-----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, Gma9pRbF/QfLfiMqfpKUOsufM5B2rBkKeqXXwQGcKwXKoTB7p/uB1rUY8dd1IdsG jd360eTX71jasup5gzP/7w== 0000916641-02-000412.txt : 20020415 0000916641-02-000412.hdr.sgml : 20020415 ACCESSION NUMBER: 0000916641-02-000412 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020127 FILED AS OF DATE: 20020313 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: VA FISCAL YEAR END: 0427 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15321 FILM NUMBER: 02574106 BUSINESS ADDRESS: STREET 1: 200 COMMERCE STREET STREET 2: 999 WATERSIDE DRIVE CITY: SMITHFIELD STATE: VA ZIP: 23430 BUSINESS PHONE: 7573653000 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 d10q.txt QUARTERLY REPORT UNITED STATES 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 January 27, 2002 ---------------- 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 March 8, 2002 - -------------------------------- -------------------------------------- Common Stock, $.50 par value 110,690,812 1-18 SMITHFIELD FOODS, INC. CONTENTS
PART I -- FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Condensed Statements of Income - 13 Weeks Ended January 27, 2002 and 3 January 28, 2001 and 39 Weeks Ended January 27, 2002 and January 28, 2001 Consolidated Condensed Balance Sheets - January 27, 2002 and April 29, 2001 4-5 Consolidated Condensed Statements of Cash Flows - 39 Weeks Ended January 27, 2002 and January 28, 2001 6 Notes to Consolidated Condensed Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-15 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. 16 Item 5. Other Information 16-17 Item 6. Exhibits and Reports on Form 8-K. 17
2-18 PART I -- FINANCIAL INFORMATION SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended (In thousands, except per share data) January 27, 2002 January 28, 2001 January 27, 2002 January 28, 2001 - --------------------------------------------------------------------------------------------------------------------------------- Sales $ 2,086,325 $ 1,537,372 $ 5,393,052 $ 4,389,617 Cost of sales 1,767,542 1,307,879 4,535,869 3,695,928 ------------ ------------ ------------ ------------ Gross profit 318,783 229,493 857,183 693,689 Selling, general and administrative expenses 164,669 124,460 407,736 336,722 Depreciation expense 36,914 31,145 102,599 92,324 Interest expense 28,561 22,657 71,434 71,052 Minority interests 1,389 2,559 3,011 1,391 Gain on sale of IBP common stock - (76,480) (7,008) (76,480) ------------ ------------ ------------ ------------ Income before income taxes 87,250 125,152 279,411 268,680 Income taxes 32,719 44,303 107,464 98,686 ------------ ------------ ------------ ------------ Net income $ 54,531 $ 80,849 $ 171,947 $ 169,994 ============ ============ ============ ============ Net income per common share: Basic $ .49 $ .74 $ 1.60 $ 1.56 ============ ============ ============ ============ Diluted $ .48 $ .73 $ 1.57 $ 1.54 ============ ============ ============ ============ Average common shares outstanding: Basic 111,413 108,880 107,183 109,050 ============ ============ ============ ============ Diluted 113,881 110,546 109,462 110,520 ============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements 3-18 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands) January 27, 2002 April 29, 2001 - ------------------------------------------------------------------------------------------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 95,942 $ 56,532 Accounts receivable, net 508,987 387,841 Inventories 821,584 729,167 Prepaid expenses and other current assets 76,961 90,155 ----------- ----------- Total current assets 1,503,474 1,263,695 ----------- ----------- Property, plant and equipment 2,115,914 1,796,655 Less accumulated depreciation (620,028) (522,178) ----------- ----------- Net property, plant and equipment 1,495,886 1,274,477 ----------- ----------- Other assets: Goodwill 469,196 347,342 Investments in partnerships 110,234 88,092 Other 213,013 277,282 ----------- ----------- Total other assets 792,443 712,716 ----------- ----------- $ 3,791,803 $ 3,250,888 =========== ===========
See Notes to Consolidated Condensed Financial Statements 4-18 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data) January 27, 2002 April 29, 2001 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Current liabilities: Notes payable $ 16,498 $ 35,504 Current portion of long-term debt and capital lease obligations 67,281 79,590 Accounts payable 378,527 278,093 Accrued expenses and other current liabilities 302,702 235,095 ----------- ----------- Total current liabilities 765,008 628,282 ----------- ----------- Long-term debt and capital lease obligations 1,308,765 1,146,223 ----------- ----------- Other noncurrent liabilities: Deferred income taxes 266,771 271,516 Pension and postretirement benefits 73,767 77,520 Other 20,432 25,820 ----------- ----------- Total other noncurrent liabilities 360,970 374,856 ----------- ----------- Minority interests 16,575 48,395 ----------- ----------- Shareholders' equity: Preferred stock, $1.00 par value, 1,000,000 authorized shares - - Common stock, $.50 par value, 200,000,000 and 100,000,000 authorized shares; 110,660,812 and 52,502,951 issued and outstanding 55,330 26,251 Additional paid-in capital 498,259 405,665 Retained earnings 810,724 638,779 Accumulated other comprehensive loss (23,828) (17,563) ----------- ----------- Total shareholders' equity 1,340,485 1,053,132 ----------- ----------- $ 3,791,803 $ 3,250,888 =========== ===========
See Notes to Consolidated Condensed Financial Statements 5-18 SMITHFIELD FOODS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
39 Weeks Ended 39 Weeks Ended (In thousands) January 27, 2002 January 28, 2001 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 171,947 $ 169,994 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 108,686 103,573 Gain on sale of IBP common stock (7,008) (76,480) (Gain) loss on sale of property, plant and equipment (495) 3,780 Changes in operating assets and liabilities, net of effect of acquisitions 44,804 55,785 --------- --------- Net cash provided by operating activities 317,934 256,652 --------- --------- Cash flows from investing activities: Capital expenditures (101,775) (106,506) Business acquisitions, net of cash (162,008) (26,855) Proceeds from sale of IBP common stock 58,654 186,445 Proceeds from sale of property, plant and equipment 12,221 3,942 Investments in IBP common stock - (60,240) Investments in partnerships (6,956) (2,394) --------- --------- Net cash used in investing activities (199,864) (5,608) --------- --------- Cash flows from financing activities: Net repayments on notes payable (36,723) (36,286) Proceeds from issuance of long-term debt 400,535 28,491 Net repayments on long-term credit facility (242,000) (191,000) Principal payments on long-term debt and capital lease obligations (119,825) (33,298) Repurchase and retirement of common stock (84,472) (17,284) Exercise of common stock options 3,450 1,630 --------- --------- Net cash used in financing activities (79,035) (247,747) --------- --------- Net increase in cash and cash equivalents 39,035 3,297 Effect of foreign exchange rate changes on cash 375 (593) Cash and cash equivalents at beginning of period 56,532 49,882 --------- --------- Cash and cash equivalents at end of period $ 95,942 $ 52,586 ========= ========= Supplemental disclosures of cash flow information: Common stock issued for acquisitions $ 202,695 $ - ========= ========= Cash payments during period: Interest (net of amount capitalized) $ 58,353 $ 74,909 ========= ========= Income taxes $ 104,244 $ 76,430 ========= =========
See Notes to Consolidated Condensed Financial Statements 6-18 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) These statements should be read in conjunction with the Consolidated Financial Statements and related notes, which are included in the Company's Annual Report, for the fiscal year ended April 29, 2001. The interim consolidated condensed financial information furnished herein is unaudited. The information reflects all adjustments (which include only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods included in the report. (2) Inventories consist of the following: (In thousands) January 27, 2002 April 29, 2001 - -------------- ---------------- -------------- Hogs on farms $ 346,990 $ 331,060 Fresh and processed meats 378,261 316,929 Manufacturing supplies 73,663 60,823 Other 22,670 20,355 ---------- --------- $ 821,584 $ 729,167 ========== ========= (3) Net income per basic share is computed based on the average common shares outstanding during the period. Net income per diluted share is computed based on the average common shares outstanding during the period adjusted for the effect of potential common stock equivalents, such as stock options. The computation for basic and diluted net income per share is as follows:
13 Weeks Ended 39 Weeks Ended ----------------------------------------------------- (In thousands, January 27, January 28, January 27, January 28, except per share data) 2002 2001 2002 2001 - ---------------------- ----------- ----------- ----------- ----------- Net income $ 54,531 $ 80,849 $171,947 $169,994 -------- -------- -------- -------- Average common shares outstanding: Basic 111,413 108,880 107,183 109,050 Dilutive stock options 2,468 1,666 2,279 1,470 -------- -------- -------- -------- Diluted 113,881 110,546 109,462 110,520 ======== ======== ======== ======== Net income per common share: Basic $ .49 $ .74 $ 1.60 $ 1.56 ======== ======== ======== ======== Diluted $ .48 $ .73 $ 1.57 $ 1.54 ======== ======== ======== ========
7-18 (4) The components of comprehensive income, net of related taxes, consist of:
13 Weeks Ended 39 Weeks Ended ------------------------------------------------------ January 27, January 28, January 27, January 28, (In thousands) 2002 2001 2002 2001 - -------------- ----------- ----------- ----------- ----------- Net income $ 54,531 $ 80,849 $ 171,947 $ 169,994 Other comprehensive income: Unrealized loss on cash flow hedges (13,325) - (1,977) - Unrealized (loss) gain on securities (506) 353 1,035 60 Foreign currency translation (1,693) 6,217 (5,323) (1,423) --------- --------- --------- --------- Comprehensive income $ 39,007 $ 87,419 $ 165,682 $ 168,631 ========= ========= ========= =========
(5) The following table presents information about the results of operations for each of the Company's reportable segments for the 13 and 39 weeks ended January 27, 2002 and January 28, 2001. In connection with the acquisitions of Moyer Packing Company (Moyer) and substantially all of the assets and business of Gorges/Quik-to-Fix Foods, Inc. (Quik-to-Fix) in the first quarter and the acquisition of Packerland Holdings, Inc. (Packerland) in the second quarter, assets for the Meat Processing Group increased by approximately $516.5 million to $2.4 billion.
Meat Hog General (In thousands) Processing Production Corporate Total - --------------------------------------------------------------------------------- 13 Weeks Ended: January 27, 2002 ----------------------- Sales $ 2,015,151 $ 279,569 $ - $ 2,294,720 Intersegment sales - (208,395) - (208,395) Operating profit (loss) 100,277 30,746 (15,212) 115,811 January 28, 2001 ----------------------- Sales $ 1,471,893 $ 275,844 $ - $ 1,747,737 Intersegment sales - (210,365) - (210,365) Operating profit (loss) 56,037 31,041 (15,749) 71,329 - --------------------------------------------------------------------------------- 39 Weeks Ended: January 27, 2002 ----------------------- Sales $ 5,138,467 $ 988,973 $ - $ 6,127,440 Intersegment sales - (734,388) - (734,388) Operating profit (loss) 138,608 249,413 (44,184) 343,837 January 28, 2001 ----------------------- Sales $ 4,153,498 $ 912,315 $ - $ 5,065,813 Intersegment sales - (676,196) - (676,196) Operating profit (loss) 80,648 214,928 (32,324) 263,252
General corporate expenses for the 13 and 39 weeks ended January 28, 2001 include $7.5 million of expenses related to the attempted merger with IBP, inc. (IBP) and the subsequent sale of the common stock of IBP. 8-18 (6) On December 6, 2001, the Company entered into a five-year $750.0 million revolving credit agreement. The borrowings are prepayable and bear interest, at the Company's option, at variable rates based on margins over the Federal Funds rate or short-term Eurodollar rates. The margins are a function of the Company's leverage. In connection with this refinancing, the Company repaid all of its borrowings under its previous $650.0 million revolving credit facility, which was terminated. On October 23, 2001, the Company issued $300.0 million of 8.0% Senior Notes, Series A, due 2009. The net proceeds from the sale of the unsecured notes were used to repay indebtedness under the Company's revolving credit facility. In fiscal 2002, Animex S.A., the Company's Polish subsidiary, entered into a US$100.0 million Senior Secured Facilities Agreement (Facility). The proceeds of the financing were used to repay existing borrowings and to provide working capital financing. This Facility is secured by a pledge of the operating assets, accounts receivable and inventories of Animex and its subsidiaries. In the second quarter of fiscal 2002, the Company's Canadian subsidiary, Schneider Corporation (Schneider), entered into a CDN$65.0 million debenture with five institutional investors. The proceeds of this financing were used to repay existing borrowings and to provide working capital financing. The debenture obligations are secured by the fixed assets of Schneider. (7) In October 2001, the Company completed the acquisition of Packerland and its affiliated companies for approximately 6.3 million shares of the Company's common stock and the assumption of $124.8 million of debt and other liabilities. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of the acquisition was recorded as intangible assets. Prior to the acquisition, Packerland had annual sales of approximately $1.4 billion. In June 2001, the Company completed the acquisition of Moyer for approximately $90.5 million in cash plus assumed debt. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of the acquisition was recorded as intangible assets. Prior to the acquisition, Moyer had annual sales of approximately $600 million. Had the acquisitions of Packerland and Moyer occurred at the beginning of fiscal 2001, sales would have been $6.3 billion for the 39 weeks ended January 27, 2002, and $2.0 billion and $5.8 billion for the 13 ad 39 weeks ended January 28, 2001, respectively. There would not have been a material effect on net income or net income per share for the 39 weeks ended January 27, 2002, or the 13 and 39 weeks ended January 28, 2001. In September 2001, the Company acquired virtually all the remaining common shares of Schneider, for approximately 2.8 million shares of the Company's common stock. Prior to this transaction, the Company owned approximately 63% of the outstanding shares of Schneider. The balance of the purchase price in excess of the fair value of the assets acquired and the liabilities assumed at the date of acquisition was recorded as intangible assets. In July 2001, the Company acquired substantially all of the assets and business of Quik-to-Fix for approximately $31.0 million in cash. Prior to the acquisition, Quik-to-Fix had annual sales of approximately $140 million. During the third quarter of fiscal year 2001, Schneider increased its investment in Saskatchewan-based Mitchell's Gourmet Foods Inc. (Mitchell's) to 54%. Prior to the third quarter of fiscal year 2001, the Company had used the equity method of accounting for Mitchell's. For the fiscal year ended October 2000, Mitchell's had sales of approximately $190 million. These acquisitions were accounted for using the purchase method of accounting, and accordingly, the accompanying financial statements include the financial position and results of operations from the dates of acquisition. Had the acquisitions of Quik-to-Fix, Mitchell's and the remaining shares of Schneider occurred at the beginning of the fiscal years in which they were acquired, there would not have been a material effect to sales, net income or net income per share for the 13 or the 39 weeks ended January 27, 2002 or January 28, 2001. (8) On April 30, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and No. 138. SFAS 133 requires that all derivative instruments be reported on the Company's 9-18 Consolidated Balance Sheet at fair value and provides guidance on the accounting treatment of gains and losses from derivatives based on the type of hedging transaction. As substantially all of the Company's derivatives are considered cash flow hedges, as defined in SFAS 133, changes in the fair value of derivatives are recorded in other comprehensive income or current earnings depending on whether the derivative is designated as a hedge transaction and the effectiveness of the hedging relationship. Gains and losses on derivative instruments reported in other comprehensive income are recognized in earnings in the period in which earnings are impacted by the underlying hedged item. The ineffective portions of cash flow hedges are recognized in current period earnings. The Company uses futures and option contracts for the purpose of hedging its exposure to changes in the cost of raw materials, including live hogs and grains, and to changes in the market prices for the sale of live hogs when management determines the conditions are appropriate for such hedges. Substantially all of the Company's products are produced from commodity-based raw materials, corn and soybean meal in the Hog Production Group (HPG) and live hogs in the Meat Processing Group (MPG). The cost of corn and soybean meal and live hogs are subject to wide fluctuations due to unpredictable factors such as weather conditions, economic conditions, government regulation and other unforeseen circumstances. In addition, the unpredictability of raw material costs in the MPG limits the Company's ability to forward price fresh and processed meat products without the use of commodity contracts through a program of price-risk management. The Company uses price-risk management techniques to engage in forward sales contracts, where prices for future deliveries are fixed, by purchasing (or selling) commodity contracts to reduce or eliminate the effect of fluctuations in future raw material costs. The particular hedging methods employed and the time periods for the contracts depend on a number of factors, including the availability of adequate contracts for the respective periods and commodity hedged. The Company attempts to closely match the contract expiration periods with the dates for product sale and delivery. In accordance with the provisions of SFAS No. 133, the Company recorded a transition adjustment on April 30, 2001 (the first day of the Company's current fiscal year), of $12.7 million after-tax, cumulative effect loss in Accumulated Other Comprehensive Loss and a net decrease in current assets of $20.6 million to recognize the fair value of derivative instruments that are designated as hedge transactions. For the 13 weeks and the 39 weeks ended January 27, 2002, $14.5 million and $5.3 million of net derivative gains were reclassified from Accumulated Other Comprehensive Loss into earnings and $1.0 million and $0.1 million of net losses related to cash flow hedge ineffectiveness were recognized in earnings, respectively. As of January 27, 2002, the net accumulated loss on derivative instruments in Accumulated Other Comprehensive Loss was $2.0 million. The Company expects that substantially all of these losses will be reclassified into earnings over the next twelve months as the underlying hedged transactions are realized. At January 27, 2002, the maximum maturity date for any commodity contract outstanding was 12 months. (9) In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. The Statement requires that acquired goodwill and other intangible assets are no longer periodically amortized into income, but are subject to an annual impairment measurement. The Company has elected early adoption of SFAS 142. In accordance with SFAS 142, the 13 weeks and 39 weeks ended January 27, 2002 do not include amortization of acquired goodwill and certain other intangible assets. The Company has allocated goodwill to its reporting units and performed an assessment of potential capital impairment. Management does not currently believe that there is significant exposure to a loss from impairment of acquired goodwill and other intangible assets. Had SFAS 142 been effective in the previous fiscal year, net income and diluted net income per common share, excluding the gain on the sale of IBP common stock, would have been $39.5 million, or $.36 10-18 per diluted share, and $132.9 million, or $1.20 per diluted share, for the 13 weeks and 39 weeks ended January 28, 2001, respectively. (10) On August 29, 2001, the board of directors of the Company declared a 2-for-1 stock split of the Company's common stock effective September 14, 2001. Share amounts presented in the Consolidated Condensed Balance Sheets reflect the actual share amounts issued and outstanding for each period presented. All per common share amounts have been restated to reflect the effect of the stock split. In addition, on August 29, 2001, the Company's shareholders approved an amendment to the articles of incorporation providing for an increase in the authorized shares of common stock from 100 million to 200 million. (11) In February 2002, the Company's Board of Directors approved a new 2.0 million share repurchase program. Including this new program, the Company has an authorization to purchase 2.6 million shares as of March 8, 2002. 11-18 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 primarily eight wholly owned domestic meat processing subsidiaries and four international meat processing entities. The HPG consists primarily of three hog production operations located in the United States and certain joint ventures outside the United States. RESULTS OF OPERATIONS - --------------------- The following acquisitions affect the comparability of the results of operations for the 13 and 39 weeks ended January 27, 2002 and January 28, 2001: In October 2001, the Company completed the acquisition of Packerland Holdings, Inc. (Packerland) and its affiliated companies for approximately 6.3 million shares of the Company's common stock and the assumption of $124.8 million of debt and other liabilities. Prior to the acquisition, Packerland had annual sales of approximately $1.4 billion. In June 2001, the Company completed the acquisition of Moyer Packing Company (Moyer) for approximately $90.5 million in cash and assumed debt. Prior to the acquisition, Moyer had annual sales of approximately $600.0 million. In September 2001, the Company acquired virtually all the remaining common shares of Schneider Corporation (Schneider), for approximately 2.8 million shares of the Company's common stock. Prior to this transaction, the Company owned approximately 63% of the outstanding shares of Schneider. In July 2001, the Company acquired substantially all of the assets and business of Gorges/Quik-to-Fix Foods, Inc. (Quik-to-Fix) for approximately $31.0 million in cash. Prior to the acquisition, Quik-to-Fix had annual sales of approximately $140.0 million. During the third quarter of fiscal year 2001, Schneider increased its investment in Saskatchewan-based Mitchell's Gourmet Foods Inc. (Mitchell's) to 54%. Prior to the third quarter of fiscal year 2001, the Company had used the equity method of accounting for Mitchell's. For the fiscal year ended October 2000, Mitchell's had sales of approximately $190.0 million. These acquisitions were accounted for using the purchase method of accounting and, accordingly, the accompanying financial statements include the results of operations from the dates of acquisition. Consolidated Sales in the 13 and 39 weeks ended January 27, 2002 increased by $549.0 million, or 35.7%, and by $1.0 billion, or 22.9%, respectively, from the comparable prior year periods. The increases in sales are due to the incremental sales of acquired businesses and increases in average unit selling prices in the MPG of 4.5% and 7.4% for the 13 and 39 weeks ended January 27, 2002, respectively. See the following sections for comments on sales changes by business segment. 12-18 Gross profit in the 13 and 39 weeks ended January 27, 2002 increased $89.3 million, or 38.9%, and $163.5 million, or 23.6%, respectively, from the comparable prior year periods. The current year gross profit increases are primarily the result of a favorable operating environment for fresh pork, a strong emphasis on branded and value-added categories, the incremental gross profit of acquired businesses and lower raising costs in the HPG. Selling, general and administrative expenses in the 13 and 39 weeks ended January 27, 2002 increased $40.2 million, or 32.3%, and $71.0 million, or 21.1%, respectively, from the comparable prior year periods. The increases were primarily due to the inclusion of expenses of acquired businesses, increased advertising and promotion of branded fresh and processed meats in both periods, and a $5.0 million loss incurred in the current 39-week period as a result of a fire at a Circle Four farm in Utah. These increases were partially offset by $7.5 million of expenses related to the attempted merger with IBP, inc. (IBP) and the subsequent sale of IBP common stock in the third quarter of 2001 and the adoption of the Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) in the first quarter of 2002. Had SFAS 142 been effective in the previous fiscal year, selling, general and administrative expenses would have been reduced by $2.3 million and $6.5 million for the 13 weeks and 39 weeks ended January 28, 2001, respectively. Depreciation expense in the 13 and 39 weeks ended January 27, 2002 increased $5.8 million, or 18.5%, and $10.3 million, or 11.1%, respectively, from the comparable periods a year earlier. The increases are primarily due to the inclusion of depreciation expense of acquired businesses. Interest expense increased $5.9 million, or 26.1%, and $0.4 million, or 0.5%, in the 13 and 39 weeks ended January 27, 2002, respectively, compared to the same periods last year. The increase in the 13-week period is due to the inclusion of assumed debt of acquired businesses. For the 39-week period, interest remained relatively flat despite increased total debt due to a decrease in average interest rates on the revolving credit facility and other variable rate debt. In the third quarter of fiscal 2001, the Company sold 6.7 million shares of IBP common stock resulting in a nonrecurring, pretax gain of $76.5 million, for the 13 and 39 weeks ended January 28, 2001. In the first quarter of fiscal 2002, the Company sold 2.9 million shares of IBP common stock resulting in a nonrecurring, pretax gain of $7.0 million for the 39 weeks ended January 27, 2002. The effective income tax rate for the 13 and 39 weeks ended January 27, 2002 increased to 37.5% and 38.5%, respectively, compared with 35.4% and 36.7% in both prior year periods on increased overall earnings at higher marginal rates and an increase in the valuation allowance at certain foreign operations. The Company had a valuation allowance of $24.0 million related to income tax assets as of January 27, 2002 primarily related to losses in foreign jurisdictions for which no tax benefit was recognized. Reflecting the foregoing factors, net income increased to $54.5 million, or $.48 per diluted share, and $170.7 million, or $1.56 per diluted share, in the 13 and 39 weeks ended January 27, 2002, respectively. This compares to net income of $37.2 million, or $.34 per diluted share, and $126.3 million, or $1.14 per diluted share, in the comparable periods ended January 28, 2001, respectively. Current year amounts exclude an after-tax gain on the sale of IBP common stock, and an after-tax loss incurred as a result of a fire at a Circle Four farm in Utah. Including these items, net income totaled $171.9 million, or $1.57 per diluted share, for the 39 weeks ended January 27, 2002. Prior year amounts exclude a nonrecurring gain, net of expenses and taxes, of $43.6 million, or $.39 per diluted share, for the 13 and 39 weeks ended January 28, 2001. Meat Processing Group Sales in the MPG segment increased $543.3 million, or 36.9%, and $985.0 million, or 23.7%, in the 13 and 39 weeks ended January 27, 2002, respectively, from the comparable prior year periods. These increases are due to a 25.9% and 15.1% increase in fresh and processed meats sales volume and a 4.5% and 7.4% increase in average unit selling prices in the 13 and 39 weeks ended January 27, 2002, 13-18 respectively, from the comparable prior year periods. The sales tonnage increases are primarily related to the inclusion of sales of acquired businesses, partially offset by the prior year sale of a Canadian fresh pork plant. Included in the sales tonnage of acquired businesses is 385.1 million and 514.0 million pounds of fresh beef from the Company's newly formed beef processing division, for the 13 and 39 weeks ended January 27, 2002, respectively. This division was formed after the acquisitions of Moyer in June 2001 and Packerland in October 2001. In the base business, fresh pork and processed meats volumes remained relatively flat for the 13-week period, while fresh pork volumes have increased 3.7% and processed meats volumes have remained flat for the 39-week period. MPG operating profit in the 13 and 39 weeks ended January 27, 2002 increased to $100.3 million from $56.0 million and to $138.6 million from $80.6 million, respectively, from the comparable prior year periods. These increases are due to higher margins in both fresh and processed meats and the inclusion of the beef processing division, partially offset by increased advertising and promotional costs. Fresh meat margins increased resulting from the continued emphasis on the branded, value-added fresh pork categories. Increased processed meat margins reflected higher pricing and improved product mix. Hog Production Group HPG sales for the 13 and 39 weeks ended January 27, 2002 increased 1.4% and 8.4%, respectively, from the comparable prior year periods. The increase for the 13-week period is due to an increase in head sold partially offset by a decrease in unit selling prices for hogs. For the 39-week period, head sold and unit selling prices for hogs both increased. Most HPG sales represent inter-segment sales to the MPG and, therefore, are eliminated in the Company's Consolidated Condensed Statements of Income. Operating profit in the 13 weeks ended January 27, 2002 remained relatively flat at $30.7 million compared to $31.0 million in the prior year due to lower live hog prices offset by the impact of favorable commodity hedging contracts and lower raising costs. For the 39 weeks ended January 27, 2002, HPG operating profit improved to $249.4 million as compared to $214.9 million from the comparable prior year period. Operating profit improved in the 39-week period due to higher live hog prices and lower raising costs, partially offset by a loss incurred as a result of a fire at a Circle Four farm in Utah. Included in the operating profit for the 39 weeks ended January 28, 2001 is a $7.0 million gain for insurance settlements for the recovery of losses incurred, in hog production operations, related to Hurricane Floyd. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash provided by operations totaled $317.9 million for the 39 weeks ended January 27, 2002 compared to $256.7 million in the same period last year. The increase is due to higher earnings, net of a gain on the sale of IBP common stock. Cash used in investing activities increased to $199.9 million for the 39 weeks ended January 27, 2002 compared to $5.6 million for the comparable prior year period. The increase is due to the acquisitions of Moyer and Quik-to-Fix in the current period and the prior year period sale of IBP stock less the cost of shares purchased. Capital expenditures totaled $101.8 million in the current period primarily related to fresh and processed meats expansion projects and plant improvements. As of January 27, 2002, the Company has definitive commitments of $106.3 million for capital expenditures primarily for processed meat expansion and production efficiencies. Cash used in financing activities was $79.0 million in the current 39-week period. In October 2001, the Company issued $300.0 million of 8.0% Senior Notes, Series A, due 2009. The net proceeds from the sale of the unsecured notes went to repay indebtedness under the Company's revolving credit facility. This repayment was offset by borrowings on the revolving credit facility to fund net investment activity and to repurchase 4.2 million shares of the Company's common stock. The Company's Polish subsidiary, Animex S.A., entered into a US$100.0 million Senior Secured Facilities Agreement (Facility) during the 14-18 period. The proceeds of the financing were used to repay existing borrowings and to provide working capital financing. The Facility is secured by a pledge of the operating assets, accounts receivable and inventories of Animex and its subsidiaries. Schneider entered into a CDN$65.0 million debenture with five institutional investors, during the period. The proceeds of this financing were used to repay existing borrowings and to provide working capital financing. The debenture obligations are secured by the fixed assets of Schneider. On December 6, 2001, the Company entered into a five-year $750.0 million revolving credit agreement. The borrowings are prepayable and bear interest, at the Company's option, at variable rates based on margins over the Federal Funds rate or short-term Eurodollar rates. The margins are a function of the Company's leverage. In connection with this refinancing, the Company repaid all of its borrowings under its previous $650.0 million revolving credit facility, which was terminated. Management believes that through internally generated funds and access to global credit markets, funds are available to adequately meet the Company's current and future operating and capital needs. In February 2002, the Company's Board of Directors approved a new 2.0 million share repurchase program. As of March 8, 2002, 15.4 million shares of the Company's common stock have been repurchased under the original 16.0 million share repurchase program. Including the new program, the Company currently has an authorization to purchase 2.6 million shares. FORWARD-LOOKING STATEMENTS - -------------------------- This Form 10-Q may contain "forward-looking" information within the meaning of the federal securities laws. The forward-looking information may include statements concerning the Company's outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. The forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements. These risks and uncertainties include the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations, the availability and prices of live hogs, raw materials and supplies, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, operating efficiencies, access to capital, the cost of compliance with environmental and health standards, adverse results from on-going litigation, legislative changes and other actions of domestic and foreign governments. 15-18 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 2001, in April 2000, the Company and one of its subsidiaries were named as defendants, along with IBP, inc., in a civil action filed in the United States District Court for the Middle District of Georgia. The case was filed by four named plaintiffs on behalf of a putative nationwide class of hog producers who from 1994 to the present produced and sold finished hogs to defendants on a spot, auction or cash market basis. The plaintiffs contended that the defendants violated the Packers and Stockyards Act of 1921 (the PSA) by reason of the defendants' engaging in various captive supply arrangements for the procurement of hogs for processing. The Company moved the Georgia court to dismiss the case for lack of jurisdiction or in the alternative transfer it to the United States District Court for the Eastern District of Virginia, where the Company is headquartered. On March 30, 2001, the Georgia court granted the Company's motion to transfer. On May 11, 2001, the Company filed a motion to dismiss the case for failure to state a claim upon which relief can be granted, arguing that the alleged captive supply arrangements do not violate the PSA and are consistent with similar vertical integration in the poultry industry. The Virginia court denied the Company's motion to dismiss by order dated September 19, 2001. However, in light of the issues raised by that motion regarding the scope of the PSA, the Virginia court required the parties to comply with a schedule for focused discovery relating to the plaintiffs' allegation that captive hog procurement practices violate the PSA and required prompt briefing on a motion for summary judgment by the defendants. On November 21, 2001, a hearing was held on the defendants' summary judgment motion. On January 2, 2002, the Virginia court granted the defendants' summary judgment motion and dismissed the case. The plaintiffs filed a timely notice of appeal to the Fourth Circuit Court of Appeals but subsequently voluntarily withdrew that appeal, bringing an end to this suit. As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 2001, in March 2001, Eugene C. Anderson and other individuals filed what purports to be a class action in the United States District Court for the Middle District of Florida, Tampa Division, against the Company and Joseph W. Luter, III (the Anderson Suit). The Anderson Suit purports to allege violations of various laws, including the Racketeer Influenced and Corrupt Organizations Act, based on the Company's alleged failure to comply with environmental laws. The complaint seeks treble damages that are unspecified. The plaintiffs filed an amended complaint on May 1, 2001. On February 13, 2002, the District Court granted the Company's and Mr. Luter's motion to dismiss, giving the plaintiffs 30 days within which to file an amended complaint. The Company continues to believe that the Anderson Suit is baseless and without merit and will continue to defend the suit vigorously. Item 5. Other Information On October 23, 2001, the Company issued $300.0 million 8% Senior Notes, Series A, due 2009, in a transaction exempt from the registration requirements of the Securities Act. Accordingly, these senior notes may not be reoffered, resold, or otherwise transferred unless registered under the Securities Act or any applicable securities law or unless an applicable exemption from the registration and prospectus delivery requirements of the Securities Act is available. In connection with the sale of the senior notes, the Company agreed to file with the Securities and Exchange Commission on or before 90 days after the issuance of the senior notes a registration statement registering exchange notes to be offered in exchange for the senior notes. The Company also agreed that the notes to be registered, known as the exchange notes, would generally contain the same terms as the senior notes, except for provisions restricting their transfer. Failure to complete the exchange offer or certain alternative transactions within the time periods the Company agreed to when the senior notes were issued would result in an increase in the amount of interest on the senior notes until the Company was able to complete the exchange offer or one of the alternative transactions. 16-18 On November 30, 2001, the Company filed a registration statement for the exchange notes. The registration statement was declared effective on December 7, 2001, and the exchange offer proceeded with a January 8, 2002 expiration date. The exchange offer transaction closed on January 16, 2002, with $298.7 million principal amount of the senior notes being properly tendered and exchanged for a like amount of registered exchange notes. Since the exchange offer was completed within the agreed upon time period, the Company will not be subject to the imposition of any additional interest. A measure to ban packer ownership of livestock passed in the U.S. Senate as part of its vote on the new farm bill. The measure, which was introduced by Sen. Tim Johnson (D. S.D.) would prohibit packers from owning live cattle and hogs for more than 14 days prior to slaughter. The House version of the new farm bill does not include a packer ban. Differences between the Senate and House versions of the bill are currently being reviewed by a conference committee. Both Sen. Johnson, the amendment's sponsor, and Sen. Tom Daschle (D. S.D.), the Senate Majority Leader, have acknowledged publicly that they do not believe the packer ban will become law. The House conferees are solidly aligned against the Johnson amendment. If the packer ban were to become law, it is likely that it would have a material impact on the Company's financial statements. However, the Company does not expect the bill eventually adopted by the conference committee to include the packer ban and therefore does not believe the Johnson amendment poses any significant threat to the Company's operations. Item 6. Exhibits and Reports on Form 8-K. A. Exhibits Exhibit 3.1 - Articles of Amendment effective August 29, 2001 to the Amended and Restated Articles of Incorporation, including the Amended and Restated Articles of Incorporation of the Company, as amended to date (incorporated by reference to Exhibit 3.1 to the Company's Amendment No.1 to Form 10-Q Quarterly Report filed with the Securities and Exchange Commission (SEC) on September 12, 2001). Exhibit 3.2 - Amendment to the Bylaws adopted May 30, 2001, including the Bylaws of the Company, as amended to date (incorporated by reference to Exhibit 2 to the Company's Registration Statement on Form 8-A filed with the SEC on May 30, 2001). B. Reports on Form 8-K. None. 17-18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMITHFIELD FOODS, INC. /s/ DANIEL G. STEVENS - --------------------- Daniel G. Stevens Vice President and Chief Financial Officer /s/ JEFFREY A. DEEL - -------------------- Jeffrey A. Deel Corporate Controller Date: March 13, 2002 18-18 -----END PRIVACY-ENHANCED MESSAGE-----