-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ed9dGJN8JfRt72HID1NqTg+EVmaBr5FjkNO+7oiL6BBG+of89KbNlhqkOOX2i7hX MXeWICJnxE0gEhz9ZEmzQg== 0000052477-01-500021.txt : 20010314 0000052477-01-500021.hdr.sgml : 20010314 ACCESSION NUMBER: 0000052477-01-500021 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000923 FILED AS OF DATE: 20010313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBP INC CENTRAL INDEX KEY: 0000052477 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 420838666 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-06085 FILM NUMBER: 1567526 BUSINESS ADDRESS: STREET 1: 800 STEVENS PORT DR CITY: DAKOTA DUNES STATE: SD ZIP: 57049 BUSINESS PHONE: 4024942061 MAIL ADDRESS: STREET 1: IBP AVE STREET 2: P O BOX 515 CITY: DAKOTA CITY STATE: NE ZIP: 68731 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PROCESSORS INC /PRED/ DATE OF NAME CHANGE: 19821109 FORMER COMPANY: FORMER CONFORMED NAME: IOWA BEEF PACKERS INC DATE OF NAME CHANGE: 19701130 10-Q/A 1 q300edgar.txt 3RD QUARTER 2000 FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q/A ____________________________ [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 39 weeks ended September 23, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6085 ____________________________ IBP, inc. a Delaware Corporation I.R.S. Employer Identification No. 42-0838666 800 Stevens Port Drive Dakota Dunes, South Dakota 57049 Telephone 605-235-2061 ____________________________ 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, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 1, 2000, the registrant had outstanding 105,610,334 shares of its common stock ($.05 par value). -1- PART I. FINANCIAL INFORMATION IBP, inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) Restated Restated September December 23, 25, 2000 1999 ASSETS ------------ ------------ - ------ CURRENT ASSETS: Cash and cash equivalents $ 35,193 $ 32,865 Accounts receivable, less allowance for doubtful accounts of $23,079 and 672,370 849,679 $21,352 Inventories 815,837 615,192 Deferred income tax benefits and prepaid expenses 94,686 82,992 --------- --------- TOTAL CURRENT ASSETS 1,618,086 1,580,728 Property, plant and equipment less accumulated depreciation of $1,055,140 and $960,391 1,551,062 1,362,765 Goodwill, net of accumulated amortization of $212,771 and $189,395 1,038,808 1,054,839 Other assets 152,541 145,225 --------- --------- $4,360,497 $4,143,557 ========= ========= LIABILITIES, REDEEMABLE STOCK, AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to banks 746,348 542,060 Accounts payable 416,874 421,564 Deferred income taxes and other current liabilities 439,153 455,968 Current portion of long-term debt 54,271 13,125 --------- --------- TOTAL CURRENT LIABILITIES 1,656,646 1,432,717 Long-term debt and capital lease Obligations 663,181 789,861 Deferred income taxes and other Liabilities 184,092 175,932 --------- --------- TOTAL LIABILITIES 2,503,919 2,398,510 --------- --------- REDEEMABLE STOCK - 44,564 --------- --------- STOCKHOLDERS' EQUITY: Common stock at par value 5,434 4,964 Additional paid-in capital 442,640 404,463 Retained earnings 1,489,886 1,358,971 Accumulated other comprehensive income (10,267) (8,600) Treasury stock (71,115) (59,315) --------- --------- TOTAL STOCKHOLDERS' EQUITY 1,856,578 1,700,483 --------- --------- $4,360,497 $4,143,557 ========= ========= See accompanying notes to condensed consolidated financial statements. 2 IBP, inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) 13 Weeks Ended 39 Weeks Ended ----------------------- ----------------------- Restated Restated Restated Restated Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net sales $4,177,445 $3,798,687 $12,146,396 $10,625,973 Cost of products sold 3,886,678 3,508,658 11,372,213 9,900,789 --------- --------- ---------- ---------- Gross profit 290,767 290,029 774,183 725,184 Selling, general and administrative expense 141,822 116,551 422,387 310,866 Nonrecurring merger-related expense - - 31,299 - --------- --------- ---------- ---------- EARNINGS FROM OPERATIONS 148,945 173,478 320,497 414,318 Interest expense, net 21,121 17,543 64,071 48,710 --------- --------- ---------- ---------- Earnings before income taxes, accounting change and extraordinary item 127,824 155,935 256,426 365,608 Income tax expense 49,096 45,918 97,520 124,329 --------- --------- ---------- ---------- Earnings before accounting change and extraordinary item 78,728 110,017 158,906 241,279 Cumulative effect of change in accounting principle (2,429) Extraordinary loss on early extinguishment of debt, less applicable taxes - - (15,037) - --------- --------- ---------- ---------- NET EARNINGS $ 78,728 $ 110,017 $ 141,440 $ 241,279 ========= ========= ========== ========= Earnings per common share: Earnings before cumulative effect of accounting change and extraordinary item $ .75 $1.13 $1.47 $2.48 Cumulative effect of accounting change - - (.02) - Extraordinary item - - (.14) - ---- ---- ---- ---- Net earnings $ .75 $1.13 $1.31 $2.48 ==== ==== ==== ==== Earnings per common share - assuming dilution: Earnings before cumulative effect of accounting change and extraordinary item $ .74 $1.03 $1.46 $2.25 Cumulative effect of change in accounting principle - - (.02) - Extraordinary item - - (.14) - ---- ---- ---- ---- Net earnings $ .74 $1.03 $1.30 $2.25 ==== ==== ==== ==== 3 IBP, inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (continued) (In thousands, except per share data) 13 Weeks Ended 39 Weeks Ended ----------------------- ----------------------- Restated Restated Restated Restated Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Pro forma amounts assumed the accounting change is applied retroactively: Earnings before extraordinary $ 78,728 $ 109,891 $ 158,906 $ 239,413 ========= ========= ========== ========= Net earnings $ 78,728 $ 109,891 $ 143,869 $ 239,413 ========= ========= ========== ========= Earnings per common share: Earnings before extraordinary item $ .75 $1.13 $1.47 $2.46 ==== ==== ==== ==== Net earnings $ .75 $1.13 $1.47 $2.46 ==== ==== ==== ==== Net earnings per common share - assuming dilution: Earnings before extraordinary item $ .74 $1.03 $1.46 $2.23 ==== ==== ==== ==== Net earnings $ .74 $1.03 $1.32 $2.23 See accompanying notes to condensed consolidated financial statements. 4 IBP, inc. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 39 Weeks Ended ----------------------------- Restated Restated Sept. 23, Sept. 25, 2000 1999 -------------- ------------ Inflows (outflows) NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 252,529 $ 99,491 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures $ (301,001) $ (152,470) Purchases of marketable securities (25,000) (19,400) Proceeds from disposals of marketable securities 25,000 20,800 Investments in equity ventures (11,908) - Increase in noncurrent receivables (7,763) - Acquisitions, net of cash acquired 4,069 (394,599) Proceeds from sale of fixed assets 1,459 3,565 Insurance proceeds - 3,010 Other investing cash inflows 456 320 --------- --------- Net cash flows used by investing activities $ (314,688) $ (538,774) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term Obligations $ (484,912) $ (9,860) Increase in short-term debt 298,388 456,441 Proceeds from issuance of long-term debt 300,063 3,020 Redemption of preferred stock (28,512) - Purchases of treasury stock (14,281) (3,099) Dividends paid (7,626) (6,922) Exercise of stock options 1,356 (624) Other financing cash outflows - (437) --------- --------- Net cash flows provided by financing activities $ 64,476 $ 438,519 --------- --------- Effect of exchange rate on cash and cash equivalents 11 (217) --------- --------- Net change in cash and cash equivalents 2,328 (981) Cash and cash equivalents at beginning of period 32,865 29,295 --------- --------- Cash and cash equivalents at end of period $ 35,193 $ 28,314 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the periods for: Interest, net of amounts capitalized $ 67,646 $ 48,998 Income taxes, net of refunds received 115,536 126,813 Depreciation and amortization expense 106,766 89,975 Amortization of intangible assets 26,478 22,856 See accompanying notes to condensed consolidated financial statements. 5 IBP, inc. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Columnar amounts in thousands, except per share amounts A. GENERAL Restatements The accompanying financial statements have been restated to reflect adjustments for irregularities and misstatements at one of the company's subsidiaries,the cumulative and current period effect on revenue recognition related to the adoption of Staff Accounting Bulletin ("SAB") No. 101, the application of variable plan accounting for certain stock options, and expanded disclosures related to segment information, acquisitions, long-term debt and capital lease obligations, contingencies, redeemable stock and capital stock. See Notes J, M and N for more detail relating to the effects of these restatements. The statement of cash flows has also been restated for the above adjustments and to provide more detail of certain cash transactions that were previously reported on a combined basis and to reclassify the change in the company's checks in process of clearing to cash flows from operations rather than from financing activities. The company has also provided additional disclosures related to acquisitions, long-term debt and capital lease obligations, contingencies, redeemable stock and capital stock. The condensed consolidated balance sheet of IBP, inc. and subsidiaries ("IBP" or "the company") at December 25, 1999 has been taken from audited financial statements at that date, as restated, and condensed. All other condensed consolidated financial statements contained herein have been prepared by IBP and are unaudited. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in IBP's Annual Report on Form 10-K (as amended) for the year ended December 25, 1999, as well as the consolidated financial statements restated to give retroactive effect to the merger with Corporate Brand Foods America, Inc. included in IBP's 8-K (as amended). On February 7, 2000, the company completed a merger with Corporate Brand Foods America, Inc. ("CBFA") (see Note G). The merger has been accounted for as a pooling of interests and, accordingly, all prior period consolidated financial statements have been restated to include the combined results of operations, financial position and cash flows of CBFA. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of IBP at September 23, 2000 and the results of its operations and its cash flows for the periods presented herein. Certain reclassifications have been made to prior financial statements to conform to the current year presentation. 6 B. MERGER AGREEMENT On October 1, 2000, DLJ Merchant Banking Partners III, L.P., ("DLJMBP"), a private equity fund affiliated with Donaldson, Lufkin & Jenrette, Inc., reached an agreement with the IBP, inc. ("IBP") Board of Directors to acquire the stock of IBP. The agreement is subject to shareholder and regulatory approvals. If approved, IBP will be merged with Rawhide Acquisition Corporation ("Merger"), and each share of IBP common stock outstanding immediately prior to the Merger will be converted into a right to receive $22.25 in cash. After completion of the Merger, DLJMBP and affiliated funds will be the majority owner of IBP. Other investors will include Archer Daniels Midland Company, Inc. and certain IBP management employees, among others. The company filed a Current Report on Form 8-K on October 2, 2000 with respect to this proposed merger. C. OTHER IBP's interim operating results may be subject to substantial fluctuations that do not necessarily occur or recur on a seasonal basis. Such fluctuations are normally caused by competitive and other conditions in the cattle and hog markets over which IBP has little or no control. Therefore, the results of operations for the interim periods presented are not necessarily indicative of the results to be attained for the full fiscal year. D. INVENTORIES Inventories, valued at the lower of first-in, first-out cost or market, are comprised of the following: Restated Restated September December 23, 25, 2000 1999 ----------- ----------- Product inventories: Raw materials $ 75,548 $ 57,385 Work in process 96,016 84,505 Finished goods 402,196 238,710 ------- ------- 573,760 380,600 Livestock 147,321 137,300 Supplies 94,756 97,292 ------- ------- $815,837 $615,192 ======= ======= 7 E. EARNINGS PER SHARE 13 Weeks Ended ----------------------- Restated Restated Sept.23, Sept. 25, 2000 1999 Numerator: ---------- ----------- Net earnings $ 78,728 $110,017 Preferred stock dividends and accretion - (462) ------- ------- Earnings available for common shares $ 78,728 $109,555 Denominator: Weighted average common shares Outstanding 105,575 96,573 Dilutive effect of employee stock plans 1,139 10,143 ------- ------- Diluted average common shares Outstanding 106,714 106,716 ======= ======= Basic earnings per common share $ .75 $1.13 ==== ==== Diluted earnings per common share $ .74 $1.03 ==== ==== 39 Weeks Ended -------------------------- Restated Restated Sept. 23, Sept. 25, 2000 1999 Numerator: ------------ ------------ Earnings before accounting change and extraordinary item $158,906 $241,279 Preferred stock dividends and accretion (2,566) (1,569) ------- ------- Earnings available for common shares $156,340 $239,710 Denominator: Weighted average common shares Outstanding 105,877 96,573 Dilutive effect of employee stock plans 1,250 9,926 ------- ------- Diluted average common shares Outstanding 107,127 106,499 ======= ======= Basic earnings before extraordinary item per common share $1.47 $2.48 ==== ==== Diluted earnings before extraordinary item per common share $1.46 $2.25 ==== ==== The summary below lists stock options outstanding at the end of the fiscal quarters which were not included in the computations of diluted EPS because the options' exercise price was greater than the average market price of the common shares. These options had varying expiration dates. 2000 1999 -------- -------- Stock options excluded from Diluted EPS computation 3,291 937 Average option price per share $21.03 $25.55 8 F. COMPREHENSIVE INCOME Comprehensive income consists of net earnings and foreign currency translation adjustments. Management considers its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars. Comprehensive income for the 39 weeks ended September 23, 2000 and September 25, 1999 was as follows: 39 Weeks Ended ------------------------- Restated Restated Sept. 23, Sept. 25, 2000 1999 ----------- ----------- NET EARNINGS $141,440 $241,279 Other comprehensive income: Foreign currency translation Adjustments (1,667) 5,927 ------- ------- COMPREHENSIVE INCOME $139,773 $247,206 ======= ======= G. ACQUISITION On February 7, 2000, the company acquired the outstanding common stock of Corporate Brand Foods America, Inc. ("CBFA"), a privately held processor and marketer of meat and poultry products for the retail and foodservice markets. In the transaction, which was accounted for as a pooling of interests, IBP issued approximately 14.4 million common shares for all of the outstanding common stock of CBFA. The company also assumed $344 million of CBFA's debt and preferred stock obligations. At the acquisition date, all of the debt obligations were refinanced (see Note H) and the preferred stock was redeemed. The companies incurred $31 million of nonrecurring merger-related expenses, related primarily to a $21 million non-cash increase in the valuation of CBFA's restricted redeemable stock, and transaction- related fees. The company, by virtue of its acquisition of CBFA, has a restricted stock plan. During the third quarter 2000, the participants of this plan voluntarily relinquished their rights to put the stock back to the company. Prior to the relinquishments, the plan was accounted for as a "variable plan" in accordance with APB Opinion #25 and classified as redeemable stock in the accompanying consolidated balance sheet. Following the relinquishments, the plan became a "fixed plan" and the redeemable stock was reclassified to equity and deferred compensation liability in the accompanying balance sheet. Prior to the merger, CBFA's fiscal year ended on the Sunday closest to the last day of February. The following information presents certain statement of earnings data for the separate companies corresponding to IBP's fiscal quarter and nine months ended September 25, 1999: 9 Restated Restated 13 Weeks 39 Weeks Ended Ended September 25, September 25, 1999 1999 -------------- ------------- Net sales: IBP, as previously reported $3,648,390 $10,224,509 Intercompany sales to (16,076) (44,953) --------- ---------- CBFA Net IBP sales 3,632,314 10,179,556 CBFA 166,373 446,417 --------- ---------- $3,798,687 $10,625,973 ========= ========== Net earnings: IBP $ 108,228 $ 238,256 CBFA 1,789 3,023 --------- ---------- $ 110,017 $ 241,279 ========= ========== H. LONG-TERM OBLIGATIONS: Long-term obligations are summarized as follows: Restated September 23, December 25, 2000 1999 -------------- -------------- 7.95% Senior Notes due 2010 $300,000 $ - 7.45% Senior Notes due 2007 125,000 125,000 6.125% Senior Notes due 2006 100,000 100,000 7.125% Senior Notes due 2026 100,000 100,000 6.0% Securities due 2001 50,000 50,000 CBFA long-term obligations - 168,934 Revolving credit facilities - 218,327 Present value of minimum Capital lease obligations 21,838 26,878 Other 20,614 13,847 ------- ------- 717,452 802,986 Less amounts due within one year 54,271 13,125 ======= ======= $663,181 $789,861 On January 31, 2000, the company issued $300 million of 7.95% 10-year notes under its $550 million Debt Securities program originally registered with the Securities and Exchange Commission ("SEC") in 1996. This Debt Securities program was subsequently amended and filed with the SEC on January 27, 2000. The net proceeds, issued at a slight discount to par, were used to reduce outstanding borrowings under IBP's revolving credit facilities, $175 million of which had been classified as non-current at December 25, 1999. Interest is payable semiannually. On February 7, 2000, the company completed its merger with CBFA and, at the same time, refinanced all of CBFA's various existing debt obligations, using available IBP credit facilities that were at more favorable terms. Prepayment premiums, accelerated amortization of unamortized deferred financing costs, and transaction expenses totaled $22 10 million, before applicable income tax benefit of $7 million, and was accounted for as an extraordinary loss in the condensed consolidated statement of earnings. I. CONTINGENCIES: IBP is involved in numerous disputes incident to the ordinary course of its business. While the outcome of any litigation is not predictable, or subject to the Company's control, and the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists both as to such outcome and as to the future financial results, management believes that any liability for which provision has not been made relative to the various lawsuits, claims and administrative proceedings pending against IBP, including those described below, is not likely to have a material adverse effect on its future consolidated results, financial position or liquidity. In July 1996, a lawsuit was filed against IBP by certain cattle producers in the U.S. District Court, Middle District of Alabama, seeking certification of a class of all cattle producers. The complaint alleges that IBP has used its market power and alleged "captive supply" agreements to reduce the prices paid to producers for cattle. Plaintiffs have disclosed that, in addition to declaratory relief, they seek actual and punitive damages. The original motion for class certification was denied by the District Court; plaintiffs then amended their motion, defining a narrower class consisting of only those cattle producers who sold cattle directly to IBP from 1994 through the date of certification. The District Court approved this narrower class in April 1999. The 11th Circuit Court of Appeals reversed the District Court decision to certify a class, on the basis that there were inherent conflicts amongst class members preventing the named plaintiffs from providing adequate representation to the class. The plaintiffs then filed pleadings seeking to certify an amended class. The Court denied the plaintiffs' motion on October 17, 2000. Management continues to believe that the company has acted properly and lawfully in its dealings with cattle producers. On January 12, 2000, The United States Department of Justice ("DOJ"), on behalf of the Environmental Protection Agency ("EPA"), filed a lawsuit against IBP in U.S. District Court for the District of Nebraska, alleging violations of various environmental laws at IBP's Dakota City facility. This action alleges, among other things, violations of: (1) the Clean Air Act; (2) the Clean Water Act; (3) the Resource, Conservation and Recovery Act; (4) the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"); and (5) the Emergency Planning and Community Right to Know Act ("EPCRA"). This action seeks injunctive relief to remedy alleged violations and damages of $25,000 per violation per day for alleged violations which occurred prior to January 30, 1997, and $27,500 per violation per day for alleged violations after that date. The Complaint alleges that some violations began to occur as early as 1989, although the great majority of the violations are alleged to have occurred much later, and continue into the present. The company determined to reserve $3.5 million for the claims raised in this lawsuit based upon the evaluation of a confidential settlement demand received from the DOJ, and review and evaluation of the resolution of comparable claims, 11 in light of the company's assessment of the facts as known to the company in light of the legal theories advanced by the DOJ. On the same basis, the company believes the range of exposure is between $3.5 million and $15.9 million, though is unable to predict with accuracy the ultimate resolution in this matter due to risks and uncertainties that make such an evaluation difficult at this time. The company believes it has meritorious defenses on each of these allegations and intends to aggressively defend these claims. On May 19, 2000, IBP signed a Partial Consent Decree with the EPA that makes environmental improvements that were already underway at IBP's Dakota City, Nebraska facility federally enforceable. Although this Partial Consent Decree does not purport to resolve all of the allegations in the Complaint, if EPA were to prevail in court on certain of its factual allegations, these improvements may satisfy part of the injunctive relief sought by EPA under the Complaint. EPA has acknowledged that final injunctive relief under CAA claims may incorporate some or all of the work agreed to under the Partial Consent Decree. In February 2000, several lawsuits were filed against IBP by certain shareholders in the United States District Court for the District of Nebraska seeking to certify a class of all persons who purchased IBP stock between March 25, 1999 and January 12, 2000. The complaints, seeking unspecified damages, allege that IBP violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and claims IBP issued materially false statements about the company's compliance with environmental laws in order to inflate the company's stock price. The lawsuits have been consolidated and the Court has appointed three lead plaintiffs and has appointed lead and liaison counsel. An amended consolidated complaint with respect to all the actions was filed, and the company is preparing its response. Management believes it has accurately reported the company's compliance with environmental laws, and the company intends to vigorously contest these claims. On January 15, 1997, the Illinois EPA brought suit against IBP at its Joslin, Illinois facility alleging that IBP's operations at its Joslin, Illinois facility are violating the "odor nuisance" regulations enacted in the State of Illinois. IBP has already commenced additional improvements at its Joslin facility to further reduce odors from this operation, but denies Illinois EPA's contention that such conditions amount to a "nuisance". IBP is in the midst of discussions aimed at a complete resolution of these issues, and reports this issue solely because of a recent determination that the penalties have the potential to exceed $100,000. In October 2000, fourteen lawsuits were filed against IBP by certain shareholders in Delaware, seeking to certify a class of all IBP shareholders. The complaints seek unspecified damages and seek to enjoin the company's proposed acquisition of IBP's stock by DLJMBP. J. BUSINESS SEGMENTS Segment information has been prepared in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related 12 Information." Performance of the segments is evaluated on earnings from operations. The Beef Carcass segment is involved in the slaughter of live fed cattle, reducing them to dressed carcasses and allied products for sales to further processors. Over 90% of Beef Carcass sales are to other IBP segments, chiefly to Beef Processing. The Beef Carcass segment also markets its allied products to manufacturers of pharmaceuticals and animal feeds. The Beef Processing segment is primarily involved in fabrication of dressed beef carcasses into primals and sub- primal meat cuts. The Pork segment is involved in hog slaughter and fabrication and related allied product processing activities. The Beef Processing and Pork segments market their products to food retailers, distributors, wholesalers, restaurants and hotel chains and other food processors in domestic and international markets. The Pork segment also sells allied products to pharmaceutical and animal feeds manufacturers. The Foodbrands America segment consists of several IBP subsidiaries, principally Foodbrands America, Inc., The Bruss Company, and IBP Foods, Inc. The Foodbrands America group produces, markets and distributes a variety of frozen and refrigerated products to the "away from home" food preparation market, including pizza toppings and crusts, value-added pork-based products, ethnic specialty foods, appetizers, soups, sauces and side dishes as well as deli meats and processed beef, pork and poultry products. The Foodbrands America segment also produces portion-controlled premium beef and pork products for sale to restaurants and foodservice customers in domestic and international markets. The All Other segment includes several businesses that do not constitute reportable business segments. These businesses primarily include the company's logistics operations, its Lakeside Farm Industries, Ltd. subsidiary (Canadian beef slaughter and fabrication operation and cattle feedlot), its cow boning operations, its hide curing and tanning operations, and its newly formed Fresh Meats Case Ready division. Corporate and other includes various unallocated corporate items not attributable to the company's operating segments. The principal itemschief component in this caption areis unallocated goodwill amortization and variable stock options expense (credits). Intersegment sales have been recorded at amounts approximating market. Earnings from operations are comprised of net sales less all identifiable operating expenses, allocated corporate selling, general and administrative expenses, and goodwill amortization. Allocable corporate costs are allocated generally based on sales. Net interest expense and income taxes have been excluded from segment operations. 13 13 Weeks Ended 39 Weeks Ended --------------------- --------------------- Restated Restated Restated Restated Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 NET SALES ---------- --------- --------- --------- Sales to unaffiliated customers: Beef Carcass $273,705 $234,395 $799,394 $682,743 Beef Processing 2,031,356 1,946,458 5,932,409 5,478,930 Pork 554,030 566,838 1,697,106 1,566,579 Foodbrands America 816,091 658,832 2,297,119 1,662,274 All Other 502,263 392,164 1,420,368 1,235,447 --------- --------- --------- --------- $4,177,445 $3,798,687 $12,146,396 $10,625,973 ========= ========= ========== ========== Intersegment sales: Beef Carcass $2,002,118 $1,895,899 $5,961,381 $5,392,768 Beef Processing 19,129 68,148 151,036 193,972 Pork 127,624 94,288 377,110 236,311 All Other 125,048 116,658 341,056 336,468 Intersegment elimination (2,273,919)(2,174,993) (6,830,583) (6,159,519) --------- --------- --------- --------- $ - $ - $ - $ - ========= ========= ========= ========= Net sales: Beef Carcass $2,275,823 $2,130,294 $6,760,775 $6,075,511 Beef Processing 2,050,485 2,014,606 6,083,445 5,672,902 Pork 681,654 661,126 2,074,216 1,802,890 Foodbrands America 816,091 658,832 2,297,119 1,662,274 All Other 627,311 508,822 1,761,424 1,571,915 Intersegment elimination (2,273,919)(2,174,993) (6,830,583) (6,159,519) --------- --------- --------- --------- $4,177,445 $3,798,687 $12,146,396 $10,625,973 ========= ========= ========== ========== EARNINGS FROM OPERATIONS Beef Carcass $ 47,653 $ 18,438 $ 112,315 $ 60,364 Beef Processing 47,870 74,905 106,269 134,947 Pork 18,290 33,266 48,162 105,850 Foodbrands America 17,311 30,273 (9,697) 87,122 All Other 21,870 23,315 71,325 29,952 --------- --------- --------- --------- Earnings from segments 152,994 180,197 328,374 418,235 Corporate (4,049) (6,719) (7,877) (3,917) --------- --------- --------- --------- Total Earnings 148,945 173,478 320,497 414,318 Net interest expense (21,121) (17,543) (64,071) (48,710) --------- --------- --------- --------- Earnings before income taxes, accounting change and extraordinary item $ 127,824 $ 155,935 $ 256,426 $ 365,608 ========= ========= ========== =========== NET SALES BY LOCATION OF CUSTOMERS United States $3,548,112 $3,239,739 $10,311,382 $ 9,062,900 Japan 250,461 209,635 733,806 618,781 Canada 137,892 132,272 421,044 380,634 Korea 78,733 63,109 221,507 152,918 Mexico 64,495 52,698 176,955 136,365 Other foreign countries 97,752 101,234 281,702 274,375 --------- --------- ---------- ---------- $4,177,445 $3,798,687 $12,146,396 $10,625,973 ========= ========= ========== ========== 14 K. INCOME TAXES During the third quarter 1999, the company reached a settlement with the Internal Revenue Service ("IRS") on all audit issues related to tax years 1989 through 1991. As a result of that settlement, the company reduced income taxes payable and income tax expense by $14 million, or $0.15 per diluted share. During the third quarter 2000, the company filed amended tax returns for the years 1992 through 1997, claiming additional deductions plus interest. The IRS has challenged and continues to challenge certain tax credits claimed by the company on tax returns filed for fiscal years 1992 to date, aggregating approximately $100 million. While the company believes it has a basis for claiming such credits, no benefit has been reflected for financial reporting purposes given the uncertainty of ultimate sustainability. The outcome of this matter remains uncertain. L. SUBSEQUENT EVENT In late October 2000, management discovered certain inaccuracies in a Foodbrands subsidiary's financial statements, resulting in a $9 million reduction in pre-tax earnings and inventories. The third quarter 2000 financial statements included herein include this reduction from amounts previously reported in IBP's earnings press release on October 16, 2000. M. RESTATEMENTS DFG RESTATEMENTS: Following the third quarter 2000, the company identified $9.6 million in adjustments that were necessary related to inaccuracies at its DFG subsidiary, which were reflected in the company's reported results in its Quarterly Report on Form 10-Q for the period ended September 23, 2000. As a result of these inaccuracies, which were identified during the fourth quarter 2000, the company initiated a comprehensive internal review of its accounting records, systems, processes and controls related to its DFG subsidiary. These reviews and other issues raised during the fourth quarter 2000 resulted in recording certain charges and adjustments, as discussed below, which impacted previously reported results for the year ended December 25, 1999 and each of the interim periods of 2000. The accompanying financial statements have been restated to reflect $(2,112) and $17,422 of pre-tax (credits) charges in the three months and nine months ended September 2000, related principally to overstated prepaid expenses; inventory valued above net realizable value; uncollectible accounts receivable due to customer short payments, unauthorized deductions and subsequent allowances; underaccrual of liabilities for inventory purchases, temporary labor costs, marketing, rebates and commissions; and an impairment loss of $5,763 for contingent consideration that was paid and recorded as a purchase price adjustment in second quarter 2000, based on incorrect 1999 fiscal earnings. These adjustments resulted in an increase (decrease) of $(345) for the quarter and $10,398 for the nine months ended September 2000 in previously reported cost of goods sold and a $(1,767) and $7,024 increase (decrease) in selling and 15 general administrative expenses for the quarter and nine months ended September 2000, respectively. The related income tax expense (benefit) of these adjustments of $800 in the third quarter and ($6,600) on a year-to-date basis was also reflected in the statements of earnings and balance sheets. The impact of these adjustments increased (decreased) earnings per diluted share by $0.01 for the quarter and $(0.10) for the nine months ended September 2000. The accompanying financial statements also reflect the related balance sheet adjustments made to the December 25, 1999 financial statements, as restated in the company's amended Form 10-K. STOCK OPTIONS: The company's stock option plan grants officers additional bonus options if the original options are exercised. The original officer options are generally issued at market price at the date of the grant, vest over a five-year period and have a ten-year term. The bonus options are issued at market price at the date the bonus options are granted and are exercisable after two years, provided the shares acquired with the original options are still owned by the officer. As a result of the bonus options features, variable plan accounting is appropriate for the options granted under these provisions. Compensation expense for the original options has been revised and is now recorded over the vesting period based on the difference between the market value and the exercise price at the end of each period. Compensation expense related to the bonus options is recorded based on the market value and the exercise prices over the vesting period from the date vesting becomes probable, to the date the bonus options are vested and exercisable. Prior to the restatement, the company followed fixed accounting for these options, treating the original grants and the bonus option grants as two separate grants. The restatement records the period and cumulative accrued compensation and related deferred tax impact, which increased compensation expense by $1,911 and $462 in the third quarters 2000 and 1999, respectively, and decreased income tax expenses for the tax benefit associated with the expense. The change decreased net earnings by $1,693 and $377 and diluted earnings per share by $0.01 and $0.00 in the third quarters 2000 and 1999, respectively. The restatement increased (decreased) compensation expense by $330 and ($7,131) in the first nine months of 2000 and 1999, respectively, and adjusted income tax expense and deferred income tax asset for the tax benefit associated with the expense. The change increased (decreased) net earnings by ($272) and $6,510 and earnings per diluted share by $0.00 and $0.07 in the first nine months of 2000 and 1999, respectively. REVENUE RECOGNITION: The restated financial statements reflect adjustments to adopt SAB 101 in first quarter 2000, as described in Note N. The company adopted SAB 101 effective in the first quarter 2000 by recording a cumulative adjustment that reduced net earnings by $2,429 or $0.02 per diluted share. Net earnings before the cumulative effect of the accounting change were increased (decreased) by $676 and ($1,666) or $0.01 and ($0.02) per diluted share in the quarter and nine months ended September 23, 2000, respectively. 16 SEGMENTS: Note J has been restated for all periods presented to reflect a change in the segments from those previously reported. The company previously reported two segments, Fresh Meats and Foodbrands America. As a result of reconsidering the requirements of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, the company has expanded the number of segments disclosed. ADDITIONAL DISCLOSURES: The statements of cash flows has also been restated for the above adjustments, to provide more detail of certain cash transactions that were previously reported on a combined basis and to reclassify the change in the company's checks in process of clearance to cash flows from operations rather than from financing activities. The following tables present the impact of the above restatements related to the balance sheets, statements of earnings, and statements of cash flows: CONSOLIDATED BALANCE SHEET As September 23, 2000 Previously Stock Revenue As Reported DFG Options Recognition Restated ASSETS Accounts receivable $ 795,422 $ (4,308) $ - $ (118,744) $ 672,370 Inventories 721,451 (17,269) - 111,655 815,837 Deferred income tax benefits 95,007 (804) - 483 94,686 TOTAL CURRENT ASSETS 1,647,073 (22,381) - (6,606) 1,618,086 Goodwill 1,046,571 (7,763) - - 1,038,808 Other assets 150,541 2,000 - - 152,541 TOTAL ASSETS $4,395,247 $(28,144) $ - $ (6,606) $4,360,497 17 CONSOLIDATED BALANCE SHEET As September 23, 2000 Previously Stock Revenue As Reported DFG Options Recognition Restated LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 416,574 300 - - 416,874 Deferred income taxes and other 449,665 (8,001) - (2,511) 439,153 TOTAL CURRENT LIABILITIES 1,666,858 (7,701) - (2,511) 1,656,646 Deferred income taxes and other liabilities 176,822 - 7,270 - 184,092 STOCKHOLDERS' EQUITY: Retained earnings 1,521,694 (20,443) (7,270) (4,095) 1,489,886 TOTAL STOCKHOLDERS' EQUITY 1,888,386 (20,443) (7,270) (4,095) 1,856,578 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,395,247 $ (28,144) $ - $ (6,606) $4,360,497
CONSOLIDATED STATEMENT Of EARNINGS 13 Weeks Ended September 23, 2000 As Previously Stock Revenue As Reported DFG Options Recognition Restated Net sales $4,154,262 $ - $ - $ 23,183 $4,177,445 Cost of products sold 3,864,848 (345) - 22,175 3,886,678 Gross profit 289,414 345 - 1,008 290,767 Selling, general and administrative expense 141,760 (1,767) 1,911 (82) 141,822 EARNINGS FROM OPERATIONS 147,654 2,112 (1,911) 1,090 148,945 Earnings before income taxes 126,533 2,112 (1,911) 1,090 127,824 Income tax expense 48,100 800 (218) 414 49,096 NET EARNINGS $ 78,433 $ 1,312 $ (1,693) $ 676 $ 78,728 Earnings per common share - Basic $ 0.74 $ 0.01 $ (0.01) $ 0.01 $ 0.75 Earnings per common share - Diluted $ 0.73 $ 0.01 $ (0.01) $ 0.01 $ 0.74
18 39 Weeks Ended September 23, 2000 As Previously Stock Revenue As Reported DFG Options Recognition Restated Net sales $12,201,829 $ - $ - $ (55,433) $12,146,396 Cost of products sold 11,414,435 10,398 - (52,620) 11,372,213 Gross profit 787,394 (10,398) - (2,813) 774,183 Selling, general and administrative expense 415,158 7,024 330 (125) 422,387 EARNINGS FROM OPERATIONS 340,937 (17,422) (330) (2,688) 320,497 Earnings before income taxes and extraordinary item 276,866 (17,422) (330) (2,688) 256,426 Income tax expense 105,200 (6,600) (58) (1,022) 97,520 Earnings before extraordinary item 171,666 (10,822) (272) (1,666) 158,906 Cumulative effect of Accounting change - - - (2,429) (2,429) NET EARNINGS $ 156,629 $(10,822) $ (272) $ (4,095) $ 141,440 Earnings per common share: Earnings before extraordinary item $ 1.60 $ (0.11) $ - $ (0.02) $ 1.47 Cumulative effect of change in accounting principle - - - (0.02) (0.02) Net earnings $ 1.46 $ (0.11) $ - $ (0.04) $ 1.31 Earnings per common share - assuming dilution: Earnings before extraordinary $ 1.58 $ (0.10) $ - $ (0.02) $ 1.46 item Cumulative effect of change in accounting principle - - - (0.02) (0.02) Net earnings $ 1.44 $(0.10) $ - $ (0.04) $ 1.30
19 13 Weeks Ended September 25, 1999 As Previously Stock Revenue As Reported DFG Options Recognition Restated Selling, general and administrative expenses $ 116,088 $ - $ 463 $ - $ 116,551 Earnings from operations 173,941 - (463) - 173,478 Income taxes 46,003 - (85) - 45,918 Net earnings 110,395 - (378) - 110,017 Earnings per share - Basic $ 1.14 $ - $ 0.01) $ - $ 1.13 Earnings per share - Diluted $ 1.03 $ - $ 0.00 $ - $ 1.03 39 Weeks Ended September 25, 1999 As Previously Stock Revenue As Reported DFG Options Recognition Restated Selling, general and administrative Expenses $ 317,996 $ - $(7,130) $ - $ 310,866 Earnings from Operations 407,188 - 7,130 - 414,318 Income taxes 123,708 - 621 - 124,329 Net earnings 234,770 - 6,509 - 241,279 Earnings per share - Basic $ 2.41 $ - $ 0.07 $ - $ 2.48 Earnings per share - Diluted $ 2.19 $ - $ 0.07 $ - $ 2.25
20 CONSOLIDATED STATEMENTS OF CASH FLOWS Reclass 39 Weeks Ended September As Checks in 23, 2000 Previously DFG Process of As Reported Impact Clearance Restated Net cash flows provided by operating activities $215,293 $ 429 $ 36,807 $252,529 Net cash flows provided by financing activities $101,283 $ - $(36,807) $ 64,476 Net change in cash and cash equivalents 1,899 429 - 2,328 39 Weeks Ended September 25, 1999 Net cash flows provided by operating activities $ 59,766 $ - $ 39,725 $ 99,491 Net cash flows provided by financing activities $478,244 $ - $(39,725) $438,519 N. REVENUE RECOGNITION Beginning in the first quarter 2000, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. As a result of the guidance in SAB No.101, the company will recognize revenue upon delivery to customers. Previously, the company had recognized revenue upon shipment to customers, in accordance with its interpretation of Statement of Financial Accounting Concepts No. 5, Revenue and Recognition in Measurement in Financial Statements of Business Enterprises. The cumulative effect of the change on prior years resulted in a charge to earnings of $2,429 (net of income taxes of $1,489) or $.02 per share, which is included in earnings for the nine months ended September 23, 2000. The effect of the change on the quarter and nine months ended September 23, 2000 was to increase (decrease) income before the cumulative effect of the accounting change by $676 ($0.01 per share) and ($1,666)($0.02 per share). The pro forma amounts presented in the earnings statement were calculated assuming the accounting change was made retroactively to prior periods. For the nine months ended September 23, 2000, the company recognized $63,311 in revenue that was included in the cumulative effect adjustment as of January 1, 2000. The effect of that revenue in the nine months ended September 23, 2000 was to increase net earnings by $2,429 (after reduction for income taxes of $1,489) during that period. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ This quarterly report on Form 10-Q contains forward-looking statements that reflect management's current view with respect to future events and financial performance. Specifically, these forward- looking statements include risks and uncertainties. Thus, actual results may differ materially from those expressed or implied in those statements. Those risks and uncertainties include, without limitation, risks of changing market conditions with regard to livestock supplies and demand for the company's products, domestic and international legal and regulatory risks, the costs of environmental compliance, the impact of governmental regulations, operating efficiencies, as well as competitive and other risks over which IBP has little or no control. Moreover, past financial performance should not be considered a reliable indicator of future performance. The company makes no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement. RESTATEMENTS Management's discussion and analysis has been restated and expanded to reflect the following items, as described in Note M to the financial statements: DFG RESTATEMENTS: Following the third quarter 2000, the company identified $9.6 million in adjustments that were necessary related to inaccuracies at its DFG subsidiary, which were reflected in the company's reported results in its Quarterly Report on Form 10-Q for the period ended September 23, 2000. As a result of these inaccuracies, which were identified during the fourth quarter 2000, the company initiated a comprehensive internal review of its accounting records, systems, processes and controls related to its DFG subsidiary. These reviews and other issues raised during the fourth quarter 2000 resulted in recording certain charges and adjustments, as discussed below, which impacted previously reported results for the year ended December 25, 1999 and each of the interim periods of 2000. The accompanying discussion and analysis has been revised to reflect $(2,112) and $17,422 of pre-tax (credits) charges in the three months and nine months ended September 2000, related principally to overstated prepaid expenses; inventory valued above net realizable value; uncollectible accounts receivable due to customer short payments, unauthorized deductions and subsequent allowances; under accrual of liabilities for inventory purchases, temporary labor costs, marketing, rebates and commissions; and an impairment loss of $5,763 for contingent consideration that was paid and recorded as a purchase price adjustment in second quarter 2000, based on incorrect 1999 fiscal earnings. These adjustments resulted in an increase (decrease) of $(345) for the quarter and $10,398 for the nine months ended September 2000 in previously reported cost of goods sold and a $(1,767) and $7,024 increase (decrease) in selling and general administrative expenses for the quarter and nine months ended September 2000, respectively. The related income tax expense (benefit) of these adjustments of 22 $800 in the third quarter and ($6,600) on a year-to-date basis was also reflected in the statements of earnings and balance sheets. The impact of these adjustments increased (decreased) earnings per diluted share by $0.01 for the quarter and $(0.10) for the nine months ended September 2000. The accompanying financial statements also reflect the related balance sheet adjustments made to the December 25, 1999 financial statements, as restated in the company's amended Form 10-K. STOCK OPTIONS: The company's stock option plan grants officers additional bonus options if the original options are exercised. The original officer options are generally issued at market price at the date of the grant, vest over a five-year period and have a ten-year term. The bonus options are issued at market price at the date the bonus options are granted and are exercisable after two years, provided the shares acquired with the original options are still owned by the officer. As a result of the bonus options features, variable plan accounting is appropriate for the options granted under these provisions. Compensation expense for the original options has been revised and is now recorded over the vesting period based on the difference between the market value and the exercise price at the end of each period. Compensation expense related to the bonus options is recorded based on the market value and the exercise prices over the vesting period from the date vesting becomes probable, to the date the bonus options are vested and exercisable. Prior to the restatement, the company followed fixed accounting for these options, treating the original grants and the bonus option grants as two separate grants. The restatement increased compensation by $1,911 and $462 in the third quarters 2000 and 1999, respectively, and decreased income tax for the tax benefit associated with the expense. The change decreased net earnings by $1,693 and $377 and diluted earnings per share by ($.02) and $0.00 in the third quarters 2000 and 1999, respectively. The restatement increased (decreased) compensation expense by $330 and ($7,131) in the first nine months of 2000 and 1999, respectively, and adjusted income tax expense for the tax benefit associated with the expense. The change increased (decreased) net earnings by ($272) and $6,510 and earnings per diluted share by $0.00 and $0.06 in the first nine months of 2000 and 1999, respectively. REVENUE RECOGNITION: The restated financial statements reflect adjustments to adopt SAB 101 in first quarter 2000, as described in Note N. The company adopted SAB 101 effective in the first quarter 2000 by recording a cumulative adjustment that reduced net earnings by $2,429 or $0.02 per diluted share. Net earnings before the cumulative effect of the accounting change were increased (decreased) by $676 and ($1,666) or $0.01 and ($0.02) per diluted share in the quarter and nine months ended September 23, 2000, respectively. SEGMENTS: The company previously reported two segments, Fresh Meats and Foodbrands America. As a result of reconsidering the requirements of Statement of Financial Accounting Standards No. 131, Disclosures about Segments 23 of an Enterprise and Related Information, the company has expanded the number of segments disclosed. MERGER AGREEMENT On October 1, 2000, DLJ Merchant Banking Partners III, L.P., ("DLJMBP"), a private equity fund affiliated with Donaldson, Lufkin & Jenrette, Inc., reached an agreement with the IBP, inc. ("IBP") Board of Directors to acquire the stock of IBP. The agreement is subject to shareholder and regulatory approvals. If approved, IBP will be merged with Rawhide Acquisition Corporation ("Merger"), and each share of IBP common stock outstanding immediately prior to the Merger will be converted into a right to receive $22.25 in cash. After completion of the Merger, DLJMBP and affiliated funds will be the majority owner of IBP. Other investors will include Archer Daniels Midland Company, Inc. and certain IBP management employees, among others. The company filed a Current Report on Form 8-K on October 2, 2000 with respect to this proposed merger. ACQUISITION On February 7, 2000, the company acquired Corporate Brand Foods America, Inc. ("CBFA"), a privately held processor and marketer of meat and poultry products for the retail and foodservice markets. In the transaction, which was accounted for as a pooling of interests, IBP issued 14.4 million common shares for all of the outstanding stock of CBFA. The company also assumed $344 million of CBFA's debt and preferred stock obligations. At the acquisition date, all of the debt obligations were refinanced (see Note G) and the preferred stock was redeemed. The companies incurred $31 million of nonrecurring merger- related expenses, related primarily to a non-cash increase in the valuation of CBFA's restricted redeemable stock and to transaction-related fees. RESULTS OF OPERATIONS Beef carcass operating earnings increased to 2.1% of net sales in the third quarter 2000 versus 0.9% in the third quarter 1999. Through nine months, beef carcass operating earnings as a percentage of net sales in 2000 measured 1.6% versus 1.0% in 1999. Beef Carcass operations performed well on strong demand and higher capacity utilization. Beef Processing operating earnings decreased to 2.3% of net sales in the third quarter 2000 versus 3.7% in the third quarter 1999. Through nine months, beef processing operating earnings as a percentage of net sales in 2000 measured 1.7% versus 2.4% in 1999. The decrease in operating earnings was due primarily to increased raw material cost offset by a strong demand for beef product and higher capacity utilization. Pork segment operating earnings decreased to 2.9% of net sales in the third quarter 2000 versus 5.5% in the third quarter 1999. Through nine months, operating earnings as a percentage of net sales in 2000 measured 2.4% versus 6.1% in 1999. Pork operations were hampered by higher live hog costs and lower capacity utilization. 24 In the Foodbrands America segment, third quarter 2000 operating earnings decreased to 2.1% of net sales compared to 4.6% in the third quarter 1999. Year-to- date 2000 operating earnings, before nonrecurring and unusual items, measured 1.4% of net sales versus 5.2% in 1999. The lower 2000 results reflected margin pressure from increased raw material costs, especially fresh pork. Additionally, the IBP Foods, Inc. operation, consisting of former Thorn Apple Valley, Inc. facilities purchased in the third quarter 1999, lost $4 million in the third quarter and $22 million in the first nine months of 2000. The IBP Foods facilities have been split up and moved to other divisions of the company. However, on a combined basis, the IBP Foods facilities had progressively smaller operating losses in 2000 and are projected to be profitable in the fourth quarter 2001. Foodbrands America's year-to-date 2000 operating earnings were reduced by the DFG issue and two other unusual items. The most significant item was $31 million in pre-tax, nonrecurring CBFA merger-related expense described above. The second unusual item was an $11 million pre-tax bad debt provision increase due to a significant customer's bankruptcy. This customer's bankruptcy will not have a material negative impact on the company's net sales. The company had product sales of $342 million to this customer in 1999. Excluding the unusual items and the IBP Foods, Inc. losses, the Foodbrands America segment earned $72 million from operations through September 2000 compared to $90 million in the first three quarters of 1999. Operating earnings in the All Other segment decreased to 3.2% of net sales in the third quarter 2000 versus 4.1% in the third quarter 1999. The decrease in operating earnings for the third quarter was due primarily to decreased capacity utilization at the company's Canadian beef complex. Through nine months, operating earnings, before norecurring and unusual items, as a percentage of net sales in 2000 measured 3.9% versus 2.9% in 1999. The increased operating earnings from the prior year were due primarily to a $17 million nonrecurring pre-tax charge in the second quarter 1999 for cow facility asset write- downs, as well as operating losses in its cow operations. The latest estimates by livestock industry analysts predict that beef production in 2000 will be slightly higher than in 1999 and will remain strong into the first half of 2001. However, analysts believe beef production for the full year 2001 will be down in the three-to-five percentage point range from 2000. Meanwhile, analysts anticipate pork production in 2000 to be down 1% to 2% from the record production in 1999 and up approximately 2.5% in 2001. 25 COMPARATIVE SEGMENT RESULTS (in thousands) 13 Weeks Ended 39 Weeks Ended ---------------------- ----------------------- Restated Restated Restated Restated Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 ---------- ---------- ----------- ---------- Net sales: Beef Carcass $2,275,823 $2,130,294 $ 6,760,775 $ 6,075,511 Beef Processing 2,050,485 2,014,606 6,083,445 5,672,902 Pork 681,654 661,126 2,074,216 1,802,890 Foodbrands America 816,091 658,832 2,297,119 1,662,274 All Other 627,311 508,822 1,761,424 1,571,915 Intersegment elimination (2,273,919) (2,174,993) (6,830,583) (6,159,519) --------- --------- --------- --------- $4,177,445 $3,798,687 $12,146,396 $10,625,973 ========= ========= ========== ========== Earnings from operations: Before nonrecurring and unusual items: Beef Carcass $ 47,653 $ 18,438 $ 112,315 $ 60,364 Beef Processing 47,870 74,905 106,269 134,947 Pork 18,290 33,266 48,162 105,850 Foodbrands America 17,311 30,273 32,137 87,122 All Other 21,870 23,315 71,325 46,647 --------- --------- --------- --------- Earnings from segments 152,994 180,197 328,374 494,930 418,235434,9 Corporate (4,049) (6,719) (7,877) (3,917) --------- --------- --------- --------- Total Earnings $ 148,945 $ 173,478 $ 362,331 $ 431,013 ========= ========= ========== ========== After nonrecurring and unusual items: Beef Carcass $ 47,653 $ 18,438 $ 112,315 $ 60,364 Beef Processing 47,870 74,905 106,269 134,947 Pork 18,290 33,266 48,162 105,850 Foodbrands America 17,311 30,273 (9,697) 87,122 All Other 21,870 23,315 71,325 29,952 --------- --------- --------- --------- Total from segments 152,994 180,197 328,374 418,235 Corporate (4,049) (6,719) (7,877) (3,917) --------- --------- --------- --------- Total Earnings $ 148,945 $ 173,478 $ 320,497 $ 414,318 ========= ========= ========== ========== SALES Beef Carcass segment net sales increased 7% and 11% in the 13-week and 39-week periods ended September 2000 from the comparable prior year periods. The increase for the 13-week period was due primarily to a 6% increase in average selling prices of beef carcasses sold along with a 1% increase in pounds of beef carcass products sold. The increase for the 39-week period was due primarily to a 9% increase in average selling prices of beef carcasses sold along with a 2% increase in pounds of beef carcass products sold. Approximately 90% of Beef Carcass sales are intersegment sales, principally to the Beef Processing segment operation. Beef Processing segment net sales increased 2% and 7% in the 13-week and 39-week periods ended September 2000 from the comparable prior year periods. The increase in the 13-week period was due primarily to an 8% increase in average selling prices of beef products 26 sold offset by a 6% decrease in pounds of beef products sold. The increase in the 39-week period was due mainly to an 8% increase in average selling prices of beef products sold. Pounds of beef products sold for the 39-week period in 2000 versus the same period in 1999 remained relatively flat. Pork segment net sales increased 3% and 15% in the 13-week period and 39-week period ended September 2000 from the comparable prior year periods. The increase in the 13-week period was due primarily to a 2% increase in the average selling price of pork products and a 1% increase in pounds of pork products sold. The increase in the 39-week period was mainly due to a 14% increase in average selling prices of pork products sold along with a 2% increase in total pounds of pork products sold. The higher selling prices in both beef segments and the pork segment reflected continued strong demand for red meat in the United States and international markets, and to tightened available supplies of fresh pork. Foodbrands America's net sales for the third quarter of 2000 increased 24% over the third quarter of 1999, primarily due to acquisitions in the second half of 1999. These second half 1999 additions (IBP Foods, Inc. and Wilton Foods, Inc. during the third quarter and Wright Brand Foods, Inc. (by CBFA) in the fourth quarter) increased net sales by approximately $100 million, or 15%, for the quarter. Excluding the effect of acquisitions, net sales for existing operations increased approximately 9%, of which 7% is due to increased prices driven by higher raw material costs and 2% is due to higher sales volume. Foodbrands America's year-to-date net sales for 2000 increased 38% over 1999. The 1999 additions (Russer Foods and H&M Foods in the second quarter, IBP Foods and Wilton Foods in the third quarter and Wright Brand Foods, Inc. in the fourth quarter) increased year- to-date net sales by approximately $435 million, or 26%. Excluding the effect of acquisitions, year-to- date net sales for existing operations increased approximately 12%, of which 8% is due to increased prices driven by higher raw material costs and 4% is due to volume. Net sales in the All Other segment increased 20% and 11% in the 13-week and 39-week periods ended September 2000 from the comparable prior year periods. The increases for the 13-week period were due primarily to increases in hides selling prices and pounds of hides sold. The increases for the 39-week period were due primarily to increased average hides selling prices along with increased total pounds of hides sold. Net export sales increased 15% in the third quarter 2000 from the year earlier and 19% for the nine months ended September 2000 versus a year ago. While the volume of pounds sold increased 10% in the third quarter and 5% on a year-to-date basis from the prior year, improved pricing and product mix factors contributed most to the sales increases. As the Far East economies have improved, the product mix sold to the region has shifted to higher-value products. Net sales into Asia, which accounted for 75% of total export dollars, increased 23% on a year-to-date basis from the prior year. Sales into Mexico also improved 27 30% year-to-date through September on a volume increase of 23%. Net export sales accounted for 12% of total net sales in the first nine months of 2000 and 1999. COST OF PRODUCTS SOLD In the Beef Carcass segment, the cost of products sold in the third quarter and nine months ended September 2000 increased 5% and 10% from the comparable 1999 periods. Higher average live cattle prices were the principal reason for the higher 2000 costs. In the Beef Processing segment, the cost of products sold in the third quarter and nine months ended September 2000 increased 3% and 8% from the comparable 1999 periods. Higher raw material costs passed through from the Beef Carcass segment, driven by higher average live cattle prices were the principal reason for the higher 2000 costs. In the Pork segment, the cost of products sold in the third quarter and year-to-date period ended September 2000 increased 8% and 21% from the comparable 1999 periods. The increases were due primarily to higher 2000 average live pork prices compared to the comparable periods in 1999. Foodbrands America's third quarter 2000 cost of products sold increased 27% from the third quarter 1999, of which 16% is the result of acquisitions mentioned above. Year-to-date cost of products sold in 2000 increased 45% over 1999, 29% of which is the result of acquisitions. Excluding the effect of acquisitions, cost of products sold for the third quarter increased 11%, 7% of which is due to higher raw material costs, 2% resulted from increased sales volume and 2% resulted from the DFG issues. Year-to-date cost of products sold before acquisitions increased 15% over 1999, 10% of which is due to higher raw material costs, 4% resulted from increased sales volume and 1% resulted from the DFG issues. In the All Other segment, costs in the third quarter and nine months ended September 2000 increased 8% and 4% from the comparable 1999 periods. Higher volume-driven raw materials, passed through from the Pork and Beef Processing segments, and plant costs in the company's newly formed Fresh Meats Case Ready operations and higher raw material costs at the company's Canadian beef complex and hide operations, passed through from the Beef Carcass segment, were somewhat offset by lower volume-driven raw material costs and plant costs at the cow operations. Cow operations plant costs were also reduced by the result of a $17 million nonrecurring pre-tax charge in the second quarter 1999 for cow facility asset write-downs. The company exited the cow business in the first quarter 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The Beef Carcass segment's third quarter and year- to-date 2000 expense increased 18% and 19% over the comparable 1999 periods. Higher personnel-related expenses and computer-related expenses were major factors in the increase. 28 The Beef Processing segment's third quarter and year-to-date 2000 expense increased 10% and 11% over the comparable 1999 periods. Higher personnel-related expenses, computer-related expenses and international selling expense were major factors in the increase. Pork segment third quarter and year-to-date 2000 expense increased 6% and 10% over the comparable 1999 periods. Higher personnel-related expenses, computer- related expense and international selling expense were major factors in the increase. In the Foodbrands America segment, third quarter 2000 expenses increased 28% over the third quarter 1999, 12% of which is related to acquisitions. Year-to- date expenses in 2000 increased 61% over year-to-date expenses in 1999, of which 22% is related to acquisitions. Higher bad debt expense ($11 million in the first quarter) related to a customer bankruptcy and year-to-date merger-related costs of $31 million accounted for an additional 21% of the increase. The customer bankruptcy was a large distributor that accounted for $342 million in the company's consolidated 1999 net sales. However, no material negative impact is expected as the distributor's customers have continued to purchase the company's products. The DFG issues accounted for 2% and 3% of the increase for the quarter and nine months ended, respectively. Higher volume-related selling expenses and increased personnel-related expenses were the principal factors driving the remaining 14% increase in the third quarter and the remaining 15% increase year- to-date. INTEREST EXPENSE The 32% increase in net interest expense in 2000 versus the nine months ended September 1999 was due primarily to a 24% increase in average borrowings in 2000 but also to a higher average effective interest rate. INCOME TAXES IBP's higher 2000 effective income tax rates in the third quarter and year-to-date periods versus 1999 resulted from a third quarter 1999 settlement with the Internal Revenue Service on all audit issues related to fiscal years 1989 through 1991. The settlement decreased 1999 income tax expense by $14 million or $0.13 per diluted share. Excluding the audit settlement impact, the 2000 effective tax rates were comparable to the 1999 rates. RECENT ACCOUNTING CHANGES Beginning in the first quarter 2000, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. As a result of the guidance in SAB No. 101, the company will recognize revenue upon delivery to customers. Previously, the company had recognized revenue upon shipment to customers, in accordance with its interpretation of Statement of Financial Accounting Concepts No. 5, Revenue and Recognition in Measurement in Financial Statements of Business Enterprises. The cumulative effect of the change on prior years resulted 29 in a charge to income of $2,429 (net of income taxes of $1,489) or $.02 per share, which is included in income for the nine months ended September 23, 2000. The effect of the change on the quarter and nine months ended September 23, 2000 was to increase (decrease) income before the cumulative effect of the accounting change by $676 ($0.01 per share) and ($1,666) ($0.02 per share). The pro forma amounts presented in the income statement were calculated assuming the accounting change was made retroactively to prior periods. For the nine months ended September 23, 2000, the company recognized $63,311 in revenue that was included in the cumulative effect adjustment as of January 1, 2000. The effect of that revenue in the nine months ended September 23, 2000 was to increase income by $2,429 (after reduction for income taxes of $1,489) during that period. LIQUIDITY AND CAPITAL RESOURCES Total outstanding borrowings averaged $1,449 million in the first nine months of 2000 compared to $1,165 million in the comparable 1999 period. The higher 2000 average outstanding borrowings versus 1999 were the result of acquisitions (IBP Foods, Wilton Foods and Wright Brand Foods all acquired in the second half of 1999) and increased capital expenditures. Borrowings outstanding under committed and uncommitted credit facilities at September 23, 2000 totaled $746 million compared to $623 million (excluding CBFA) at December 25, 1999, and available unused credit capacity under committed facilities at September 23, 2000 was $187 million. On January 31, 2000, the company issued $300 million of 7.95% 10-year notes under its $550 million Debt Securities program originally registered with the Securities and Exchange Commission ("SEC") in 1996. This Debt Securities program was subsequently amended and filed with the SEC on January 27, 2000. The net proceeds, issued at a slight discount to par, were used to reduce borrowings under IBP's revolving credit facilities. Interest on the 7.95% notes is payable semiannually. In January 2000, the company put in place $300 million of additional revolving credit capacity via a 364-day facility with two major financial institutions. Credit terms were similar to those in existing credit facilities. Meanwhile, IBP's $100 million Promissory Note expired in February 2000 and was replaced by a $100 million short-term facility maturing in December 2000, giving the company $900 million in borrowing capacity under committed facilities. On February 7, 2000, the company completed its merger with CBFA and, at the same time, refinanced all of CBFA's various existing debt obligations, using available IBP credit facilities that were at more favorable terms. Year-to-date capital expenditures through September 23, 2000 totaled $301 million compared to $152 million in the first nine months of 1999. Major projects included purchases of forward warehousing and case-ready facilities, renovations of the Norfolk, 30 Nebraska, beef processing plant, and various plant and distribution facility expansions. Approximately 77% of the year-to-date 2000 spending was for revenue enhancement or cost-saving projects, while the remainder went toward upgrades and replacements of existing equipment and facilities. 31 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of stockholders of IBP, inc. was held on April 20, 2000, in Dakota Dunes, South Dakota. (c) The following matters were voted upon at the annual meeting: (i) The election of the members of the Board of Directors: Richard L. Bond Votes for: 80,528,104 Votes withheld: 1,113,531 John S. Chalsty Votes for: 80,512,578 Votes withheld: 1,129,057 Dr. Wendy L. Gramm Votes for: 80,507,404 Votes withheld: 1,134,231 John J.Jacobson, Jr. Votes for: 80,528,621 Votes withheld: 1,113,014 Eugene D. Leman Votes for: 80,532,361 Votes withheld: 1,109,274 Martin A.Massengale Votes for: 80,510,630 Votes withheld 1,131,005 Robert L. Peterson Votes for: 80,510,815 Votes withheld: 1,130,820 Michael L. Sanem Votes for: 80,534,159 Votes withheld: 1,107,476 JoAnn R. Smith Votes for: 80,512,265 Votes withheld: 1,129,370 (ii) Approval of the performance-based bonus of the Chairman of the Board and Chief Executive Officer, the President and Chief Operating Officer, and the Chief Executive Officer of Foodbrands America, Inc. For: 74,440,358 Against: 6,962,816 Abstain: 238,560 32 Item 5. Other Information In connection with its Medium-Term Notes program, the company hereby reports the following computations: 39 Weeks Ended ----------------------- Restated Restated Sept. 23, Sept. 25, 2000 1999 ----------- ---------- Earnings before income taxes, cumulative effect of accounting change and extraordinary item $256,426 $365,608 Total fixed charges 86,164 66,648 Capitalized interest (6,229) (6,687) ------- ------- Earnings before fixed charges, income taxes and extraordinary item $336,361 $425,569 ======= ======= Ratio of earnings to fixed charges 3.9 6.4 === === Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K No reports on Form 8-K were filed by the company during the quarter ended September 23, 2000. 33 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IBP, inc. ------------------------- (Registrant) March 12, 2001 /s/ Robert L. Peterson - ---------------------- -------------------------- (date) Robert L. Peterson Chairman of the Board and Chief Executive Officer /s/ Larry Shipley -------------------------- Larry Shipley Chief Financial Officer /s/ Craig J. Hart ------------------------- Craig J. Hart Vice President and Controller 34
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