.63 to 32.69 30,000 7.8 32.07
------------------------------------------------------------------------------
Stock options with an exercise price of $11.53 and $15.31 per share are the
only options exercisable as of April 30, 2000.
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:
2000 1999 1998
------------------------------------------------------------------------------
Net income, as reported $75,112 $94,884 $53,400
Pro forma net income 73,960 93,705 52,571
Net income per common share, as
reported:
Basic $ 1.54 $ 2.39 $ 1.42
Diluted 1.52 2.32 1.34
Pro forma net income per common
share:
Basic $ 1.52 $ 2.36 $ 1.40
Diluted 1.50 2.29 1.32
------------------------------------------------------------------------------
The weighted average fair values of option shares granted were $11.68,
$13.40 and $11.88 for fiscal 2000, 1999 and 1998, 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:
2000 1999 1998
------------------------------------------------------------------------------
Expected option life 7.0 years 7.0 years 6.0 years
Expected annual volatility 35.0% 35.0% 35.0%
Risk-free interest rate 5.9% 5.3% 6.3%
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.
F-15
<PAGE>
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 8 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:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
APRIL 30, 2000 MAY 2, 1999 APRIL 30, 2000 MAY 2, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Change in benefit obligation
Benefit obligation at beginning of year $442,752 $242,554 $30,294 $10,817
Service cost 10,779 6,626 596 397
Interest cost 30,251 22,007 2,006 1,416
Plan amendments -- 15,681 (1,360) --
Employee contributions 1,240 -- -- --
Acquisitions 12,584 156,343 -- 18,843
Benefits paid (26,929) (22,285) (1,869) (1,055)
Foreign currency changes (2,727) 10,676 (388) 1,138
Actuarial (gain) loss (42,760) 11,150 (2,646) (1,262)
-----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 425,190 442,752 26,633 30,294
-----------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 396,725 203,392 -- --
Actual return on plan assets 11,982 12,979 -- --
Acquisitions 11,968 172,116 -- --
Employer contributions 20,676 19,049 1,869 1,055
Foreign currency changes (3,149) 11,474 -- --
Benefits paid (26,929) (22,285) (1,869) (1,055)
-----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 411,273 396,725 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Reconciliation of accrued cost
Funded status (13,917) (46,027) (26,633) (30,294)
Unrecognized actuarial (gain) or loss (7,333) 11,303 -- (490)
Unrecognized prior service cost 14,236 15,728 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Accrued cost at end of year $ (7,014) $(18,996) $(26,633) $(30,784)
===================================================================================================================================
Amounts recognized in the statement of
financial position consist of
Prepaid benefit cost $ 35,211 $ 19,546 $ -- $ --
Accrued benefit liability (64,127) (44,163) (26,633) (30,784)
Intangible asset 9,508 410 -- --
Accumulated other comprehensive income 12,394 5,211 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of year $ (7,014) $(18,996) $(26,633) $(30,784)
===================================================================================================================================
</TABLE>
F-16
<PAGE>
Components of net periodic costs include:
PENSION BENEFITS
2000 1999 1998
------------------------------------------------------------------------------
Service cost $ 10,779 $ 6,626 $ 4,104
Interest cost 30,251 22,007 16,730
Expected return on plan assets (35,468) (25,834) (15,309)
Net amortization 1,174 86 (1,137)
------------------------------------------------------------------------------
Net periodic cost $ 6,736 $ 2,885 $ 4,388
==============================================================================
POSTRETIREMENT BENEFITS
2000 1999 1998
------------------------------------------------------------------------------
Service cost $ 596 $ 397 $ 58
Interest cost 2,006 1,416 767
Net amortization (124) 95 69
------------------------------------------------------------------------------
Net periodic cost $2,478 $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 $184,039, $174,709 and $119,951, respectively, as
of April 30, 2000 and $204,648, $193,010 and $139,027, respectively, as of May
2, 1999.
In determining the projected benefit obligation and the accumulated
postretirement benefit obligation in fiscal 2000 and 1999, the following
assumptions were made:
PENSION BENEFITS POSTRETIREMENT BENEFITS
APRIL 30, MAY 2, APRIL 30, MAY 2,
2000 1999 2000 1999
------------------------------------------------------------------------------
Discount rate 7.7% 6.8% 7.5% 6.7%
Expected return on assets 8.7% 9.0% -- --
Compensation increase 3.7% 3.9% -- --
------------------------------------------------------------------------------
In determining the accumulated postretirement benefit obligation in fiscal
2000 and 1999, the assumed annual rate of increase in per capita cost of covered
health care benefits was 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 8.0% for
fiscal 2000 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 PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
------------------------------------------------------------------------------
Effect on postretirement benefit
obligations as of April 30, 2000 $1,662 $(1,522)
Effect on annual benefit cost in fiscal
2000 $ 205 $ (183)
------------------------------------------------------------------------------
F-17
<PAGE>
NOTE 9 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 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 2000, 1999 and 1998, the Company paid $6,299, $5,807 and $6,228,
respectively, in fees for use of the facilities. As of April 30, 2000 and May 2,
1999, the Company had investments of $545 and $1,108, 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 leases the facility for an amount covering
debt service costs plus a minimum guaranteed annual fee. Debt service cost was
$2,206 and $2,239 in fiscal 2000 and 1999, respectively. The minimum guaranteed
annual fee was $200 for both years. As of April 30, 2000 and May 2, 1999, the
Company had investments of $444 and $1,028, respectively, in the partnership.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements are as follows:
FISCAL YEAR
------------------------------------------------------------------
2001 $ 24,487
2002 26,246
2003 13,386
2004 10,175
2005 7,558
Thereafter 18,640
------------------------------------------------------------------
$100,492
==================================================================
Rental expense was $32,425 in fiscal 2000, $24,535 in fiscal 1999 and
$24,839 in fiscal 1998. Rental expense in fiscal 2000, 1999 and 1998 included
$2,566, $2,787 and $3,231 of contingent maintenance fees, respectively.
The Company has a sale and leaseback arrangement for certain hog production
facilities. 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
------------------------------------------------------------------
2001 $ 5,639
2002 4,909
2003 4,423
2004 10,759
2005 2,044
Thereafter 2,435
------------------------------------------------------------------
30,209
Less amounts representing interest (6,257)
------------------------------------------------------------------
Present value of net minimum obligations 23,952
Less current portion (3,564)
------------------------------------------------------------------
Long-term capital lease obligations $20,388
==================================================================
F-18
<PAGE>
As of April 30, 2000, the Company had definitive commitments of $53,582 for
capital expenditures primarily to increase its processed meats and value-added
fresh pork capacity at several of its processing plants.
NOTE 10 RELATED PARTY TRANSACTIONS
The president of CFI before the acquisition (see Note 3) was a director of the
Company in fiscal 1999. Prior to the acquisition, the Company had a long-term
agreement to purchase hogs from CFI at prices that, in the opinion of
management, were equivalent to market. Pursuant to this agreement with CFI, the
Company purchased $161,965 and $246,371 of hogs in fiscal 1999 and 1998,
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 $138,705, $106,365 and $168,829 of hogs in fiscal 2000, 1999
and 1998, respectively.
In fiscal 1999 and 1998, the Company purchased raw materials totaling
$5,997 and $18,524, respectively, from a company which was 48%-owned by the
chairman and chief executive officer's children in fiscal 1998. In the opinion
of management, these purchases were made at prices that were equivalent to
market.
NOTE 11 REGULATION AND LITIGATION
Like other participants in the meat processing industry, the Company is subject
to various laws and regulations administered by federal, state and other
government entities, including the Environmental Protection Agency and
corresponding state agencies as well as the United States Department of
Agriculture, the United States Food and Drug Administration and the United
States Occupational Safety and Health Administration. Management believes that
the Company presently is in compliance with all such laws and regulations in all
material respects, and that continued compliance with these standards will not
have a material adverse effect on the Company's financial position or results of
operations. Furthermore, with respect to the suits discussed below, the Company
believes that their ultimate resolution will not have a material adverse effect
on the Company's financial position or annual results of operations.
In United States of America v. Smithfield Foods, Inc. et al., the United
States District Court for the Eastern District of Virginia imposed a $12,600
civil penalty on the Company and two of its subsidiaries for Clean Water Act
violations at the Company's Smithfield, Virginia processing plants. The Company
recorded a nonrecurring charge of $12,600 during fiscal 1998 with respect to
this penalty. In September 1999, the United States Court of Appeals for the
Fourth Circuit affirmed the District Court's determination of liability but
remanded the penalty determination to the District Court with instructions to
recalculate the civil penalty solely to correct a 4% error made by the
government's expert. In May 2000, the Company filed a certiorari petition
seeking review of the Fourth Circuit's ruling by the United States Supreme
Court. There can be no assurance as to the outcome of such appeal or any
subsequent proceedings regarding this matter.
F-19
<PAGE>
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 suit described above. In October 1999, the Circuit Court
dismissed the Commonwealth's case against the Company, ruling under the doctrine
of res judicata that the subject matter of the case had already been finally
adjudicated against the Company in the suit. The Commonwealth has appealed the
decision of the Circuit Court to the Supreme Court of Virginia. There can be no
assurance as to the outcome of the Commonwealth's appeal or any subsequent
proceedings regarding this matter.
In June 2000, Neuse River Foundation, Inc., Richard J. Dove, d/b/a The
Neuse Riverkeeper, D. Boulton Baldridge, d/b/a The Cape Fear Riverkeeper, New
River Foundation, Inc., Tom Mattison, d/b/a The New Riverkeeper, and The Water
Keeper Alliance filed a lawsuit in the General Court of Justice, Superior Court
Division, of the State of North Carolina against the Company, CFI, Brown's of
Carolina, Inc., MFI, Wendell H. Murphy, Sr., Wendell H. Murphy, Jr., and Joseph
W. Luter, III. The lawsuit alleges, among other things, claims based on
negligence, trespass, strict liability and unfair trade practices related to the
operation of swine waste disposal lagoons in North Carolina. The lawsuit
apparently seeks numerous and costly remedies, including injunctive relief to
end all use of hog waste disposal lagoons in North Carolina, unspecified but
very large remediation costs and unspecified additional damages. The Company
believes that none of these claims has merit and furthermore that the plaintiffs
lack standing to bring such a suit. The Company intends to contest this
litigation vigorously.
In April 2000, the Company and one of its subsidiaries were named as
defendants, along with IBP, inc., in a civil action filed in the United States
District Court for the Middle District of Georgia. The case was filed by four
named plaintiffs on behalf of a putative nationwide class of hog producers who
from 1994 to the present produced and sold finished hogs to defendants on a
spot, auction or cash market basis. The plaintiffs contend that the defendants
violated the Packers and Stockyards Act of 1921 (the "PSA") by reason of the
defendants' engaging in various captive supply arrangements for the procurement
of hogs for slaughter. The Company believes that it has valid defenses to this
action, that it has acted properly in its dealings with hog producers and that
it has not violated the PSA or any other applicable law. The Company further
believes that the action does not qualify for certification as a class action.
Accordingly, the Company will defend this action vigorously.
F-20
<PAGE>
NOTE 12 NET INCOME PER SHARE
The computation for basic and diluted net income per share follows:
WEIGHTED
AVERAGE
NET INCOME SHARES PER SHARE
------------------------------------------------------------------------------
FISCAL 2000
Net income per basic share $75,112 48,642 $1.54
Effect of dilutive stock options -- 744 --
------------------------------------------------------------------------------
Net income per diluted share $75,112 49,386 $1.52
==============================================================================
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
==============================================================================
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 April 30, 2000.
2000 1999 1998
------------------------------------------------------------------------------
Stock option shares excluded 500,000 495,000 65,000
Average option price per share $27.90 $28.10 $32.42
------------------------------------------------------------------------------
NOTE 13 SEGMENTS
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 supplies raw materials (live hogs) to the hog slaughtering operations of the
Company and independent third parties on both an open-market sales basis and
under long-term contracts. 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 April 30, 2000, May 2, 1999 and May 3, 1998.
The information contains certain allocations of expenses that the Company deems
reasonable and appropriate for the evaluation of results of operations. Certain
prior year amounts have been restated to conform with fiscal 2000 presentations.
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.
F-21
<PAGE>
MEAT HOG GENERAL
PROCESSING PRODUCTION CORPORATE TOTAL
------------------------------------------------------------------------------
FISCAL 2000
Sales $4,984,010 $735,328 $ -- $5,719,338
Intersegment sales -- (568,869) -- (568,869)
Depreciation and
amortization 73,133 41,288 4,543 118,964
Operating profit (loss) 122,880 99,633 (30,582) 191,931
Interest expense 37,941 26,103 7,900 71,944
Assets 1,613,395 1,319,097 197,121 3,129,613
Capital expenditures 91,925 7,262 1,196 100,383
------------------------------------------------------------------------------
FISCAL 1999
Sales $3,729,644 $155,796 $ -- $3,885,440
Intersegment sales -- (110,451) -- (110,451)
Depreciation and
amortization 48,814 16,541 3,211 68,566
Operating profit (loss) 253,839 (46,050) (23,830) 183,959
Interest expense 25,565 12,583 2,373 40,521
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)
Depreciation and
amortization 34,936 9,206 1,730 45,872
Operating profit (loss) 144,049 (2,292) (28,904) 112,853
Interest expense 22,854 7,390 1,647 31,891
Assets 787,274 178,078 118,293 1,083,645
Capital expenditures 70,329 13,252 9,332 92,913
------------------------------------------------------------------------------
The following table presents the Company's sales and long-lived assets
attributed to operations in the U.S. and international geographic areas.
2000 1999 1998
------------------------------------------------------------------------------
Sales:
U.S. $4,016,749 $3,470,307 $3,867,442
Canada 632,897 244,121 --
Poland 344,984 -- --
France 155,839 60,561 --
------------------------------------------------------------------------------
Total $5,150,469 $3,774,989 $3,867,442
==============================================================================
Long-lived assets at end of
year:
U.S. $1,545,204 $ 790,315 $ 572,522
Canada 187,092 169,038 --
Poland 90,809 78,201 --
France 73,782 51,980 --
------------------------------------------------------------------------------
F-22
<PAGE>
NOTE 14 QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
FIRST SECOND THIRD FOURTH
------------------------------------------------------------------------------
2000
Sales $1,142,415 $1,230,129 $1,377,166 $1,400,759
Gross profit 147,496 172,640 176,183 197,747
Net income 6,930 22,214 17,488 28,480
Net income per common
share
Basic $ .15 $ .49 $ .37 $ .52
Diluted .15 .48 .36 .51
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
------------------------------------------------------------------------------
F-23
<PAGE>
Report of Independent Public Accountants on Schedule I
To the Shareholders of Smithfield Foods, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Smithfield Foods, Inc. and subsidiaries
included in this Form 10-K Annual Report and have issued our report thereon
dated June 7, 2000. Our audit was made for the purpose of forming an opinion on
the basic financial statements as a whole. Schedule I, listed in the Index to
Financial Statements and Financial Statement Schedule, is the responsibility of
the Company's management and is presented for the purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in to relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Richmond, Virginia
June 7, 2000
F-24
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY BALANCE SHEET
As of April 30, 2000 and May 2, 1999
<TABLE>
<CAPTION>
Fiscal Years Ended
April 30, 2000 May 2, 1999
---------------- ----------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 25 $ 24
Accounts receivable 11,516 15,137
Receivable from related parties - 4,051
Refundable income taxes 1,987 1,458
Deferred income taxes 15,195 20,551
Other current assets 49,652 16,005
---------------- ----------------
Total current assets 78,375 57,226
---------------- ----------------
Investments in and net advances to
subsidiaries, at cost plus equity
in undistributed earnings 1,457,414 885,291
---------------- ----------------
Other assets:
Investment in partnerships 545 31,139
Property, plant and equipment, net 20,412 21,422
Other 47,691 42,447
---------------- ----------------
Total other assets 68,648 95,008
---------------- ----------------
$1,604,437 $1,037,525
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 18,133 $ 5,633
Accounts payable 6,996 5,086
Accrued expenses 53,368 61,254
---------------- ----------------
Total current liabilites 78,497 71,973
---------------- ----------------
Long-term debt 571,237 385,370
---------------- ----------------
Deferred income taxes and other noncurrent liabilites 51,794 37,936
---------------- ----------------
Shareholders' equity 902,909 542,246
---------------- ----------------
$1,604,437 $1,037,525
================ ================
The accompanying notes are an integral part of these statements
</TABLE>
F-25
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
April 30, 2000 May 2, 1999 May 3, 1998
-------------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
Sales $ - $ - $ -
Cost of sales (8,379) 5,073 9,589
---------------- ---------------- ----------------
Gross Profit 8,379 (5,073) (9,589)
---------------- ---------------- ----------------
General and administrative expenses, net of allocation
to subsidiaries 24,696 8,366 4,686
Depreciation expense 2,205 1,252 843
Interest expense 31,756 24,930 24,578
Nonrecurring charge - - 12,600
---------------- ---------------- ----------------
Loss before income tax benefit and equity in earnings
of subsidiaries (50,278) (39,621) (52,296)
Income tax benefit (21,795) (16,677) (19,130)
---------------- ---------------- ----------------
Loss before equity in earnings of subsidiaries
(28,483) (22,944) (33,166)
---------------- ---------------- ----------------
Equity in earnings of subsidiaries 103,595 117,828 86,566
---------------- ---------------- ----------------
Net income $75,112 $94,884 $53,400
================ ================ ================
The accompanying notes are an integral part of these statements
F-26
</TABLE>
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
April 30, 2000 May 2, 1999 May 3, 1998
-------------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cashflows from operating activities:
Net Income $75,112 $94,884 $53,400
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,119 2,758 1,461
(Gain) loss on sale of property, plant and equipment - 30 -
Changes in operating assets and liabilities:
Deferred income taxes and other noncurrent liabilities 19,214 23,145 13,966
Accounts receivable 3,621 (14,813) 3,351
Receivables from related parties 4,051 (4,051) 1,414
Other current assets (33,647) (84) (10,784)
Accounts payable and accrued expenses (5,976) 18,313 14,243
Refundable income taxes (529) 842 (4,089)
Other assets (7,158) (17,600) (10,495)
-------- -------- --------
Net cash provided by operating activities 58,807 103,424 62,467
-------- -------- --------
Cashflows from investing activities:
Capital expenditures (1,196) (4,377) (9,332)
Increase in investment in and net advances to subsidiaries (217,547) (131,827) (235,117)
Investments in partnerships 30,594 15,827 (5,213)
-------- -------- --------
Net cash used in investing activities: (188,149) (120,377) (249,662)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 225,000 - 447,150
Principal payments on long-term debt (26,633) (2,977) (252,317)
Repurchase and retirement of common stock (73,145) - -
Proceeds from exercise of stock options 4,121 12,154 124
-------- -------- --------
Net cash provided by financing activities: 129,343 9,177 194,957
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 1 (7,776) 7,762
Cash and cash equivalents at beginning of year 24 7,800 38
-------- -------- --------
Cash and cash equivalents at end of year $ 25 $ 24 $ 7,800
======== ======== ========
The accompanying notes are an integral part of these statements
F-27
</TABLE>
<PAGE>
Schedule I-Condensed Financial Information of Registrant
Smithfield Foods, Inc.
Notes to Parent Company Financial Statements
(Dollars In Thousands)
April 30, 2000 and May 2, 1999
1. The Notes to Parent Company Financial Statements should be read in
conjunction with the Registrant's Notes to Consolidated Financial Statements
included herein.
2. Restricted assets of Registrant:
Existing loan convenants contain provisions which limit the amount of funds
available for transfer from the subsidiaries to Smithfield Foods, Inc.
without the consent of certain lenders.
3. Accrued expenses as of April 30, 2000 and May 2, 1999 are as follows:
<TABLE>
2000 1999
---------- ----------
<S> <C> <C>
Self-insurance reserves $22,006 $20,216
Interest 10,626 8,957
Other 20,736 32,081
---------- ----------
$53,368 $61,254
========== ==========
</TABLE>
4. Long-term Debt:
In fiscal 2000, the Company increased the revolving credit facility
borrowing from $300,000 to $650,000. 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 and expires in July 2002.
In fiscal 2000, the Company placed $225,000 ten-year senior secured notes.
The $225,000 million in senior secured notes include $75,000 in variable
rate debt, $100,000 of notes at 7.89% and $50,000 of notes at 8.44%. A
substantial portion of the proceeds from the notes were advanced to the
Registrant's subsidiaries.
As of April 30, 2000, the Registrant guaranteed $18,171 of capital lease
obligations of its subsidiaries.
Scheduled maturities of the Registrant's long-term debt consists of the
following:
<TABLE>
<CAPTION>
Fiscal Year
---------------------
<S> <C>
2001 $ 18,133
2002 18,084
2003 25,473
2004 64,886
2005 26,414
Thereafter 436,380
--------
$589,370
========
</TABLE>
5. The amount of dividends received from subsidiaries in fiscal 2000 and 1999
was $37,800 and $76,700 million, respectively.
F-28
<PAGE>
6. In fiscal 1998, the Registrant's shareholders approved the reincorporation
of the Registrant in Virginia from Delaware. The purpose of the
reincorporation was to reduce annual franchise taxes and does not affect the
Registrant's capitalization or the manner in which it operates.
7. Supplemental disclosures of cash flow information:
<TABLE>
2000 1999 1998
------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest paid, net of amount capitalized $ 39,107 $28,180 $20,901
============= =============== ===============
Income taxes paid $ 24,458 $15,306 $10,179
============= =============== ===============
Noncash investing and financing activities:
Common stock issued for acquisitions $369,407 $73,049 $ -
============= =============== ===============
F-29
</TABLE>
