-----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, T35RkX8cSogFRa2FKbr4GDvu4FNgxh2Pc1hKAgdZPmaCKVXCApgHYB6UkEOW1NAY lWXAjWq9WUdl2uI1VRkQSA== 0000916641-98-001333.txt : 19981217 0000916641-98-001333.hdr.sgml : 19981217 ACCESSION NUMBER: 0000916641-98-001333 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981101 FILED AS OF DATE: 19981216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITHFIELD FOODS INC CENTRAL INDEX KEY: 0000091388 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 520845861 STATE OF INCORPORATION: DE FISCAL YEAR END: 0427 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02258 FILM NUMBER: 98770614 BUSINESS ADDRESS: STREET 1: 200 COMMERCE STREET STREET 2: 999 WATERSIDE DRIVE CITY: SMITHFIELD STATE: VA ZIP: 23430 BUSINESS PHONE: 8043653000 MAIL ADDRESS: STREET 1: 900 DOMINION TOWER STREET 2: 999 WATERSIDE DRIVE CITY: NORFOLK STATE: VA ZIP: 23510 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY EQUITIES CORP DATE OF NAME CHANGE: 19710221 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY REAL ESTATE TRUST DATE OF NAME CHANGE: 19661113 10-Q 1 SMITHFIELD FOODS, 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 November 1, 1998 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.................... to.......................... COMMISSION FILE NUMBER 0-2258 SMITHFIELD FOODS, INC. 200 Commerce Street Smithfield, Virginia 23430 (757) 365-3000 Virginia 52-0845861 - ---------------------------- ------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Class Shares outstanding at December 11, 1998 - ---------------------------- --------------------------------------- Common Stock, $.50 par value 41,298,014 1-15 SMITHFIELD FOODS, INC. CONTENTS
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Condensed Balance Sheets - November 1, 1998 and May 3, 1998 3-4 Consolidated Condensed Statements of Income - 13 Weeks Ended November 1, 1998 and October 26, 1997 and 26 Weeks Ended November 1, 1998 and October 26, 1997 5 Consolidated Condensed Statements of Cash Flows - 26 Weeks Ended November 1, 1998 and October 26, 1997 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9-13 Operations PART II. OTHER INFORMATION 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) November 1, 1998 May 3,1998 - -------------- ---------------- ---------- ASSETS (Unaudited) Current assets: Cash $ 36,245 $ 60,522 Accounts receivable, net 216,267 156,091 Inventories 320,350 249,511 Prepaid expenses and other current assets 35,015 44,999 ---------- ---------- Total current assets 607,877 511,123 ---------- ---------- Property, plant and equipment 910,154 705,872 Less accumulated depreciation (258,873) (233,652) ---------- ---------- Net property, plant and equipment 651,281 472,220 ---------- ---------- Other assets: Investments in partnerships 33,360 49,940 Goodwill 33,780 12,360 Other 46,184 38,002 ---------- ---------- Total other assets 113,324 100,302 ---------- ---------- $1,372,482 $1,083,645 ========== ==========
See accompanying notes to consolidated condensed financial statements. 3-15 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands) November 1, 1998 May 3, 1998 - -------------- ---------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Current liabilities: Notes payable $ 12,639 $ - Current portion of long-term debt and capital lease obligations 17,295 8,511 Accounts payable 195,926 118,909 Accrued expenses and other current liabilities 135,395 124,515 ---------- ---------- Total current liabilities 361,255 251,935 ---------- ---------- Long-term debt and capital lease obligations 552,206 407,272 ---------- ---------- Other noncurrent liabilities: Pension and postretirement benefits 32,633 38,486 Other 36,636 24,942 ---------- ---------- Total other noncurrent liabilities 69,269 63,428 ---------- ---------- Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 authorized shares Common stock, $.50 par value, 100,000,000 authorized shares; 38,806,862 and 37,527,362 issued 19,403 18,769 Additional paid-in capital 107,497 96,971 Retained earnings 258,426 245,270 Accumulated other comprehensive income 4,426 - ---------- ---------- Total shareholders' equity 389,752 361,010 ---------- ---------- $1,372,482 $1,083,645 ========== ==========
See accompanying notes to consolidated condensed financial statements. 4-15 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended (In thousands, except per share data) November 1, 1998 October 26, 1997 November 1, 1998 October 26, 1997 - ------------------------------------- ---------------- ---------------- ---------------- ---------------- Sales $874,378 $982,699 $1,740,201 $1,897,662 Cost of sales 756,914 888,729 1,549,960 1,728,508 -------- -------- ---------- ---------- Gross profit 117,464 93,970 190,241 169,154 Selling, general and administrative expenses 65,974 53,177 123,971 102,369 Depreciation expense 14,015 10,353 26,954 20,068 Interest expense 10,916 8,036 20,622 15,403 Nonrecurring charge - - - 12,600 -------- -------- ---------- ---------- Income before income taxes 26,559 22,404 18,694 18,714 Income taxes 8,078 6,856 5,538 9,707 -------- -------- ---------- ---------- Net income $ 18,481 $ 15,548 $ 13,156 $ 9,007 ======== ======== ========== ========== Net income per common share: Basic $ .48 $ .41 $ .35 $ .24 ======== ======== ========== ========== Diluted $ .47 $ .39 $ .33 $ .23 ======== ======== ========== ========== Average common shares outstanding: Basic 38,273 37,527 37,905 37,527 ======== ======== ========== ========== Diluted 39,599 39,666 39,807 39,639 ======== ======== ========== ==========
See accompanying notes to consolidated condensed financial statements. 5-15 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
26 Weeks Ended 26 Weeks Ended November 1, 1998 October 26, 1997 ---------------- ---------------- Cash flows from operating activities: Net income $ 13,156 $ 9,007 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,039 21,649 (Gain) loss on sale of property, plant and equipment 428 (310) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (42,414) (21,542) Inventories (41,592) (36,873) Prepaid expenses and other current assets 11,481 (10,457) Other assets (5,722) 3,768 Accounts payable, accrued expenses and other liabilities 48,085 57,454 --------- --------- Net cash provided by operating activities 12,461 22,696 --------- --------- Cash flows from investing activities: Capital expenditures (40,665) (51,069) Business acquisitions, net of cash (89,176) (10,123) Proceeds from sale of property, plant and equipment 61 1,142 Investments in partnerships and other assets 577 (7,565) --------- --------- Net cash used in investing activities (129,203) (67,615) --------- --------- Cash flows from financing activities: Net borrowings (repayments) on notes payable 11,660 (75,000) Proceeds from issuance of long-term debt 3,536 2,900 Net borrowings on long-term credit facility 81,000 207,000 Principal payments on long-term debt and capital lease obligations (15,414) (80,403) Exercise of common stock options 11,160 84 --------- --------- Net cash provided by financing activities 91,942 54,581 --------- --------- Net increase (decrease) in cash and cash equivalents (24,800) 9,662 Effect of currency exchange rates 523 -- Cash and cash equivalents at beginning of period 60,522 25,791 --------- --------- Cash and cash equivalents at end of period $ 36,245 $ 35,453 ========= ========= Supplemental disclosures of cash flow information: Cash payments during period: Interest (net of amount capitalized) $ 15,071 $ 14,476 ========= ========= Income taxes $ 2,195 $ 3,847 ========= =========
See accompanying notes to consolidated condensed financial statements. 6-15 SMITHFIELD FOODS, INC. 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 May 3, 1998. (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) Nov. 1, 1998 May 3, 1998 -------------- ------------ ----------- Fresh and processed meats $218,487 $171,090 Hogs on farms 67,001 49,263 Manufacturing supplies 23,009 18,538 Other 11,853 10,620 -------- -------- $320,350 $249,511 ======== ======== (4) Income per basic share is computed based on the average common shares outstanding during the period. Income per diluted share is computed based on the average common shares outstanding during the period adjusted for the effect of potential common shares, such as stock options and contingently issuable shares. The computation for basic and diluted income per share is as follows:
13 Weeks Ended 26 Weeks Ended -------------- -------------- (In thousands, except per share amounts) Nov. 1, 1998 Oct. 26, 1997 Nov. 1, 1998 Oct. 26, 1997 ---------------------------------------- ------------ ------------- ------------ ------------- Numerator for basic and diluted income per share: Net income $18,481 $15,548 $13,156 $ 9,007 ======= ======= ======= ======= Denominator for basic income per share: Average number of shares outstanding 38,273 37,527 37,905 37,527 Effect of dilutive securities: Stock options 1,209 2,139 1,785 2,112 Contingently issuable shares 117 -- 117 -- ------- ------- ------- ------- Denominator for diluted income per share 39,599 39,666 39,807 39,639 ======= ======= ======= ======= Net income per share: Basic $ .48 $ .41 $ .35 $ .24 ======= ======= ======= ======= Diluted $ .47 $ .39 $ .33 $ .23 ======= ======= ======= =======
7-15 Summarized below are stock option shares outstanding at the end of each fiscal period which were not included in the computation of income per diluted share because the average exercise price of the options was greater than the average market price of the common shares.
13 Weeks Ended 26 Weeks Ended -------------- -------------- Nov. 1, 1998 Oct. 26, 1997 Nov. 1, 1998 Oct. 26, 1997 ------------ ------------- ------------ ------------- Stock option shares excluded 415,000 25,000 415,000 25,000 Average option price per share $27.88 $32.75 $27.88 $32.75
Under the purchase agreement with North Side Foods Corp. ("North Side"), the Company has a contingent payment in which a maximum of 469,000 shares of the Company's common stock could be issued if the market price equals or exceeds $32.00 per share. (5) The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in fiscal 1999. The components of comprehensive income, net of related tax, consist of:
13 Weeks Ended 26 Weeks Ended -------------- -------------- (In thousands) Nov. 1, 1998 Oct. 26, 1997 Nov. 1, 1998 Oct. 26, 1997 ------------ ------------- ------------ ------------- Net income $18,481 $15,548 $13,156 $9,007 Other comprehensive income: Foreign currency translation adjustment 3,489 - 3,489 - Unrealized gain on securities 687 - 937 - ------- ------- ------- ------ Comprehensive income $22,657 $15,548 $17,582 $9,007 ======= ======= ======= ======
(6) In September 1998, the Company acquired all of the capital stock of Societe Bretonne de Salaisons, the largest private label manufacturer of ham, pork shoulder and bacon products in France. In October 1998, the Company acquired all of the assets and business of North Side Foods Corp., a leading producer of precooked pork products in North America. Both acquisitions have been accounted for using the purchase method of accounting, and, accordingly, the accompanying financial statements include the financial position and results of operations from the dates of acquisition. During the 26 weeks ended November 1, 1998, the Company increased its ownership in the Circle Four hog production operation to 77% from 37%, requiring the Company to consolidate the accounts of Circle Four and to discontinue using the equity method of accounting for this operation. From June 1, 1998, the date on which the Company acquired a majority ownership of Circle Four, the financial position and results of operations of Circle Four have been reported on a consolidated basis. During fiscal 1998, Circle Four was accounted for using the equity method of accounting. (7) In August 1997, the U.S. District Court for the Eastern District of Virginia imposed $12.6 million in civil penalties against the Company in a civil action brought by the U.S. Environmental Protection Agency. This amount is reflected as a nonrecurring charge in the 26 weeks ended October 26, 1997. The Company has appealed this decision to the U.S. Court of Appeals for the Fourth Circuit. 8-15 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 seven pork processing subsidiaries, Gwaltney of Smithfield, Ltd. ("Gwaltney"), John Morrell & Co. ("John Morrell"), Lykes Meat Group, Inc. ("Lykes"), North Side Foods Corp. ("North Side"), Patrick Cudahy Incorporated ("Patrick Cudahy"), Societe Bretonne de Salaisons ("SBS"), and The Smithfield Packing Company, Incorporated ("Smithfield Packing"). The HPG consists of Brown's of Carolina, Inc. ("Brown's"), an 86%-owned subsidiary of the Company; a 50% interest in Smithfield-Carroll's ("Smithfield-Carroll's"), a joint hog production arrangement between the Company and an affiliate of Carroll's Foods, Inc., and a 77% interest in Circle Four ("Circle Four"), a joint hog production arrangement with certain of the principal hog suppliers for the Company's Eastern operations. Brown's and Smithfield-Carroll's produce hogs in North Carolina and Virginia which are sold to the MPG. Circle Four produces hogs in Utah which are sold to an unrelated party. RECENT DEVELOPMENTS On December 1, 1998, the Company completed its tender offer to acquire all of the outstanding capital stock of Schneider Corporation ("Schneider"). The Company acquired approximately 94% of Schneider's voting common shares and approximately 59% of its Class A non-voting shares, which in the aggregate represents approximately 63% of the total equity of Schneider, in exchange for approximately 2.5 million Exchangeable Shares of Smithfield Canada Limited, a wholly-owned subsidiary of the Company. Each Exchangeable Share is exchangeable by the holder at any time for one common share of the Company. Schneider produces and markets a full line of processed meats and is one of the largest food companies in Canada. Schneider had revenues in its fiscal year ended October 1997 of US$512.7 million. RESULTS OF OPERATIONS During the quarter ended November 1, 1998, the Company acquired all of the capital stock of SBS and all the assets and business of North Side. SBS is the largest private-label manufacturer of ham, pork shoulder and bacon products in France. North Side is a major domestic supplier of pre-cooked sausage to McDonald's Corporation. Both acquisitions are accounted for using the purchase method of accounting. In the first half of fiscal 1999, the Company increased its ownership in Circle Four from 37% to 77%, requiring the Company to consolidate the accounts of Circle Four and to discontinue using the equity method of accounting for this operation. The impact of this consolidation on the consolidated condensed balance sheet as of November 1, 1998 was to increase total assets by $82.4 million and long-term debt by $52.3 million. While the Company has consolidated the accounts of Circle Four in the accompanying consolidated condensed financial statements, it continues to pursue ventures which could reduce its investment in Circle Four to 50% or less. The Company's operating results for the 13 weeks ended November 1, 1998 include those of Circle Four for the full fiscal period, SBS for four weeks and North Side for two weeks. The Company's fiscal 1999 first-half operating results include those of Circle Four for 22 weeks, SBS for four weeks and North Side for two weeks. The comparative results of operations for the 13 weeks and the 26 weeks ended November 1, 1998 were favorably affected by a significant decrease in live hog prices, the lowest in nearly three decades. These prices were the primary reason for the substantially improved profits at the Company's MPG and the losses incurred at the HPG. 9-15 13 Weeks Ended November 1, 1998 - 13 Weeks Ended October 26, 1997 Sales in the second quarter of fiscal 1999 decreased $108.3 million, or 11.0%, from the comparable period in fiscal 1998. The decrease in sales reflected a 17.1% decrease in unit sales prices at the MPG, reflecting significantly lower live hog costs passed through to customers in the form of lower unit selling prices, which was not totally offset by a 6.0% increase in sales tonnage which included the sales tonnage of Circle Four, SBS and North Side. The increase in sales tonnage reflected a 6.0% increase in fresh pork tonnage, a 0.8% decrease in processed meats tonnage and a 12.1% increase in the tonnage of by-products. The increase in fresh pork tonnage reflected increased slaughter levels that took advantage of increased margins on fresh pork related to the increased supply of hogs and corresponding lower live hog prices. In addition, the increase in fresh pork tonnage reflected a full quarter of second shift operations at John Morrell's Sioux City, Iowa plant compared to less than a full quarter of second shift operations in the second quarter of fiscal 1998. The decrease in processed meats tonnage was primarily related to a sharp drop in exports of hot dogs to Russia, which was partially offset by increased processed meats tonnage at existing operations as well as at newly acquired companies. Cost of sales decreased $131.8 million, or 14.8%, in the second quarter of fiscal 1999, reflecting a 39.3% decrease in live hog costs from the comparable period in fiscal 1998, which was partially offset by increased sales tonnage at existing operations and the inclusion of the sales of Circle Four, SBS and North Side. Gross profit in the second quarter of fiscal 1999 increased $23.5 million, or 25.0%, from the comparable period in fiscal 1998. The increase in gross profit was primarily due to substantially higher margins at the MPG. Fresh pork margins improved substantially, reflecting the lower cost of raw materials (live hogs) and increased sales tonnage. Margins on processed meats also increased, reflecting the lower raw material costs. MPG gross profits were partially offset by substantial losses at the HPG due to the lower live hog prices. Selling, general and administrative expenses increased $12.8 million, or 24.1%, in the second quarter of fiscal 1999 from the comparable period in fiscal 1998. The increase was primarily due to higher selling, marketing and product promotion costs associated with intensive efforts to market branded fresh pork and processed meats, expenses associated with the Year 2000 and selling, general and administrative expenses at Circle Four, SBS and North Side. Depreciation expense increased $3.7 million, or 35.4%, in the second quarter of fiscal 1999 from the comparable period in fiscal 1998. The increase was related to completed capital projects at several of the Company's processing plants and the inclusion of the depreciation expense at Circle Four, SBS and North Side. Interest expense increased $2.9 million, or 35.9%, in the second quarter of fiscal 1999 from the comparable period in fiscal 1998, reflecting the inclusion of the interest expense of Circle Four, the cost of borrowings to finance the additional investment in Circle Four, the acquisitions of SBS and North Side, and the higher cost of long-term debt placed in the fourth quarter of fiscal 1998. Income before taxes in the second quarter of fiscal 1999 was adversely affected by a loss of $14.6 million at the HPG compared to a profit of $5.2 million in the same period of fiscal 1998. The effective income tax rate for the second quarter of fiscal 1999 was 30.4% compared to 30.6% in the corresponding period of fiscal 1998. Reflecting the factors previously discussed, net income increased to $18.5 million, or $.47 per diluted share, in the second quarter of fiscal 1999, up from net income of $15.5 million, or $.39 per diluted share, in the second quarter of fiscal 1998. The operating results of the MPG and the HPG are influenced by several factors, including the supply and price levels of hogs, and, as a result, are largely counter-cyclical in nature. While the Company expects to incur losses at the HPG for the remainder of fiscal 1999, these losses should be offset by improved margins at the MPG. 10-15 26 Weeks Ended November 1, 1998 - 26 Weeks Ended October 26, 1997 Sales in the first half of fiscal 1999 decreased $157.5 million, or 8.3%, from the comparable period in fiscal 1998. The decrease in sales reflected a 16.8% decrease in unit sales prices at the MPG, reflecting significantly lower live hog costs passed through to customers in the form of lower unit selling prices which was not totally offset by a 9.0% increase in sales tonnage which included the sales tonnage of Circle Four, SBS and North Side. The increase in sales tonnage reflected an 8.8% increase in fresh pork tonnage, a 4.8% increase in processed meats tonnage and a 14.0% increase in the tonnage of by-products. The increase in fresh pork tonnage reflected increased slaughter levels that took advantage of increased margins on fresh pork related to the increased supply of hogs and corresponding lower live hog prices. In addition, the increase in fresh pork tonnage reflected a full 26 weeks of second shift operations at John Morrell's Sioux City, Iowa plant compared to less than a full quarter of second shift operations in the first half of fiscal 1998. The increase in processed meats tonnage was primarily related to increased tonnage at existing operations as well as at newly acquired companies. This increase in tonnage was partially offset by a sharp drop in exports of hot dogs to Russia in the second quarter of fiscal 1999. Cost of sales decreased $178.5 million, or 10.3%, in the first half of fiscal 1999, reflecting a 34.7% decrease in live hog costs from the comparable period in fiscal 1998, which was partially offset by increased sales tonnage at existing operations and the inclusion of the sales of Circle Four, SBS and North Side. Gross profit in the first half of fiscal 1999 increased $21.1 million, or 12.5%, from the comparable period in fiscal 1998. The increase in gross profit was primarily due to substantially higher margins at the MPG. Fresh pork margins improved substantially, reflecting the lower cost of raw materials (live hogs) and increased sales tonnage. Margins on processed meats also increased, reflecting the lower raw material costs. MPG gross profits were partially offset by substantial losses at the HPG due to the lower live hog prices. Selling, general and administrative expenses increased $21.6 million, or 21.1%, in the first half of fiscal 1999 from the comparable period in fiscal 1998. The increase was primarily due to higher selling, marketing and product promotion costs associated with intensive efforts to market branded fresh pork and processed meats, expenses associated with the Year 2000 and selling, general and administrative expenses at Circle Four, SBS and North Side. Depreciation expense increased $6.9 million, or 34.3%, in the first half of fiscal 1999 from the comparable period in fiscal 1998. The increase was related to completed capital projects at several of the Company's processing plants and the inclusion of the depreciation expense at Circle Four, SBS and North Side. Interest expense increased $5.2 million, or 33.9%, in the first half of fiscal 1999 from the comparable period in fiscal 1998, reflecting the inclusion of the interest expense of Circle Four, the cost of borrowings to finance the additional investments in Circle Four, the acquisitions of SBS and North Side, and the higher cost of long-term debt placed in the fourth quarter of fiscal 1998. A nonrecurring charge of $12.6 million in the first half of fiscal 1998 reflected the imposition of civil penalties against the Company by the U. S. District Court for the Eastern District of Virginia in a civil action brought by the U. S. Environmental Protection Agency. The Company has appealed the Court's judgement to the U. S. Court of Appeals for the Fourth Circuit. Income before taxes in the first half of fiscal 1999 was adversely affected by a loss of $18.3 million at the HPG compared to a profit of $15.6 million in the same period of fiscal 1998. The effective income tax rate for the first half of fiscal 1999 was 29.6% compared to 31.0% in the corresponding period of fiscal 1998, excluding the nonrecurring charge, reflecting increased use of tax incentives. 11-15 Reflecting the factors previously discussed, net income increased to $13.2 million, or $.33 per diluted share, in the first half of fiscal 1999, up from net income of $9.0 million, or $.23 per diluted share, in the first half of fiscal 1998. Excluding the nonrecurring charge, net income was $21.6 million, or $.55 per diluted share, for the first half of fiscal 1998. The operating results of the MPG and the HPG are influenced by several factors, including the supply and price levels of hogs, and, as a result, are largely counter-cyclical in nature. While the Company expects to incur losses at the HPG for the remainder of fiscal 1999, these losses should be offset by improved margins at the MPG. LIQUIDITY AND CAPITAL RESOURCES The Company's cash provided by operations totaled $12.5 million in the first half of fiscal 1999. This increase in cash was the result of profitable operations. The historical seasonal increase in the levels of inventories and accounts receivable was offset by an increase in current liabilities. Traditionally, the Company builds large inventories of hams in the summer months which are sold during the fall holiday season. These sales are converted to cash and used to reduce credit facility borrowings in the Company's fiscal third quarter. The Company's capital expenditures totaled $40.7 million in the first half of fiscal 1999. These capital expenditures included renovations and expansion projects at several of the Company's processing plants, additional hog production facilities at Circle Four and replacement systems associated with the Year 2000. In addition, the Company invested $23.5 million in Circle Four and acquired all of the capital stock of SBS and all the assets and business of North Side. These capital expenditures and acquisitions were funded with borrowings under the Company's revolving credit facility. As of November 1, 1998, the Company had definitive commitments of $20.4 million for capital expenditures primarily to increase its value-added fresh pork capacity at several of its processing plants and to replace and upgrade portions of its hardware and software in response to the Year 2000. In addition, the Company had definitive commitments of $17.2 million at Circle Four primarily for additional hog production facilities. The Company anticipates additional investments of $24.8 million in Circle Four in fiscal 1999 for the capital expenditures and working capital needs. These expenditures at Circle Four will be funded with additional long-term financing or with funds provided by a joint venture which the Company is actively seeking. YEAR 2000 The Year 2000 problem relates to computer systems that have date-sensitive programs that were designed to read years beginning with "19," but may not recognize the year 2000. Company information technology ("IT") systems (including non-IT systems) and third party information systems that fail due to the Year 2000 may have a material adverse effect on the Company. The Year 2000 issue has the potential to effect the Company's supply, production, distribution and financial chains. The Company began addressing the potential exposure associated with the Year 2000 during fiscal 1998. Management has approved the plan necessary to remediate, upgrade, and replace the affected systems to be Year 2000 compliant. A corrective five-point action plan has been developed including: 1) analysis and planning, 2) allocation of resources and commencing correction, 3) remediation, correction and replacement, 4) testing, and 5) development of contingency plans. The Company has identified and defined the critical IT and non-IT projects. These projects relate to systems which include any necessary technology used in manufacturing or administration with date-sensitive information that is critical to the day-to-day operations of the business. Of the IT projects, 7% have been completed, 17% are being tested, 17% are in remediation, correction and replacement, and the remaining, less critical projects are being analyzed and planned. All critical IT system implementations and remediations are expected to be completed by June 30, 1999. The non-IT (plant) projects have identified system components which have a potential issue with rolling dates into the Year 2000. Of these components, 44% are fully compliant with the others at various stages of progress in the action plan. Approximately 30% of the non-IT system remediation process has been completed. All critical non-IT system implementation and remediation is expected to be completed by June 30, 1999. 12-15 The forecasted cost of the Year 2000 solution, including hardware and software replacement, is expected to be approximately $31.7 million, of which $15.0 million has been expended to date. The Company has expensed approximately $3.4 million to date, including $2.6 million in the second quarter of fiscal 1999 for the Year 2000, primary related to planning and evaluating system status. The Company estimates $18.5 million will be capitalized in accordance with generally accepted accounting principles. These expenditures are anticipated to be incurred through December 1999. Third party risk is being proactively assessed through inquiries and questionnaires. Significant vendors, electronic commerce customers and financial institutions have been sent inquiries about the status of their compliance for the Year 2000. Additionally, the Company will follow up the inquiries and questionnaires with interviews. This process is expected to be an ongoing evaluation and at this point management cannot determine the level of risk associated with third parties. The Company believes its planning efforts are adequate to address its Year 2000 concerns. The Company is developing a worse case scenario and a contingency plan which includes an evaluation of the criticality of each manufacturing process and the determination of possible manual alternatives, including the purchase of additional inventory and related storage for production supplies. While the Company believes it is taking the appropriate steps to address its readiness for the Year 2000, the costs of the project and expected completion dates are dependent upon the continued availability of certain resources and other factors. There can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that could influence the results may include, but are not limited to, the availability and cost of personnel trained in this area, and the ability to locate and correct all relevant computer codes and similar uncertainties. 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 raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital, integration of acquisitions and changes in, or the failure or inability to comply with, governmental regulation, including without limitation, environmental and health regulations. 13-15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. A. Exhibits Exhibit 4.5 - Five-Year Credit Agreement dated as of July 10, 1997, among Smithfield Foods, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, relating to a $300,000,000 secured five-year revolving credit facility (incorporated by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for its fiscal year ended April 27, 1997 filed with the Commission on July 25, 1997); and Amendment Number One to the Five-Year Credit Agreement dated as of November 19, 1997 (incorporated by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 1, 1998 filed with the Commission on March 17, 1998); Amendment Number Two to the Five-Year Credit Agreement dated as of August 26, 1998 (incorporated by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 2, 1998 filed with the Commission on September 14, 1998); and Amendment Number Three to the Five-Year Credit Agreement dated as of November 12, 1998. Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K. The Registrant filed no reports on Form 8-K during the quarter for which this report is filed. 14-15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMITHFIELD FOODS, INC. /s/ AARON D. TRUB ------------------------- Aaron D. Trub Vice President, Chief Financial Officer and Secretary /s/ C. LARRY POPE ---------------------------- C. Larry Pope Vice President, Finance Date: December 15, 1998 15-15 EX-4 2 EXHIBIT 4.5 EXHIBIT 4.5 CONFORMED COPY AMENDMENT NO. 3 AMENDMENT NO. 3 dated as of November 12, 1998 among SMITHFIELD FOODS, INC., a corporation duly organized and validly existing under the laws of the State of Virginia (the "Borrower"); the SUBSIDIARY GUARANTORS party hereto (the "Subsidiary Guarantors"); the LENDERS party hereto (the "Lenders"); and THE CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity, the "Administrative Agent"). The parties hereto are parties to a Five-Year Credit Agreement dated as of July 15, 1997 (as amended to and in effect on the date hereof, the "Credit Agreement"). Capitalized terms used but not otherwise defined herein have the meanings given them in the Credit Agreement. The parties hereto wish to amend certain respects, and accordingly, hereby agree as follows: Section 1. Amendments. Subject to the execution and delivery hereof by the Borrower, the Subsidiary Guarantors, the Required Lenders and the Administrative Agent, but effective as of August 3, 1998, the Credit Agreement is hereby amended as follows: A. General. All references in the Credit Agreement to the Credit Agreement (including indirect references) shall be deemed to be references to the Credit Agreement as amended hereby. B. Commitments. Section 2.01 of the Credit Agreement shall be amended to read as follows: Section 2.01. Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount (i) that will not result in such Lender's Revolving Credit Exposure exceeding such Lender's Commitment and (ii) that will not result in the sum of the aggregate amount of the Revolving Credit Exposures of all of the Lenders plus the aggregate principal amount of all Pari Passu Debt then outstanding plus the aggregate principal amount (as defined in the definition of "Material Indebtedness" herein) of the obligations of the Borrower or any of its Subsidiaries under Hedging Agreements exceeding the Consolidated Borrowing Base. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. C. Investments, Loans, Advances, Guarantees and Acquisitions. Section 6.04 of the Credit Agreement shall be amended by deleting "and" from the end of subsection (f) thereof, replacing the period at the end of subsection (g) thereof with "; and" and adding a new clause, to read as follows: (h) other Investments by the Borrower or any of its Subsidiaries in any Person (other than a Subsidiary) principally engaged in a business in which the Borrower and its Subsidiaries are permitted by Section 6.03(b) to be engaged, subject always to the limitation set forth in Section 6.12(f). D. Financial Covenants. Section 6.12(f) of the Credit Agreement shall be amended to read as follows: (f) (1) Except as permitted by Section 6.12(f)(2) below, the Borrower will not permit the sum (without duplication) of (i) Capital Expenditures made by the Borrower and its Subsidiaries in any fiscal year of the Borrower plus (ii) the Aggregate Consideration for all Acquisitions made by the Borrower and its Subsidiaries in such fiscal year plus (iii) an amount (not less than zero) equal to any net increase from the beginning of such fiscal year through the end of such fiscal year in the aggregate amount of Investments in Joint Ventures plus (iv) an amount equal to the aggregate amount of Investments made under Section 6.04(h) in such fiscal year, to exceed the higher of (x) the sum of Consolidated Net Income plus depreciation for the Borrower and its Subsidiaries for such fiscal year or (y) $100,000,000. (2) The sum (without duplication) of (i) Capital Expenditures made by the Borrower and its Subsidiaries in any fiscal year of the Borrower plus (ii) the Aggregate Consideration for all Acquisitions made by the Borrower and its Subsidiaries in such fiscal year plus (iii) an amount (not less than zero) equal to any net increase from the beginning of such fiscal year through the end of such fiscal year in the aggregate amount of Investments in Joint Ventures plus (iv) an amount equal to the aggregate amount of Investments made under in Section 6.04(h) in such fiscal year may exceed the limit established by Section 6.12(f)(1), provided that the aggregate amount of all such excesses permitted by this Section 6.12(f)(2) for all fiscal years of the Borrower shall not exceed the Net Cash Proceeds of the Senior Subordinated Notes received by the Borrower at or prior to the time of determination. Section 2. Representations and Warranties. The Borrower hereby represents and warrants to the Lenders and the Administrative Agent that the representations and warranties set forth in Article III of the Credit Agreement are on the date hereof true and complete as if made on and as of such date and as if each reference in such representations and warranties to the Credit Agreement included reference to such agreement as amended by this Amendment No. 3. Section 3. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart and sending the same by telecopier, mail messenger or courier to the Administrative Agent or counsel to the Administrative Agent. This Amendment No. 3 shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to be duly executed as of the day and year first above written. SMITHFIELD FOODS, INC. By /s/ Aaron D. Trub -------------------------------- Name: Aaron D. Trub Title: Vice President Chief Financial Officer Secretary THE SMITHFIELD PACKING COMPANY, INCORPORATED By /s/ Aaron D. Trub -------------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer GWALTNEY OF SMITHFIELD, LTD. By /s/ Aaron D. Trub -------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer PATRICK CUDAHY INCORPORATED By /s/ Aaron D. Trub ------------------------------ Name: Aaron D. Trub Title: Secretary and Treasurer JOHN MORRELL & CO. By /s/ Aaron D. Trub ------------------------------ Name: Aaron D. Trub Title: Secretary and Treasurer LYKES MEAT GROUP, INC. By /s/ Aaron D. Trub ------------------------------ Name: Aaron D. Trub Title: Secretary and Treasurer BROWN'S OF CAROLINA, INC. By /s/ Aaron D. Trub ------------------------------ Name: Aaron D. Trub Title: Secretary and Treasurer HANCOCK'S OLD FASHIONED COUNTRY HAMS, INC. By /s/ Aaron D. Trub ---------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer VALLEYDALE FOODS, INC. By /s/ Aaron D. Trub ----------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer COPAZ PACKING CORPORATION By /s/ Aaron D. Trub ----------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer SUNNYLAND, INC. By /s/ Aaron D. Trub -------------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer SMITHFIELD PACKING-LANDOVER, INC. By /s/ Aaron D. Trub ------------------------------- Name: Aaron D. Trub Title: Secretary and Treasurer THE CHASE MANHATTAN BANK, individually and as Administrative Agent By /s/ Gary L. Spevak ------------------------------- Name: Gary L. Spevak Title: Vice President COOPERATIEVE CENTRALE RAIFFEISEN - BOERENLEENBANK B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH By /s/ Theodore W. Cox ------------------------------ Name: Theodore W. Cox Title: Vice President By /s/ W. Jeffrey Vollack ------------------------------ Name: W. Jeffrey Vollack Title: Senior Credit Officer and Senior Vice President AGRIBANK, FCB By /s/ J. Hathaway ----------------------------- Name: J. Hathaway Title: Director CREDIT AGRICOLE INDOSUEZ By /s/ Katherine L. Abbott ---------------------------- Name: Katherine L. Abbott Title: First Vice President By /s/ W. Leroy Startz ----------------------------- Name: W. Leroy Startz Title: First Vice President DG BANK, DEUTSCHE GENOSSENSCHAFTSBANK, CAYMAN ISLANDS BRANCH By /s/ Kurt A. Morris ----------------------------- Name: Kurt A. Morris Title: Vice President By /s/ Eric K. Zimmerman ------------------------------ Name: Eric K. Zimmerman Title: Assistant Treasurer NATIONSBANK, N.A. By /s/ Barry P. Sullivan ----------------------------- Name: Barry P. Sullivan Title: Vice President U.S. BANCORP AG CREDIT, INC. (f/k/a FBS AG CREDIT, INC.) By /s/ Douglas S. Hoffner ---------------------------- Name: Douglas S. Hoffner Title: Vice President SUNTRUST BANK, ATLANTA By /s/ Robert V. Honeycutt ----------------------------- Name: Robert V. Honeycutt Title: Vice President By /s/ Hugh E. Brown ----------------------------- Name: Hugh E. Brown Title: Banking Officer THE BANK OF TOKYO-MITSUBISHI, LTD. By_________________________ Name: Title: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By /s/ Deborah Slusarczyk ---------------------------- Name: Deborah Slusarczyk Title: Vice President By /s/ A.R. Morris --------------------------- Name: A. Richard Morris Title: First Vice President FARM CREDIT SERVICES OF THE MIDLANDS, PCA By /s/ James R. Knuth ----------------------------- Name: James R. Knuth Title: Vice President HARRIS TRUST AND SAVINGS BANK By /s/ Greg Hennenfent ---------------------------- Name: Greg Hennenfent Title: Vice President SANWA BANK LIMITED By_________________________ Name: Title: THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH By_________________________ Name: Title: EX-27 3 EXHIBIT 27
5 1,000 6-MOS MAY-02-1999 NOV-01-1998 36,245 0 218,488 2,221 320,350 607,877 910,154 258,873 1,372,482 361,255 552,206 0 0 19,403 370,349 1,372,482 1,740,201 1,740,201 1,549,960 1,549,960 0 0 20,622 18,694 5,538 13,156 0 0 0 13,156 0.35 0.33
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