3. Seeing
is Smithfield Foods is the world’s largest pork processor and
hog producer, with revenues exceeding $11 billion in fiscal 2005.
The company raises 14 million hogs domestically each year for a 14 percent U.S.
market share, and annually processes 27 million hogs, representing 27 percent of
the U.S. market. With a large collection of well-known brands, approximately half
the company’s pork revenues come from value-added, further processed products.
Smithfield is also the fifth-largest U.S. beef processor. The company processes
approximately two million cattle annually, which represents a six percent share of
the U.S. market. Outside the United States, Smithfield owns subsidiaries in France,
Poland, Romania and the United Kingdom, and has joint ventures or major invest-
ments in Brazil, Mexico, Spain and
believing
China. Smithfield employs more
than 51,000 people worldwide.
FINANCIAL HIGHLIGHTS
May 2, 2004% April 27, 2003%
May 1, 2005%
FISCAL YEARS ENDED (IN MILLIONS, EXCEPT PER SHARE DATA)
$ 9,267.0% $ 7,135.4%
$ 11,354.2%
Sales
162.7% 11.9%
296.2%
Income from continuing operations
227.1% 26.3%
296.2%
Net income
1.46% .11%
2.64%
Income from continuing operations per diluted share
2.03% .24%
2.64%
Net income per diluted share
111.7% 109.8%
112.3%
Weighted average diluted shares outstanding
ADDITIONAL INFORMATION
$ 135.4% $ 167.1%
$ 201.6%
Capital expenditures
167.5% 151.5%
189.6%
Depreciation expense
1,056.6% 833.0%
1,445.6%
Working capital
Total debt(1) 1,801.5% 1,642.3%
2,289.1%
1,598.9% 1,299.2%
1,901.4%
Shareholders’ equity
Total debt to total capitalization(2) 53.0% 55.8%
54.7%
1 TOTAL DEBT IS EQUAL TO NOTES PAYABLE AND LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS INCLUDING CURRENT PORTION.
2 COMPUTED USING TOTAL DEBT DIVIDED BY TOTAL DEBT AND SHAREHOLDERS’ EQUITY.
1
4. Financial
strength
In fiscal year 2005, Smithfield
reported record net income
of $296.2 million, or $2.64 per diluted share, up 30 percent from the prior
year. Sales rose to a new high-water mark of $11.4 billion, a 23 percent increase
over fiscal 2004. By any measure – revenues, earnings and especially share price
appreciation – over the past 30 years, Smithfield’s growth has been extraordinary.
Since April 1975, the value of a share of Smithfield common stock has grown an
average of more than 25 percent annually. Over any appreciable holding period,
whether 25 years, 20 years,10 years or even five years,
1975-2005
Smithfield has been an outstanding investment.
1 FINANCIAL HIGHLIGHTS
2 FINANCIAL STRENGTH, 1975-2005
11 LETTER TO SHAREHOLDERS
18 THIRTY YEARS OF PROGRESS
23 SMITHFIELD FOODS TODAY, YEAR IN REVIEW
30 OUR COMMITMENT TO STEWARDSHIP
32 FINANCIAL SUMMARY
34 FINANCIAL CONTENTS
83 MANAGEMENT BOARD
84 CORPORATE OFFICERS
85 DIRECTORS
86 CORPORATE INFORMATION
2
5. SALES (IN MILLIONS)
’05 — $11,354.2
’04 — 9,267.0
’03 — 7,135.4
’02 — 6,604.9
’01 — 5,123.7
’00 — 4,511.0
’99 — 3,550.0
’98 — 3,867.4
’97 — 3,870.6
’96 — 2,383.9
’95 — 1,526.5
’94 — 1,403.5
’93 — 1,113.7
’92 — 1,036.6
’91 — 1,071.8
’90 — 853.4
’89 — 774.8
’88 — 916.3
’87 — 1,046.6
’86 — 864.3
’85 — 669.1
’84 — 541.6 AVERAGE SALES (IN MILLIONS)
’83 — 570.6
’82 — 344.4
’81 — 218.3 ’05 — $11,354.2
(1)
’80 — 61.1 ’00-’04 — 6,528.4
’79 — 192.9 ’95-’99 — 3,039.7
’78 — 170.8 ’90-’94 — 1,095.8
’77 — 139.1 ’85-’89 — 854.2
(1)
’76 — 131.0 ’80-’84 — 400.6
(2) (2)
’75 — 127.0 ’75-’79 — 152.2
(1) Includes the 17-week period ended April 27, 1980.
(2) Current management assumed responsibility on April 8, 1975.
The following may contain “forward-looking information” within the meaning of 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 uncertain-
ties that could cause the actual results to differ materially from those expressed in, or implied by, the statements. These risks and uncertainties include
availability and prices of livestock, raw materials and supplies, livestock costs, livestock disease, food safety, product pricing, the competitive environment
and related market conditions, ability to make and successfully integrate acquisitions, operating efficiencies, access to capital, the cost of compliance
with environmental and health standards, adverse results from ongoing litigation and action of domestic and foreign governments and other risks and
uncertainties described herein.
3
6. (1) (2)
DILUTED EARNINGS PER SHARE
’05 — $2.64
’04 — 1.46
’03 — .11
’02 — 1.70
’01 — 1.95
’00 — .69
’99 — 1.09
’98 — .67
’97 — .58
’96 — .27
’95 — .46
’94 — .28
’93 — .05
’92 — .35
’91 — .50
’90 — .12
’89 — .15
’88 — .21
’87 — .14
’86 — .12
’85 — .04
(1) (2)
’84 — .03 AVERAGE DILUTED EARNINGS PER SHARE
’83 — .03
’82 — .02
’81 — .01 ’05 — $2.64
(3)
’80 — .02 ’00-’04 — 1.18
’79 — .05 ’95-’99 — .61
’78 — .05 ’90-’94 — .26
’77 — .02 ’85-’89 — .13
(3)
’76 — .01 ’80-’84 — .03
(4) (4)
’75 — .00 ’75-’79 — .03
(1) Diluted EPS from continuing operations before extraordinary loss and change in accounting
principles.
(2) FY02 & FY01 diluted EPS includes a net of tax gain $.04 and $.41 per diluted share,
respectively, related to the sale of IBP inc. common stock.
,
(3) Includes the 17-week period ended April 27, 1980.
(4) Current management assumed responsibility on April 8, 1975.
4
7. (1) (2)
INCOME FROM CONTINUING OPERATIONS (IN MILLIONS)
’05 — $296.2
’04 — 162.7
’03 — 11.9
’02 — 188.0
’01 — 214.3
’00 — 68.0
’99 — 89.6
’98 — 53.4
’97 — 44.9
’96 — 19.8
’95 — 31.9
’94 — 19.3
’93 — 3.3
’92 — 21.8
’91 — 28.7
’90 — 7.1
’89 — 9.8
’88 — 15.2
’87 — 9.7
’86 — 9.2
’85 — 2.9
(1) (2)
’84 — 2.3 AVERAGE INCOME FROM CONTINUING OPERATIONS (IN MILLIONS)
’83 — 2.9
’82 — 1.6
’81 — 0.9 ’05 — $296.2
(3)
’80 — 1.2 ’00-’04 — 129.0
’79 — 3.5 ’95-’99 — 47.9
’78 — 3.9 ’90-’94 — 16.0
’77 — 1.6 ’85-’89 — 9.4
(3)
’76 — 0.9 ’80-’84 — 2.1
(4) (4)
’75 — (0.2) ’75-’79 — 1.9
(1) Income from continuing operations before extraordinary loss and change in accounting
principles.
(2) FY02 & FY01 income from continuing operations includes a net of tax gain of $4.2 and
$45.2, respectively, related to the sale of IBP inc. common stock.
,
(3) Includes the 17-week period ended April 27, 1980.
(4) Current management assumed responsibility on April 8, 1975.
5
9. (1) EBITDA represents income from continuing operations before interest expense, income taxes, depreciation and amortization and gains
not associated with normal operations. EBITDA is not intended to be a substitute for measures under U.S. generally accepted accounting
principles, and the items excluded in determining EBITDA are significant components in understanding and assessing financial performance.
EBITDA should not be considered as an alternative to operating earnings, income from continuing operations, net income or net cash pro-
vided by operating activities or as a measure of our ability to meet our cash needs.
(2) See EBITDA reconciliation below.
(3) Includes the 17-week period ended April 27, 1980.
(4) Current management assumed responsibility on April 8, 1975.
(5) Income from continuing operations before extraordinary loss and change in accounting principles.
(6) FY02 & FY01 income from continuing operations includes a net of tax gain of $4.2 and $45.2, respectively, related to the sale of IBP,
inc. common stock.
(3)
FY90 FY89 FY88 FY87 FY86 FY85 FY84 FY83 FY82 FY81) FY80 FY79 FY78 FY77 FY76 FY75)
FY93 FY92 FY91
$ 7.1 $ 9.8 $15.2 $ 9.7 $ 9.2 $ 2.9 $ 2.3 $ 2.9 $ 1.6 $0.9) $1.2 $3.5 $3.9 $1.6 $0.9 $(0.2)
$ 3.3 $21.8 $28.7
3.6 5.4 10.4 7.7 9.2 3.4 1.3 1.8 0.3 (0.4) 1.0 2.7 1.5 1.7 1.0 (0.1)
1.7 11.7 14.9
6.3 4.1 4.7 5.6 6.0 6.0 4.5 6.6 4.0 1.9) 0.5 1.6 1.2 1.4 1.6 1.8)
6.2 4.1 7.7
10.2 8.8 8.9 8.5 7.6 7.0 5.9 5.8 4.1 2.5) 0.7 1.8 1.4 1.2 1.1 1.0)
20.1 13.1 11.6
– – – – – – – – – –) – – – – – –)
– – –
– – – – – – – – – –) – – – – – –)
– – –
$27.2 $28.1 $39.2 $31.5 $32.0 $19.3 $14.0 $17.1 $10.0 $4.9) $3.4 $9.6 $8.0 $5.9 $4.6 $ 2.5)
$31.3 $50.7 $62.9
7
10. STOCK PRICE VS. S&P 500
4000%
3500%
3000%
2500%
2000%
1500%
1000%
500%
0
’75
’76
’77
’78
’79
’80
’81
’82
’83
’84
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
■ Smithfield Foods, Inc.
■ S&P 500
Measured from April 8, 1975 through April 29, 2005. Includes dividends.Adjusted for spin-offs and split-offs. Stock prices derived from
public sources. Compiled and computed by a third party on a consistent basis.
8
11. ACQUISITIONS (IN CALENDAR YEARS)
Vertical Integration
Carroll’s Foods 1999
Murphy Farms 2000
Vall, Inc. 2002
Alliance Farms 2003
MF Cattle Feeding 2004
Five Rivers Ranch 2005
International Growth (1)
Cattle Feeding JV
1998
SBS (France)
1998
Schneider (Canada)
1999
Animex (Poland)
1999
SFGP (France)
2000
Mitchell’s (Canada)
Domestic Growth
2000
Norson (Mexico JV)
2002
AFG (China JV)
1981
Gwaltney 2003
Smithfield Foods Ltd. (UK)
1984
Patrick Cudahy 2004
Agrotorvis (Romania)
1985
Esskay 2004
Campofrío (Spain)
1992
Valleydale acquired 22% stake
1995
John Morrell 2004
Jean Caby (France)
1996
Lykes Meat Group 2004
Morliny (Poland)
1998
North Side Foods 2004
Comtim Group (Romania)
2001
Quik-to-Fix
2001
Moyer
2001
Packerland
2002
Stefano Foods
2003
Farmland
2003
Cumberland Gap
(1) Five Rivers is a joint venture between the company’s MF Cattle Feeding operations and ContiBeef Cattle Feeding operations formed
in May 2005.
9
13. TO OUR SHAREHOLDERS
W e are pleased to report record profits for fiscal 2005 of
$296.2 million, or $2.64 per diluted share. This compares
with $162.7 million, or $1.46 per diluted share in fiscal 2004.
These results, on a continuing operations basis, represent more than
a 50 percent increase in operating earnings over the next-best year in
the company’s history, excluding gains on the sale of marketable secu-
rities in fiscal 2001. What is even more satisfying is that these results
were achieved in a year when others in our industry have reported
lower earnings. This is a credit to our strong, vertically integrated
model that we have been building for nearly 20 years.
BUILDING THE BASE
This was another year in which we broadened our core business.
On the domestic front, we continued the march toward our goal of
utilizing all our superior raw material internally. In this regard, we
are in the midst of adding six new pre-cooked bacon lines, or a 50
percent increase in capacity, to further define our number-one posi-
tion in the bacon category and to convert more of our raw bellies
into further value-added products. This expansion, slated for both
the East coast and the Midwest, reflects the shift in the bacon busi-
ness from raw products to fully cooked, ready-to-eat products. We
are actively engaged and committed to this rapidly growing category.
11
14. In addition, Smithfield is building one of the largest cooked ham
plants in the world and within the next 18 months will have the
leading state-of-the-art ham cooking capacity in the world.
Both of these capital investments will benefit the company through
highly competitive, low-cost production.
On the beef side of the business, we have partnered with
ContiGroup Companies, Inc. in a joint venture to raise cattle. This
joint venture, Five Rivers Ranch Cattle Feeding LLC, which repre-
sents the combination of feedlots we purchased from ConAgra Foods
early in the fiscal year and a ContiGroup subsidiary, ContiBeef, is
now the largest feeder of cattle in the country. We believe that we
added substantial value to our feedlots by combining them with
those of ContiBeef. This joint venture should benefit Smithfield
over the long term as we integrate our beef operations and pursue
opportunities to expand in beef.
On the international front, the company completed the acquisition
of Jean Caby, in France, and Morliny, in Poland, thus expanding our
presence and market position in those two countries. In addition, we
increased our ownership in Campofrío, the largest processed meats
company in Spain, to 22 percent.
Finally, we have begun making significant investments in Romania,
both in pork processing and hog production, to create a strong pres-
ence in this rapidly emerging Central European country. We also
have entered into two joint ventures for cold storage and distri-
bution to give us access to all markets in the country. We are very
excited about the opportunities in Europe, particularly Eastern and
Central Europe. We believe that Romania is probably the best
opportunity available for growth for Smithfield today. The fact that
it is a net importer of meat while all market fundamentals would
point to it being a net exporter bodes well for us as we strive to
rebuild the pork industry in that country. Provided we continue to
receive the support of the Romanian government, Smithfield
expects to continue to make investments over the next several years
to become the major pork supplier in that country, and, in the longer
term, enable Romania to become a net exporter of pork.
12
15. CHANGING AS WE GROW
As the company continues to broaden and evolve, we are changing
the way in which we manage and direct the business. Our business
model now is more like an integrated pork operation, rather than
a processor and a producer. The benefit of this strategy was evident
this past year as we reacted to rising live hog prices and processed
more hogs in an environment where we would traditionally have
processed less. The model worked and it worked well. By taking
into consideration the financial, operational and sales impact on both
sides of the business, we were able to improve the combined prof-
itability of the complex. We intend to continue this strategy in fiscal
2006 and beyond.
Our size and scale both force us and enable us to take advantage
of strategies and opportunities we could not pursue in prior years.
The addition of Farmland Foods and the development of sales forces
in several foreign countries have allowed us to access new customers
and new markets that were never available to us before.
We have adopted a “flexible go-to-market” style that we believe
makes us more attractive to our customers. We go to them either as
one organization or as individual companies, depending upon their
needs and their desires. On the export front, we have established
a focused corporate sales team to help identify sales opportunities
across all markets and pursue them to maximize the value of our
various cuts. This resulted in 30 percent growth in pork exports last
year. We believe these two sales strategies are broadening and
strengthening our long-term relationships with both our domestic
and export customers.
CORPORATE RESPONSIBILITY
We have demonstrated again this year our commitment in the areas
of corporate governance and fiscal responsibility. This year we fully
adopted and implemented the requirements of Sarbanes-Oxley into
our accounting and financial reporting processes.We have fully com-
plied with the requirements of SOX and our external auditors have
attested to our compliance. This was not without cost: $6 million and
40,000 man hours of our internal staff. However, we will continue
to respond to all external requirements that will result in more
13
16. transparent financial reporting. We have always believed in full
and fair disclosure in our financial reporting process and we are
committed to ensuring that the company fully complies with all
corporate governance and financial reporting requirements.
THE FUTURE
We have spent the past 30 years building the company for the long
term, not being distracted by near-term industry dynamics. The
results of this past year were achieved without the benefit of prof-
itability in beef or any significant contribution from our investments
in Europe. Yet, both of these business sectors hold major promise
over the long term. We will continue to build a company that can
both stand the test of time and change with the times. The future is
extremely bright and we are as optimistic today as ever.
Thank you for your continued confidence.
Joseph W. Luter, III C. Larry Pope
Chairman and President and
Chief Executive Officer Chief Operating Officer
June 29, 2005
14
17. As
appeared in the
Wall Street Journal,
June 27,
2001
When Joe Luter realized that Smithfield’s long-term return to shareholders far exceeded the performance
of many of America’s most esteemed companies, and even outperformed legendary Berkshire Hathaway, he decided
to run this advertisement in The Wall Street Journal in June 2001.
16
18. Thirty years
The Return of Joe Luter, III The Beginning of Vertical Integration
◆ ◆ ◆ ◆
In 1974, Joseph W. Luter, III was asked to return to Smithfield Foods, the company founded By the late 1980’s, Smithfield faced a new challenge – there wasn’t enough local hog
production to meet its growing needs. Smithfield was trucking in more than 1.5 million hogs a
by his father and grandfather back in 1936. Joe III had successfully run the company from
year from the Midwest, an expensive endeavor. In addition, cyclical hog prices were squeezing
1966 to 1970, but then sold it to a holding company for $20 million and left soon afterwards.
its profits. And so, in 1987 Smithfield began to produce its own hogs through a joint venture
By 1974, however, the once-thriving little company had been driven into virtual bankruptcy
with Carroll’s Foods. This helped to provide a reliable supply of raw material, smoothed out
by its new owners, and the banks, rather than force the company into default, demanded a
the effects of cyclical prices, and ended the company’s dependence on Midwestern hogs.
management change.
Once more at the helm, Joe III wasted little time jettisoning layers of management, unneces-
The NPD Pig
◆ ◆
sary expenses and other businesses with which his successors had encumbered the company.
He refocused it solely on its pork business – in which it had always excelled – and devoted
In 1991, Joe Luter went to England to see a new breed of pigs. Developed by the National
his efforts to cutting costs, paying down debt and ensuring the company’s survival.
Pig Development Company, its meat was much leaner than traditional pork. The public
wanted a product that was consistent, high quality and low in fat, and this promised to be the
answer. Smithfield bought exclusive U.S. and Mexican rights to the NPD genetic line, and
The Acquisition of Gwaltney
◆ ◆ introduced 2,000 sows to its hog production operations, to breed an entirely new herd of
animals. By 1994, the first Smithfield Lean Generation Pork™ debuted in foodservice operations,
Within a few years, Smithfield Foods returned to financial health and even began to expand. and by 1996 was rolled out to supermarkets on a large scale. It revolutionized the industry
In 1981, it announced its first major acquisition – the purchase of Gwaltney of Smithfield, its and went on to enormous success.
local rival and a well-established pork products company. It was a bold move, leveraging up
at a time when interest rates were north of 20 percent. But it doubled Smithfield Foods’ size,
enlarged its family of brands, and catapulted the company from being a local packer and
Construction of the Tar Heel Plant
◆ ◆
processor to becoming a major regional force along the East coast of the United States.
In 1991, Smithfield Foods made another bold decision – to build the largest, most modern
fresh pork complex in the United States. At an initial cost of $77 million, the Tar Heel, North
The Acquisition of Patrick Cudahy
◆ ◆ Carolina, plant was the company’s biggest investment to date. It was close to Smithfield’s
processing operations, to the large Virginia and North Carolina hog producers – and to the
Although Smithfield was prospering, in 1984 the industry was going through hard times, with hungry East coast markets. Opened in October 1992, the massive new facility now processes
overcapacity, intense competition and weak consumer demand. In December 1984, Smith- up to 32,000 hogs per day. It ensured Smithfield of all the raw material it needed and trans-
field bought 80 percent of Patrick Cudahy, a 100-year-old Wisconsin company that was formed the company into the largest pork processor in the world.
losing money but famous for its sweet apple-wood smoked sausages, bacon and ham. For
$27.5 million, Smithfield acquired a huge manufacturing plant, valuable new products and
its first presence outside the East coast. In 1986, Smithfield acquired another distressed com-
pany, Baltimore’s Schluderberg-Kurdle Company, or Esskay, which nevertheless possessed a
valuable brand and loyal customers.
18 19
19. of progress
The Acquisition of John Morrell Later Acquisitions
◆ ◆ ◆ ◆
John Morrell & Co. was one of America’s largest and most established pork processors. From the late 1990’s through 2004, Smithfield accumulated numerous overlooked and often
Located in the heart of the Midwest, it possessed strong regional brands and extensive oper- unprofitable domestic companies that nevertheless owned valuable assets, and branched out
ations. But it had gone through a long period of losing money, and its parent company was into new areas such as foodservice and ready-to-eat. Acquisitions included Lykes Meat Group
eager to sell. In 1995, Smithfield agreed to take it over, paying $25 million in cash and $33 (bacon, hot dogs and processed meats), North Side Foods (pre-cooked sausages), RMH Foods
million in stock. John Morrell’s $1.5 billion in annual sales doubled Smithfield in size, made (branded pre-cooked pork and beef entrees), Quik-to-Fix Foods (fully cooked and ready-
it a truly national company – and eventually yielded substantial profits. to-cook foods for retail and foodservice), Stefano Foods (Italian convenience foods),
Cumberland Gap (hickory-smoked ham, sausage and specialty products), Vall, Inc. and Alliance
Farms (hog production).
International Expansion
◆ ◆
Entry into Beef
◆ ◆
Prior to 1998, Smithfield’s only international sales were its exports of premium, fresh pork to
Japan. But that quickly changed as Europe and other international markets opened vast new
In 2001, Smithfield acquired Moyer Packing Co., the largest beef processor in the eastern
possibilities for growth. In rapid succession, from 1998 to 2005, Smithfield purchased opera-
U.S., and Packerland Holdings, a large Midwestern processor. Together, these made the
tions and entered into partnerships in France, Poland, Canada (sold in 2004), China, Mexico,
Smithfield Beef Group the nation’s fifth-largest beef processor. The purchase of MF
Spain, the U.K., Brazil and Romania.Today, these offer tremendous opportunity as Smith-
Cattle Feeding in 2004, placed into a joint venture with ContiBeef in 2005, created the
field brings its expertise and its vision to markets in a world undergoing substantial industrial
largest cattle feeding company providing 1.6 million head of cattle per year to the U.S. beef
and economic change.
packing industry.
The Acquisition of Farmland
◆ ◆
The Creation of Murphy-Brown
◆ ◆
In October 2003, Smithfield made one of its largest acquisitions. It won Farmland Foods, the
Following its successful partnership with Carroll’s Foods, Smithfield forged another hog
sixth-largest U.S. pork processor, in a court-supervised bankruptcy auction. For $377 million
raising venture in 1992, Brown’s of Carolina. In 1998, hog prices plummeted and Smithfield’s
in cash and the assumption of $67 million in pension liabilities, Smithfield added Farmland’s
independent suppliers found themselves in financial straits. In 1999, Smithfield purchased
$1.6 billion in sales to its top line, which brought Smithfield close to the lofty milestone of
Carroll’s Foods and, shortly afterwards, Murphy Family Farms. This quadrupled Smithfield’s
$10 billion in annual sales.
capacity, and the combined hog raising entity, called Murphy-Brown, LLC, turned Smithfield
into the leading hog producer in the world.
20 21
20. As
appeared in the
Wall Street Journal,
February 17,
2005
Following up on the previous advertisement, Smithfield ran this ad in February 2005.
During the period between the two advertisements, the S&P 500 Index lost 2%, whereas Smithfield continued to
advance handsomely, gaining over 76%.
17
21. YEAR IN REVIEW
Smithfield
Foods Smithfield Foods has grown remarkably
over the years, to become a world leader in
our industry. But we are essentially the same company as always: quick
to seize opportunities, yet firmly focused on our long-term growth.
Our strategy of vertical integration maximizes efficiency and profitability.
We continue to make timely acquisitions and expand our geographic
presence. And, we are investing substantially for the future, emphasizing
higher margin, value-added products and pursuing promising market
today
opportunities both in the United States and internationally.
23
22. YEAR IN REVIEW (United States)
A
dramatic increase in hog production profitability in fiscal 2005 resulted in significant
bottom-line growth and record earnings, as live hog prices remained exceptionally
strong throughout the year. Record export demand, which increased by 30 percent,
combined with the company’s vertical integration strategy, fueled growth in the hog production
and pork segments. Although pork processing margins suffered from the impact of high hog prices,
the total pork complex delivered a strong performance.The company’s beef segment recorded a
modest loss, resulting from weak demand, closed export markets, tight cattle supplies and high
cattle costs.The company experienced a moderate increase in international segment earnings and
improved profitability in the “other” segment, led by strong results in the turkey business.
GROWING THROUGH ACQUISITIONS
Continuing in its tradition of growth through opportunistic acquisitions,
Smithfield purchased several companies, both domestically and internationally. In
the United States, the company acquired MF Cattle Feeding, Inc., with a one-time
feeding capacity of 357,000 head. Later in the year, ContiBeef LLC, a subsidiary of
ContiGroup Companies, Inc., and MF Cattle Feeding, Inc., announced the forma-
tion of a 50/50 joint venture cattle feeding business, Five Rivers Ranch Cattle
Feeding LLC, with a one-time total feeding capacity of 811,000 head. The joint
venture was formed subsequent to the fiscal year end, making the company the
number-one cattle feeder in the country. The purchase of a 60 percent interest in
Henry’s Hickory House, a manufacturer of premium packaged sliced bacon,
provided another destination for the company’s raw bellies.
On the international front, the company acquired Jean Caby S.A. in France, a pro-
ducer and marketer of cured and cooked processed meats, including deli cooked
hams, dry sausages, cocktail sausages and hot dogs. The company also acquired
Morliny S.A., a meat processor in Poland, and Comtim Group SRL, an integrated
meat processing company in Romania. The company purchased an additional seven
percent of the outstanding shares of Campofrío Alimentación, S.A., the largest pork
processor in Spain, raising its total interest in the company to 22 percent.
24
23. YEAR IN REVIEW (United States)
INCREASED HOG PRODUCTION EFFICIENCIES; EXPANSION IN EUROPE
Productivity and efficiency improvements, as well as cost containment, were the
main focuses of Murphy-Brown.The hog production businesses acquired in fiscal
2004 from Alliance Farms Cooperative Association and Farmland Foods, Inc. were
integrated to remove redundancy. At year end, Murphy-Brown had a total of
797,000 sows in the U.S., 46,000 in Poland, 14,400 in Romania, 76,000 in Mexico
and 14,400 in Brazil. On the international side, several new feed mills were installed
and in Eastern Europe the company focused on growing the herd with superior
genetics.
PREPARING FOR TOMORROW
Fiscal 2005 was a year of transition for Smithfield Packing. Looking toward the
future, the company repositioned its brands and packaging. Smithfield grew branded
fresh meat by four percent and boneless hams in the retail channel by nearly 40
percent, while case-ready and marinated fresh meat sales rose by nearly 45 percent.
In fiscal 2005, Smithfield developed a process verified program to provide trace-
ability and a point of differentiation with high-end retailers. The process verified
program is at the core of Smithfield’s fresh meat strategy for the future.
John Morrell maintained its customer base, added new retail and foodservice cus-
tomers and focused on growing its smoked sausage and fully cooked pork business.
Curly’s volume rose more than 15 percent. The company completed another
expansion to increase production of pre-cooked product, primarily pre-cooked ribs
and pulled pork.
CONCENTRATING ON VALUE-ADDED PRODUCTS
Farmland reported impressive results in many areas. Working on its strategy to
convert commodity pork to value-added products, the company decreased sales of
commodity pork by over two percent, while reporting double-digit sales increases
in categories such as hams, bacon and case-ready pork. Farmland’s niche exact-
weight product line, Nutrition Wise, grew over 10 percent. Farmland’s All Natural
line of fresh pork, which utilizes Smithfield Premium Genetics, was the fastest
growing product line in the company.
25
24.
25. YEAR IN REVIEW (United States)
Gwaltney enjoyed significant volume gains in hams, lunchmeat, hot dogs, sliced
lunchmeat and smoked sausage. Gwaltney was the top-selling brand of bacon, hot
dogs and sliced bologna in the mid-Atlantic and Southeast regions. The company
increased its processed meats business to large retailers in Mexico, including bacon
and other processed meats.
Patrick Cudahy focused on its cornerstone for future growth: expanding its
pre-cooked, pre-sliced and dried products. Bacon and dry sausage, Cudahy’s highest
margin products, proved to be the leading growth categories in fiscal
2005. Microwave bacon grew by 20 percent and dry sausage by 10 percent. The
company increased overall processed meats volume by three percent. Patrick
Cudahy continued to focus on its ethnic product lines, with substantial growth in
its La Abuelita and Pavone brands.
INCREASING PRODUCT OFFERINGS
North Side Foods installed a high speed, automated, flexible production line that
manufactures fully cooked links, meatballs, sausage toppings and other items at
throughput speeds of over 7,500 pounds per hour. This is one of the highest speed
lines available for these types of products, increasing hourly throughput by almost
500 percent. Increasing production of a broad range of fully cooked and ready-
to-cook products, Quik-to-Fix reported growth of nearly 16 percent of its fully
cooked entrees. Strengthening Smithfield’s higher value-added business, Cumber-
land Gap increased volumes of boneless smoked hams by 17 percent.
Smithfield RMH Foods Group continues to expand Smithfield’s influence in the
value-added, fully cooked category of the industry in both branded and private-label
offerings. This year marked the launch of Smithfield’s new brand of fully cooked
entrees under the Flavoré Brand, signaling the company’s commitment to inno-
vative, convenience-focused and value-added products. Stefano Foods introduced a
line of grilled panini sandwiches and experienced success with their portable
Hispanic line of products and expanded initiatives in national account business.
Smithfield Deli Group continued to grow several times faster than the industry with
strong performances in both branded and private-label products. The Deli Group’s
pre-cooked segment volume also experienced double-digit growth. Smithfield
Innovation Group launched a ten-item line of gourmet frozen dinners and began
development of 37 products for national QSR and full-service restaurant units. The
27
26. YEAR IN REVIEW (United States)
company completed the development of a 16-item deli product line and attended
several trade shows, supporting Smithfield operating companies in creative culinary
presentations.
MANAGING THE BUSINESS
Smithfield Beef Group experienced a slight loss as industry conditions remained
depressed this year and it closed the Showcase Foods facility; however, the com-
pany was able to outperform the industry in adverse conditions. Beef volume
declined 10 percent as the industry continued to experience tight cattle supplies.
The company concentrated on controlling costs in the face of significantly lower
slaughter rates due to the reduced supply of cattle. Smithfield Beef Group central-
ized cattle procurement at its Green Bay facility. Additionally, the company
achieved source verification documentation that management believes will enable
it to ship product overseas immediately when foreign markets open.
The turkey business performed exceptionally well, posting its best year ever in
fiscal 2005, concentrating on value-added products for retail and foodservice and
joint sales and marketing with sister companies.
ACHIEVING ENVIRONMENTAL EXCELLENCE
In fiscal 2005, Smithfield became the first company in its industry to achieve ISO
14001 certification for all its U.S. hog production and processing facilities. ISO
14001 is the international gold standard for environmental management. If a
facility receives ISO certification, it means that facility has implemented state-of-
the-art environmental management systems that include formalized practices to
protect the environment.
28
27. YEAR IN REVIEW (International)
EXPANDING INTERNATIONALLY
Last year Smithfield made initial investments in Romania in anticipation that
hog production and meat processing can be accomplished at lower costs in Eastern
Europe than Western Europe. Grain costs also are significantly lower there. In a
series of acquisitions, Smithfield acquired processing plants, hog farms and feed
mills, which, together with a distribution center and cold storage facility, will pro-
vide an important platform upon which to develop the Romania business plan.
Currently, Smithfield is exporting pork from the U.S. to establish its position in the
Romanian market.
Smithfield acquired a 22 percent interest in Campofrío, the largest meat processor
in Spain and one of Europe’s largest diversified meat processors. Campofrío’s
earnings doubled in fiscal 2005 and Smithfield continues to work together with
Campofrío management to create value for the benefit of all stakeholders. This
strategic relationship will provide another base for growth in both Eastern and
Western Europe.
After the Jean Caby acquisition, Smithfield merged the company with its existing
French unit, SBS, creating a first-tier processed meats company.The company will
operate under the well-known Jean Caby name and should provide the vehicle to
transform the French operation into a branded processed meats leader.
The acquisition of Morliny, another Polish meat processor, expands and compli-
ments Animex’s branded processed meats market in Poland, while also providing
more export opportunities and operating efficiencies.
Norson, a vertically integrated pork joint venture in Mexico, reached profitability
for the first time in fiscal 2005 and is expected to show further growth and prof-
itability next year. The company strategically refocused, restructured and reposi-
tioned its efforts both domestically and internationally to achieve operational
improvements in yield, productivity, quality and costs.
VERTICAL INTEGRATION STRATEGY
The company, through its vertical integration strategy, achieved exceptional results
in fiscal 2005, well ahead of any other year. Smithfield continues to capitalize on
opportunistic acquisitions, increase efficiencies, and look toward the future, focused
on its strategy to convert commodity pork into value-added products to improve
margins and increase product offerings to customers.
29
29. Our
commitment to Both at home and
abroad, Smithfield is committed to industry leadership in protecting the environ-
ment, in the humane treatment of animals, and in ensuring the health and safety of
our customers and employees. Carefully monitoring and measuring our activities
throughout the company, we endeavor to reduce our impact on water, soil and air,
to conserve energy and recycle waste materials. Our objective is to exceed the
standards of 100 percent regulatory compliance, and we continually pursue the
search for innovative ways to improve our performance. We are dedicated to
communication and transparency, and to assisting others in our industry to
improve their practices in these vital areas. Our stewardship strategy is designed
to support our business goal of becoming the most trusted leader in the meat pro-
cessing and hog production industries.
stewardship
31
30. FINANCIAL SUMMARY
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
2005 2004 2003
FISCAL YEARS (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA)
Operations
$9,267.0 $7,135.4
$11,354.2
Sales
938.9 602.2
1,238.4
Gross profit
570.8 497.9
656.4
Selling, general, and administrative expenses
121.3 87.8
135.0
Interest expense
162.7 11.9
Income from continuing operations(1) 296.2
227.1 26.3
Net income(1) 296.2
Per Diluted Share
$ 1.46 $ .11
Income from continuing operations(1) $ 2.64
2.03 .24
Net income(1) 2.64
14.31 11.83
16.93
Book value
111.7 109.8
112.3
Weighted average shares outstanding
Financial Position
$1,056.6 $ 833.0
$ 1,445.6
Working capital
4,785.6 4,210.6
5,704.8
Total assets
1,801.5 1,642.3
Total debt(2) 2,289.1
1,598.9 1,299.2
1,901.4
Shareholders’ equity
Financial Ratios
2.09 2.02
2.3
Current ratio
53.0% 55.8%
Total debt to total capitalization(3) 54.7%
Other Information
$ 135.4 $ 167.1
$ 201.6
Capital expenditures, net of proceeds
167.5 151.5
189.6
Depreciation expense
1,332 1,195
1,269
Common shareholders of record
46,400 44,100
51,290
Number of employees
(1) Fiscal 2001 income from continuing operations and net income include a gain of $45.2 million, or $.41 per diluted share, from the sale of IBP, inc. common stock, net of
related expenses.
(2) Total debt is equal to notes payable and long-term debt and capital lease obligations including current portion.
(3) Computed using total debt divided by total debt and shareholders’ equity.
32
32. FINANCIAL CONTENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
35
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF INCOME
52
CONSOLIDATED BALANCE SHEETS
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
54
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
56
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
80
OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
81
FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC
82
ACCOUNTING FIRM
33. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL This discussion of management’s views on the financial condition and results of
operations of the Company should be read in conjunction with the consolidated financial state-
ments and the notes to the consolidated financial statements.
The Company conducts its business through six reporting segments, Pork, Beef,
Hog Production (HP), International, Other and Corporate, each of which is comprised of a
number of subsidiaries. Prior to the fourth quarter of fiscal 2005, the Company conducted its
business through five reporting segments, Pork, Beef, HP, Other and Corporate. The Company
has reclassified the segment information for fiscal 2004 and 2003 to conform to the fiscal
2005 presentation.
The Pork segment consists mainly of eight wholly- or majority-owned U.S. fresh
pork and processed meats subsidiaries. The Beef segment is composed mainly of two U.S. beef
processing subsidiaries and the Company’s cattle feeding operations. The HP segment consists
primarily of hog production operations located in the U.S., Poland and Romania. The Inter-
national segment is comprised of international meat processing operations, mainly in France,
Poland and Romania and the Company’s interests in international meat processing operations,
mainly in Mexico and Spain. The Other segment is mainly comprised of the Company’s turkey
production operations, its interests in turkey processing operations, and the Company’s alterna-
tive fuels subsidiary. Each of the segments have certain joint ventures and other investments in
addition to their main operations.
RESULTS OF OVERVIEW
CONTINUING General Factors Affecting the Results of Continuing Operations
OPERATIONS
The Company’s fiscal year consists of 52 or 53 weeks, ending on the Sunday nearest
April 30th. Fiscal 2005 and fiscal 2003 were 52 weeks. Fiscal 2004 was 53 weeks.
Fiscal 2005 hog prices increased over fiscal 2004. This increased the sales and operating
profit of the HP segment and the raw materials cost at the Pork segment.
Export markets for U.S. beef products remain closed following the discovery of a case
of BSE in the State of Washington in December 2003 (fiscal 2004), negatively affecting beef
margins that were also impacted by higher cattle prices. Beef volumes were down 10% during
fiscal 2005.
In February 2004 (fiscal 2004), the Company purchased 8,008,294 shares of
Campofrío Alimentación S.A. (Campofrío) for approximately $87.9 million. This investment
represented 15% of the outstanding shares of Campofrío. In August 2004 (fiscal 2005), in two
separate transactions, the Company purchased a total of 3,787,265 additional shares of
Campofrío for approximately $49.0 million. The Company currently holds 11,795,559 shares,
or 22% of the outstanding shares of Campofrío.
35
34. Acquisitions
The following acquisitions affect the comparability of the results of operations for fis-
cal years 2005, 2004 and 2003:
In November 2004 (fiscal 2005), the Company acquired Morliny S.A. (Morliny) and
Comtim Group SRL (Comtim) in the International segment for approximately $71.3 million
plus the assumption of certain liabilities. Morliny is a meat processor in Poland and Comtim is
an integrated meat processing company in Romania. The preliminary 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 goodwill totaling $21.5 million.
In October 2004 (fiscal 2005), the Company acquired MF Cattle Feeding, Inc. (MFI)
for approximately $56.7 million. The principal assets of MFI were three cattle feedlots in Col-
orado and one in Idaho. The one-time feeding capacity of the feedlots, which will be operated
by the Beef segment or by entities the Beef segment has investments in, is 357,000 head. The
acquired assets did not include any of the cattle that were located on the feedlots. The prelimi-
nary balance of the purchase price in excess of the fair value of the assets and the liabilities
assumed at the date of acquisition was recorded as goodwill totaling $7.0 million.
In July 2004 (fiscal 2005), the Company acquired Jean Caby S.A. (Jean Caby) and
related companies for approximately $33.4 million plus the assumption of certain liabilities. Jean
Caby, established in France in 1919, produces and markets cured and cooked processed meats
including deli cooked hams, dry sausages, cocktail sausages, and hot dogs. The preliminary bal-
ance 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 goodwill totaling $10.6 million.
In October 2003 (fiscal 2004), the Company completed the acquisition of substantially
all of the assets of Farmland Foods, the pork production and processing business of Farmland
Industries, Inc., for approximately $377.4 million in cash, plus the assumption of certain
Farmland Foods liabilities. The assumed liabilities include $67.4 million of pension obligations,
net of associated assets. The balance of the purchase price in excess of the fair value of the assets
acquired and the liabilities assumed was recorded as goodwill totaling $35.2 million.
In September 2003 (fiscal 2004), the Company acquired 90% of the outstanding shares
of Cumberland Gap Provision Company (Cumberland Gap) for approximately $54.8 million
plus assumed debt. Cumberland Gap is a processor of premium branded smoked hams, sausages
and other specialty pork products. 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
goodwill totaling $30.9 million.
Discontinued Operations
On April 5, 2004, the Company completed the sale of all of the outstanding stock of
Schneider Corporation (Schneider) to Maple Leaf Foods Inc.
Showcase Foods Facility Closure
Despite the Company’s efforts to build a viable business at the Showcase Foods facil-
ity, this Beef segment operation continued to incur operating losses and the Company decided
to cease operations there. The Company recorded a pre-tax charge of $4.0 million during fiscal
2005 in connection with the closing of the facility. In addition, Showcase Foods incurred oper-
ating losses of $5.2 million during fiscal 2005. The Company does not currently expect to incur
further significant losses or charges related to the closing of the Showcase Foods facility.
36
35. Polish Facility Temporary Shutdown
Subsequent to its fiscal 2005 year end, the Company’s Polish operations temporarily
shutdown a red meat plant in connection with media reports on food safety and related issues.
The Company voluntarily shut down the plant for ten days and recalled some previously shipped
product. The effects of the shutdown and returns did not have a material impact on the Com-
pany’s financial position or results of operations.
RESULTS OF CONTINUING OPERATIONS FOR THE FISCAL YEAR ENDED
MAY 1, 2005 COMPARED TO THE FISCAL YEAR ENDED MAY 2, 2004
The following table presents sales by reportable segment for the fiscal years indicated:
2005 2004 $ Change
(IN MILLIONS)
Sales:
$ 5,856.4 $1,780.1
$ 7,636.5
Pork
2,391.6 (111.0)
2,280.6
Beef
663.7 358.6
1,022.3
International
1,441.3 671.1
2,112.4
HP
116.7 25.0
141.7
Other
10,469.7 2,723.8
13,193.5
Segment sales
(1,202.7) (636.6)
(1,839.3)
Inter-segment sales
$ 9,267.0 $2,087.2
$11,354.2
Total sales
The Pork segment’s sales increased $1,780.1 million, or 30%, to $7,636.5 million for fis-
cal 2005 from $5,856.4 million for fiscal 2004. The increase was due in part to the inclusion of
a full year of Farmland Foods results, which increased revenues by $1,060.7 million in fiscal 2005.
Fresh pork and processed meats volumes in the Pork segment, including acquisitions, increased
14%. Excluding acquisitions and adjusting for the extra week of sales in fiscal 2004, total fresh
pork and processed meats volume increased 4% with fresh pork increasing 1% and processed
meats, including pre-cooked bacon, pre-cooked entrees and dry sausage, increasing 3%. Aver-
age unit selling prices in the Pork segment increased 15%, reflecting higher raw material costs
and a strong consumer demand for pork.
The Beef segment’s sales decreased $111.0 million, or 5%, to $2,280.6 million for fiscal
2005 from $2,391.6 million for fiscal 2004. The decrease was mainly due to a 10% decrease in
the volume of beef products and a 5% decrease in average unit selling prices for beef partially
offset by cattle feeding sales. Beef markets continue to be depressed following the discovery in
December 2003 of a case of BSE in the State of Washington.
The International segment’s sales increased $358.6 million, or 54%, to $1,022.3 mil-
lion for fiscal 2005 from $663.7 million for fiscal 2004. The increase in sales in the Company’s
International segment was mainly due to acquisitions as well as stronger underlying foreign cur-
rencies. Total fresh pork and processed meats volumes in the International segment, including
acquisitions, increased 21% with fresh pork volumes increasing 17% and processed meats vol-
umes increasing 23%. Excluding acquisitions and adjusting for the extra week of sales in fiscal
2004, total fresh and processed meats volume decreased 3% with fresh meat volumes decreasing
7% and processed meats volumes increasing 2%. Average unit selling prices increased 33%, with
approximately half of the increase reflective of currency rate changes.
The HP segment’s sales increased $671.1 million, or 47%, to $2,112.4 million for fiscal
2005 from $1,441.3 million for fiscal 2004. The increase in the HP segment’s sales was mainly
due to a 29% increase in live hog market prices coupled with a 6% percent increase in head sold.
37
36. The Other segment’s sales increased $25.0 million, or 21%, to $141.7 million for fiscal
2005 from $116.7 million for fiscal 2004. Sales in the Company’s Other segment grew due to
strong results in its turkey operations.
Gross profit increased $299.5 million, or 32%, to $1,238.4 million in fiscal 2005 from
$938.9 million in fiscal 2004. The increase was mainly the result of substantially higher margins in
the HP segment on a 29% increase in live hog market prices and the inclusion of a full year of
Farmland Foods in the Pork segment. These increases were partially offset by higher raw mate-
rial costs in the Pork segment and continuing depressed market conditions in the Beef segment.
Selling, general and administrative expenses increased $85.6 million, or 15%, to
$656.4 million in fiscal 2005 from $570.8 million in fiscal 2004. The increase was mainly due
to the inclusion of $74.7 million of expenses of acquired businesses, higher international expenses
on stronger underlying currencies and increased advertising and variable compensation costs
partially offset by favorable foreign exchange gains.
The following table represents operating profit by reportable segment for the fiscal years
indicated:
2005 2004 $ Change
(IN MILLIONS)
Operating Profit:
$208.6 $ (43.0)
$165.6
Pork
82.6 (91.5)
(8.9)
Beef
11.3 0.4
11.7
International
125.7 355.2
480.9
HP
11.2 16.9
28.1
Other
(71.3) (24.1)
(95.4)
Corporate
$368.1 $213.9
$582.0
Total operating profit
The Pork segment’s operating profit decreased $43.0 million, or 21%, to $165.6 mil-
lion for fiscal 2005 from $208.6 million for fiscal 2004. Although hog processing levels increased
15% from fiscal 2004 levels and there was a 15% increase in the average unit selling price, these
did not fully offset the 29% increase in raw material costs.
The Beef segment’s operating profit decreased $91.5 million, or 111%, to an $8.9 mil-
lion loss for fiscal 2005 from an $82.6 million profit for fiscal 2004. Factors adversely affecting
results in the Beef segment were a 10% decrease in volume, a 5% decrease in average unit selling
price and a 6% increase in raw material cost. These factors resulted primarily from the contin-
uing depressed market conditions for beef as many key export markets remained closed because
of the discovery in December 2003 (fiscal 2004) of a case of BSE in the State of Washington.
In addition, during fiscal 2005, the Company recorded $5.2 million of operating losses and a
pre-tax charge of $4.0 million related to the closure of the Showcase Foods facility.
The International segment’s operating profit increased $0.4 million, or 4%, to $11.7 mil-
lion for fiscal 2005 from $11.3 million for fiscal 2004. The increase was due to operating profit
from the Company’s investments in Spain and Mexico. These were partially offset by lower oper-
ating profit in Poland and France due to sharply higher raw material costs.
The HP segment’s operating profits increased $355.2 million, or 283%, to $480.9 mil-
lion for fiscal 2005 from $125.7 million for fiscal 2004. The increase was mainly due to the
increase in market prices and head sold, partially offset by a 2% increase in raising costs due to
higher grain costs during the first half of fiscal 2005.
The Other segment’s operating profit increased $16.9 million, or 151%, to $28.1 mil-
lion for fiscal 2005 from $11.2 million for fiscal 2004. Operating profits in the segment grew due
to improved results in its turkey operations as a result of strong demand.
38
37. Corporate expenses increased $24.1 million, or 34%, to $95.4 million for fiscal 2005
from $71.3 million for fiscal 2004. The increase was mainly due to benefit and other variable
compensation costs, primarily related to the increase in overall Company profits.
Interest expense increased $13.7 million, or 11%, to $135.0 million in fiscal 2005 from
$121.3 million in fiscal 2004. The increase was mainly due to higher borrowings on the Com-
pany’s primary revolving credit facility (the Facility) and the incremental interest on long-term
debt issued in August and November of fiscal 2005 to fund acquisitions and other investments.
The effective income tax rate was 34% for both fiscal 2005 and fiscal 2004.
RESULTS OF CONTINUING OPERATIONS FOR THE FISCAL YEAR ENDED
MAY 2, 2004 COMPARED TO THE FISCAL YEAR ENDED APRIL 27, 2003
The following table presents sales by reportable segment for the fiscal years indicated:
2004 2003 $ Change
(IN MILLIONS)
Sales:
$ 5,856.4 $4,183.1 $1,673.3
Pork
2,391.6 2,165.2 226.4
Beef
663.7 538.3 125.4
International
1,441.3 1,059.8 381.5
HP
116.7 98.9 17.8
Other
10,469.7 8,045.3 2,424.4
Segment sales
(1,202.7) (909.9) (292.8)
Inter-segment sales
$ 9,267.0 $7,135.4 $2,131.6
Total sales
The Pork segment’s sales increased $1,673.3 million, or 40%, to $5,856.4 million for
fiscal 2004 from $4,183.1 million for fiscal 2003. The increase was due in large part to the acqui-
sition of Farmland Foods, which had revenues of $940.9 million for the six months of opera-
tions that were included in the Company’s results. The addition of Farmland Foods’ substantial
processed meats business grew the Pork segment’s sliced retail, branded bacon market share to a
solid number one in the U.S., according to ACNielsen. Total fresh pork and processed meats
volumes in the Pork segment, including acquisitions, increased 24% with fresh pork volumes
increasing 23% and processed meats increasing 25%. Excluding acquisitions and adjusting for
the extra week of sales in fiscal 2004, total fresh pork and processed meats volume increased 3%
with fresh pork volumes increasing 1% and processed meats increasing 7%. Average unit selling
prices in the Pork segment increased 14%, reflecting higher raw material costs and a strong con-
sumer demand for pork.
The Beef segment’s sales increased $226.4 million, or 10%, to $2,391.6 million for fis-
cal 2004 from $2,165.2 million for fiscal 2003. The increase was primarily due to a 16% increase
in average unit selling prices for beef. The increase in unit prices was offset slightly by a six per-
cent decrease in total volumes, which resulted primarily from several months of depressed mar-
ket conditions following the discovery in December 2003 (fiscal 2004) of a case of BSE in the
State of Washington.
The International segment’s sales increased $125.4 million, or 23%, to $663.7 million
for fiscal 2004 from $538.3 million for fiscal 2003. The increase was due to improvements in
Poland on sharply higher volumes, as the Krakus brand achieved significant volume growth in
both Poland and export channels.
The HP segment’s sales increased $381.5 million, or 36%, to $1,441.3 million for fiscal
2004 from $1,059.8 million for fiscal 2003. The increase in the HP segment’s sales was mainly
39
38. due to a 27% increase in live hog market prices coupled with a 7% increase in head sold mainly
due to the inclusion of acquired businesses.
The Other segment’s sales increased $17.8 million, or 18%, to $116.7 million for fiscal 2004
from $98.9 million for fiscal 2003. The increase was due to strong results in its turkey operations.
Gross profit increased $336.7 million, or 56%, to $938.9 million in fiscal 2004 from
$602.2 million in fiscal 2003. The increase was mainly the result of substantially higher margins
in the HP segment on a 27% increase in live hog market prices and the inclusion of the results
of Farmland Foods, both of which were partially offset by higher raw material costs in the
Pork segment.
Selling, general and administrative expenses increased $72.9 million, or 15%, to
$570.8 million in fiscal 2004 from $497.9 million in fiscal 2003. The increase was mainly due to
the inclusion of $56.6 million of expenses of acquired businesses, increased pension and other
variable compensation expenses and the effect of a $4.7 million insurance settlement in the prior
year, all partially offset by lower advertising and promotion cost.
The following table represents operating profit by reportable segment for the fiscal years
indicated:
2004 2003 $ Change
(IN MILLIONS)
Operating Profit:
$208.6 $ 178.1 $ 30.5
Pork
82.6 77.4 5.2
Beef
11.3 10.0 1.3
International
125.7 (108.4) 234.1
HP
11.2 6.1 5.1
Other
(71.3) (58.9) (12.4)
Corporate
$368.1 $ 104.3 $263.8
Total operating profit
The Pork segment’s operating profit increased $30.5 million, or 17%, to $208.6 mil-
lion for fiscal 2004 from $178.1 million for fiscal 2003. The increase was due in large part to the
inclusion of six months of Farmland Foods operations, which had operating profit of $53.9 mil-
lion while fresh pork and processed meats margins were lower as increases in average unit sell-
ing prices did not fully offset a 24% increase in raw material costs.
The Beef segment’s operating profit increased $5.2 million, or 7%, to $82.6 million for
fiscal 2004 from $77.4 million for fiscal 2003. During the first two quarters of fiscal 2004, oper-
ating profit in the Beef segment was higher due to higher average unit selling prices on higher
pricing for quality choice and rendered by-products, partially offset by an increase in live cattle
prices. During the third quarter of fiscal 2004, following the BSE discovery, the Company’s beef
operations recognized inventory losses of $7.7 million as a result of the drop in cattle and beef
markets. Additionally, due to a lack of available market cattle in the weeks following the BSE
discovery, the Company incurred operating inefficiencies in its beef plants totaling approxi-
mately $3.3 million as a result of sharply reduced operating levels.
The International segment’s operating profit increased $1.3 million, or 13%, to $11.3 mil-
lion for fiscal 2004 from $10.0 million for fiscal 2003. The increase was due to improvements in
Poland on sharply higher volumes, as the Krakus brand achieved significant volume growth in
both Poland and export channels.
The HP segment’s operating profits increased $234.1 million to a $125.7 million profit
for fiscal 2004 from a $108.4 million loss for fiscal 2003. The increase was mainly due to the
increase in market prices and head sold, partially offset by a 5% increase in raising costs.
The Other segment’s operating profit increased $5.1 million, or 84%, to $11.2 million
for fiscal 2004 from $6.1 million for fiscal 2003. Operating profits in the segment grew due to
strong results in its turkey operations.
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39. Corporate expenses increased $12.4 million, or 21%, to $71.3 million for fiscal 2004
from $58.9 million for fiscal 2003. The increase was due to pension and other variable com-
pensation, primarily related to the increase in overall Company profits.
Interest expense increased $33.5 million, or 38%, to $121.3 million in fiscal 2004 from
$87.8 million in fiscal 2003. The increase is mainly due to the incremental interest on long-term
debt issued in May 2003 (fiscal 2004) and increased interest and issuance cost amortization
related to the bridge loan issued in October 2003 (fiscal 2004). The bridge loan was issued to
complete the acquisition of Farmland Foods. The timing of the Farmland Foods acquisition and
Schneider dispositions did not coincide, resulting in the Company incurring additional interest
and issuance cost amortization of $14.0 million.
The effective income tax rate increased to 34% during fiscal 2004 as compared to 28%
in fiscal 2003. The fiscal 2003 effective income tax rate was lower due to a greater impact of tax
credits on sharply lower earnings.
LIQUIDITY The Company has available a variety of sources of liquidity and capital resources, both
AND CAPITAL internal and external. These resources provide funds required for current operations, acquisi-
RESOURCES
tions, debt retirement and other capital requirements.
The meat processing industry is characterized by high sales volume and rapid turnover
of inventories and accounts receivable. Because of the rapid turnover rate, the Company con-
siders its meat inventories and accounts receivable highly liquid and readily convertible into cash.
The HP segment also has rapid turnover of accounts receivable. Although inventory turnover
in the HP segment is slower, mature hogs are readily convertible into cash. Borrowings under
the Company’s credit facilities are used, in part, to finance increases in the levels of inventories
and accounts receivable resulting from seasonal and other market-related fluctuations in raw
material costs.
Cash Flows from Operating Activities
Cash provided by operations decreased to $101.0 million in fiscal 2005 from $321.6 mil-
lion in fiscal 2004. Changes in operating assets and liabilities used $377.6 million of cash in fis-
cal 2005 compared to $33.7 million of cash used in fiscal 2004. This is due to higher inventories
of cattle at the Company’s cattle feeding operations and the effect of higher prices on meat inven-
tories and accounts receivable. These changes in operating assets and liabilities were partially off-
set by higher earnings in the current year.
Cash Flows from Investing Activities
Cash used in investing activities was $506.6 million in fiscal 2005 compared to
$456.1 million in fiscal 2004. During fiscal 2005, the Company spent $219.5 million for acqui-
sitions, including Morliny and Comtim ($71.3 million), MFI ($56.7 million), Jean Caby S.A.
($33.4 million) and several smaller acquisitions, primarily in the Pork segment. During fiscal
2004, the Company spent $512.2 million for acquisitions mainly related to the acquisitions of
Farmland Foods ($377.4 million), Cumberland Gap ($54.8 million), Agrotorvis ($23.8 million)
and Alliance ($23.1 million). Also during fiscal 2004, the Company sold Schneider, its Canadian
meat processing business, for $279.4 million.
Capital expenditures in fiscal 2005 totaled $201.6 million, compared to $135.4 million
in fiscal 2004. Capital expenditures are related mainly to fresh pork and processed meats expan-
sion, plant improvement projects and additional hog production facilities. As of May 1, 2005,
the Company had approved capital expenditure commitments of $199.3 million mainly for
processed meats expansion and production efficiency projects. The Company expects to fund
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