<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 29, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from........................to........................
COMMISSION FILE NUMBER 0-2258
SMITHFIELD FOODS, INC.
200 Commerce Street
Smithfield, Virginia 23430
(757) 365-3000
Virginia 52-0845861
---------------------------- -------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
------ -------
Class Shares outstanding at December 8, 2000
---------------------------- --------------------------------------
Common Stock, $.50 par value 54,440,211
1-16
<PAGE>
SMITHFIELD FOODS, INC.
CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - October 29, 2000 and April 30, 2000 3-4
Consolidated Condensed Statements of Income - 13 Weeks Ended October 29, 2000
and October 31,1999 and 26 Weeks Ended October 29, 2000 and October 31,1999 5
Consolidated Condensed Statements of Cash Flows - 26 Weeks Ended October 29, 2000
and October 31, 1999 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2-16
<PAGE>
PART I. FINANCIAL INFORMATION
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) October 29, 2000 April 30, 2000
-----------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 50,295 $ 49,882
Accounts receivable, net 380,581 390,037
Inventories 726,313 665,143
Prepaid expenses and other current assets 71,958 127,664
---------- ----------
Total current assets 1,229,147 1,232,726
---------- ----------
Property, plant and equipment 1,680,881 1,612,043
Less accumulated depreciation (451,702) (398,469)
---------- ----------
Net property, plant and equipment 1,229,179 1,213,574
---------- ----------
Other assets:
Goodwill 319,714 320,148
Investments in partnerships 118,953 102,551
Other 379,961 260,614
---------- ----------
Total other assets 818,628 683,313
---------- ----------
$3,276,954 $3,129,613
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3-16
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) October 29, 2000 April 30, 2000
-------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C>
Current liabilities:
Notes payable $ 58,152 $ 64,924
Current portion of long-term debt and capital lease obligations 41,702 48,505
Accounts payable 269,186 270,004
Accrued expenses and other current liabilities 235,382 239,436
---------- ----------
Total current liabilities 604,422 622,869
---------- ----------
Long-term debt and capital lease obligations 1,260,360 1,187,770
---------- ----------
Other noncurrent liabilities:
Deferred income taxes 287,572 274,329
Pension and postretirement benefits 74,353 78,656
Other 27,242 30,311
---------- ----------
Total other noncurrent liabilities 389,167 383,296
---------- ----------
Minority interests 27,693 32,769
---------- ----------
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares - -
Common stock, $.50 par value, 100,000,000
authorized shares; 54,429,711 and 54,705,386 issued 27,215 27,353
Additional paid-in capital 465,947 473,974
Retained earnings 504,410 415,266
Accumulated other comprehensive income (2,260) (13,684)
---------- ----------
Total shareholders' equity 995,312 902,909
---------- ----------
$3,276,954 $3,129,613
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4-16
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
(In thousands, except per share data) October 29, 2000 October 31, 1999 October 29, 2000 October 31, 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C>
Sales $1,430,918 $1,230,129 $2,852,244 $2,372,544
Cost of sales 1,196,123 1,057,525 2,388,049 2,052,408
---------- ---------- ---------- ---------
Gross profit 234,795 172,604 464,195 320,136
Selling, general and administrative expenses 108,417 96,721 212,262 191,306
Depreciation expense 30,524 25,815 61,179 50,674
Interest expense 25,007 16,760 48,395 31,293
Minority interests (923) (875) (1,169) 1,886
---------- ---------- ---------- ---------
Income before income taxes 71,770 34,183 143,528 44,977
Income taxes 27,194 11,969 54,383 15,833
---------- ---------- ---------- ---------
Net income $ 44,576 $ 22,214 $ 89,145 $ 29,144
========== ========== ========== ==========
Net income per common share:
Basic $ .82 $ .49 $ 1.63 $ .64
========== ========== ========== ==========
Diluted $ .81 $ .48 $ 1.61 $ .62
========== ========== ========== ==========
Average common shares outstanding:
Basic 54,474 45,585 54,567 45,722
========== ========== ========== ==========
Diluted 55,158 46,433 55,252 46,772
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5-16
<PAGE>
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
(In thousands) October 29, 2000 October 31, 1999
------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 89,145 $ 29,144
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 68,169 54,328
(Gain) loss on sale of property, plant and equipment 4,857 (182)
Changes in operating assets and liabilities, net of effect of
acquisitions (43,798) (75,589)
--------- ---------
Net cash provided by operating activities 118,373 7,701
--------- ---------
Cash flows from investing activities:
Capital expenditures (69,709) (52,917)
Business acquisitions, net of cash (7,930) (25,478)
Proceeds from sale of property, plant and equipment 387 2,335
Investments in long-term marketable securities (60,415) (10,262)
Investments in partnerships (17,936) (3,913)
--------- ---------
Net cash used in investing activities (155,603) (90,235)
--------- ---------
Cash flows from financing activities:
Net repayments on notes payable (9,206) (164,613)
Proceeds from issuance of long-term debt 19,688 249,523
Net borrowings on long-term credit facility 57,000 173,000
Principal payments on long-term debt and capital lease obligations (22,558) (149,983)
Repurchase and retirement of common stock (9,691) (31,667)
Exercise of common stock options 906 2,946
--------- ---------
Net cash provided by financing activities 36,139 79,206
--------- ---------
Net decrease in cash and cash equivalents (1,091) (3,328)
Effect of foreign exchange rate changes on cash 1,504 (384)
Cash and cash equivalents at beginning of period 49,882 30,590
--------- ---------
Cash and cash equivalents at end of period $ 50,295 $ 26,878
========= =========
Supplemental disclosures of cash flow information:
Cash payments during period:
Interest (net of amount capitalized) $ 52,801 $ 28,088
========= =========
Income taxes $ 47,639 $ 12,362
========= =========
</TABLE>
Noncash investing and financing activities:
In May of fiscal 2000, the Company completed the acquisition of Carroll's
Foods, Inc. and its affiliated companies and partnership interests in
exchange for 4.3 million shares of the Company's common stock and the
assumption of approximately $231.0 million in debt, plus other liabilities.
See also Note 7.
See Notes to Consolidated Condensed Financial Statements
6-16
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) These statements should be read in conjunction with the Consolidated
Financial Statements and related notes, which are included in the Company's
Annual Report, for the fiscal year ended April 30, 2000. The interim
consolidated condensed financial information furnished herein is unaudited.
The information reflects all adjustments (which include only normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations
for the periods included in this report.
(2) Inventories consist of the following:
(In thousands) October 29, 2000 April 30, 2000
-------------- ---------------- --------------
Hogs on farms $ 316,816 $ 323,639
Fresh and processed meats 335,480 264,479
Manufacturing supplies 56,002 55,937
Other 18,015 21,088
--------- ---------
$ 726,313 $ 665,143
========= =========
(3) Net income per basic share is computed based on the average common shares
outstanding during the period. Net income per diluted share is computed
based on the average common shares outstanding during the period adjusted
for the effect of potential common stock equivalents, such as stock
options. The computation for basic and diluted net income per share is as
follows:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------------------------------------------------------
(In thousands, October 29, October 31, October 29, October 31,
except per share data) 2000 1999 2000 1999
--------------------- ---------- ---------- --------- ----------
<S> <C>
Net income $44,576 $22,214 $ 89,145 $29,144
------- ------- -------- -------
Average common shares outstanding:
Basic 54,474 45,585 54,567 45,722
Dilutive stock options 684 848 685 1,050
------- ------- -------- -------
Diluted 55,158 46,433 55,252 46,772
======= ======= ======== =======
Net income per common share:
Basic $ .82 $ .49 $ 1.63 $ .64
======= ======= ======== =======
Diluted $ .81 $ .48 $ 1.61 $ .62
======= ======= ======== =======
</TABLE>
The summary below lists stock options outstanding at the end of each
fiscal period 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.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
-----------------------------------------------------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C>
Stock option shares excluded 1,045,000 370,000 1,195,000 180,000
Average option price per share $27.14 $28.92 $27.03 $30.16
</TABLE>
(4) The components of comprehensive income, net of related taxes, consist of:
7-16
<PAGE>
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------------------------------------------------------
October 29, October 31, October 29, October 31,
(In thousands) 2000 1999 2000 1999
-------------- ---------- ---------- ---------- ----------
<S> <C>
Net income $44,576 $22,214 $ 89,145 $29,144
Other comprehensive income:
Foreign currency translation (6,327) (1,485) (7,640) (2,985)
Unrealized gain (loss) on securities 25,355 (471) 19,064 (288)
------- ------- -------- -------
Comprehensive income $63,604 $20,258 $100,569 $25,871
======= ======= ======== =======
</TABLE>
(5) The following table presents information about the results of operations
for each of the Company's reportable segments for the 13 and 26 weeks ended
October 29, 2000 and October 31, 1999, respectively. Certain prior year
amounts have been restated to conform to fiscal 2001 presentations.
<TABLE>
<CAPTION>
Meat Hog General
(In thousands) Processing Production Corporate Total
-----------------------------------------------------------------------------------------------------
<S> <C>
13 Weeks Ended:
October 29, 2000
---------------------
Sales $1,351,582 $311,752 $ - $1,663,334
Intersegment sales - (232,416) - (232,416)
Operating profit (loss) 32,429 72,736 (8,388) 96,777
October 31, 1999
---------------------
Sales $1,208,974 $123,627 $ - $1,332,601
Intersegment sales - (102,472) - (102,472)
Operating profit (loss) 44,320 13,279 (6,656) 50,943
------------------------------------------------------------------------------------------------------
26 Weeks Ended:
October 29, 2000
---------------------
Sales $2,681,606 $636,469 $ - $3,318,075
Intersegment sales - (465,831) - (465,831)
Operating profit (loss) 24,611 183,887 (16,575) 191,923
October 31, 1999
---------------------
Sales $2,330,594 $243,998 $ - $2,574,592
Intersegment sales - (202,048) - (202,048)
Operating profit (loss) 59,220 29,764 (12,714) 76,270
</TABLE>
(6) In January 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.
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 $147.0 million. The acquisition
was accounted for using the purchase method of accounting and, accordingly,
the accompanying financial statements include the financial position and
results of operations from the date of acquisition. Had the acquisition of
MFI occurred at the beginning of fiscal 2000, sales would have been $1.3
million and $2.5 million for the 13 weeks and the 26 weeks ended October
31, 1999, respectively. Net income and net income per diluted share would
have been $20.5 million and $.36, respectively, for the 13 weeks ended
October 31, 1999, and $28.6 million and $.50, respectively, for the 26
weeks ended October 31, 1999.
8-16
<PAGE>
(7) In May 1999 (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.
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 $45.1 million.
(8) In August 1999 (fiscal 2000), the Company acquired all of the capital
stock of Societe Financiere de Gestion et de Participation S.A. ("SFGP").
SFGP had sales of approximately $100.0 million in calendar year 1998.
(9) On October 1, 2000, IBP, inc. ("IBP") entered into a merger agreement with
Rawhide Holdings Corporation, an affiliate of Donaldson Lufkin & Jenrette,
certain members of IBP senior management, Archer Daniels Midland Company
and Booth Creek Partners which provided for a leveraged buyout of IBP for
$22.25 per share in cash.
On November 12, 2000, the Company made an offer to a special committee
of the board of directors of IBP to acquire all of the outstanding shares
of IBP through a tax-free merger. Pursuant to the merger, IBP shareholders
would receive $25.00 per share payable in Smithfield Foods common stock at
an exchange ratio based on the average price of Smithfield Foods shares for
a period prior to the closing. The proposal provides for a maximum exchange
ratio of 0.878 for each IBP share if the pre-closing average trading price
of Smithfield Foods stock is below $28.46 and a minimum exchange ratio of
0.719 if the pre-closing average trading price is above $34.79. The
proposed transaction would have a total transaction value of approximately
$4.1 billion, including the assumption of $1.4 billion of IBP debt. The
Company expects to use the pooling-of-interests method of accounting for
the proposed combination. The offer is subject to certain conditions set
forth in the Company's proposal letter which is included in the press
release attached as Exhibit 1 to the Company's Schedule 13D.
On November 16, 2000, the Company and IBP entered into a
confidentiality agreement. Since that time the Company and its advisors
have been conducting a due diligence review of IBP and have engaged in
discussions with IBP and its advisors.
On December 4, 2000, Tyson Foods, Inc. made an offer to the special
committee of the board of directors of IBP to acquire all of the
outstanding shares of IBP through a transaction in which Tyson would first
make a cash tender offer for 50.1% of the outstanding IBP shares at a price
of $26.00 per share and would then effect a merger in which each remaining
IBP share would be converted into the right to receive an amount of Tyson
Class A Common Stock derived from a formula based on the pre-closing
average trading price of Tyson Class A Common Stock subject to a maximum
exchange ratio of 2.063 Tyson shares and a minimum exchange ratio of 1.688
Tyson shares per IBP share. The Tyson offer is also subject to certain
conditions described in Tyson's offer letter. On December 4, 2000, IBP
announced that it had executed a confidentiality agreement with Tyson and
would commence discussions with Tyson and permit Tyson to engage in a due
diligence review of IBP.
On December 4, 2000, the Company issued a press release regarding
the Tyson proposal. The Company's response included, in part, the following
statements. "It is by no means clear that the proposal Tyson made today
represents superior long-term value over ours. Indeed, we believe that the
Smithfield-IBP combination is the more attractive combination given our
experience in the meat business, the synergies we can generate by combining
our companies, our track record of successfully integrating management
teams, and our history of creating shareholder value. . . . We will
continue moving forward with the due diligence process and evaluating our
next steps, consistent with our disciplined approach to investing our
shareholders' assets."
On December 12, 2000, Tyson commenced a cash tender offer for 50.1% of
the outstanding shares of IBP at a price of $26.00 per share.
9-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
-------
Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group
("MPG") and a Hog Production Group ("HPG"). The MPG consists of five wholly
owned domestic pork processing subsidiaries and four international meat
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.
RESULTS OF OPERATIONS
---------------------
The following acquisitions affect the comparability of the results of operations
for the 13 and 26 weeks ended October 29, 2000 and October 31, 1999:
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 with approximately 345,000 sows that produce approximately 6.0
million market hogs annually. 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 $147.0 million.
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.
These acquisitions were accounted for using the purchase method of
accounting and, accordingly, the accompanying financial statements include the
results of operations from the dates of acquisition.
Consolidated
Sales in the 13 and 26 weeks ended October 29, 2000 increased by $200.8 million,
or 16.3%, and by $479.7 million, or 20.2%, respectively, from the comparable
prior year periods. The increases in sales reflected a 12.1% and a 19.2%
increase in unit selling prices in the MPG for the 13 and 26 weeks ended October
29, 2000, respectively, and the incremental sales of acquired businesses. See
the following section for comments on sales changes by business segment.
Gross profit in the 13 and 26 weeks ended October 29, 2000 increased
$62.2 million, or 36.0%, and $144.1 million, or 45.0%, respectively, from the
comparable periods last year. The current year gross profit increases are
primarily the result of the inclusion of MFI and sharply improved margins in the
HPG due to higher live hog prices.
Selling, general and administrative expenses in the 13 and 26 weeks
ended October 29, 2000 increased $11.7 million, or 12.1%, and $21.0 million, or
11.0%, respectively, from the comparable periods in fiscal 2000. The increases
were primarily due to the inclusion of expenses of acquired businesses and
increased promotion of processed meats.
Depreciation expense in the 13 and 26 weeks ended October 29, 2000
increased $4.7 million, or 18.2%, and $10.5 million, or 20.7%, respectively,
from the comparable periods a year earlier. The increases are primarily due to
the inclusion of depreciation expense of acquired businesses. In addition,
depreciation increased in the base business reflecting prior capital
expenditures to increase processed meats and value-added fresh pork capacities.
10-16
<PAGE>
Interest expense increased $8.2 million, or 49.2%, and $17.1 million,
or 54.7%, in the 13 and 26 weeks ended October 29, 2000, respectively, compared
to the same periods last year. This increase is primarily due to the interest
expense of acquired businesses, additional borrowings associated with the
Company's investment in the common stock of IBP, inc. and the share repurchase
program and an increase in average interest rates.
The effective income tax rate increased to 37.9% in both the 13 and 26
weeks ended October 29, 2000 compared to 35.0% and 35.2%, respectively, in the
corresponding periods last year on the inclusion of foreign earnings at higher
effective tax rates. The Company had a valuation allowance of $8.7 million
related to income tax assets as of October 29, 2000 primarily related to losses
in foreign jurisdictions for which no tax benefit was recognized.
Reflecting the foregoing factors, net income increased to $44.6
million, or $.81 per diluted share, and $89.1 million, or $1.61 per diluted
share, in the 13 and 26 weeks ended October 29, 2000, respectively, as compared
to $22.2 million, or $.48 per diluted share, and $29.1 million, or $.62 per
diluted share, in the same periods ending October 31, 1999, respectively.
Earnings per diluted share in the 13 and 26 weeks ended October 29, 2000 was
effected by an 18.8% and an 18.1% increase, respectively, in the average common
shares outstanding due to shares issued in connection with business acquisitions
in the last half of fiscal 2000.
Meat Processing Group
Sales in the MPG segment increased $142.6 million, or 11.8%, in the 13 weeks
ended October 29, 2000 on a 12.1% increase in unit selling prices. In this
period, total sales tonnage remained flat with a modest increase in fresh pork
volume being offset by a slight decrease in processed meats volume. Sales
increased $351.0 million, or 15.1%, in the 26 weeks ended October 29, 2000 on a
19.2% increase in unit selling prices offset by a 3% decrease in total sales
volume. This sales volume decrease is primarily due to the elimination of
certain low margin export product lines.
MPG operating profit in the 13 and 26 weeks ended October 29, 2000
decreased to $32.4 million from $44.3 million and to $24.6 million from $59.2
million, respectively, in the corresponding prior year periods due to sharply
lower fresh pork margins. The lower margins were due to a 20.4% and a 30.0%
increase in raw material costs (live hogs) in the 13- and 26-week periods,
respectively, all of which could not be passed through in the form of higher
unit selling prices. The decrease in fresh pork margins was partially offset by
an increase in processed meats margins, which benefited from better pricing and
production efficiencies.
Hog Production Group
HPG sales increased sharply as a result of the inclusion of the sales of MFI and
higher live hog prices in the period. With the acquisition of MFI, hogs sold in
the 13 and 26 weeks ended October 29, 2000 increased to 3.2 million and 6.0
million, respectively, compared to 1.4 million and 2.8 million, respectively,
for the corresponding prior year periods. Most HPG sales represent intersegment
sales to the MPG and, therefore, are eliminated in the Company's consolidated
condensed statements of income.
Operating profit in the 13 and 26 weeks ended October 29, 2000 at the
HPG improved to $72.7 million and $183.9 million, respectively, from $13.3
million and $29.8 million, respectively, for the comparable prior year periods
primarily as a result of sharp increases in hog prices, the additional hog
production of MFI, and improved raising efficiencies and synergies between the
HPG and the MPG. Operating profit in the current 13-week period includes a
pretax gain of $7.0 million for insurance settlements for the recovery of losses
incurred in hog production related to Hurricane Floyd. The actual losses arising
from production inefficiencies associated with the hurricane were reflected in
each of the last four quarters.
11-16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash provided by operations totaled $118.4 million for the 26 weeks ended
October 29, 2000 compared to $7.7 million in the same period last year. In
addition to the impact of sharply higher earnings in the current period,
non-cash charges increased to $68.2 million from $54.3 million due to the
inclusion of depreciation and amortization expenses of acquired businesses.
Changes in operating assets and liabilities traditionally show significant cash
usage during this period of the fiscal year as the Company builds large
inventories of hams in the summer months to be sold during the fall holiday
season in the third quarter. Cash usage for operating assets and liabilities was
$31. 8 million less in the current period compared to the same period last year
primarily due to large reductions from the April 30, 2000 position in deposits
with brokers for outstanding commodity futures contracts.
Cash used in investing activities increased to $155.6 million in the
first half of fiscal 2001 from $90.2 million in the same period in fiscal 2000.
Capital expenditures totaled $69.7 million in the current period primarily
related to processed meats and plant improvement projects. In addition, during
the current period, the Company invested $60.4 million in long-term marketable
securities, $25.8 million in partnerships and business acquisitions. These
capital expenditures and investments were funded with cash provided by
operations and borrowings under the Company's long-term revolving credit
facility. As of October 29, 2000, the Company had definitive commitments of
$72.3 million for capital expenditures primarily for processed meats expansion,
production efficiencies and the addition of hog production facilities in Utah.
Financing activities provided cash of $36.1 million in the current
period. The Company borrowed $57.0 million on the long-term credit facility and
issued $19.7 million of new debt to cover operating and investing activities as
well as for the repayment of scheduled debt and for the repurchase of 0.3
million shares of the Company's common stock. The Company has been authorized to
repurchase 4.0 million shares of which 3.3 million shares have been purchased
under this authorization.
OUTLOOK
-------
Hog prices are expected to decline, as they traditionally do, in the third
fiscal quarter. This will impact the profitability of the HPG; however, margins
in fresh pork are expected to improve significantly from the first half of the
year. The third quarter is traditionally the best quarter for the MPG as fresh
pork margins are generally good and margins on processed meats peak as the
result of strong sales for the fall and holiday seasons.
RECENT DEVELOPMENTS
-------------------
On October 1, 2000, IBP, inc. ("IBP") entered into a merger agreement with
Rawhide Holdings Corporation, an affiliate of Donaldson Lufkin & Jenrette,
certain members of IBP senior management, Archer Daniels Midland Company and
Booth Creek Partners which provided for a leveraged buyout of IBP for $22.25 per
share in cash.
On November 12, 2000, the Company made an offer to a special committee
of the board of directors of IBP to acquire all of the outstanding shares of IBP
through a tax-free merger. Pursuant to the merger, IBP shareholders would
receive $25.00 per share payable in Smithfield Foods common stock at an exchange
ratio based on the average price of Smithfield Foods shares for a period prior
to the closing. The proposal provides for a maximum exchange ratio of 0.878 for
each IBP share if the pre-closing average trading price of Smithfield Foods
stock is below $28.46 and a minimum exchange ratio of 0.719 if the pre-closing
average trading price is above $34.79. The proposed transaction would have a
total transaction value of approximately $4.1 billion, including the assumption
of $1.4 billion of IBP debt. The Company expects to use the pooling-of-interests
method of accounting for the proposed combination. The offer is subject to
certain conditions set forth in the Company's proposal letter which is included
in the press release attached as Exhibit 1 to the Company's Schedule 13D.
On November 16, 2000, the Company and IBP entered into a confidentiality
agreement. Since that time the Company and its advisors have been conducting a
due diligence review of IBP and have engaged in discussions with IBP and its
advisors.
12-16
<PAGE>
On December 4, 2000, Tyson Foods, Inc. made an offer to the special
committee of the board of directors of IBP to acquire all of the outstanding
shares of IBP through a transaction in which Tyson would first make a cash
tender offer for 50.1% of the outstanding IBP shares at a price of $26.00 per
share and would then effect a merger in which each remaining IBP share would be
converted into the right to receive an amount of Tyson Class A Common Stock
derived from a formula based on the pre-closing average trading price of Tyson
Class A Common Stock subject to a maximum exchange ratio of 2.063 Tyson shares
and a minimum exchange ratio of 1.688 Tyson shares per IBP share. The Tyson
offer is also subject to certain conditions described in Tyson's offer letter.
On December 4, 2000, IBP announced that it had executed a confidentiality
agreement with Tyson and would commence discussions with Tyson and permit Tyson
to engage in a due diligence review of IBP.
On December 4, 2000, the Company issued a press release regarding the Tyson
proposal. The Company's response included, in part, the following statements.
"It is by no means clear that the proposal Tyson made today represents superior
long-term value over ours. Indeed, we believe that the Smithfield-IBP
combination is the more attractive combination given our experience in the meat
business, the synergies we can generate by combining our companies, our track
record of successfully integrating management teams, and our history of creating
shareholder value. . . . We will continue moving forward with the due diligence
process and evaluating our next steps, consistent with our disciplined approach
to investing our shareholders' assets."
On December 12, 2000, Tyson commenced a cash tender offer for 50.1% of the
outstanding shares of IBP at a price of $26.00 per share.
FORWARD-LOOKING STATEMENTS
--------------------------
This Form 10-Q may contain "forward-looking" information within the meaning of
the federal securities laws. The forward-looking information may include
statements concerning Smithfield's or IBP's outlook for the future, the ability
to realize estimated synergies, 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. The following factors,
among others, could cause actual results to differ materially from those
expressed in, or implied by, the statements: the risks that Smithfield's and
IBP's businesses will not be integrated successfully, the risk that Smithfield
and IBP will not realize estimated synergies, costs relating to the proposed
transaction, the availability and prices of live hogs, live cattle, raw
materials and supplies, product pricing, the competitive environment and related
market conditions, operating efficiencies, access to capital, actions of
domestic and foreign governments and other factors discussed in Smithfield's and
IBP's respective filings with the SEC.
More detailed information pertaining to Smithfield's proposal will be set
forth in appropriate filings to be made with the SEC. We urge stockholders to
read any relevant documents that may be filed with the SEC because they will
contain important information. Stockholders will be able to obtain a free copy
of any filings containing information about Smithfield and IBP, without charge,
at the SEC's Internet site (http://www.sec.gov). Copies of any filings
containing information about Smithfield can also be obtained, without charge, by
directing a request to Smithfield Foods, Inc., 200 Commerce Street, Smithfield,
Virginia 23430, Attention: Office of the Corporate Secretary (757-365-3000).
This communication shall not constitute an offer to sell or the
solicitation of an offer to buy securities, nor shall there be any sale of
securities in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
such jurisdiction. Smithfield and certain other persons named below may be
deemed to be participants in the solicitation of proxies. The participants in
this solicitation may include the directors and executive officers of
Smithfield. A detailed list of the names of Smithfield's directors and officers
13-16
<PAGE>
is contained in Smithfield's proxy statement for its 2000 annual meeting, which
may be obtained without charge at the SEC's Internet site (http://www.sec.gov).
As of the date of this communication, none of the foregoing participants,
other than Smithfield (which beneficially owns approximately 6.6% of IBP's
common stock), individually beneficially owns in excess of 5% of IBP's common
stock. Except as disclosed above and in Smithfield's proxy statement for its
2000 annual meeting and other documents filed with the SEC including
Smithfield's Schedule 13D relating to the IBP common stock, to the knowledge of
Smithfield, none of the directors or executive officers of Smithfield has any
material interest, direct or indirect, by security holdings or otherwise, in
Smithfield or IBP.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<S> <C>
Exhibit 27 - Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SMITHFIELD FOODS, INC.
/s/ C. LARRY POPE
--------------------------------------------
C. Larry Pope
Vice President and Chief Financial Officer
/s/ DANIEL G. STEVENS
--------------------------------------------
Daniel G. Stevens
Vice President and Corporate Controller
Date: December 13, 2000
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