10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 30, 2000 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from....................to.......................... COMMISSION FILE NUMBER 0-2258 SMITHFIELD FOODS, INC. 200 Commerce Street Smithfield, Virginia 23430 (757) 365-3000 Virginia 52-0845861 ---------------------------- ------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ------ ------ Class Shares outstanding at September 8, 2000 ---------------------------- ---------------------------------------- Common Stock, $.50 par value 54,492,911 1-15 SMITHFIELD FOODS, INC. CONTENTS
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Condensed Balance Sheets - July 30, 2000 and April 30, 2000 3-4 Consolidated Condensed Statements of Income - 13 Weeks Ended July 30, 2000 and August 1, 1999 5 Consolidated Condensed Statements of Cash Flows - 13 Weeks Ended July 30, 2000 and August 1, 1999 6 Notes to Consolidated Condensed Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 PART II. OTHER INFORMATION Item 2. Change in Securities and Use of Proceeds 13 Item 4. Submission of Matters to a Vote of Security Holders 13-14 Item 6. Exhibits and Reports on Form 8-K 14
2-15 PART I. FINANCIAL INFORMATION SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) July 30, 2000 April 30, 2000 ----------------------------------------------------------------------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 46,157 $ 49,882 Accounts receivable, net 367,575 390,037 Inventories 699,546 665,143 Prepaid expenses and other current assets 90,003 127,664 ---------- ---------- Total current assets 1,203,281 1,232,726 ---------- ---------- Property, plant and equipment 1,659,791 1,612,043 Less accumulated depreciation (425,825) (398,469) ---------- ---------- Net property, plant and equipment 1,233,966 1,213,574 ---------- ---------- Other assets: Goodwill 326,280 320,148 Investments in partnerships 109,646 102,551 Other 309,619 260,614 ---------- ---------- Total other assets 745,545 683,313 ---------- ---------- $3,182,792 $3,129,613 ========== ========== See Notes to Consolidated Condensed Financial Statements 3-15 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) July 30, 2000 April 30, 2000 ------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Current liabilities: Notes payable $ 75,222 $ 64,924 Current portion of long-term debt and capital lease obligations 45,847 48,505 Accounts payable 277,929 270,004 Accrued expenses and other current liabilities 223,627 239,436 ---------- ---------- Total current liabilities 622,625 622,869 ---------- ---------- Long-term debt and capital lease obligations 1,213,585 1,187,770 ---------- ---------- Other noncurrent liabilities: Deferred income taxes 276,206 274,329 Pension and postretirement benefits 77,129 78,656 Other 30,145 30,311 ---------- ---------- Total other noncurrent liabilities 383,480 383,296 ---------- ---------- Minority interests 30,305 32,769 ---------- ---------- Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 authorized shares Common stock, $.50 par value, 100,000,000 authorized shares; 54,468,911 and 54,705,386 issued 27,235 27,353 Additional paid-in capital 467,017 473,974 Retained earnings 459,833 415,266 Accumulated other comprehensive income (21,288) (13,684) ---------- ---------- Total shareholders' equity 932,797 902,909 ---------- ---------- $3,182,792 $3,129,613 ========== ==========
See Notes to Consolidated Condensed Financial Statements 4-15 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) 13 Weeks Ended 13 Weeks Ended (In thousands, except per share data) July 30, 2000 August 1, 1999 ----------------------------------------------------------------------------- Sales $1,421,326 $1,142,415 Cost of sales 1,191,926 994,919 ---------- ---------- Gross profit 229,400 147,496 Selling, general and administrative expenses 103,845 94,550 Depreciation expense 30,655 24,858 Interest expense 23,388 14,533 Minority interests (246) 2,761 ---------- ---------- Income before income taxes 71,758 10,794 Income taxes 27,189 3,864 ---------- ---------- Net income $ 44,569 $ 6,930 ========== ========== Net income per common share: Basic $ .82 $ .15 ========== ========== Diluted $ .81 $ .15 ========== ========== Average common shares outstanding: Basic 54,660 45,859 ========== ========== Diluted 55,343 47,088 ========== ========== See Notes to Consolidated Condensed Financial Statements 5-15 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
13 Weeks Ended 13 Weeks Ended (In thousands) July 30, 2000 August 1, 1999 ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 44,569 $ 6,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 33,897 25,968 Loss on sale of property, plant and equipment 1,463 603 Changes in operating assets and liabilities, net of effect of acquisitions (20,070) (19,056) -------- -------- Net cash provided by operating activities 59,859 14,445 -------- -------- Cash flows from investing activities: Capital expenditures (30,506) (28,877) Business acquisitions, net of cash (7,916) (4,849) Proceeds from sale of property, plant and equipment 859 983 Investments in partnerships and other assets (38,478) 2,372 -------- -------- Net cash used in investing activities (76,041) (30,371) -------- -------- Cash flows from financing activities: Net borrowings (repayments) on notes payable 5,418 (84,685) Proceeds from issuance of long-term debt 627 11,006 Net borrowings on long-term credit facility 26,000 94,000 Principal payments on long-term debt and capital lease obligations (12,024) (9,969) Repurchase and retirement of common stock (7,992) - Exercise of common stock options 471 1,886 -------- -------- Net cash provided by financing activities 12,500 12,238 -------- -------- Net decrease in cash and cash equivalents (3,682) (3,688) Effect of foreign exchange rate changes on cash (43) 403 Cash and cash equivalents at beginning of period 49,882 30,590 -------- -------- Cash and cash equivalents at end of period $ 46,157 $ 27,305 ======== ======== Supplemental disclosures of cash flow information: Cash payments during period: Interest (net of amount capitalized) $ 20,589 $ 10,980 ======== ======== Income taxes $ 15,607 $ 10,886 ======== ======== Noncash Investing and Financing Activities: As discussed in Note 8, in fiscal 2000, the Company completed the acquisition of CFI and its affiliated companies and partnership interests in exchange for 4.3 million shares of the Company's common stock and the assumption of approximately $231.0 million in debt, plus other liabilities.
See Notes to Consolidated Condensed Financial Statements 6-15 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) These statements should be read in conjunction with the Consolidated Financial Statements and related notes which are included in the Company's Annual Report for the fiscal year ended April 30, 2000. (2) The interim consolidated condensed financial information furnished herein is unaudited. The information reflects all adjustments (which include only normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the financial position and results of operations for the periods included in this report. (3) Inventories consist of the following: (In thousands) July 30, 2000 April 30, 2000 -------------- ------------- -------------- Hogs on farms $333,019 $323,639 Fresh and processed meats 292,188 264,479 Manufacturing supplies 53,479 55,937 Other 20,860 21,088 ------- ------- $699,546 $665,143 ======= ======= (4) Net income per basic share is computed based on the average common shares outstanding during the period. Net income per diluted share is computed based on the average common shares outstanding during the period adjusted for the effect of potential common stock equivalents, such as stock options. The computation for basic and diluted net income per share is as follows: 13 Weeks 13 Weeks Ended Ended (In thousands, except per share data) July 30, 2000 August 1,1999 ------------------------------------- ------------- ------------- Net income $44,569 $ 6,930 ------ ------ Average common shares outstanding: Basic 54,660 45,859 Dilutive stock options 683 1,229 ------ ------ Diluted 55,343 47,088 ====== ====== Net income per common share: Basic $ .82 $ .15 ====== ====== Diluted $ .81 $ .15 ====== ====== 7-15 The summary below lists stock options outstanding at the end of each fiscal period which were not included in the computation of net income per diluted share because the options' exercise price was greater than the average market price of the common shares. July 30, 2000 August 1, 1999 ------------- -------------- Stock option shares excluded 1,235,000 55,000 Average option price per share $27.03 $32.38 (5) The components of comprehensive income, net of related taxes, consist of: 13 Weeks 13 Weeks Ended Ended (In thousands) July 30, 2000 August 1, 1999 -------------- ------------- -------------- Net income $44,569 $ 6,930 Other comprehensive income: Foreign currency translation (1,313) (1,400) Unrealized (loss) gain on securities (6,291) 82 ------- ------ Comprehensive income $36,965 $5,612 ======= ====== (6) The following table presents information about the results of operations for each of the Company's reportable segments for the 13 weeks ended July 30, 2000 and August 1, 1999. Certain prior year amounts have been restated to conform to fiscal 2001 presentations. Meat Hog General (In thousands) Processing Production Corporate Total --------------------- ------------------------------------------------- July 30, 2000 --------------------- Sales $1,330,024 $324,717 $ - $1,654,741 Intersegment sales - (233,415) - (233,415) Operating (loss) profit (7,818) 111,151 (8,187) 95,146 August 1, 1999 --------------------- Sales $1,099,795 $142,196 $ - $1,241,991 Intersegment sales - (99,576) - (99,576) Operating profit (loss) 14,900 16,486 (6,059) 25,327 (7) In January of fiscal 2000, the Company completed the acquisition of Murphy Farms, Inc. ("MFI") and its affiliated companies for 11.1 million shares of the Company's common stock (subject to post-closing adjustments) and the assumption of approximately $203.0 million in debt, plus other liabilities. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of acquisition was recorded as an intangible asset totaling $147.0 million. The acquisition was accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the financial position and results of operations from the date of acquisition. Had the acquisition of MFI occurred at the beginning of fiscal 2000 it would not have had a material effect on sales. Net income and net income per diluted share would have been $8.2 million and $0.14 respectively for the 13 weeks ended August 1, 1999. 8-15 (8) In May of fiscal 2000, the Company completed the acquisition of Carrolls Foods Inc. ("CFI") and its affiliated companies and partnership interests for 4.3 million shares of the Company's common stock and the assumption of approximately $231.0 million in debt, plus other liabilities. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of acquisition was recorded as an intangible asset totaling $45.1 million. 9-15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Smithfield Foods, Inc. (the "Company") is comprised of a Meat Processing Group ("MPG") and a Hog Production Group ("HPG"). The MPG consists of five wholly owned domestic pork processing subsidiaries and four international meat processing entities. The HPG consists primarily of three hog production operations located in the United States and certain joint venture investments outside the United States. RESULTS OF OPERATIONS The following acquisitions affect the comparability of the results of operations for the 13 week periods ended July 30, 2000 and August 1, 1999: In January of fiscal 2000, the Company completed the acquisition of Murphy Farms, Inc. ("MFI") and its affiliated companies for 11.1 million shares of the Company's common stock (subject to post-closing adjustments) and the assumption of approximately $203.0 million in debt, plus other liabilities. MFI is a hog producer that has approximately 345,000 sows which produce approximately 6.0 million market hogs annually. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of acquisition was recorded as an intangible asset totaling $147.0 million. In August of fiscal 2000, the Company acquired the capital stock of Societe Financiere de Gestion et de Participation S.A. ("SFGP") a private-label processed meats manufacturer in France. SFGP had sales of approximately $100.0 million in calendar year 1998. The acquisitions were accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the results of operations from the dates of acquisition. Consolidated 13 Weeks Ended July 30, 2000 - 13 Weeks Ended August 1, 1999 Sales in the first quarter of fiscal 2001 increased $278.9 million, or 24.4%, from the comparable period in the prior year. The increase in sales primarily reflected a 23.8% increase in unit selling prices in the MPG and the incremental sales of acquired businesses in both the HPG and MPG partially offset by a decrease in sales volume in fresh pork in the MPG as compared to the first quarter in the prior year. See the following section for comments on sales changes by business segment. Gross profit in the current quarter increased $81.9 million, or 55.5%, from the comparable period in the prior year primarily on the inclusion of MFI and sharply improved margins in the HPG due to higher live hog prices. Selling, general and administrative expenses increased $9.3 million, or 9.8%, in the first quarter of fiscal 2001 from the comparable period in fiscal 2000. The increase was primarily due to the inclusion of expenses of acquired businesses. Depreciation expense increased $5.8 million, or 23.3%, in the first quarter of fiscal 2001 from the comparable period in the prior year primarily due to the inclusion of the depreciation expense of acquired businesses. 10-15 Interest expense increased $8.9 million, or 60.9%, in the first quarter of fiscal 2001 from the comparable period in the prior year primarily due to an increase in average interest rates, additional borrowings associated with the share repurchase program, interest expense of acquired businesses and other long-term investments. The effective income tax rate for the first quarter of fiscal 2001 increased to 37.9% compared to 35.8% in the corresponding period of fiscal 2000 primarily on the inclusion of foreign earnings at higher marginal tax rates. The Company had a valuation allowance of $7.2 million related to income tax assets as of July 30, 2000 primarily related to losses in foreign jurisdictions for which no tax benefit was recognized. At August 1, 1999, the Company had no valuation allowances for deferred tax assets. Reflecting the factors previously discussed, net income increased to $44.6 million, or $ .81 per diluted share, in the first quarter of fiscal 2001, up from $6.9 million, or $.15 per diluted share, in the first quarter of fiscal 2000. Earnings per diluted share was also effected by a 19.2% increase in average shares outstanding due to shares issued in connection with business acquisitions in fiscal 2000. Meat Processing Group 13 Weeks Ended July 30, 2000 - 13 Weeks Ended August 1, 1999 Sales in the MPG segment increased $230.2 million or 20.9% on a 23.8% increase in unit selling prices partially offset by a decrease in fresh pork volumes. Total sales tonnage decreased 4.8% primarily due to the decrease in fresh pork volumes as a result of a cutback in the number of hogs slaughtered. The Company reduced slaughter levels as a result of higher hog costs which increased 41.1% in the current quarter compared to the prior year. The MPG incurred an operating loss of $7.8 million compared to operating profit of $14.9 million in the prior year on a substantial increase in raw material costs (live hogs) noted above partially offset by an increase in unit selling prices. Hog Production Group 13 Weeks Ended July 30, 2000 - 13 Weeks Ended August 1, 1999 The majority of the sales of the HPG group are to the MPG and, therefore, are eliminated in the Company's consolidated statements of income. Before intercompany eliminations, HPG sales increased sharply as a result of the inclusion of the sales of MFI and higher live hog prices in the period. With the acquisition of MFI, hogs sold in the current quarter increased to 2.7 million compared to approximately 1.3 million for the first quarter of fiscal 2000. Operating profit in the HPG improved to $111.2 million from $16.5 million in the previous year primarily as a result of the additional operating profits of MFI, a sharp increase in hog prices noted above and an increase in the number of hogs sold in the base business at substantially better margins in the current year. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations totaled $59.9 million for the 13 weeks ended July 30, 2000 compared to $14.4 million in the same period last year. In addition to the impact of sharply higher earnings in the current quarter, non-cash charges increased to $33.9 million from $26.0 million due primarily to the depreciation and amortization expense of acquired businesses. 11-15 Cash used in investing activities increased to $76.0 million in the current quarter from $30.4 million in the same period in the prior year. Capital expenditures totaled $30.5 million in the first quarter of fiscal 2001 primarily related to processed meats and plant improvement projects. In addition, during the current quarter, the Company made investments in long-term marketable securities and other long-term investments. These capital expenditures and investments were funded with cash provided by operations and borrowings under the Company's long-term revolving credit facility. As of July 30, 2000, the Company had definitive commitments of $60.2 million for capital expenditures primarily to increase its value-added fresh pork capacity at several of its processing plants. These expenditures are expected to be funded with cash provided by operations. Financing activities provided $12.5 million in the current quarter as additional borrowings were used for the repurchase of 0.3 million shares of the Company's common stock. The Company has been authorized to repurchase 4.0 million shares of which 3.3 million shares have been purchased under this authorization. FORWARD-LOOKING STATEMENTS This Form 10-Q may contain "forward-looking" information within the meaning of the federal securities laws. The forward-looking information may include, among other information, statements concerning the Company's outlook for the future. There may also be other statements of beliefs, future plans and strategies or anticipated events and similar expressions concerning matters that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: availability and prices of live hogs and other raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital, the cost of compliance with environmental and health standards and actions of domestic and foreign governments. 12-15 PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds At the annual meeting of shareholders held on August 29, 2000, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to provide for: (i) the classification, effective immediately, of the Board of Directors into three classes of directors with staggered terms of office, (ii) the removal of directors only with cause by the affirmative vote of the holders of shares representing at least two-thirds of the votes entitled to be cast on such action, and (iii) the filling of vacancies on the Board of Directors only by the remaining directors. The amendment further provides that these provisions may not be amended or repealed unless such action has been approved by the affirmative vote of the holders of shares representing at least two-thirds of the votes entitled to be cast by each voting group entitled to vote on such action. A copy of the amendment to the Articles of Incorporation is filed as Exhibit 3.1(b) to this Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders (a) Annual meeting of Shareholders held August 29, 2000. (b) Not applicable (c) There were 54,039,934 shares of Company's Common Stock and one Series B Special Voting Preferred Share outstanding as of July 12, 2000, the record date for the 2000 Annual Meeting of Shareholders. Each share of Common Stock entitled the holder thereof to one vote; the Series B Special Voting Preferred Share entitled the holder thereof to 691,636 votes; the total number of votes that shareholders could cast at the 2000 Annual Meeting of Shareholders was therefore 54,731,570. A total of 50,311,616 votes (or 91.9% of the total) were cast. All of management's nominees for directors of the corporation were elected with the following vote: Votes Broker Director Nominee Votes For Withheld Non-Voters ---------------------- --------------- --------------- ------------ Robert L. Burrus, Jr. 49,163,324 1,116,169 0 Carol T. Crawford 49,715,633 563,860 0 Ray A. Goldberg 49,700,354 579,139 0 George E. Hamilton, Jr. 49,548,277 731,216 0 Joseph W. Luter, III 49,576,141 703,352 0 Wendell H. Murphy 49,578,542 700,951 0 William H. Prestage 49,562,738 716,755 0 Melvin O. Wright 49,712,538 566,955 0 A proposal to amend the Company's Articles of Incorporation to provide, among other things, for the classification of the Board of Directors into three classes was approved by the shareholders with the following vote: Votes Broker Votes For Votes Against Withheld Non-Votes ---------- ------------- --------- --------- 30,618,938 12,785,875 1,555,282 5,319,398 A proposal to amend the Company's 1998 Stock Incentive Plan to provide, among other things, for an increase by 1,500,000 in the number of shares of the Company's Common Stock reserved for issuance thereunder was approved by the shareholders with the following vote: Votes Broker Votes For Votes Against Withheld Non-Votes ---------- ------------- --------- --------- 47,486,266 1,045,728 1,747,499 0 13-15 A proposal to ratify the selection of Arthur Andersen LLP as independent public accountants of the Company for the fiscal year ending April 29, 2001 was approved by the shareholders with the following vote: Votes Broker Votes For Votes Against Withheld Non-Votes ---------- ------------- --------- ---------- 48,330,380 421,847 1,527,266 0 (d) Not applicable Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibit 3.1(a) - Amended and Restated Articles of Incorporation of the Company, as amended through September 12, 2000. Exhibit 3.1(b) - Amendment to the Articles of Incorporation of the Company approved by the shareholders of the Company on August 29, 2000. Exhibit 27 - Financial Data Schedule 14-15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMITHFIELD FOODS, INC. /s/ C. LARRY POPE ---------------------------------------------- C. Larry Pope Vice President and Chief Financial Officer /s/ DANIEL G. STEVENS ------------------------------------------- Daniel G. Stevens Vice President and Corporate Controller Date: September 13, 2000 15-15