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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 2, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-2258
SMITHFIELD FOODS, INC.
(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
Smithfield, Virginia 23430
(Address of principal executive offices) (Zip Code)
(757) 365-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value per share
Rights to Purchase Series A Junior Participating Preferred Stock,
$1.00 par value per share
(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 [ ]
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 in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Registrant's Common Stock held
by non-affiliates as of July 9, 1999 was approximately $1,139,970,261. This
figure was calculated by multiplying (i) the $33.50 last sales price of
Registrant's Common Stock as reported on The Nasdaq National Market on July 9,
1999 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 9, 1999, 46,109,667 shares of the Registrant's Common Stock were
outstanding (including for this purpose 1,174,219 Exchangeable Shares issued by
the Registrant's subsidiary Smithfield Canada Limited).
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 September 2, 1999.
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TABLE OF CONTENTS
ITEM
NUMBER PAGE
PART I
1. Business ......................................................... 1
General ....................................................... 1
Business Strategy ............................................. 2
Historical Expansion and Acquisitions ......................... 2
Meat Processing Group ......................................... 3
Hog Production Group .......................................... 5
Employees ..................................................... 6
Regulation .................................................... 6
2. Properties ....................................................... 7
3. Legal Proceedings ................................................ 8
4. Submission of Matters to a Vote
of Security Holders ............................................. 8
4A. Executive Officers of the Company ............................... 9
PART II
5. Market for Company's Common Equity
and Related Stockholder Matters ................................. 10
6. Selected Financial Data .......................................... 11
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 12
8. Financial Statements and Supplementary Data ...................... 17
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .......................... 17
PART III
10. Directors and Executive Officers of the Company ................. 18
11. Executive Compensation .......................................... 18
12. Security Ownership of Certain Beneficial Owners
and Management ................................................. 18
13. Certain Relationships and Related Transactions .................. 18
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ........................................ 19
SIGNATURES .......................................................... 22
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ...... F-1
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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 of six domestic and three
international pork processing subsidiaries. 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 1999 SALES
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John Morrell & Co. ................................... Cincinnati, Ohio $1.4 billion
The Smithfield Packing Company, Incorporated ......... Smithfield, Virginia $1.3 billion
Schneider Corporation (63%-owned) .................... Kitchener, Ontario, Canada $550 million*
Gwaltney of Smithfield, Ltd. ......................... Smithfield, Virginia $489 million
Animex S.A. (80%-owned) .............................. Warsaw, Poland $350 million*
Lykes Meat Group, Inc. ............................... Plant City, Florida $159 million
Patrick Cudahy Incorporated .......................... Cudahy, Wisconsin $144 million
Societe Bretonne de Salaisons ........................ Lampaul Guimiliau, France $100 million*
North Side Foods Corp. ............................... Arnold, Pennsylvania $60 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 25% of its live hog
requirements. The Hog Production Group operates numerous production facilities
through two subsidiaries headquartered in Warsaw, North Carolina as indicated
below.
HOG PRODUCTION GROUP
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ANNUALIZED MARKET
SUBSIDIARY PRINCIPAL LOCATIONS NUMBER OF SOWS HOG PRODUCTION
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Carroll's Foods, Inc.
(wholly-owned) ......... North Carolina and Virginia 180,000 2.9 million
Brown's of Carolina, Inc.
(86%-owned) ............ North Carolina, Virginia, Utah,
Colorado and South Carolina 170,000* 2.7 million
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* Numbers include 100% of Brown's sows and market hogs produced, as well as
the sows and market hogs produced by Circle Four Farms, LLC, a wholly-owned
subsidiary of Smithfield Foods. Circle Four is managed by Brown's. The
market hogs produced by Circle Four's sows are sold to an unrelated third
party.
The discussion below of the Company's business will first summarize 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, followed by the Hog Production Group.
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BUSINESS STRATEGY
The Company's business is based around four strategic initiatives:
o vertical integration into hog production through Company-owned hog
production operations and long-term partnerships and alliances with
other large and efficient hog producers;
o use of genetics which produce hogs that are among the leanest
commercially available to enable the Company to market highly
differentiated pork products;
o continued growth through strategic acquisitions; and
o a heightened emphasis on expansion into international markets.
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.
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 sales
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.
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 manufacturer 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 80% 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.
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.
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MEAT PROCESSING GROUP
This discussion of the Meat Processing Group will first provide an
overview of the Group's proportionate revenues from fresh pork, processed meats
and other items. Next, the discussion will describe 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.
1999 1998 1997 1996 1995
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Fresh Pork ............... 49% 56% 59% 59% 51%
Processed Meats .......... 46% 40% 37% 37% 45%
Other Products ........... 5% 4% 4% 4% 4%
-- -- -- -- --
100% 100% 100% 100% 100%
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The increase in percentage of revenues derived from fresh pork between fiscal
years 1995 and 1996 resulted principally from an increase in the number of hogs
slaughtered at the Bladen County, North Carolina plant; conversely, the
increase for processed meats since fiscal 1997 reflects the impact of lower
fresh pork prices combined with the Company's acquisitions of processing
operations.
UNITED STATES PROCESSING OPERATIONS
FRESH PORK PRODUCTS. The Company is the largest fresh pork processor in
the world, producing in fiscal 1999 approximately 2.6 billion pounds. The Meat
Processing Group's domestic operations slaughter hogs at five plants (three in
the Southeast and two in the 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 and
freshness 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. Smithfield
Packing has 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. For more on NPD pork, see
"Business -- Hog Production Group" below.
PROCESSED MEAT 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 1999, the Company produced 1.5 billion
pounds of processed meat products. The Company markets its domestic processed
meat products under labels that include Smithfield Premium, Smithfield Lean
Generation Pork, 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. 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. 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.
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
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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 interest rates.
The Meat Processing Group purchases approximately 25% of its live hog
requirements from the Hog Production Group. In addition, the Company purchases
hogs from several of the nation's largest hog producers, strategically located
in proximity to the Company's hog slaughtering and further processing
operations in North Carolina and Virginia. The Company has established
multi-year agreements with Maxwell Foods, Inc., Murphy Family Farms, 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 29% 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, from certain Canadian
sources, and through certain exclusive dealer-operated buying stations in the
Midwest. 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.
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
and 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 1999, 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
processed meat 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 placed major emphasis on
growing and expanding its export sales. In fiscal 1999, 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 1999. 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 translation 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."
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
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Company distributes its products directly from certain of its plants and from
leased distribution centers in Connecticut, Indiana, Missouri, Kansas, Texas
and California. The Company also operates distribution centers adjacent to its
plants in Bladen County, North Carolina and Sioux Falls, South Dakota.
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 France, Poland and Canada. 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 Schneider's and Fleetwood. Schneider has annualized 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 and Port Perry, Ontario; Winnipeg, Manitoba; Surrey, 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.
ANIMEX. Between September 1998 and June 1999, Smithfield Foods acquired an
80% 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 annualized volume. Animex's
brands include Krakus and Pek. Animex has 10 plants, six for red meat and four
for poultry, located across Poland. The Company plans to expand Animex's
network of distribution centers to include several additional areas in Poland.
Approximately 26% of Animex's annualized sales are export sales.
SOCIETE BRETONNE DE SALAISONS. In September 1998, the Company acquired
Societe Bretonne de Salaisons, one of the largest private label manufacturer of
ham, pork shoulder and bacon products in France. SBS has annualized production
volume of approximately 70 million pounds.
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
and Carroll's Foods, which operate numerous hog production facilities with
approximately 350,000 sows producing about 5.6 million market hogs annually.
The Company obtains approximately 25% of the live hogs it currently processes
from Brown's and Carroll's Foods. Adjusting for sales by Circle Four to an
unrelated party and for the minority interest in Brown's, the Company believes
it is 28% vertically integrated. The Company's raw material costs decrease when
hog production at Brown's and Carroll's Foods is profitable and conversely
increase when production is unprofitable. The profitability of hog production
is directly related to the market price of live hogs and the cost of corn and
soybean meal. Hog producers such as Brown's and Carroll's Foods generate 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
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meal prices are high. Management believes that hog production at Brown's and
Carroll's Foods 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 308,000 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 1999, the Company processed 3.3 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 88% 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 60% of the Hog
Production Group's market hogs come from contract farms.
As of July 1999, the Hog Production Group operated farm sites in five
states. Seventy percent of these sites are located in North Carolina, and
approximately 12% in both Utah and Virginia. Colorado and South Carolina have
5% and 1% respectively. Except for some start-up activity in Utah and Colorado,
the Hog Production Group's farm sites are mature operations with static
production volume.
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.
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.
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EMPLOYEES
As of June 1, 1999, the Meat Processing Group had approximately 30,800
employees, approximately 15,900 of whom are covered by collective bargaining
agreements expiring between May 19, 2000 and March 16, 2003, and the Hog
Production Group had approximately 2,200 employees, none of whom are covered by
collective bargaining agreements. The Company believes that its relationship
with its employees is good.
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.
EPA SUIT
In UNITED STATES OF AMERICA V. SMITHFIELD FOODS, INC. ET AL. (Civil Case
No. 2:96:cv1204), a federal judge for 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 the first
quarter of fiscal 1998 with respect to this penalty. The Company has appealed
this trial verdict and is awaiting a decision by the United States Court of
Appeals for the Fourth Circuit in Richmond, Virginia. There can be no assurance
as to the outcome of such appeal or any subsequent proceedings regarding this
matter.
SUIT BY 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 EPA suit. This action is set for trial on
October 18, 1999. While each violation is subject to a maximum penalty of
$25,000, Virginia follows a civil penalties policy designed to recapture from
the violator any economic benefit which accrued as a result of its
noncompliance, plus a surcharge penalty for having committed such violations.
In addition, the policy may increase the amount of penalties based upon the
extent of environmental damage caused by the violations. On July 30, 1999,
Virginia advised Smithfield Foods that Virginia will seek to prove Smithfield
Foods received an economic benefit of approximately $3.8 million. Among other
defenses, the Company will maintain that no economic benefit accrued to the
Company as a result of, and that no environmental damage was caused by, the
violations. There can be no assurance as to the outcome of this proceeding.
- 7 -
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.
LOCATION OPERATION
- ------------------------------- --------------------------------------------------------------
Smithfield Packing Plant* Slaughtering and cutting hogs; manufacture of bacon products,
Smithfield, Virginia smoked meats, and dry salt meats; production of hams and
picnics
Smithfield Packing Plant* Slaughtering and cutting hogs; production of boneless hams
Bladen County, North Carolina and loins
Gwaltney Plant* Slaughtering and cutting hogs; production of boneless loins,
Smithfield, Virginia bacon, sausage, bone-in and boneless cooked and smoked
hams and picnics
John Morrell Plant* Slaughtering and cutting hogs and lambs; production of
Sioux Falls, South Dakota boneless loins, bacon, hot dogs, luncheon meats, smoked and
canned hams, and packaged lard
John Morrell Plant Slaughtering and cutting hogs; production of boneless hams,
Sioux City, Iowa loins, butts and picnics
Lykes Meat Group Plant Production of hot dogs, luncheon meats and sausage products
Plant City, Florida
Patrick Cudahy Plant Manufacture of bacon, dry sausage, boneless cooked hams
Cudahy, Wisconsin and refinery products
Schneider Plant Production of processed and prepared meats, including
Kitchener, Ontario, Canada wieners, luncheon meats, hams and specialty and dry
sausages.
- ---------
* Pledged as collateral under various loan agreements.
The Hog Production Group owns and leases numerous hog production
facilities, primarily in North Carolina and Virginia, with additional hog
production facilities in Colorado, South Carolina and Utah. A substantial
number of these owned facilities are pledged under related loan agreements.
The Company operates hog buying stations in North Carolina, South Carolina
and Virginia which have facilities for purchasing and loading hogs for shipment
to the Company's plants in Smithfield, Virginia and Bladen County, North
Carolina and hog buying stations in Iowa, Kansas, Minnesota, Nebraska and South
Dakota, which have facilities for purchasing and loading hogs for shipment to
the Company's plants in Sioux City, Iowa and Sioux Falls, South Dakota.
ITEM 3. LEGAL PROCEEDINGS
Smithfield Foods and its subsidiaries and affiliates are parties in
various lawsuits arising in the ordinary course of business, excluding certain
matters discussed under "Business -- Regulation" above. 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. For a discussion of certain other regulatory
and environmental matters, see "Item 1. Business -- Regulation" above.
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.
- 8 -
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 or Directors or until
their successors are elected, or until their resignation or removal.
POSITION BUSINESS EXPERIENCE
NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS
- ---------------------------- ----------------------------------- ---------------------------------------
Joseph W. Luter, III (60) Chairman of the Board and Chief Mr. Luter has served as Chairman of
Executive Officer of the Company the Board and Chief Executive
Officer since 1975. Prior to May
1995, he also served as President of
the Company.
Lewis R. Little (55) President and Chief Operating Mr. Little was elected President and
Officer of the Company, Lykes Chief Operating Officer of the
and Smithfield Packing Company and Smithfield Packing in
November 1996 and President and
Chief Operating Officer of Lykes in
June 1998. From May 1993 until
November 1996, he was President
and Chief Operating Officer of
Gwaltney.
Douglas W. Dodds (53) Chairman and Chief Executive Mr. Dodds has served as the Chief
Officer of Schneider Corporation Executive Officer of Schneider since
1987 and was elected Chairman
March 1997; from March 1996 until
March 1997, he was Vice Chairman,
and prior to March 1996 President, of
Schneider.
Roger R. Kapella (57) President and Chief Operating Mr. Kapella has served as President
Officer of Patrick Cudahy and Chief Operating Officer of
Patrick Cudahy since 1986.
Joseph B. Sebring (52) President and Chief Operating Mr. Sebring has served as President
Officer of John Morrell and Chief Operating Officer of John
Morrell since May 1994.
Timothy A. Seely (49) President and Chief Operating Mr. Seely was elected President and
Officer of Gwaltney Chief Operating Officer of Gwaltney
in November 1996. Prior to that time,
he was Vice President, Sales and
Marketing, Fresh Meats, of Gwaltney.
C. Larry Pope (44) Vice President, Finance of the Mr. Pope was elected Vice President,
Company Finance of the Company in July
1998. He served as Vice President
and Controller from August 1995 to
July 1998, and prior to that time as
Controller.
Richard J. M. Poulson (60) Vice President and Senior Advisor Mr. Poulson joined the Company as
to the Chairman Vice President 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.
Aaron D. Trub (64) Vice President, Chief Financial Mr. Trub has served as Vice President
Officer and Secretary of the and Secretary of the Company since
Company 1978. Prior to July 1998, he also held
the position of Treasurer. In July
1998, he was elected Chief Financial
Officer of the Company.
- 9 -
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Company is traded on The Nasdaq National Market
under the symbol "SFDS."
The following table sets forth, for the fiscal periods indicated, the
highest and lowest sales prices of the Common Stock on The Nasdaq National
Market.
RANGE OF SALES PRICES
-----------------------
HIGH LOW
----------- -----------
Fiscal year ended May 3, 1998
First quarter .............. $ 31.12 $ 22.00
Second quarter ............. 33.87 22.75
Third quarter .............. 35.62 24.37
Fourth quarter ............. 36.37 28.62
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
HOLDERS
As of July 9, 1999, there were 1,222 record holders of the Common Stock.
In addition, there were on such date 264 record holders of the Exchangeable
Shares issued by Smithfield Foods' subsidiary Smithfield Canada Limited, an
Ontario corporation. The terms of such Exchangeable Shares are 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, will be made only from assets legally available for that
purpose and will 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.
- 10 -
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.
FISCAL YEAR ENDED
-------------------------------------------------------------------------
MAY 2, MAY 3, APRIL 27, APRIL 28, APRIL 30,
1999 1998 1997 1996 1995
------------- --------------- --------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Sales ............................................. $3,774,989 $ 3,867,442 $ 3,870,611 $2,383,893 $1,526,518
Cost of sales ..................................... 3,235,414 3,479,629 3,546,816 2,202,112 1,380,243
---------- ----------- ----------- ---------- ----------
Gross profit ...................................... 539,575 387,813 323,795 181,781 146,275
Selling, general and administrative expenses ...... 295,610 219,861 191,225 103,095 61,723
Depreciation expense .............................. 63,524 42,300 35,825 25,979 19,717
Interest expense .................................. 40,521 31,891 26,211 20,942 14,054
Minority interests ................................ (3,518) 199 2,857 1,514 343
Nonrecurring charge ............................... - 12,600 - - -
---------- ----------- ----------- ---------- ----------
Income from continuing operations before income
taxes ............................................ 143,438 80,962 67,677 30,251 50,438
Income taxes ...................................... 48,554 27,562 22,740 10,465 18,523
---------- ----------- ----------- ---------- ----------
Income from continuing operations ................. 94,884 53,400 44,937 19,786 31,915
Income (loss) from discontinued operations ........ - - - (3,900) (4,075)
---------- ----------- ----------- ---------- ----------
Net Income ....................................... $ 94,884 $ 53,400 $ 44,937 $ 15,886 $ 27,840
========== =========== =========== ========== ==========
DILUTED INCOME (LOSS) PER SHARE:
Continuing operations ............................. $ 2.32 $ 1.34 $ 1.17 $ 0.53 $ 0.92
Discontinued operations ........................... - - - (0.11) (0.12)
---------- ----------- ----------- ---------- ----------
Net Income ........................................ $ 2.32 $ 1.34 $ 1.17 $ 0.42 $ 0.80
========== =========== =========== ========== ==========
Average diluted shares outstanding ................ 40,962 39,732 38,558 35,000 33,923
BALANCE SHEET DATA:
Working capital ................................... $ 215,865 $ 259,188 $ 164,312 $ 88,026 $ 60,911
Total assets ...................................... 1,771,614 1,083,645 995,254 857,619 550,225
Long term debt and capital lease obligations ...... 594,241 407,272 288,486 188,618 155,047
Shareholders' equity .............................. 542,246 361,010 307,486 242,516 184,015
OPERATING DATA:
Fresh pork sales (pounds) ......................... 2,687,412 2,539,221 2,320,477 1,635,300 955,290
Processed meats sales (pounds) .................... 1,606,021 1,370,232 1,218,835 839,341 774,615
Total hogs purchased .............................. 19,093 17,952 16,869 12,211 8,678
- 11 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
The Company's business is comprised of two segments, a Meat Processing
Group ("MPG") and a Hog Production Group ("HPG"). As of May 2, 1999, the MPG
consisted of six wholly owned domestic pork processing subsidiaries, Gwaltney of
Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat
Group, Inc. ("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy
Incorporated ("Patrick Cudahy") and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), and three international meat processing subsidiaries,
Animex S.A. ("Animex"), a 67%-owned Polish subsidiary, Schneider Corporation
("Schneider"), a 63%-owned Canadian subsidiary, and Societe Bretonne de
Salaisons ("SBS"), a wholly owned French subsidiary. As of May 2, 1999, the HPG
consisted of Brown's of Carolina, Inc. ("Brown's"), an 86%-owned subsidiary of
the Company, a 50% interest in Smithfield-Carroll's ("Smithfield-Carroll's"), a
joint hog production arrangement between the Company and an affiliate of
Carroll's Foods, Inc. ("CFI") and an 84% interest in Circle Four ("Circle
Four"), a joint hog production arrangement between the Company and affiliates of
CFI. Brown's and Smithfield-Carroll's produce hogs in Colorado, North Carolina
and Virginia, which are sold primarily to the MPG. Circle Four produces hogs in
Utah which are sold to an unrelated party. Effective May 3, 1999, the Company
acquired CFI and its affiliated companies and partnership interests (See Note
15). Subsequent to the end of fiscal 1999, the Company increased its ownership
in Animex from 67% to 80% of total equity.
ACQUISITIONS
In the third quarter of fiscal 1999, the Company acquired 100% of the
voting common shares of Schneider and approximately 59% of its Class A
non-voting shares, which in the aggregate represents approximately 63% of the
total equity of Schneider, in exchange for approximately 2,527,000 Exchangeable
Shares of Smithfield Canada Limited, a wholly owned subsidiary of the Company.
Each Exchangeable Share is exchangeable by the holder at any time for one
common share of the Company. Schneider produces and markets fresh pork and a
full line of processed meats and is the second largest meat processing company
in Canada. Schneider had sales in its fiscal year ended October 1998 of $548.1
million.
In April 1999, the Company acquired, in a tender offer, 11,500,000 shares
of the capital stock of Animex, the largest meat and poultry processing company
in Poland. Following the tender offer, the Company's ownership represented 67%
of the total equity and 51% voting control of Animex. Animex had calendar year
1998 sales of approximately $400.0 million.
In September 1998, the Company acquired all of the capital stock of SBS,
the largest private-label manufacturer of ham, pork shoulder and bacon products
in France. SBS had calendar year 1998 sales of approximately $100.0 million.
In October 1998, the Company acquired all of the assets and business of
North Side, a major domestic supplier of precooked sausage to McDonald's
Corporation. North Side had calendar year 1998 sales of approximately $58.0
million.
Each of these acquisitions was accounted for using the purchase method of
accounting and, accordingly, the accompanying financial statements include the
financial position and results of operations from the dates of acquisition.
In addition, during fiscal 1999, the Company increased its ownership in
the Circle Four hog production operations from 37% to 84%. Accordingly, the
accompanying financial statements include the financial position and results of
operations from June 1, 1998, the date the Company's ownership interest
exceeded 50%. Prior to June 1, 1998, Circle Four was accounted for using the
equity method of accounting.
RESULTS OF OPERATIONS
The consolidated results of operations for fiscal 1999 compared to fiscal
1998 were favorably affected by significantly lower live hog and raw material
prices. In fiscal 1999, hog prices fell to their lowest level in five decades.
These prices were the primary reason for the substantially improved profits in
the Company's MPG and the losses incurred in the HPG.
Fiscal 1999 and 1997 included 52 weeks of operations compared to fiscal
1998, which included 53 weeks of operations. Accordingly, sales and all expense
categories in fiscal 1999 and 1997 reflect the impact of one less week of
operations compared to fiscal 1998.
- 12 -
CONSOLIDATED
FISCAL 1999 COMPARED TO FISCAL 1998
Sales in fiscal 1999 decreased $92.5 million, or 2.4% from fiscal 1998.
The decrease in sales reflected a 12.4% decrease in unit sales prices of meat
products as the result of significantly lower raw material (live hog) prices
passed through to customers in the form of lower unit selling prices. This
decrease was nearly offset by a 10.2% increase in MPG sales tonnage due to the
inclusion of the sales of Schneider, SBS and North Side and increased volumes
at existing operations.
Cost of sales decreased $244.2 million, or 7.0%, in fiscal 1999,
reflecting a 33.9% decrease in live hog costs partially offset by the increased
sales tonnage.
Gross profit increased $151.8 million, or 39.1%, in fiscal 1999 compared
to fiscal 1998. The increase in gross profit was primarily due to substantially
higher margins in the MPG. Fresh pork margins improved substantially,
reflecting the impact of the lower cost of raw materials (live hogs) and
margins on increased sales tonnage of both fresh pork and processed meats. MPG
gross profits were partially offset by substantial losses in the HPG due to
lower live hog prices.
Selling, general and administrative expenses increased $75.7 million, or
34.5%, in fiscal 1999 compared to fiscal 1998. The increase was primarily due
to the inclusion of selling, general and administrative expenses of acquired
businesses, higher selling, marketing and product promotion costs associated
with the intensive efforts to market branded fresh pork and processed meats and
expenses associated with preparing the Company's information systems for the
Year 2000.
Depreciation expense increased $21.2 million, or 50.2%, in fiscal 1999
compared to fiscal 1998. This increase was primarily due to the inclusion of
the depreciation of acquired businesses.
Interest expense increased $8.6 million, or 27.1%, in fiscal 1999 compared
to fiscal 1998. This increase reflected the inclusion of the interest expense
of the acquired businesses, the cost of borrowings to finance the additional
investment in Circle Four and the borrowings to finance the acquisitions of SBS
and North Side.
A nonrecurring charge of $12.6 million in fiscal 1998 reflected the
imposition of civil penalties against the Company by the U.S. District Court
for the Eastern District of Virginia in a civil action brought by the U.S.
Environmental Protection Agency ("EPA"). The Company has appealed the Court's
judgment to the U.S. Court of Appeals for the Fourth Circuit.
The effective income tax rate for fiscal 1999 was 33.9% compared to 29.5%
in fiscal 1998, excluding the nondeductible nonrecurring charge. This increase
reflected higher profits at higher marginal tax rates. The Company had no
valuation allowance related to income tax assets as of May 2, 1999 and May 3,
1998.
Reflecting the factors previously discussed, net income increased to $94.9
million, or $2.32 per diluted share, in fiscal 1999, up from net income of
$66.0 million, or $1.66 per diluted share in fiscal 1998, excluding the
nonrecurring charge. Including the nonrecurring charge, net income was $53.4
million, or $1.34 per diluted share, in fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Sales in fiscal 1998 were flat compared to fiscal 1997. Sales reflected a
9.0% decrease in unit sales prices of meat products, as a result of lower raw
material (live hog) prices passed through to customers in the form of lower
unit selling prices, offset by a 9.4% increase in MPG sales tonnage. The
increase in sales tonnage reflected an increase in the number of hogs
slaughtered and the inclusion of a full year of the sales of Lykes.
Cost of sales decreased $67.2 million, or 1.9%, in fiscal 1998, reflecting
a 17.3% decrease in live hog costs offset by the increased sales tonnage.
Gross profit increased $64.0 million, or 19.8%, in fiscal 1998 compared to
fiscal 1997. The increase in gross profit reflected sharply improved margins on
higher sales of both fresh pork and processed meats.
Selling, general and administrative expenses increased $28.6 million, or
15.0%, in fiscal 1998. This increase was primarily due to the inclusion of the
operations of Lykes and to higher selling, marketing and product promotion
costs associated with intensified efforts to market branded fresh pork and
processed meats.
Depreciation expense increased $6.5 million, or 18.1%, in fiscal 1998. The
increase was primarily due to completed capital projects at several of the
Company's processing plants and to the inclusion of the operations of Lykes for
the full fiscal year.
- 13 -
Interest expense increased $5.7 million, or 21.7%, in fiscal 1998,
reflecting the higher cost of long-term debt placed during the past two fiscal
years and higher average borrowing costs related to higher levels of inventory
and accounts receivable in the first half of fiscal 1998.
A nonrecurring charge of $12.6 million in fiscal 1998 reflected the
imposition of civil penalties against the Company by the U.S. District Court
for the Eastern District of Virginia in a civil action brought by the EPA. The
Company has appealed the Court's judgment to the U.S. Court of Appeals for the
Fourth Circuit.
The effective income tax rate for fiscal 1998 decreased to 29.5%,
excluding the nondeductible nonrecurring charge, from 33.6% in fiscal 1997.
This decrease reflected the impact of a lower tax rate on increased export
sales and employment-related tax credits. The Company had no valuation
allowance related to income tax assets as of May 3, 1998 and April 27, 1997.
Excluding the nonrecurring charge, net income increased to $66.0 million,
or $1.66 per diluted share in fiscal 1998 from $44.9 million, or $1.17 per
diluted share in fiscal 1997. Including the nonrecurring charge, net income was
$53.4 million in fiscal 1998, or $1.34 per diluted share.
MEAT PROCESSING GROUP
FISCAL 1999 COMPARED TO FISCAL 1998
MPG sales in fiscal 1999 decreased $137.8 million, or 3.6%, from fiscal
1998. The decrease reflected a 12.4% decrease in unit sales prices as the
result of sharply lower raw material (live hog) prices passed through to
customers. This decrease was partially offset by a 10.2% increase in sales
tonnage due to the inclusion of the sales of Schneider, SBS and North Side and
increased volumes at existing operations. The increase in sales tonnage
reflected a 5.8% increase in fresh pork tonnage, 17.2% increase in processed
meats tonnage and 12.8% increase in the tonnage of other products. Fresh pork
tonnage increased as the result of the inclusion of the sales of Schneider and
a full fiscal year of second shift operations at John Morrell's Sioux City,
Iowa plant compared to less than a full year of second shift operations in
fiscal 1998. The increase in processed meats tonnage resulted from the
inclusion of the sales of Schneider, SBS and North Side and increased tonnage
at existing operations despite a sharp drop in hot dog exports to Russia.
The MPG reported profit before income taxes of $233.4 million in fiscal
1999 compared to profit before income taxes of $121.2 million in fiscal 1998.
This increase reflected sharply lower raw material (live hog) costs and the
impact of acquired businesses and increased volumes from the base business.
These increases were partially offset by increased marketing and distribution
expenses incurred to market branded fresh and processed meat products and
expenses related to preparing the Company's information systems for the Year
2000.
FISCAL 1998 COMPARED TO FISCAL 1997
MPG sales in fiscal 1998 were flat compared to fiscal 1997. Sales
reflected a 9.4% increase in tonnage offset by a 9.0% decrease in unit sales
prices as a result of lower raw material (live hog) prices passed through to
customers in the form of lower unit selling prices. The increase in sales
tonnage reflected a 9.4% increase in fresh pork tonnage, 12.4% increase in
processed meats tonnage and 4.5% increase in the tonnage of other products. The
fresh pork tonnage increase was primarily related to an increase in the number
of hogs slaughtered at the Company's Sioux City, Iowa and Bladen County, North
Carolina plants. The increase in processed meats tonnage was primarily related
to a full fiscal year of sales at Lykes compared to six months of sales in
fiscal 1997.
The MPG reported a profit before income taxes of $121.2 million in fiscal
1998 compared to profit before income taxes of $66.5 million in fiscal 1997.
This increase reflected sharply improved margins as a result of significantly
lower raw material (live hog) costs, which were partially offset by higher
selling, marketing and product promotion costs associated with intensified
efforts to market branded fresh pork and processed meats.
HOG PRODUCTION GROUP
FISCAL 1999 COMPARED TO FISCAL 1998
HPG sales were relatively flat in fiscal 1999 compared to fiscal 1998, as
a 33.0% decrease in the unit selling price of live hogs, due to an oversupply
of hogs in the market, was offset by a 48.5% increase in the number of hogs
sold, primarily the result of including the sales of Circle Four. Intersegment
sales to the MPG are eliminated in the Consolidated Statements of Income.
- 14 -
The HPG reported a pretax loss of $63.6 million in fiscal 1999, compared
to a pretax loss of $9.7 million in fiscal 1998. The substantially higher loss
was primarily the result of the lower unit selling prices of hogs, which were
at their lowest levels in five decades. Despite the near-term weakness in live
hog prices, management expects the HPG to return to profitability in fiscal
2000 through the utilization of hedging and price-risk management techniques
and expected increases in hog prices toward the end of fiscal 2000.
FISCAL 1998 COMPARED TO FISCAL 1997
HPG sales in fiscal 1998 increased by $4.8 million, or 3.1%, from fiscal
1997. The increase reflected a 19.9% increase in the number of hogs sold as a
result of increased production at Brown's. The increase was partially offset by
a 14.0% decrease in the unit selling price of live hogs, reflecting an overall
industry expansion in hog production. Substantially all HPG sales in fiscal
1998 and 1997 were to the MPG and, accordingly, are intersegment sales which
were eliminated in the Consolidated Statements of Income.
The HPG reported a loss before income taxes of $9.7 million in fiscal 1998
compared to a profit before income taxes of $19.9 million in fiscal 1997. This
is due to significantly lower selling prices for live hogs which were not
offset by lower feed costs.
LIQUIDITY AND CAPITAL RESOURCES
The pork processing industry is characterized by high sales tonnage and
rapid turnover of inventories and accounts receivable. Because of the rapid
turnover rate, the Company considers its inventories and accounts receivable
highly liquid and readily convertible into cash. Borrowings under the Company's
credit facilities are used to finance increases in the levels of inventories
and accounts receivable resulting from seasonal and other market-related
fluctuations in raw material costs. The demand for seasonal borrowings usually
peaks in early November when inventories are at their highest levels, and
borrowings are repaid in January when accounts receivable are collected.
Net cash provided by operations was $123.4 million in fiscal 1999 compared
to $97.5 million in fiscal 1998. This increase primarily reflected higher
earnings and noncash charges.
Net cash used in investing activities totaled $261.9 million in fiscal
1999 compared to $104.9 million in fiscal 1998. In fiscal 1999, the Company
expended $151.2 million for several business acquisitions (See Note 3) and
$95.4 million for capital expenditures. These capital expenditures included
renovations and expansion projects at several of the Company's processing
plants, additional hog production facilities at Circle Four and replacement
systems associated with the Year 2000. In fiscal 1998, the Company expended
$7.8 million for business acquisitions and $92.9 million for capital
expenditures. As of May 2, 1999, the Company had definitive commitments of
$34.8 million for capital expenditures primarily to increase its processed
meats and value-added fresh pork capacities at several of its processing
plants. The Company has continuing plans to increase its processed meats and
hog production businesses through strategic acquisitions and joint ventures,
both in the United States and internationally. These investing activities will
be funded with cash from operations, borrowings under the Company's revolving
credit facilities and the issuance of additional shares of the Company's common
stock. Effective May 3, 1999, the Company completed the acquisition of CFI and
its affiliated companies and partnership interests for 4.2 million shares of
the Company's common stock and the assumption of approximately $231.0 million
in debt, plus other liabilities (See Note 15).
Net cash provided by financing activities was $108.5 million in fiscal
1999 compared to $42.1 million in fiscal 1998. The Company has aggregate credit
facilities totaling $402.0 million, including a $300.0 million revolving credit
facility with a bank group, which expires July 2002. These credit facilities
include $102.0 million of credit facilities from various U.S. and international
banks assumed in connection with businesses acquired in fiscal 1999. As of May
2, 1999, the Company had unused capacity under these credit facilities of
$214.0 million.
Average borrowings under all facilities were $74.8 million in fiscal 1999,
$149.7 million in fiscal 1998 and $165.1 million in fiscal 1997 at average
interest rates of approximately 6%, 7% and 7%, respectively. Maximum borrowings
were $152.5 million in fiscal 1999, $247.0 million in fiscal 1998 and $215.0
million in fiscal 1997. The outstanding borrowings were $134.9 million as of
May 2, 1999, at an average interest rate of 7%. There were no borrowings under
the facilities as of May 3, 1998.
Management believes that through internally generated funds and access to
global credit markets, funds are available to adequately meet the Company's
current and future operating and capital needs.
- 15 -
Long-term debt and capital lease obligations increased to $594.2 million
as of May 2, 1999 from $407.3 million as of May 3, 1998, primarily due to the
debt assumed in business acquisitions. The ratio of long-term debt to total
capitalization decreased to 52.3% as of May 2, 1999 from 53.0% as of May 3,
1998. The decrease reflected increases in equity, resulting from earnings,
common stock issued in connection with business acquisitions and stock option
exercises.
RISK MANAGEMENT
Substantially all of the Company's products are produced from
commodity-based raw materials, corn and soybean meal in the HPG and live hogs
in the MPG. The cost of corn and soybean meal (the principal feed ingredients
for hogs) and live hogs are subject to wide fluctuations due to unpredictable
factors such as weather conditions, economic conditions, government regulation
and other unforeseen circumstances. The pricing of the Company's fresh pork and
processed meats is monitored and adjusted upward and downward in reaction to
changes in the cost of the underlying raw materials. The unpredictability of
the raw material costs limits the Company's ability to forward price fresh pork
and processed meat products without the use of commodity contracts through a
program of price-risk management. The Company uses price-risk management to
enhance its ability to engage in forward sales contracts, where prices for
future deliveries are fixed, by purchasing (or selling) commodity contracts for
future periods to reduce or eliminate the effect of fluctuations in future raw
material costs on the profitability of the related sales. While this may tend
to limit the Company's ability to participate in gains from favorable commodity
price fluctuation, it also tends to reduce the risk of loss from adverse
changes in raw material prices. In addition, the Company utilizes commodity
contracts for live hogs and corn to manage hog production margins when
management determines the conditions are correct for such hedges. The
particular hedging methods employed and the time periods for the contracts
depend on a number of factors, including the availability of adequate contracts
for the respective periods for the hedge. The Company attempts to closely match
the commodity contract expiration periods with the dates for product sale and
delivery. As a result, gains and losses from hedging transactions are
recognized when the related sales and purchases are made. As of May 2, 1999 and
May 3, 1998, the Company had deferred $8.9 million and $1.9 million,
respectively, of unrealized hedging gains on outstanding futures contracts. As
of May 2, 1999 and May 3, 1998, the Company had open futures contracts with
contract values of $219.7 million and $97.1 million, respectively. As of May 2,
1999 and May 3, 1998, the Company had deposits with brokers for outstanding
futures contracts of $15.6 million and $10.9 million, respectively, which were
included in prepaid expenses and other current assets.
For open futures contracts, the Company uses a sensitivity analysis
technique to evaluate the effect that changes in the market value of
commodities will have on these commodity derivative instruments. As of May 2,
1999, the potential change in fair value of open future contracts, assuming a
10% change in the underlying commodity price, was $10.4 million.
YEAR 2000
The Year 2000 problem relates to computer systems that have date-sensitive
programs that were designed to read years beginning with "19," but may not
recognize the year 2000. Company information technology ("IT") systems
(including non-IT systems) and third-party information systems that fail due to
the Year 2000 may have a material adverse effect on the Company. The Year 2000
issue has the potential to affect the Company's supply, production,
distribution and financial chains.
The Company began addressing the potential exposure associated with the
Year 2000 during fiscal 1998. Management has approved the plan necessary to
remediate, upgrade and replace the effected systems to be Year 2000 compliant.
A corrective five-point action plan was developed including: 1) analysis and
planning, 2) allocation of resources and commencing correction, 3) remediation,
correction and replacement, 4) testing, and 5) development of contingency
plans.
The Company has identified and defined the critical IT and non-IT
projects. These projects relate to systems which include any necessary
technology used in manufacturing or administration with date-sensitive
information that is critical to the day-to-day operations of the business. Of
the critical IT projects, 87% have been completed, 10% are in correction and
replacement, and the remaining, less critical projects are being analyzed and
planned. All critical IT system implementations and remediations are expected
to be substantially completed by the end of July 1999. The non-IT (plant)
projects have identified system components that have a potential issue with
rolling dates into the Year 2000. Of these components, 98% are fully compliant
and the others are at various stages of progress in the action plan.
Substantially all critical non-IT system implementation and remediation is
complete or in final stages.
The cost of the Year 2000 solution, including hardware and software
replacement, is expected to be approximately $33.9 million, of which $26.5
million has been expended to date. The Company has expensed approximately $8.5
million
- 16 -
in fiscal 1999. The Company estimates $19.6 million of the $33.9 million will
be capitalized in accordance with generally accepted accounting principles.
These expenditures are anticipated to continue through December 1999.
Third-party risk is being proactively assessed through inquiries and
questionnaires. Significant vendors, electronic commerce customers and
financial institutions have been sent inquiries about the status of their
compliance for the Year 2000. Additionally, the Company will follow up the
inquiries and questionnaires with interviews. This process is expected to be an
ongoing evaluation. At this point management cannot determine the level of risk
associated with third parties.
The Company believes its planning efforts are adequate to address its Year
2000 concerns. The Company is developing a worst-case scenario and contingency
plan that includes an evaluation of the criticality of each manufacturing
process and the determination of possible manual alternatives, including the
purchase of additional inventory and related storage for production supplies.
The Company, while substantially complete on all critical and non-critical
IT and non-IT systems, continues to assess the Year 2000 readiness of Animex
(See Note 3) and CFI (See "Subsequent Events" below and Note 15). The
preliminary review of CFI's Year 2000 readiness is complete. Approximately 53%
of the critical systems are compliant. The remaining systems are targeted to be
compliant by September 30, 1999. Management has not determined the level of
readiness for Animex. The assessment is expected to be completed by the end of
July 1999. The costs of the Year 2000 solution are exclusive of Animex and
CFI's remediation efforts.
While the Company believes that it is taking the appropriate steps to
address its readiness for the Year 2000, the costs of the project and expected
completion dates are dependent upon the continued availability of certain
resources and other factors. There can be no guarantee that these estimates
will be achieved, and actual results could differ materially from those
anticipated. Specific factors that could influence the results may include, but
are not limited to, the availability and cost of personnel trained in this
area, and the ability to locate and correct all relevant computer codes and
similar uncertainties.
SUBSEQUENT EVENTS
Effective May 3, 1999, the Company completed the acquisition of CFI and
its affiliated companies and partnership interests for 4.2 million shares of
the Company's common stock and the assumption of approximately $231.0 million
in debt, plus other liabilities (See Note 15). The acquisition includes 100% of
the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's, CFI's 16%
interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100%
of CFI's turkey grow-out operation, CFI's 49% interest in Carolina Turkeys, and
certain hog production interests in Brazil and Mexico. The Company will account
for this acquisition using the purchase method of accounting.
Subsequent to the end of fiscal 1999, the Company increased its ownership
in Animex from 67% to 80% of total equity.
FORWARD-LOOKING INFORMATION
This report may contain "forward-looking" information within the meaning
of the federal securities laws. The forward-looking information may include
statements concerning the Company's outlook for the future, as well as other
statements of beliefs, future plans and strategies or anticipated events, and
similar expressions concerning matters that are not historical facts.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in, or implied
by, the statements. These risks and uncertainties include availability and
prices of live hogs, raw materials and supplies, live hog production costs,
product pricing, the competitive environment and related market conditions,
operating efficiencies, access to capital, and actions of domestic and foreign
governments.
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.
- 17 -
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 September 2, 1999.
(b) Information required by this Item regarding the executive officers of
the Company is included in Part I, Item 4A of this report.
There is no family relationship between any of the persons named in
response to Item 10.
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 September 2, 1999.
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 September 2, 1999.
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 September 2, 1999.
- 18 -
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 Form 8-K filed
with the Commission on September 5, 1997).
Exhibit 3.1(b) -- Articles of Amendment filed October 28, 1999 to Articles of Incorporation, as amended,
authorizing terms for one Series B Special Voting Preferred Share, par value $1.00 per
share.
Exhibit 3.2 -- By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3 to the
Company's Current Report on Form 8-K filed with the Commission on September 5, 1997).
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 Stock, 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 5 to the
Company's Current Report on Form 8-K filed with the Commission on September 5, 1997).
Exhibit 4.4 -- Rights Agreement, as amended, dated as of May 1, 1998, by and 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 4.5(a) -- Form of Certificate representing the Company's share of Series B Special Voting Preferred,
par value $1.00 per share (incorporated by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-4, 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.
Exhibit 4.5(d) -- Exchangeable Share Provisions (excerpted from the Articles of Incorporation, as amended,
of Smithfield Canada Limited).
Exhibit 4.6(a) -- Five-Year Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the
Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan
Bank, as Administrative Agent, relating to a $300,000,000 secured five-year revolving
credit facility (incorporated by reference to Exhibit 4.5 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); Amendment Number One to the Five-Year Credit Agreement dated as of
November 19, 1997 (incorporated by reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the
Commission on March 17, 1998); and Amendment Number Two to the Five-Year Credit
Agreement dated as of August 16, 1998 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August 2, 1998 filed with the
Commission on September 14, 1998).
- 19 -
Exhibit 4.6(b) -- 364-Day Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the
Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan
Bank, as Administrative Agent, relating to a $50,000,000 secured 364-day revolving credit
facility (incorporated by reference to Exhibit 4.5(a) 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); and Amendment Number One to the 364-Day Credit Agreement dated as of
November 19, 1997 (incorporated by reference to Exhibit 4.5(a) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the
Commission on March 17, 1998).
Exhibit 4.6(c) -- Collateral Agency, Pledge and Security Agreement dated as of July 10, 1997, among
Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, The Chase Manhattan
Bank, as Collateral Agent, relating to the Company's five-year revolving credit facility and
its 364-day 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) -- Note Purchase Agreement dated as of July 15, 1996, among Smithfield Foods, Inc. and each
of the Purchasers listed on Annex 1 thereto, relating to $140,000,000 in senior secured notes
(incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q Quarterly Report for
the fiscal quarter ended July 28, 1996); Amendment Number One to the Note Purchase
Agreement dated as of July 15, 1997 (incorporated by reference to Exhibit 4.6 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); Amendment Number Two to the Note Purchase
Agreement dated as of December 1, 1997 (incorporated by reference to Exhibit 4.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998
filed with the Commission on March 17, 1998); and Amendment Number Three to the Note
Purchase Agreement dated as of January 30, 1998.
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 4.8(a) -- Master Lease Agreement dated May 14, 1993 between General Electric Capital Corporation
and Brown's of Carolina, Inc. (incorporated by reference to Exhibit 4.12 to the Company's
Form 10-K Annual Report for the fiscal year ended May 2, 1993).
Exhibit 4.8(b) -- Corporate Guaranty by Smithfield Foods, Inc. dated May 14, 1993 (incorporated by
reference to Exhibit 4.12(a) to the Company's Form 10-K Annual Report for the fiscal year
ended May 2, 1993).
Exhibit 4.9 -- 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 4.10(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).
Exhibit 4.10(b) -- Loan and Loan Document Modification Agreement between Farm Credit and the Carroll's
Borrowers, dated as of May 7, 1999.
Exhibit 4.10(c) -- Unconditional Guaranty to Farm Credit from Smithfield Foods, Inc. dated as of May 7,
1999.
Exhibit 4.10(d) -- Unconditional Guaranty to Farm Credit from Carroll's Turkeys, Inc. to Farm Credit dated as
of May 7, 1999.
- 20 -
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 10.2 -- 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).
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 10.6 -- Agreement between Schneider Corporation and Douglas W. Dodds, including first, second
and third amendments.
Exhibit 21 -- Subsidiaries of the Registrant.
Exhibit 23 -- Consent of Independent Public Accountants.
Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K for February 25, 1999,
with the Commission on February 26, 1999, to report under Item 5 a
summary of earnings results for the third fiscal quarter and the signing
of a letter of intent concerning the acquisition of Carroll's Foods,
Inc.
- 21 -
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.
SMITHFIELD FOODS, INC.
By: /s/ JOSEPH W. LUTER, III
Date: July 30, 1999 -------------------------------------
Joseph W. Luter, III
Chairman of the Board 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 indicated on July 30, 1999.
SIGNATURE TITLE
--------- -----
/s/ Joseph W. Luter, III Chairman of the Board and Chief Executive
---------------------------------- Officer, and Director
Joseph W. Luter, III
/s/ Lewis R. Little President and Chief Operating Officer,
---------------------------------- and Director
Lewis R. Little
/s/ Aaron D. Trub Vice President, Chief Financial Officer
---------------------------------- and Secretary, and Director
Aaron D. Trub
/s/ C. Larry Pope Vice President, Finance
---------------------------------- (Principal Accounting Officer)
C. Larry Pope
/s/ Robert L. Burrus, Jr. Director
----------------------------------
Robert L. Burrus, Jr.
/s/ Douglas W. Dodds Director
----------------------------------
Douglas W. Dodds
/s/ F. J. Faison, Jr. Director
----------------------------------
F. J. Faison, Jr.
/s/ Joel W. Greenberg Director
----------------------------------
Joel W. Greenberg
/s/ George E. Hamilton, Jr. Director
----------------------------------
George E. Hamilton, Jr.
/s/ Robert G. Hofmann, II Director
----------------------------------
Robert G. Hofmann, II
- 22 -
Director
---------------------------------
Richard J. Holland
/s/ Roger R. Kapella Director
----------------------------------
Roger R. Kapella
/s/ William H. Prestage Director
----------------------------------
William H. Prestage
/s/ Joseph B. Sebring Director
----------------------------------
Joseph B. Sebring
/s/ Timothy A. Seely Director
----------------------------------
Timothy A. Seely
- 23 -
SMITHFIELD FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE(S)
-------------
FINANCIAL STATEMENTS
Report of Independent Public Accountants ............................................ F-2
Consolidated Balance Sheets for the Fiscal Years Ended May 2, 1999
and May 3, 1998 .................................................................. F-3
Consolidated Statements of Income for the Fiscal Years 1999, 1998, and 1997 ......... F-4
Consolidated Statements of Cash Flows for the Fiscal Years 1999, 1998, and 1997 ..... F-5
Consolidated Statements of Shareholders' Equity for the Fiscal Years ended April 27,
1997, May 3, 1998, and May 2, 1999 ............................................... 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
- F-1 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF SMITHFIELD FOODS, INC.:
We have audited the accompanying consolidated balance sheets of Smithfield
Foods, Inc. (a Virginia corporation), and subsidiaries as of May 2, 1999, and
May 3, 1998, and the related consolidated statements of income, cash flows, and
shareholders' equity for each of the three years in the period ended May 2,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smithfield Foods, Inc., and
subsidiaries as of May 2, 1999, and May 3, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
May 2, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 10, 1999
- F-2 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FISCAL YEARS ENDED
------------------------------
MAY 2, MAY 3,
1999 1998
-------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 30,590 $ 60,522
Accounts receivable less allowances of $2,656 and $1,541....................... 252,332 156,091
Inventories ................................................................... 348,856 249,511
Prepaid expenses and other current assets ..................................... 50,302 44,999
---------- ----------
Total current assets ........................................................ 682,080 511,123
---------- ----------
Property, plant and equipment:
Land .......................................................................... 29,605 15,157
Buildings and improvements .................................................... 404,002 240,032
Machinery and equipment ....................................................... 590,139 418,810
Construction in progress ...................................................... 59,670 31,873
---------- ----------
1,083,416 705,872
Less accumulated depreciation ................................................. (292,640) (233,652)
---------- ----------
Net property, plant and equipment ........................................... 790,776 472,220
---------- ----------
Other assets:
Investments in partnerships ................................................... 80,182 49,940
Goodwill, net of accumulated amortization of $2,871 and $1,964................. 103,017 12,360
Other ......................................................................... 115,559 38,002
---------- ----------
Total other assets .......................................................... 298,758 100,302
---------- ----------
$1,771,614 $1,083,645
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................................. $ 63,900 $ -
Current portion of long-term debt and capital lease obligations ............... 25,828 8,511
Accounts payable .............................................................. 207,703 118,909
Accrued expenses and other current liabilities ................................ 168,784 124,515
---------- ----------
Total current liabilities ................................................... 466,215 251,935
---------- ----------
Long-term debt and capital lease obligations ................................... 594,241 407,272
---------- ----------
Other noncurrent liabilities:
Pension and postretirement benefits ........................................... 62,276 38,486
Deferred income taxes ......................................................... 31,523 11,745
Other ......................................................................... 17,638 8,120
---------- ----------
Total other noncurrent liabilities .......................................... 111,437 58,351
Minority interests ............................................................. 57,475 5,077
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized shares.................. - -
Common stock, $.50 par value, 100,000,000 shares authorized; 41,847,359 and
37,537,362 issued shares .................................................... 20,924 18,769
Paid-in capital ............................................................... 180,020 96,971
Retained earnings ............................................................. 340,154 245,270
Accumulated other comprehensive income ........................................ 1,148 -
---------- ----------
Total shareholders' equity .................................................. 542,246 361,010
---------- ----------
$1,771,614 $1,083,645
========== ==========
See notes to consolidated financial statements
- F-3 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS
-------------------------------------------------
1999 1998 1997
------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales ................................................ $3,774,989 $ 3,867,442 $ 3,870,611
Cost of sales ........................................ 3,235,414 3,479,629 3,546,816
---------- ----------- -----------
Gross profit ........................................ 539,575 387,813 323,795
Selling, general and administrative expenses ......... 295,610 219,861 191,225
Depreciation expense ................................. 63,524 42,300 35,825
Interest expense ..................................... 40,521 31,891 26,211
---------- ----------- -----------
Minority interests ................................... (3,518) 199 2,857
Nonrecurring charge (See Note 12) .................... - 12,600 -
Income before income taxes............................ 143,438 80,962 67,677
Income taxes ......................................... 48,554 27,562 22,740
---------- ----------- -----------
Net income ........................................... $ 94,884 $ 53,400 $ 44,937
========== =========== ===========
Net income available to common shareholders .......... $ 94,884 $ 53,400 $ 43,699
========== =========== ===========
Net income per basic common share .................... $ 2.39 $ 1.42 $ 1.21
========== =========== ===========
Net income per diluted common share .................. $ 2.32 $ 1.34 $ 1.17
========== =========== ===========
See notes to consolidated financial statements
- F-4 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
Operating activities:
Net income ............................................................ $ 94,884 $ 53,400 $ 44,937
Depreciation and amortization ......................................... 68,566 45,872 39,057
Deferred income taxes ................................................. 20,737 14,752 7,810
(Gain) loss on sale of property and equipment ......................... (138) 216 (3,288)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable ................................................. 954 15,115 (12,606)
Inventories ......................................................... (17,680) 11,672 (30,008)
Prepaid expenses and other current assets ........................... (2,225) (10,550) (1,605)
Other assets ........................................................ (55,563) (7,746) (10,410)
Accounts payable, accrued expenses and other liabilities ............ 13,849 (25,194) 9,377
---------- ---------- ----------
Net cash provided by operating activities .............................. 123,384 97,537 43,264
---------- ---------- ----------
Investing activities:
Capital expenditures .................................................. (95,447) (92,913) (69,147)
Business acquisitions, net of cash acquired ........................... (151,223) (7,810) (34,835)
Investments in partnerships ........................................... (16,206) (5,357) (7,293)
Proceeds from sale of property and equipment .......................... 991 1,153 4,141
Other investing activities ............................................ - - (113)
---------- ---------- ----------
Net cash used in investing activities .................................. (261,885) (104,927) (107,247)
---------- ---------- ----------
Financing activities:
Net (repayments) borrowings on notes payable .......................... 24,182 (75,000) (33,063)
Proceeds from issuance of long-term debt .............................. 22,948 450,050 171,250
Net borrowings on long-term credit facility ........................... 71,000 - -
Principal payments on long-term debt and capital lease obligations..... (21,754) (333,053) (76,974)
Exercise of common stock options ...................................... 12,155 124 1,270
Dividends on preferred stock .......................................... - - (1,238)
---------- ---------- ----------
Net cash provided by financing activities .............................. 108,531 42,121 61,245
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ................... (29,970) 34,731 (2,738)
Effect of foreign exchange rate changes on cash ........................ 38 - -
Cash and cash equivalents at beginning of year ......................... 60,522 25,791 28,529
---------- ---------- ----------
Cash and cash equivalents at end of year ............................... $ 30,590 $ 60,522 $ 25,791
========== ========== ==========
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized .............................. $ 37,696 $ 31,428 $ 25,751
---------- ---------- ----------
Income taxes paid ..................................................... $ 15,306 $ 10,179 $ 15,043
---------- ---------- ----------
Non-cash investing and financing activities:
Refinancing of long-term debt ....................................... $ - $ - $ 59,707
---------- ---------- ----------
Conversion of preferred stock to common stock ....................... $ - $ - $ 20,000
---------- ---------- ----------
Common stock issued for acquisitions ................................ $ 73,049 $ - $ -
---------- ---------- ----------
Conversion of advances to investments in partnerships ............... $ - $ - $ 7,691
========== ========== ==========
See notes to consolidated financial statements
- F-5 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK OTHER
---------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES PAR VALUE CAPITAL EARNINGS INCOME STOCK TOTAL
---------- ----------- ----------- ------------ --------------- ------------ -----------
(IN THOUSANDS)
Balance, April 28, 1996 ................. 18,453 $ 9,227 $ 92,762 $148,171 $ - $ (7,643) $242,517
Comprehensive income:
Net income ........................... - - - 44,937 - - 44,937
------ ------- -------- -------- ------ -------- --------
Total comprehensive income .......... - - - - - - 44,937
------ ------- -------- -------- ------ -------- --------
Conversion of preferred stock .......... 667 333 19,667 - - - 20,000
Exercise of stock options .............. 77 38 1,232 - - - 1,270
Dividends on preferred stock ........... - - - (1,238) - - (1,238)
------ ------- -------- -------- ------ -------- --------
Balance, April 27, 1997 ................. 19,197 9,598 113,661 191,870 - (7,643) 307,486
Comprehensive income:
Net income ........................... - - - 53,400 - - 53,400
------ ------- -------- -------- ------ -------- --------
Total comprehensive income .......... - - - - - - 53,400
------ ------- -------- -------- ------ -------- --------
Two-for-one stock split ................ 19,200 9,600 (9,600) - - - -
Exercise of stock options .............. 14 8 116 - - - 124
Reclassification of treasury stock ..... (874) (437) (7,206) - - 7,643 -
------ ------- -------- -------- ------ -------- --------
Balance, May 3, 1998 .................... 37,537 18,769 96,971 245,270 - - 361,010
Comprehensive income:
Net income ........................... - - - 94,884 - - 94,884
Other comprehensive income ........... - - - - 1,148 - 1,148
------ ------- -------- -------- ------ -------- --------
Total comprehensive income .......... - - - - - - 96,032
------ ------- -------- -------- ------ -------- --------
Common stock issued .................... 2,986 1,493 71,556 - - - 73,049
Exercise of stock options .............. 1,324 662 11,493 - - - 12,155
------ ------- -------- -------- ------ -------- --------
Balance, May 2, 1999 .................... 41,847 $20,924 $180,020 $340,154 $1,148 $ - $542,246
====== ======= ======== ======== ====== ======== ========
See notes to consolidated financial statements
- F-6 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Smithfield Foods, Inc. and subsidiaries (the "Company") operates as a
producer, manufacturer, marketer, seller and distributor of fresh and processed
meats. The Company's principal slaughtering and further processing operations
are conducted through the Meat Processing Group ("MPG") which consists of six
wholly owned domestic pork processing subsidiaries, Gwaltney of Smithfield,
Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc.
("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated
("Patrick Cudahy") and The Smithfield Packing Company, Incorporated
("Smithfield Packing"), and three international meat processing subsidiaries,
Animex S.A. ("Animex"), a 67%-owned Polish subsidiary, Schneider Corporation
("Schneider"), a 63%-owned Canadian subsidiary, and Societe Bretonne de
Salaisons ("SBS"), a wholly owned French subsidiary. The Company's hog
production operations are conducted through the Hog Production Group ("HPG")
which consists of Brown's of Carolina, Inc. ("Brown's"), an 86%-owned
subsidiary of the Company, a 50% interest in Smithfield-Carroll's
("Smithfield-Carroll's"), a joint hog production arrangement between the
Company and an affiliate of Carroll's Foods, Inc. ("CFI") and an 84% interest
in Circle Four ("Circle Four"), a joint hog production arrangement between the
Company and affiliates of CFI. Effective May 3, 1999, the Company acquired CFI
and its affiliated companies and partnership interests (See Note 15).
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company after elimination of all material intercompany balances and
transactions. Investments in partnerships are recorded using the equity method
of accounting.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates.
Fiscal 1999 and 1997 included 52 weeks of operations compared to fiscal
1998 which included 53 weeks of operations.
FOREIGN CURRENCY TRANSLATION
Financial statements of foreign operations, where the local currency is
the functional currency, are translated using exchange rates in effect at
period end for assets and liabilities, and average exchange rates during the
period for results of operation. Related translation adjustments are reported
as a component of other comprehensive income in shareholders equity. All
amounts presented in the consolidated financial statements are in US dollars.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying value
of cash equivalents approximates market value. As of May 2, 1999 and May 3,
1998, cash and cash equivalents include $3,400 and $30,100, respectively, in
short-term marketable securities.
INVENTORIES
The Company's inventories are valued at the lower of first-in, first-out
cost or market. Cost includes direct materials, labor and applicable
manufacturing and production overhead. Inventories consist of the following:
MAY 2, 1999 MAY 3, 1998
------------- ------------
Fresh and processed meats .......... $219,647 $171,090
Hogs on farms ...................... 83,352 49,263
Manufacturing supplies ............. 30,201 18,538
Other .............................. 15,656 10,620
-------- --------
$348,856 $249,511
======== ========
- F-7 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 $2,377 in fiscal 1999, $2,530 in fiscal
1998 and $2,640 in fiscal 1997. Repair and maintenance expenses totaled
$120,833, $106,481 and $89,670 in fiscal 1999, 1998 and 1997, respectively.
OTHER ASSETS
Goodwill is amortized over no more than 40 years. Deferred debt issuance
costs are amortized over the terms of the related loan agreements.
REVENUE RECOGNITION
Revenues from product sales are recorded upon shipment to customers.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current or future operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and cleanups are probable and the cost can be reasonably estimated.
Generally, the timing of these accruals coincides with the Company's commitment
to a formal plan of action (See Note 12).
SELF-INSURANCE PROGRAMS
The Company is self-insured for certain levels of general and vehicle
liability, workers' compensation and health care coverage. The cost of these
self-insurance programs is accrued based upon estimated settlements for known
and anticipated claims. Any resulting adjustments to previously recorded
reserves are reflected in current operating results.
NET INCOME PER SHARE
The Company presents a dual computation of net income per share (See Note
13). The basic computation is based on weighted-average common shares
outstanding during the period. The diluted computation reflects the potentially
dilutive effect of common stock equivalents such as options and convertible
preferred stock during the period.
RECENTLY ISSUED ACCOUNTING STANDARDS
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
established new rules for reporting and display of comprehensive income and its
components. The adoption of SFAS 130 had no impact on the Company's net income.
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
established standards for determining an entity's operating segments and for
disclosure
- F-8 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
of financial information on such segments. The adoption of SFAS 131 had no
impact on the Company's financial position or results of operations (See Note
14).
In fiscal 1999, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits -- an amendment of statements
No. 87, 88 and 106" ("SFAS 132"). SFAS 132 standardized the disclosure
requirement for pensions and other postretirement benefits and, to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. The adoption of SFAS 132 had no impact on the Company's financial
position or results of operations (See Note 9).
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established
accounting and reporting standards for derivative instruments and hedging
activities and requires, among other things, that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS 133 is not required to be adopted until
fiscal 2001. The Company has not completed the analysis required to estimate
the impact of the standard.
RECLASSIFICATIONS
Certain prior year amounts have been restated to conform to fiscal 1999
presentations.
NOTE 2 -- RISK MANAGEMENT
Substantially all of the Company's products are produced from
commodity-based raw materials, corn and soybean meal in the HPG and live hogs
in the MPG. The cost of corn and soybean meal (the principal feed ingredients
for hogs) and live hogs are subject to wide fluctuations due to unpredictable
factors such as weather conditions, economic conditions, government regulation
and other unforeseen circumstances. The pricing of the Company's fresh pork and
processed meats is monitored and adjusted upward and downward in reaction to
changes in the cost of the underlying raw materials. The unpredictability of
the raw material costs limits the Company's ability to forward price fresh pork
and processed meat products without the use of commodity contracts through a
program of price-risk management. The Company uses price-risk management to
enhance its ability to engage in forward sales contracts, where prices for
future deliveries are fixed, by purchasing (or selling) commodity contracts for
future periods to reduce or eliminate the effect of fluctuations in future raw
material costs on the profitability of the related sales. While this may tend
to limit the Company's ability to participate in gains from favorable commodity
price fluctuation, it also tends to reduce the risk of loss from adverse
changes in raw material prices. In addition, the Company utilizes commodity
contracts for live hogs and grains to manage hog production margins when
management determines the conditions are correct for such hedges. The
particular hedging methods employed and the time periods for the contracts
depend on a number of factors, including the availability of adequate contracts
for the respective periods for the hedge. The Company attempts to closely match
the commodity contract expiration periods with the dates for product sale and
delivery. As of May 2, 1999 and May 3, 1998, the Company had deferred $8,895
and $1,867, respectively, of unrealized hedging gains on outstanding futures
contracts. As of May 2, 1999 and May 3, 1998, the Company had open futures
contracts with contract values of $219,748 and $97,072, respectively. As of May
2, 1999 and May 3, 1998, the Company had deposits with brokers for outstanding
futures contracts of $15,591 and $10,888, respectively, included in prepaid
expenses and other current assets.
For open futures contracts, the Company uses a sensitivity analysis
technique to evaluate the effect that changes in the market value of
commodities will have on these commodity derivative instruments. As of May 2,
1999, the potential change in fair value of open future contracts, assuming a
10% change in the underlying commodity price, was $10,418.
NOTE 3 -- ACQUISITIONS
In the third quarter of fiscal 1999, the Company acquired 100% of the
voting common shares of Schneider and approximately 59% of its Class A
non-voting shares, which in the aggregate represents approximately 63% of the
total equity of Schneider, in exchange for approximately 2,527,000 Exchangeable
Shares of Smithfield Canada Limited, a wholly owned subsidiary of the Company.
Each Exchangeable Share is exchangeable by the holder at any time for one
common share of
- F-9 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- ACQUISITIONS -- Continued
the Company. Schneider produces and markets fresh pork and a full line of
processed meats and is the second largest meat processing company in Canada.
The total purchase price of $69,700 was allocated to assets acquired and
liabilities assumed based on fair values at the date of the acquisition. The
balance of the purchase price in excess of the fair value of assets acquired
and liabilities assumed at the date of acquisition was recorded as an
intangible asset totaling $36,900. Had the acquisition of Schneider occurred at
the beginning of fiscal 1998, sales, net income and net income per diluted
share would have been $4,053,798, $98,146 and $2.33 for fiscal 1999 and
$4,405,239, $59,447 and $1.40 for fiscal 1998.
In April 1999 the Company acquired, in a tender offer, 11,500,000 shares
of the capital stock of Animex, the largest meat and poultry processing company
in Poland. Following the tender offer, the Company's ownership represented 67%
of the total equity and 51% voting control of Animex. A preliminary allocation
of the purchase price was made to assets acquired and liabilities assumed based
on their estimated fair values. The final purchase price allocation will be
determined during fiscal 2000 when appraisals, other studies and additional
information become available. Had the acquisition of Animex occurred at the
beginning of the fiscal 1999, sales would have been approximately $4,175,000,
and it would not have had a material effect on net income or net income per
diluted share.
In September 1998, the Company acquired all of the capital stock of SBS,
the largest private-label manufacturer of ham, pork shoulder and bacon products
in France.
In October 1998, the Company acquired all of the assets and business of
North Side, a major domestic supplier of precooked sausage to McDonald's
Corporation.
Each of these acquisitions was accounted for using the purchase method of
accounting and, accordingly, the accompanying financial statements include the
financial position and results of operations from the dates of acquisition. Had
the acquisitions of North Side and SBS occurred at the beginning of fiscal
1999, it would not have had a material effect on sales, net income or net
income per diluted share for the year ended May 2, 1999.
In addition, during fiscal 1999, the Company increased its ownership in
the Circle Four hog production operation from 37% to 84%, requiring the Company
to consolidate the accounts of Circle Four and to discontinue using the equity
method of accounting. During fiscal 1998 and 1997, Circle Four was accounted
for using the equity method of accounting.
NOTE 4 -- SMITHFIELD-CARROLL'S
The Company has an arrangement with certain affiliates of CFI to produce
hogs for the Company's meat processing plants in North Carolina and Virginia.
The arrangement ("Smithfield-Carroll's") involves: (1) Smithfield-Carroll's
Farms, a partnership owned jointly by the Company and Carroll's Farms of
Virginia, Inc. ("CFAV"), which owns the hog raising facilities, and (2) a
long-term purchase contract between the Company and Carroll's Foods of
Virginia, Inc. ("CFOV"), which leases and operates the facilities, obligating
the Company to purchase all the hogs produced by CFOV at prices equivalent to
market at the time of delivery. In addition, the Company has a long-term
agreement to purchase hogs from CFI at prices which, in the opinion of
management, are equivalent to market. A director of the Company is the
president and a director of CFI, CFAV and CFOV.
As of May 2, 1999 and May 3, 1998, the Company had investments of $30,031
and $29,357, respectively, in the Smithfield-Carroll's partnership. Profits and
losses are shared equally under the arrangement.
Substantially all revenues of the partnership consist of lease payments
from CFOV which cover debt service, depreciation charges and other operating
expenses. For the fiscal years 1999, 1998 and 1997, revenues were $7,680,
$7,386 and $8,227, respectively.
Pursuant to the long-term purchase contract, the Company purchased
$53,282, $79,087 and $93,049 of live hogs from CFOV in fiscal 1999, 1998 and
1997, respectively. The contract resulted in increased raw material costs (as
compared to market costs) of $12,465 in fiscal 1999 and decreased raw material
costs of $359 and $5,245 in fiscal 1998 and 1997, respectively. Pursuant to the
agreement with CFI, the Company purchased $161,965, $246,371 and $269,499 of
hogs in fiscal 1999, 1998 and 1997, respectively.
- F-10 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- SMITHFIELD-CARROLL'S -- Continued
Effective May 3, 1999, the Company purchased CFI in a business combination
(See Note 15).
NOTE 5 -- DEBT
Long-term debt consists of the following:
MAY 2, 1999 MAY 3, 1998
------------- ------------
7.625% senior subordinated notes, due February 2008 ............. $ 200,000 $200,000
8.52% senior notes, due August 2006 ............................. 100,000 100,000
Long-term credit facility, expiring July 2002 ................... 71,000 -
Libor + 1.50% notes, payable through December 2005 .............. 42,534 -
8.34% senior notes, due August 2003 ............................. 40,000 40,000
Euribor 3 mos. + .50% French Franc notes, payable through
April 2004 .................................................... 19,355 -
8.41% senior notes, payable through August 2004 ................. 14,779 14,779
9.70% Canadian dollar notes, payable through September 2010...... 13,114 -
Libor + 1.50% notes, payable through December 2006 .............. 13,000 -
9.85% senior notes, payable through November 2006 ............... 10,333 11,333
8.41% senior notes, payable through August 2006 ................. 9,853 9,853
8.56% Canadian dollar notes, payable through November 2003 ...... 9,749 -
8.03% weighted average notes, payable July 1999 through
October 2017 .................................................. 41,113 -
Other Euribor weighted average 3 mos. + .72% notes, due
December 2000 through November 2003 ........................... 11,865 20,876
Miscellaneous ................................................... 5,841 -
--------- --------
602,536 396,841
Less current portion ............................................ (24,102) (7,020)
--------- --------
$ 578,434 $389,821
========= ========
Scheduled maturities of long-term debt are as follows:
Fiscal year
2000 ................... $ 24,102
2001 ................... 25,487
2002 ................... 24,371
2003 ................... 94,711
2004 ................... 89,804
Thereafter ............. 344,061
--------
$602,536
========
In fiscal 1998, the Company issued $200,000 in aggregate principal amount
of 10-year 7.625% senior subordinated notes. The net proceeds from the sale of
the notes were used to repay indebtedness under the Company's revolving credit
facility with the balance invested in short-term marketable securities.
In fiscal 1997, the Company privately placed $140,000 of senior secured
notes with a group of institutional lenders. The placement consisted of $40,000
of seven-year 8.34% notes and $100,000 of 10-year 8.52% notes secured by four
of the Company's major processing plants. The proceeds of the financing were
used to repay $65,200 of long-term bank debt and to reduce short-term
borrowings. In conjunction with the placement of the senior secured notes, the
Company refinanced $59,707 of existing institutional long-term debt with the
same institutional lenders. The refinancing resulted in revised maturity dates
and repayment schedules for the refinanced debt; however, no additional
proceeds resulted from this refinancing.
- F-11 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- DEBT -- Continued
In fiscal 1998, the Company entered into a loan agreement with a bank
group for a five-year $300,000 revolving credit facility. In connection with
this refinancing, the Company repaid all borrowings under its previous $300,000
credit facilities, which were terminated. The borrowings are prepayable and
bear interest, at the Company's option, at various rates based on margins over
the federal funds rate or Eurodollar rate. The Company has aggregate credit
facilities totaling $402,000 including a $300,000 revolving credit facility
with a bank group which expires July 2002. As of May 2, 1999, the Company had
unused capacity under these credit facilities of $214,000. Included in the
aggregate credit facilities are $102,000 of short-term credit facilities with
various U.S. and international banks assumed in connection with businesses
acquired during fiscal 1999. These short-term credit facilities are classified
as notes payable in the Consolidated Balance Sheet. These facilities are
generally at prevailing market rates. The Company pays a commitment fee on the
unused portion of the $300,000 revolving credit facility.
Average borrowings under credit facilities were $74,820 in fiscal 1999,
$149,723 in fiscal 1998 and $165,071 in fiscal 1997 at average interest rates
of approximately 6%, 7% and 7%, respectively. Maximum borrowings were $152,510
in fiscal 1999, $247,000 in fiscal 1998 and $215,000 in fiscal 1997. Total
outstanding borrowings were $134,900 as of May 2, 1999, at an average interest
rate of 7%. There were no borrowings under the facility as of May 3, 1998.
The senior subordinated notes are unsecured. Senior notes are secured by
four of the Company's major processing plants and certain other property, plant
and equipment. The $300,000 credit facility is secured by substantially all of
the Company's U.S. inventories and accounts receivable.
The Company determines the fair value of public debt using quoted market
prices and values all other debt using discounted cash flow techniques at
estimated market prices for similar issues. As of May 2, 1999, the fair value
of long-term debt, based on the market value of debt with similar maturities
and covenants, was approximately $599,015.
The Company's various debt agreements contain financial covenants that
require the maintenance of certain levels and ratios for working capital, net
worth, current ratio, fixed charges, capital expenditures and, among other
restrictions, limit additional borrowings, the acquisition, disposition and
leasing of assets, and payments of dividends to shareholders.
NOTE 6 -- INCOME TAXES
Income tax expense consists of the following:
1999 1998 1997
---------- ---------- ----------
Current tax expense:
Federal ..................... $ 20,445 $ 11,315 $ 12,765
State ....................... 5,409 2,043 2,805
Foreign ..................... 1,963 - -
-------- -------- --------
27,817 13,358 15,570
-------- -------- --------
Deferred tax expense (benefit):
Federal ..................... 19,924 15,684 9,424
State ....................... (2,082) (1,480) (2,254)
Foreign ..................... 2,895 - -
-------- -------- --------
20,737 14,204 7,170
-------- -------- --------
$ 48,554 $ 27,562 $ 22,740
======== ======== ========
- F-12 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- INCOME TAXES -- Continued
A reconciliation of taxes computed at the federal statutory rate to the
provision for income taxes is as follows:
1999 1998 1997
---------- ---------- ----------
Federal income taxes at statutory rate .................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit .......... 2.5 1.0 1.7
Nondeductible settlements ............................... - 4.5 1.6
Foreign sales corporation benefit ....................... (1.4) (2.0) (1.4)
Benefits of certain insurance contracts ................. (1.1) (3.3) (3.6)
Other ................................................... (1.1) (1.2) 0.3
---- ---- ----
33.9% 34.0% 33.6%
==== ==== ====
The tax effects of temporary differences consist of the following:
MAY 2, 1999 MAY 3, 1998
------------- ------------
Deferred tax assets:
Employee benefits ........................................... $17,748 $23,264
Alternative minimum tax credit .............................. 5,283 5,781
Tax credits, carryforwards and net operating losses ......... 14,308 12,773
Inventories ................................................. 1,627 1,286
Accrued expenses ............................................ 5,398 12,867
------- -------
$44,364 $55,971
======= =======
Deferred tax liabilities:
Property, plant and equipment ............................... $47,876 $36,488
Investments in subsidiaries ................................. 3,293 719
Other assets ................................................ 4,167 6,875
------- -------
$55,336 $44,082
======= =======
As of May 2, 1999 and May 3, 1998, the Company had $20,551 and $23,634,
respectively, of net current deferred tax assets included in prepaid expenses
and other current assets. The Company had no valuation allowance related to
income tax assets as of May 2, 1999 or May 3, 1998, and there was no change in
the valuation allowance during fiscal 1999 and 1998.
The tax credits, carryforwards and net operating losses expire from fiscal
2000 to 2013. The alternative minimum tax credits do not expire.
As of May 2, 1999, foreign subsidiary net earnings of $7,195 were
considered permanently reinvested in those businesses. Accordingly, federal
income taxes have not been provided for such earnings. It is not practicable to
determine the amount of unrecognized deferred tax liabilities associated with
such earnings.
NOTE 7 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
MAY 2, 1999 MAY 3, 1998
------------- ------------
Payroll and related benefits ................. $ 60,079 $ 46,834
Self-insurance reserves ...................... 33,870 24,794
Pension and postretirement benefits .......... 12,671 23,931
Other ........................................ 62,164 28,956
-------- --------
$168,784 $124,515
======== ========
- F-13 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK
REINCORPORATION AND TREASURY STOCK
In fiscal 1998, the Company's shareholders approved the reincorporation of
the Company in Virginia from Delaware. The purpose of the reincorporation was
to reduce annual franchise taxes and does not affect the Company's
capitalization or the manner in which it operates. Since Virginia law does not
recognize treasury stock, the shares previously classified as treasury stock
reverted to unissued shares resulting in a reduction in common stock and
additional paid-in capital for the cost basis of the shares.
STOCK SPLIT
On September 26, 1997, the Company effected a two-for-one split of its
common stock. Stock option agreements provide for the issuance of additional
shares for the stock split. All stock options outstanding and per share amounts
for all periods reflect the effect of this split.
ISSUANCE OF COMMON STOCK
In fiscal 1999, the Company issued 2,527,000 Exchangeable Shares of
Smithfield Canada Limited, a wholly owned subsidiary of the Company, in
exchange for the voting common shares and the Class A non-voting shares of
Schneider Corporation. Each Exchangeable Share is exchangeable by the holder at
any time for one common share of the Company. The Company considers each
Exchangeable Share as equivalent to a share of its common stock and therefore
these shares are included in common stock issued on the consolidated balance
sheets and in the computation of net income per share.
Also in fiscal 1999, the Company issued 459,000 shares of its common stock
as part of the purchase price for North Side.
PREFERRED STOCK
The Company has 1,000,000 shares of $1.00 par value preferred stock
authorized, none of which are issued. The board of directors is authorized to
issue preferred stock in series and to fix, by resolution, the designation,
dividend rate, redemption provisions, liquidation rights, sinking fund
provisions, conversion rights and voting rights of each series of preferred
stock.
In fiscal 1997, all of the Series C 6.75% cumulative convertible
redeemable preferred stock, totaling $20,000, was converted into 1,333,332
split-adjusted shares of the Company's common stock at $15.00 per share.
STOCK OPTIONS
Under the Company's 1984 Stock Option Plan (the "1984 Plan"), officers and
certain key employees were granted incentive and nonstatutory stock options to
purchase shares of the Company's common stock for periods not exceeding 10
years at prices that were not less than the fair market value of the common
stock on the date of grant. Stock appreciation rights which are exercisable
upon a change in control of the Company are attached to the options granted
pursuant to the 1984 Plan. The 1984 Plan expired in fiscal 1999 with the final
exercise of options.
Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"),
management and other key employees may be granted nonstatutory stock options to
purchase shares of the Company's common stock exercisable five years after
grant for periods not exceeding 10 years. The exercise price for options
granted prior to August 31, 1994 was not less than 150% of the fair market
value of the common stock on the date of grant. On August 31, 1994 the Company
amended and restated the 1992 Plan, changing the exercise price of options
granted on or after that date to not less than the fair market value of the
common stock on the date of grant. The Company reserved 2,500,000 shares of
common stock under the 1992 Plan. As of May 2, 1999, there were 294,000 options
available for grant under the 1992 Plan.
Under the Company's 1998 Stock Incentive Plan (the "1998 Plan"),
management and other key employees may be granted nonstatutory stock options to
purchase shares of the Company's common stock exercisable five years after
grant for periods not exceeding 10 years. The Company reserved 1,500,000 shares
under the 1998 Plan. As of May 2, 1999, there were no options granted under
this plan.
- F-14 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
The following is a summary of transactions for the 1984 Plan and the 1992
Plan during fiscal 1997, 1998 and 1999:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------------- ---------
Outstanding at April 28, 1996 ......... 3,603,000 $ 8.86
Granted ............................. 160,000 15.67
Exercised ........................... (154,000) 3.11
Cancelled ........................... (540,000) 12.29
--------- -------
Outstanding at April 27, 1997 ......... 3,069,000 8.90
Granted ............................. 314,000 25.39
Exercised ........................... (17,000) 4.06
--------- -------
Outstanding at May 3, 1998 ............ 3,366,000 10.47
Granted ............................. 260,000 27.96
Exercised ........................... (1,323,500) 4.42
Cancelled ........................... (160,000) 15.56
---------- -------
Outstanding at May 2, 1999 ............ 2,142,500 $ 15.95
========== =======
As of May 2, 1999, May 3, 1998 and April 27, 1997, the number of option
shares exercisable was 1,127,500, 1,260,000 and 1,278,000, respectively, at
weighted average exercise prices of $11.53, $4.06 and $4.06, respectively.
The following table summarizes information about stock options outstanding
as of May 2, 1999:
OPTION SHARES WEIGHTED WEIGHTED
EXERCISE OUTSTANDING AVERAGE REMAINING AVERAGE
PRICE RANGE MAY 2, 1999 CONTRACTUAL LIFE EXERCISE PRICE
- ------------------- --------------- ------------------- ---------------
$10.72 to 11.75 1,227,500 4.6 $ 11.51
13.63 to 15.31 310,000 6.7 13.74
16.47 to 18.78 110,000 7.8 17.05
26.25 to 29.19 440,000 8.8 27.56
31.63 to 32.75 55,000 8.6 32.38
Stock options with an exercise price of $11.53 per share are the only
options exercisable as of May 2, 1999.
The Company does not recognize compensation costs for its stock option
plans. Had the Company determined compensation costs based on the fair value at
the grant date for its stock options granted subsequent to fiscal 1995, the
Company's net income and net income per common share would have been reduced to
the pro forma amounts as follows:
1999 1998 1997
------------ ------------ ------------
Net income, as reported ................. $ 94,884 $ 53,400 $ 44,937
Pro forma net income .................... 93,705 52,571 44,553
Net income per common share, as reported:
Basic ................................. $ 2.39 $ 1.42 $ 1.21
Diluted ............................... 2.32 1.34 1.17
Pro forma net income per common share:
Basic ................................. $ 2.36 $ 1.40 $ 1.20
Diluted ............................... 2.29 1.32 1.16
The weighted-average fair values of option shares granted were $13.40,
$11.88 and $7.62 for fiscal 1999, 1998 and 1997, respectively. The fair value
of each stock option share granted is estimated at date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
- F-15 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SHAREHOLDERS' EQUITY AND PREFERRED STOCK -- Continued
1999 1998 1997
------------- ------------- -------------
Expected option life ............... 7.0 years 6.0 years 6.0 years
Expected annual volatility ......... 35.0% 35.0% 35.0%
Risk-free interest rate ............ 5.3% 6.3% 6.2%
Dividend yield ..................... 0.0% 0.0% 0.0%
PREFERRED SHARE PURCHASE RIGHTS
As part of the reincorporation, the Company adopted a preferred share
purchase rights plan (the "Rights Plan") and declared a dividend of one
preferred share purchase right (a "Right") on each outstanding share of common
stock. Under the terms of the Rights Plan, if the Company is acquired in a
merger or other business combination transaction, each Right will entitle its
holder to purchase, at the Right's then current exercise price, a number of the
acquiring company's common shares having a market value of twice such price. In
addition, if a person or group acquires 20% (or other applicable percentage, as
summarized in the Rights Plan) or more of the outstanding common stock, each
Right will entitle its holder (other than such person or members of such group)
to purchase, at the Right's then current exercise price, a number of shares of
common stock having a market value of twice such price.
Each Right will entitle its holder to buy one one-thousandth of a Series A
junior participating preferred share ("Preferred Share"), par value $1.00 per
share, at an exercise price of $37.50 subject to adjustment. Each Preferred
Share will entitle its holder to 1,000 votes and will have an aggregate
dividend rate of 1,000 times the amount, if any, paid to holders of common
stock. The Rights will expire on May 31, 2001, unless the date is extended or
unless the Rights are earlier redeemed or exchanged at the option of the board
of directors for $.0001 per Right. Generally, each share of common stock issued
after May 31, 1991 will have one Right attached.
NOTE 9 -- PENSION AND OTHER RETIREMENT PLANS
The Company sponsors several defined benefit pension plans covering
substantially all U.S. and Canadian employees. Pension plans covering salaried
employees provide benefits based on years of service and average salary levels.
Pension plans covering hourly employees provide benefits of stated amounts for
each year of service. In general, the Company's funding policy for pension
plans is to contribute annually the minimum amount required under government
regulations. The pension plan assets are invested primarily in equities, debt
securities, insurance contracts and money market funds.
The Company provides health care and life insurance benefits for certain
retired employees. These plans are unfunded and generally pay covered costs
reduced by retiree premium contributions, co-payments and deductibles. The
Company retains the right to modify or eliminate these benefits.
- F-16 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
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:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------- ----------------------------
MAY 2, 1999 MAY 3, 1998 MAY 2, 1999 MAY 3, 1998
------------- ------------- ------------- ------------
Change in benefit obligation
Benefit obligation at beginning of year ................ $ 242,554 $ 215,919 $ 10,817 $ 9,630
Service cost ......................................... 6,626 4,104 397 58
Interest cost ........................................ 22,007 16,730 1,416 741
Plan amendments ...................................... 15,681 - - -
Acquisitions ......................................... 156,343 - 18,843 -
Benefits paid ........................................ (22,285) (16,590) (1,055) (895)
Foreign currency changes ............................. 10,676 - 1,138 -
Actuarial (gain) loss ................................ 11,150 22,391 (1,262) 1,283
--------- --------- --------- ---------
Benefit obligation at end of year ...................... 442,752 242,554 30,294 10,817
--------- --------- --------- ---------
Change in plan assets
Fair value of plan assets at beginning of year ......... 203,392 170,596 - -
Actual return on plan assets ......................... 12,979 35,052 - -
Acquisitions ......................................... 172,116 - - -
Employer contributions ............................... 19,049 14,334 984 895
Foreign currency changes ............................. 11,474 - - -
Benefits paid ........................................ (22,285) (16,590) (984) (895)
--------- --------- --------- ---------
Fair value of plan assets at end of year ............... 396,725 203,392 - -
--------- --------- --------- ---------
Reconciliation of accrued cost
Funded status .......................................... (46,027) (39,162) (30,294) (10,817)
Unrecognized actuarial (gain) or loss .................. 11,303 (12,995) (490) 1,060
Unrecognized prior service cost ........................ 15,728 797 - -
--------- --------- --------- ---------
Accrued cost at end of year .......................... $ (18,996) $ (51,360) $ (30,784) $ (9,757)
--------- --------- --------- ---------
Amounts recognized in the statement of financial position
consist of .............................................
Prepaid benefit cost ................................... $ 19,546 $ 1,300 $ - $ -
Accrued benefit liability .............................. (44,163) (52,660) (30,784) (9,757)
Intangible asset ....................................... 410 - - -
Accumulated other comprehensive income ................. 5,211 - - -
--------- --------- --------- ---------
Net amount recognized at end of year ................. $ (18,996) $ (51,360) $ (30,784) $ (9,757)
--------- --------- --------- ---------
Components of net periodic cost
Service cost ........................................... $ 6,626 $ 4,104 $ 397 $ 58
Interest cost .......................................... 22,007 16,730 1,416 767
Expected return on plan assets ......................... (25,834) (15,309) - -
Net amortization ....................................... 86 (1,137) 95 69
--------- --------- --------- ---------
Net periodic cost ...................................... $ 2,885 $ 4,388 $ 1,908 $ 894
========= ========= ========= =========
The projected benefit obligations, accumulated benefit obligations and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $204,648, $193,010 and $139,027,
respectively, as of May 2, 1999, and $193,890, $185,420 and $139,945,
respectively, as of May 3, 1998.
- F-17 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- PENSION AND OTHER RETIREMENT PLANS -- Continued
In determining the projected benefit obligation and the accumulated
postretirement benefit obligation in fiscal 1999 and 1998, the following
assumptions were made:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------- ----------------------------
MAY 2, 1999 MAY 3, 1998 MAY 2, 1999 MAY 3, 1998
------------- ------------- ------------- ------------
Weighted average assumptions:
Discounted rate ................... 6.8% 7.0% 6.7% 7.0%
Expected return on assets ......... 9.0% 9.0% - -
Compensation increase ............. 3.9% 4.5% - -
In determining the accumulated postretirement benefit obligation in fiscal
1999 and 1998, the assumed annual rate of increase in per capita cost of
covered health care benefits was 6.5% for fiscal 1999, 6.0% for fiscal 2000 and
5.5% thereafter for U.S. plans. For non-U.S. plans the assumed annual rate of
increase was 8.5% for fiscal 1999 and decreased by 0.5% each year until
leveling at 5.0%.
The assumed health care cost trend rate has an effect on the amounts
reported. A one percentage point change in the assumed per capita cost of
covered health care benefits would have the following effect:
ONE ONE
PERCENTAGE PERCENTAGE
POINT POINT
INCREASE DECREASE
------------ -----------
Effect on postretirement benefit obligation as of May 2, 1999 ...... $2,106 $ (2,247)
Effect on annual benefit cost in fiscal 1999 ....................... $ 178 $ (155)
NOTE 10 -- LEASE OBLIGATIONS AND COMMITMENTS
The Company leases transportation equipment under operating leases ranging
from one to 10 years with options to cancel at earlier dates. In addition, the
Company has a long-term maintenance agreement related to this equipment.
Maintenance fees are based upon fixed monthly charges for each vehicle, as well
as the maintenance facility itself and contingent fees based upon
transportation equipment usage. The amounts shown below as minimum rental
commitments do not include contingent maintenance fees.
The Company has agreements, expiring in fiscal 2004 and 2008, to use two
cold storage warehouses owned by a partnership, 50% of which is owned by the
Company. The Company has agreed to pay prevailing competitive rates for use of
the facilities, subject to aggregate guaranteed minimum annual fees of $3,600.
In fiscal 1999, 1998 and 1997, the Company paid $5,807, $6,228 and $5,372,
respectively, in fees for use of the facilities. As of May 2, 1999 and May 3,
1998, the Company had investments of $1,108 and $1,411, respectively, in the
partnership.
In fiscal 1998, the Company entered into a 15-year agreement, expiring in
2013, to use a cold storage warehouse owned by a partnership, 50% of which is
owned by the Company. The Company began leasing the facility in fiscal 1999 for
an amount covering debt service costs plus a minimum guaranteed annual fee
totaling $2,174. As of May 2, 1999 and May 3, 1998, the Company had investments
of $1,028 and $1,826, respectively, in the partnership.
Minimum rental commitments under all noncancelable operating leases and
maintenance agreements are as follows:
Fiscal year
2000 ................... $ 23,053
2001 ................... 17,695
2002 ................... 21,127
2003 ................... 10,152
2004 ................... 8,546
Thereafter ............. 30,487
--------
$111,060
========
- F-18 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- LEASE OBLIGATIONS AND COMMITMENTS -- Continued
Rental expense was $24,535 in fiscal 1999, $24,839 in fiscal 1998 and
$24,270 in fiscal 1997. Rental expense in fiscal 1999, 1998 and 1997 included
$2,787, $3,231 and $3,593 of contingent maintenance fees, respectively.
The Company has a sale and leaseback arrangement for certain hog
production facilities at Brown's. The arrangement provides for an early
termination at predetermined amounts in fiscal 2004.
Future minimum lease payments for assets under capital leases and the
present value of the net minimum lease payments are as follows:
Fiscal year
2000 ............................................. $ 3,126
2001 ............................................. 3,248
2002 ............................................. 3,195
2003 ............................................. 3,190
2004 ............................................. 9,602
--------
22,361
Less amounts representing interest ............... (4,828)
--------
Present value of net minimum obligations ......... 17,533
Less current portion ............................. (1,726)
--------
Long-term capital lease obligations .............. $ 15,807
========
As of May 2, 1999, the Company had definitive commitments of $34,841 for
capital expenditures primarily to increase its processed meats and value-added
fresh pork capacities at several of its processing plants and to replace and
upgrade portions of its hardware and software in response to the Year 2000.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The chairman and chief executive officer and a director of Murphy Family
Farms, Inc. ("MFF") was a director of the Company until May 1998. The Company
has a long-term agreement to purchase hogs from MFF at prices that, in the
opinion of management, are equivalent to market. Pursuant to this agreement
with MFF, the Company purchased $239,974, $366,397 and $433,861 of hogs in
fiscal 1999, 1998 and 1997, respectively.
A director of the Company is the chairman, president and chief executive
officer and a director of Prestage Farms, Inc. ("PFI"). The Company has a
long-term agreement to purchase hogs from PFI at prices that, in the opinion of
management, are equivalent to market. Pursuant to this agreement with PFI, the
Company purchased $106,365, $168,829 and $182,576 of hogs in fiscal 1999, 1998
and 1997, respectively.
A director and the owner of 50% of the voting stock of Maxwell Foods, Inc.
("MFI") was a director of the Company until May 1998. The Company has a
long-term agreement to purchase hogs from MFI at prices that, in the opinion of
management, are equivalent to market. Pursuant to this agreement with MFI, the
Company purchased $72,838, $118,041 and $109,470 of hogs in fiscal 1999, 1998
and 1997, respectively.
In fiscal 1999, 1998 and 1997, the Company purchased raw materials
totaling $5,997, $18,524 and $12,772, respectively, from a company which was
48%-owned by the chairman and chief executive officer's children in fiscal 1998
and fiscal 1997. In the opinion of management, these purchases were made at
prices that were equivalent to market.
The Company is engaged in a hog production arrangement with CFI (See Note
4).
NOTE 12 -- REGULATION AND LITIGATION
Like other participants in the meat processing industry, the Company is
subjected to various laws and regulations administered by federal, state and
other government entities, including the U.S. Environmental Protection Agency
("EPA"), the U.S. Department of Agriculture, the U.S. Food and Drug
Administration, the U.S. Occupational Safety and Health
- F-19 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- REGULATION AND LITIGATION -- Continued
Administration and corresponding state agencies in states where the Company
operates. Management believes that the Company presently is in compliance with
all such laws and regulations in all material respects and that continued
compliance will not have a material adverse effect on the Company's financial
position or results of operations. The Company believes that the ultimate
resolution of the litigation discussed below will not have a material adverse
effect on its financial position or results of operations.
In 1997, in a civil suit filed by the EPA against the Company, the United
States District Court for the Eastern District of Virginia imposed a $12,600
civil penalty on the Company for Clean Water Act violations at the Company's
Smithfield, Virginia processing plants. The Company recorded a nonrecurring
charge of $12,600 during the first quarter of fiscal 1998 with respect to this
penalty. The Company has appealed this decision and is awaiting a decision by
the United States Court of Appeals for the Fourth Circuit. There can be no
assurance as to the outcome of such appeal or any subsequent proceedings
regarding this matter.
In 1998, the Commonwealth of Virginia filed a civil suit against the
Company in the Circuit Court of the County of Isle of Wight, Virginia under
Virginia's water pollution control laws. Virginia alleges that 22,517
wastewater discharge permit violations occurred at the Company's Smithfield,
Virginia processing plants between 1986 and 1997. Most of these alleged
violations were also presented in the EPA suit. This action is set for trial on
October 18, 1999. While each violation is subject to a maximum penalty of $25,
Virginia follows a civil penalties policy designed to recapture from the
violator any economic benefit which accrued as a result of its noncompliance,
plus a surcharge penalty for having committed such violations. In addition, the
policy may increase the amount of penalties based upon the extent of civil
penalties in this suit. Among other defenses, the Company will maintain that no
economic benefit accrued to the Company as a result of, and that no
environmental damage was caused by, the violations. There can be no assurance
as to the outcome of this proceeding.
NOTE 13 -- NET INCOME PER SHARE
The computation for basic and diluted net income per share follows:
NET INCOME SHARES PER SHARE
------------ -------- ----------
Fiscal 1999
Net income per basic share ......................................... $94,884 39,628 $ 2.39
Effect of dilutive stock options ................................... - 1,334 -
------- ------ -------
Net income per diluted share ..................................... $94,884 40,962 $ 2.32
======= ====== =======
Fiscal 1998
Net income per basic share ......................................... $53,400 37,532 $ 1.42
Effect of dilutive stock options ................................... - 2,200 -
------- ------ -------
Net income per diluted share ..................................... $53,400 39,732 $ 1.34
======= ====== =======
Fiscal 1997
Net income per basic share ......................................... $44,937 - $ -
Less preferred stock dividends ..................................... (1,238) - -
------- ------ -------
Net income available to common shareholders per basic share ........ 43,699 36,121 1.21
Effect of dilutive stock options ................................... - 1,144 -
Effect of dilutive convertible preferred stock ..................... 1,238 1,293 -
------- ------ -------
Net income per diluted share ..................................... $44,937 38,558 $ 1.17
======= ====== =======
- F-20 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- NET INCOME PER SHARE -- Continued
The summary below lists stock options outstanding at the end of each
fiscal year which were not included in the computation of net income per
diluted share because the options' exercise prices were greater than the
average market price of the common shares. These options, which have varying
expiration dates, were still outstanding as of May 2, 1999.
1999 1998 1997
------------ ----------- ------------
Stock option shares excluded ....... 495,000 65,000 100,000
Average option price per share ..... $ 28.10 $ 32.42 $ 16.88
NOTE 14 -- SEGMENTS
In fiscal 1999, the Company adopted SFAS 131, which established standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in the interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products or services and geographic areas.
The Company identified two reportable operating segments that met the
quantitative disclosure threshold of SFAS 131. The segments identified include
the MPG and the HPG. The overriding determination of the Company's reportable
segments was based on how the chief operating decision-maker evaluates the
results of operations. The underlying factors used to identify the reportable
segments include the differences in products produced and sold.
The MPG markets its products to food retailers, distributors, wholesalers,
restaurant and hotel chains, other food processors and manufacturers of
pharmaceuticals and animal feeds in both domestic and international markets.
The HPG primarily supplies raw materials (live hogs) to the hog slaughtering
operations of the Company. The following tables present information about the
results of operations and the assets of each of the Company's reportable
segments for the fiscal years ended May 2, 1999, May 3, 1998 and April 27,
1997. The information contains certain allocations of expenses that the Company
deems reasonable and appropriate for the evaluation of results of operations.
Segment assets do not include intersegment account balances as the Company
feels that such an inclusion would be misleading or not meaningful. Management
believes all intersegment sales are at prices which approximate market.
- F-21 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- SEGMENTS -- Continued
MEAT HOG GENERAL
PROCESSING PRODUCTION CORPORATE TOTAL
------------ ------------ ----------- -------------
Fiscal 1999
Sales ................................. $3,729,644 $ 155,796 $ - $3,885,440
Intersegment sales .................... - (110,451) - (110,451)
Interest expense ...................... 25,565 12,583 2,373 40,521
Depreciation and amortization ......... 48,814 16,541 3,211 68,566
Profit (loss) before income tax ....... 233,385 (63,625) (26,322) 143,438
Assets ................................ 1,292,633 343,069 135,912 1,771,614
Capital expenditures .................. 62,315 28,755 4,377 95,447
Fiscal 1998
Sales ................................. $3,867,442 $ 156,565 $ - $4,024,007
Intersegment sales .................... - (156,565) - (156,565)
Interest expense ...................... 22,854 7,390 1,647 31,891
Depreciation and amortization ......... 34,936 9,206 1,730 45,872
Profit (loss) before income tax ....... 121,195 (9,682) (30,551) 80,962
Assets ................................ 787,274 178,078 118,293 1,083,645
Capital expenditures .................. 70,329 13,252 9,332 92,913
Fiscal 1997
Sales ................................. $3,870,611 $ 151,807 $ - $4,022,418
Intersegment sales .................... - (151,807) - (151,807)
Interest expense ...................... 23,090 6,128 (3,007) 26,211
Depreciation and amortization ......... 28,842 8,776 1,439 39,057
Profit (loss) before income tax ....... 66,494 19,910 (18,727) 67,677
Assets ................................ 738,524 169,209 87,521 995,254
Capital expenditures .................. 42,840 23,099 3,208 69,147
The following table presents the Company's sales and long-livedassets
attributed to operations in the U. S. and international geographic areas.
1999 1998 1997
------------- ------------- -------------
Sales:
U.S. ........................... $3,470,307 $3,867,442 $3,870,611
Canada ......................... 244,121 - -
France ......................... 60,561 - -
---------- ---------- ----------
Total ......................... $3,774,989 $3,867,442 $3,870,611
========== ========== ==========
Long-lived assets at end of year:
U.S. ........................... $ 449,593 $ 477,375 $ 448,612
Canada ......................... 169,038 - -
Poland ......................... 78,201 - -
France ......................... 43,489 - -
NOTE 15 -- SUBSEQUENT EVENTS
Effective May 3, 1999, the Company completed the acquisition of Carroll's
Foods, Inc. ("CFI") and its affiliated companies and partnership interests for
4,200,000 shares of the Company's common stock (subject to post closing
adjustments)
- F-22 -
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUBSEQUENT EVENTS -- Continued
and the assumption of approximately $231,000 in debt, plus other liabilities.
The acquisition includes 100% of the capital stock of CFI, CFI's 50% interest
in Smithfield-Carroll's, CFI's 16% interest in Circle Four, CFI's 50% interest
in Tar Heel Turkey Hatchery, 100% of CFI's turkey grow-out operation, CFI's 49%
interest in Carolina Turkeys, and certain hog production interests in Brazil
and Mexico. The Company will account for this acquisition using the purchase
method of accounting.
The following unaudited pro forma information combines the operating
results of the Company and CFI, assuming the acquisition had been made as of
the beginning of each of the periods presented:
1999 1998
--------------- ---------------
Sales ................................. $ 3,892,769 $ 3,994,674
Net income ............................ 66,080 61,075
Net income per basic share ............ $ 1.51 $ 1.46
Net income per diluted share .......... $ 1.46 $ 1.39
The preceding pro forma amounts are not intended to be projections of
future results or trends and do not purport to be indicative of what actual
consolidated results of operations might have been if the acquisition had been
effective as of the beginning of the periods presented.
Subsequent to the end of fiscal 1999, the Company increased its ownership
in Animex from 67% to 80% of total equity.
NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
------------ ------------- --------------- -------------
1999
Sales ............................ $865,823 $ 874,378 $ 1,035,728 $ 999,060
Gross profit ................... 72,178 115,132 201,204 151,061
Net (loss) income ................ (5,325) 18,481 54,980 26,748
Net (loss) income per common share
Basic .......................... $ (.14) $ .48 $ 1.35 $ .64
Diluted ........................ (.14) .47 1.31 .63
1998
Sales ............................ $914,963 $ 982,699 $ 1,095,999 $ 873,781
Gross profit ................... 76,445 94,654 116,590 100,124
Net (loss) income ................ (6,541) 15,548 23,719 20,674
Net (loss) income per common share
Basic .......................... $ (.17) $ .41 $ .63 $ .55
Diluted ........................ (.17) .39 .60 .52
- F-23 -
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 included in the Form 10-K Annual Report of
Smithfield Foods, Inc. and subsidiaries for the fiscal years ended May 2, 1999,
May 3, 1998, and April 27, 1997, and have issued our report thereon dated June
10, 1999. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedule I, filed as a part of the
Company's Form 10-K Annual Report is the responsibility of the Company's
management and is presented for purposes for complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the
audits 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
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia
June 10, 1999
- F-24 -
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY BALANCE SHEETS
AS OF MAY 2, 1999 AND MAY 3, 1998
FISCAL YEARS ENDED
---------------------------
MAY 2, MAY 3,
1999 1998
------------- -----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash ............................................................................... $ 24 $ 7,800
Accounts receivable ................................................................ 15,137 324
Receivable from related parties .................................................... 4,051 -
Refundable income taxes ............................................................ 1,458 2,300
Deferred income taxes .............................................................. 20,551 23,634
Other current assets ............................................................... 16,005 15,921
---------- --------
Total current assets ............................................................. 57,226 49,979
---------- --------
Investments in and net advances to subsidiaries, at cost plus equity in undistributed
earnings ........................................................................... 885,291 679,266
---------- --------
Other assets:
Investment in partnerships ......................................................... 31,139 46,966
Property, plant and equipment, net ................................................. 21,422 18,327
Other .............................................................................. 42,447 26,353
---------- --------
Total other assets ............................................................... 95,008 91,646
---------- --------
$1,037,525 $820,891
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................................. $ 5,633 $ 6,248
Accounts payable ................................................................... 5,086 2,795
Accrued expenses ................................................................... 61,254 45,232
---------- --------
Total current liabilities ........................................................ 71,973 54,275
---------- --------
Long-term debt ...................................................................... 385,370 387,732
---------- --------
Deferred income taxes and other noncurrent liabilities .............................. 37,936 17,874
---------- --------
Shareholders' equity ................................................................ 542,246 361,010
---------- --------
$1,037,525 $820,891
========== ========
The accompanying notes are an integral part of these statements.
- F-25 -
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
PARENT COMPANY STATEMENTS OF INCOME
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
MAY 2, 1999 MAY 3, 1998 APRIL 27, 1997
---------------- ---------------- ---------------
(IN THOUSANDS)
Sales ................................................... $ - $ - $ -
Cost of sales ........................................... 5,073 9,589 1,820
--------- --------- ---------
Gross profit ............................................ (5,073) (9,589) (1,820)
General and administrative expenses, net of allocation
to subsidiaries ........................................ 8,366 4,686 10,911
Depreciation expense .................................... 1,252 843 903
Interest expense ........................................ 24,930 24,578 16,434
Nonrecurring charge ..................................... - 12,600 -
--------- --------- ---------
Loss before income tax benefit and equity in earnings
of subsidiaries ........................................ (39,621) (52,296) (30,068)
Income tax benefit ...................................... (16,677) (19,130) (12,562)
--------- --------- ---------
Loss before equity in earnings of subsidiaries .......... (22,944) (33,166) (17,506)
Equity in earnings of subsidiaries ...................... 117,828 86,566 62,443
--------- --------- ---------
Net income .............................................. $ 94,884 $ 53,400 $ 44,937
========= ========= =========
The accompanying notes are an integral part of these statements.
- F-26 -
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC
PARENT COMPANY STATEMENTS OF CASH FLOWS
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
MAY 2, 1999 MAY 3, 1998 APRIL 27, 1997
---------------- ---------------- ---------------
(IN THOUSANDS)
Cash flows from operating activities:
Net Income ......................................................... $ 94,884 $ 53,400 $ 44,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 2,758 1,461 1,040
(Gain) loss on sale of property, plant and equipment ............. 30 - (2,328)
Changes in operating assets and liabilities:
Deferred income taxes and other noncurrent
liabilities .................................................... 23,145 13,966 (37,308)
Accounts receivable ............................................. (14,813) 3,351 (1,329)
Receivables from related parties ................................ (4,051) 1,414 45
Other current assets ............................................ (84) (10,784) (3,367)
Accounts payable and accrued expenses ........................... 18,313 14,243 15,696
Refundable income taxes ......................................... 842 (4,089) 1,560
Other assets .................................................... (17,600) (10,495) (1,541)
---------- ---------- ---------
Net cash provided by operating activities .......................... 103,424 62,467 17,405
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures ............................................... (4,377) (9,332) (3,226)
Proceeds from sale of property, plant and equipment ................ - - 3,424
Increase in investment in and net advances to subsidiaries ......... (131,827) (235,117) (80,800)
Investments in partnerships ........................................ 15,827 (5,213) (5,660)
---------- ---------- ---------
Net cash used in investing activities ............................ (120,377) (249,662) (86,262)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of short-term debt .......................... - - (500)
Proceeds from issuance of long-term debt ........................... - 447,150 140,000
Principal payments on long-term debt ............................... (2,977) (252,317) (71,200)
Proceeds from exercise of stock options ............................ 12,154 124 1,270
Preferred dividends ................................................ - - (1,238)
---------- ---------- ---------
Net cash provided by financing activities ........................ 9,177 194,957 68,332
Net (decrease) increase in cash and cash equivalents ................ (7,776) 7,762 (525)
Cash and cash equivalents at beginning of year ...................... 7,800 38 563
---------- ---------- ---------
Cash and cash equivalents at end of year ............................ $ 24 $ 7,800 $ 38
========== ========== =========
The accompanying notes are an integral part of these statements.
- F-27 -
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
MAY 2, 1999 AND MAY 3, 1998
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 covenants 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 May 2, 1999 and May 3, 1998 are as follows:
1999 1998
---------- ----------
Self-insurance reserves .......... $20,216 $21,834
Other ............................ 41,038 23,398
------- -------
$61,254 $45,232
======= =======
4. Long-Term Debt:
In fiscal 1998, the Registrant entered into a loan agreement with a bank
group providing for a five-year $300,000 revolving credit facility. In
connection with this refinancing, the Registrant repaid all borrowings under
its previous $300,000 credit facilities, which were terminated.
In fiscal 1998, the Registrant 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 issued to repay indebtedness under the Registrant's
$300,000 revolving credit facility with the balance invested in short-term
marketable debt securities.
As of May 2, 1999, the Registrant is guaranteeing $17,500 of capital lease
obligations of its subsidiaries and a $300,000 credit facility that has an
outstanding balance of $71,000.
Scheduled maturities of the Registrant's long-term debt consists of the
following:
FISCAL YEAR
- --------------
2000 $ 5,633
2001 3,133
2002 3,084
2003 10,473
2004 49,886
Thereafter 318,794
--------
$391,003
========
5. The amount of dividends received from subsidiaries in fiscal 1999 and
1998 was $76,700 and $43,400, respectively.
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.
- F-28 -
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SMITHFIELD FOODS, INC.
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS -- CONTINUED
7. Supplemental disclosures of cash flow information:
FISCAL YEAR 1998 1998 1997
- ----------------------------------------------------------------- ---------- ---------- ----------
Interest paid, net of amount capitalized ........................ $28,180 $20,901 $11,106
======= ======= =======
Income taxes paid ............................................... $15,306 $10,179 $15,043
======= ======= =======
Noncash investing and financing activities:
Refinancing of long-term debt .................................. $ - $ - $59,707
======= ======= =======
Conversion of preferred stock to common stock .................. $ - $ - $20,000
======= ======= =======
Common stock issued for acquisitions ........................... $73,049 $ - $ -
======= ======= =======
Conversion of advances to investments in partnerships .......... $ - $ - $ 7,691
======= ======= =======
- F-29 -