Smithfield Foods - 10-K annual report

Smithfield Foods, Inc. is the largest hog producer and pork processor in the world. The Company conducts its business through two groups, the Meat Processing Group and the Hog Production Group, each comprised of a number of subsidiaries.

Meat Processing Group.    The Meat Processing Group produces domestically and internationally a wide variety of fresh pork and beef and processed meat products and markets them nationwide and to over 25 foreign markets, including Canada, Poland, France, Japan and Mexico. The Meat Processing Group currently consists primarily of eight domestic processing subsidiaries and four international meat processing entities. All these subsidiaries are wholly owned except as indicated below. Collectively, these subsidiaries currently operate over 50 processing plants.

Hog Production Group.    To complement its processing operations, the Company has vertically integrated into hog production through its Hog Production Group, which currently provides the Meat Processing Group with approximately 50% of its domestic live hog requirements. In order to more strategically align the hog production group, in fiscal 2002 the Company reorganized under a subsidiary named Murphy-Brown LLC which owns and manages the following two principal business units.

The Company’s business is based on four basic strategies:

Since 1975, when current management assumed control, the Company has made numerous acquisitions that have increased production capacity, provided vertical integration and expanded both its geographic reach and its portfolio of recognized brands. The Company has also expanded into the beef processing business to provide a broader range of products.

United States Meat Processing Acquisitions.    In fiscal 1982, the Company acquired Gwaltney of Smithfield, then Smithfield Packing’s principal Mid-Atlantic competitor. This acquisition doubled its sales and production capacity and added several popular lines of branded products along with a highly efficient hot dog and luncheon meats production facility. The proximity of Gwaltney of Smithfield to Smithfield Packing allowed for synergies and cost savings in manufacturing, purchasing, engineering and transportation. This combination set the stage for a series of acquisitions of smaller regional processors with widely recognized brands, including Patrick Cudahy, Esskay, Mash’s and Valleydale.

In fiscal 1996, the Company acquired John Morrell, a major Midwestern pork processor with primary markets in the Midwest, Northeast and western United States. This acquisition changed the Company’s character from a large multi-regional pork processor to one with national distribution. It also doubled its sales and production capacity, added several popular lines of branded processed meat products along with four efficient processing facilities and more than doubled the Company’s international sales. The Company believes that John Morrell’s strength in fresh meat, smoked sausage, hot dogs, luncheon meats, bacon and smoked hams complements the strong smoked meats, hot dog and bacon business of its Eastern operations. The acquisition of John Morrell also presented substantial opportunities for cost savings in the areas of processing, marketing, purchasing and distribution.

In fiscal 1997, the Company acquired the assets and businesses of the Lykes Meat Group, Inc., based in Plant City, Florida. Lykes is a pork processor with primary markets in the South and Southeast. Lykes produces branded processed meats, including bacon, hot dogs and breakfast and dinner sausages under the Lykes and Sunnyland brands.

In fiscal 1999, the Company acquired the assets and business of North Side, a major domestic supplier of precooked sausage to McDonald’s Corporation.

In June 2001, the Company acquired of 50% of the outstanding common shares of Pennexx Foods, Inc. (formerly known as Pinnacle Foods, Inc.), a Philadelphia-based producer of pre-priced, pre-packaged case-ready products.

In July 2001, the Company acquired The Smithfield Companies, a Smithfield, Virginia-based producer of Genuine Smithfield Hams and other specialty food products.

Also in July 2001, the Company acquired substantially all of the assets of Gorges/Quik-to-Fix Foods, Inc., a producer, marketer, and distributor of value-added beef, pork and poultry products for the retail and food service industry.

In June 2002, the Company acquired an 80% interest in Stefano Foods, a marketer of Italian convenience foods, including stuffed pizza rings and calzones, based in Charlotte, North Carolina.

International Meat Processing Acquisitions.    In fiscal 1999, the Company acquired Société Bretonne de Salaisons, one of the largest private-label manufacturers of ham, pork shoulder and bacon products in France.

In fiscal 1999, the Company acquired a 63% interest in Schneider Corporation, a food processing company headquartered in Kitchener, Ontario. In November 2001, the Company completed the acquisition of the remaining interest in Schneider, which is now a wholly-owned subsidiary of the Company.

In fiscal 1999 and 2000, the Company acquired an 85% stake in Animex, one of the largest meat and poultry processing companies in Poland. Animex produces a very broad line of fresh and processed meats and poultry.

In fiscal 2000, the Company acquired Société Financière de Gestion et de Participation, a private-label processed meats manufacturer in France.

Also in fiscal 2000, the Company acquired a 50% stake in Agroindustrial del Noroeste S. de R.L. de C.V., a Mexican meat processing and hog production joint venture.

In fiscal 2001, Schneider increased its investment in Saskatoon, Saskatchewan-based Mitchell’s Gourmet Foods Inc. from 38% to 54%. Mitchell’s is one of Canada’s leading value-added pork processors.

In fiscal 2002, the Company entered into an agreement with Artal Holland B.V. for a joint venture in AFG Company Limited, a Chinese meat processing and distributing company.

Hog Production Acquisitions.    In fiscal 1999, the Company acquired a 12,000 sow operation in Colorado to supply hogs to John Morrell.

In fiscal 2000, the Company acquired Carroll’s Foods and related companies and assets, including approximately 180,000 sows. Carroll’s Foods was a longtime hog production partner of the Company. Through a 49%-owned joint venture, Carroll’s Foods is also among the nation’s largest turkey processors.

Also in fiscal 2000, the Company acquired Murphy Farms and related companies and assets, including approximately 345,000 sows. Murphy Farms was also a longtime hog production partner of the Company.

In August 2001, the Company acquired the Oklahoma hog production assets of Land O’ Lakes, Inc., including approximately 8,000 sows.

Recent Beef Processing Acquisitions.    In June 2001, the Company acquired Moyer Packing, the ninth largest beef processor in the United States.

In October 2001, the Company acquired Packerland Holdings, the fifth largest beef processor in the United States.

The Meat Processing Group derives its revenue from fresh pork and beef and processed meats. The following table shows for the fiscal periods indicated the percentages of Meat Processing Group revenues derived from fresh pork, fresh beef, processed meats and other products.

Over the five-year period, processed meats have increased as a percentage of processed meats and fresh pork reflecting the Company’s acquisitions of higher margin processed meats operations.

Fresh Pork and Beef Products.    The Company is the largest fresh pork processor in the world, producing in fiscal 2002 approximately 2.7 billion pounds of which 2.5 billion pounds are produced in the United States. Following its recent acquisitions of Packerland and Moyer Packing, the Company has also become the fifth largest fresh beef processor in the United States, producing in fiscal 2002 approximately 880 million pounds of fresh beef. The Meat Processing Group’s domestic operations process hogs at five plants (three in the Southeast and two in the Midwest), with a current aggregate slaughter capacity of 78,300 hogs per day. It also processes cattle at five plants (three in the Midwest, one in the Northeast, and one in the Southwest), with a current aggregate slaughter capacity of 8,500 cattle per day. A substantial portion of the Meat Processing Group’s fresh pork is sold to retail customers as unprocessed, trimmed cuts such as loins (including roasts and chops), butts, picnics and ribs. Its fresh beef is sold to retail customers as boxed beef and ground beef (both chub and case-ready). The Meat Processing Group also sells hams, bellies and trimmings to other further processors. The Meat Processing Group is putting greater emphasis on the sale of value-added, higher margin fresh pork and beef products. In addition, the Company’s Hog Production Group provides the Meat Processing Group’s pork operations with raw material of much higher quality than that generally available through open market purchases.

The Company is marketing on a national basis an extensive product line of leaner fresh pork cuts (including boneless loins, shoulder cuts, chops, ribs and processed and cubed pork) under the Smithfield Lean Generation Pork brand to selected retail chains and institutional foodservice customers. Several of the Company’s subsidiaries have also developed a case-ready pork program designed to supply supermarket chains with pre-packaged, weighed, labeled and pre-priced fresh pork ready for immediate sale to the consumer. Management believes that these initiatives, over time, will result in greater brand identification and higher margins for the Company’s fresh pork products. For more information on the Company’s lean pork products, see the discussion of NPD pork in “Hog Production Group” below.

Processed Meats Products.    The Meat Processing Group’s pork operations manufacture a wide variety of processed meats, including smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli and luncheon meats and specialty products such as pepperoni and dry salami. In fiscal 2002, the Company’s U.S. operations produced 1.6 billion pounds of processed meat products. The Company markets its domestic processed meat products under labels that include Smithfield Premium, Gwaltney, Patrick Cudahy and John Morrell, as well as Dinner Bell, Ember Farms, Esskay, Great, Kretschmar, Lykes, Patrick’s Pride, Rath and Valleydale. The Company also sells a substantial quantity of processed meats as private-label products. The Company believes it is one of the largest producers of smoked hams and picnics in the United States.

In recent years, as consumers have become more health conscious, the Company has broadened its product line to include leaner fresh pork products as well as fat-free, lower fat and lower salt processed meats. The Company also markets a lower-fat line of value-priced luncheon meats, smoked sausage and hot dogs, as well as fat-free hot dogs, fat-free deli hams and 40-percent-lower-fat bacon. Management believes that leaner pork products combined with the industry’s efforts to heighten public awareness of pork as an attractive protein source have led to increased consumer demand.

In February 2002, the Company announced the formation of the Smithfield Deli Group, a business unit dedicated solely to marketing to the retail deli trade, including new product development to broaden the deli product line and meet changing consumer needs.

Raw Materials.    The primary raw materials of the Meat Processing Group are live hogs and cattle.

Historically, hog and cattle prices have been subject to substantial fluctuations. Hog and cattle supplies, and consequently prices, are also affected by factors such as corn and soybean meal prices, weather and farmers’ access to capital. In addition, hog prices tend to rise seasonally as hog supplies decrease during the hot summer months and tend to decline as supplies increase during the fall. This is due to lower farrowing performance during the winter months and slower animal growth rates during the hot summer months.

The Meat Processing Group purchases approximately 44% of its domestic live hog requirements from the Hog Production Group. In addition, the Company has established multi-year agreements with Maxwell Foods,

The Meat Processing Group also purchases hogs on a daily basis at Southeastern and Midwestern processing plants, at company-owned buying stations in three Southeastern and five Midwestern states and from Canadian sources. The Company also purchases fresh pork from other meat processors to supplement its processing requirements. Additional purchases include raw beef, poultry and other meat products to add to the Company’s sausage, hot dogs and luncheon meats. Those meat products and other materials and supplies, including seasonings, smoking and curing agents, sausage casings and packaging materials are readily available from numerous sources at competitive prices.

The Company’s five beef processing plants purchase lean Holstein steers and cows and other cattle primarily from feed yards, auction barns, company-operated buying stations and through direct contract relationships in a seven state region, including Arizona, California, Minnesota, Wisconsin, Iowa, Michigan and Pennsylvania. The Company’s close proximity to most of its suppliers reduces transportation costs, shrinkage and bruising of livestock in transit. The Company generally maintains a “bought ahead” position of a one- to two-week supply of live cattle. The Company procures approximately 35% of its live cattle on a forward contract basis, filling the remainder of its live cattle requirements on the spot market.

Customers and Marketing.    The Meat Processing Group has significant market presence nationwide, and strong market positions in the Mid-Atlantic, Southeast, South and Midwest. The Company’s fundamental marketing strategy is to sell large quantities of value-priced processed meat products as well as fresh pork to national and regional supermarket chains, wholesale distributors, the foodservice industry (fast food, restaurant and hotel chains, hospitals and other institutional customers) and export markets. Management believes that this marketing approach reaches the largest number of value-conscious consumers without requiring large advertising and promotional campaigns. The Company uses both in-house salespersons as well as independent commission brokers to sell its products. In fiscal 2002, the Company sold its products to more than 3,500 customers, none of whom accounted for as much as 10% of the Company’s revenues. The Company has no significant or seasonally variable backlog because most customers prefer to order products shortly before shipment, and therefore, do not enter into formal long-term contracts. Management believes that registered trademarks have been important to the success of the Company’s branded fresh pork processed meats products. In a number of markets, the Company’s brands are among the leaders in selected product categories.

The Meat Processing Group in recent years has emphasized growth in export sales. In fiscal 2002, export sales comprised approximately 5% of the Company’s total sales. The Company provides Japanese markets with a line of branded fresh pork and beef products, as well as other chilled and frozen unbranded fresh pork and beef products. In connection with export sales to Japan, the Company maintains a distributorship arrangement with Sumitomo Corporation of America. The Company currently has export sales to Mexico and to more than two dozen other foreign countries. The Company expects continued growth in its export sales for the foreseeable future. Export sales are subject to factors beyond the Company’s control, such as tariffs, exchange rate fluctuations and changes in governmental policies. The Company’s conduct all of its export sales in U.S. dollars and therefore bear no currency exchange risk.

The Company’s pork processed meats business is somewhat seasonal in that, traditionally, the periods of higher sales for hams are the holiday seasons such as Thanksgiving, Christmas and Easter, and the periods of higher sales of smoked sausage, hot dogs and luncheon meats are the summer months. The Company typically builds substantial inventories of hams in anticipation of its seasonal holiday business.

The Company uses recognized price risk management and hedging techniques to enhance sales and to reduce the effect of adverse price changes on its profitability. The Company’s price risk management and hedging activities currently are utilized in the areas of forward sales, hog production margin management, procurement of raw materials (ham and bacon) for seasonal demand peaks, inventory hedging, hog and cattle contracting and truck fleet fuel purchases. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Trademarks.    The Company owns and uses numerous marks. These marks are the Company’s registered trademarks or are otherwise subject to protection under applicable intellectual property laws. The Company considers these marks and the accompanying goodwill and customer recognition valuable and material to its business.

Distribution.    The Meat Processing Group uses a private fleet of leased tractors and trailers and independent common carriers and owner operators to distribute fresh pork and beef and processed meats to its customers, as well as to move raw material between plants for further processing. The Company coordinates deliveries and uses backhauling to reduce overall transportation costs. The Company distributes its products directly from some of its plants and from leased distribution centers in California, Connecticut, Indiana, Kansas, Missouri, North Carolina and Texas. The Company also operates distribution centers adjacent to its plants in Bladen County, North Carolina, and Sioux Falls, South Dakota.

Competition.    The protein industry generally, and the pork and beef processing industries in particular, are highly competitive. The Company’s products compete with a large number of other protein sources, including chicken, turkey and seafood, but the Company’s principal competition comes from other pork and beef processors.

Management believes that the principal competitive factors in the pork and beef processing industries are price, quality, product distribution and brand loyalty. Some of the Company’s competitors are larger, have correspondingly greater financial and other resources and enjoy wider recognition for their branded products. Some of these competitors are also more diversified than the Company. To the extent that their other operations generate profits, these companies may be able to subsidize their meat processing operations for a time.

In fiscal 1999, the Meat Processing Group made its first international acquisitions by acquiring operations in Canada, Poland and France. In fiscal 2000, the Company made another acquisition in France and entered into a joint venture in Mexico. These acquisitions reflect the Company’s heightened emphasis on expansion into international markets.

Schneider.    In fiscal 1999, the Company acquired a 63% stake in Schneider. In November 2001, the Company completed its acquisition and now owns 100% of the Schneider shares. Schneider, based in Kitchener, Ontario, is one of Canada’s largest producers of premium quality food products, with brands including Schneiders and Fleetwood. Schneider has annual production volume of approximately 520 million pounds and manages its various subsidiaries and joint ventures through two operating groups, consumer foods and agribusiness. The consumer foods group, comprised of the processed meat and grocery operations, produces more than 1,000 products, including hams, sausage, wieners, bacon, luncheon meats, specialty meats and savory bakery products for sale through traditional grocery stores, delicatessens and foodservice establishments. Schneider has consumer foods operations in Kitchener, Ayr, St. Mary’s, Guelph, Port Perry and Mississauga, Ontario; Surry, British Columbia; Saskatoon, Saskatchewan; and St.-Anselme, Quebec. In addition, Schneider participates in the consumer foods sector through joint ventures with the Prince Group of Drummondville, Quebec; Cappola Food of Toronto, Ontario; National Meats of Toronto; and Luigino’s of Duluth, Minnesota. The agribusiness group, comprised of the fresh pork and live poultry operations, focuses on identifying and meeting the needs of retail, foodservice and export customers. Schneider markets its products in the poultry sector under the Schneiders brand and private labels to retail and foodservice customers. The pork processing plant in Winnipeg, Manitoba, previously owned by Schneiders, was sold in fiscal 2001 and customers of that facility are being serviced from other facilities.

Animex.    In fiscal 1999 and 2000, the Company acquired an 85% stake in Animex, the largest meat and poultry processing company in Poland. Animex produces a very broad line of fresh and processed meats and poultry products, with approximately 375 million pounds of annual volume. Animex’s brands include Krakus and Pek. Animex operates seven plants, four for red meat and three for poultry, located across Poland. The Company plans to expand Animex’s network of distributions centers to include several additional areas in Poland.

Société Bretonne de Salaisons.    In fiscal 1999, the Company acquired Société Bretonne de Salaisons, one of the largest private-label manufacturers of ham, pork shoulder and bacon products in France. It has annual production volume of approximately 65 million pounds.

Société Financière de Gestion et de Participation.    In fiscal 2000, the Company acquired Société Financière de Gestion et de Participation, a private-label processed meats manufacturer in France. It has annual production volume of approximately 70 million pounds.

Agroindustrial del Noroeste.    The Company has a 50% interest in a joint venture, Agroindustrial del Noroeste with two Mexican partners. It has annual production volume of approximately 100 million pounds.

AFG Company Limited.    In December 2001, the Company entered into an agreement with Artal Holland B.V. for a joint venture in AFG Company Limited, located in the Guangdong Province of the Peoples Republic of China. The company produces, sells and distributes processed meats products to retail and foodservice customers in China under the Maverick and Haslett brands.

General.    As a complement to the Company’s hog processing operations, the Company has vertically integrated into hog production through Murphy-Brown, which operates numerous hog production facilities with approximately 729,000 sows producing about 12.2 million market hogs annually. The Meat Processing Group obtains approximately 44% of the live hogs it currently processes from the Hog Production Group. Including sales to unrelated parties, the Company is 61% vertically integrated. The profitability of hog production is directly related to the market price of live hogs and the cost of corn and soybean meal. The Hog Production Group generates higher profits when hog prices are high and corn and soybean meal prices are low, and lower profits (or losses) when hog prices are low and corn and soybean meal prices are high. Management believes that the Hog Production Group furthers the Company’s strategic initiative of vertical integration and reduces its exposure to fluctuations in profitability historically experienced by the pork processing industry.

In May 1991, the Company acquired from NPD, a British company, exclusive United States franchise rights relating to genetic lines of specialized breeding stock. The Hog Production Group makes extensive use of these genetic lines, with approximately 376,000 NPD breeding sows. In addition, the Company has sub-licensed some of these rights to some of its strategic hog production partners. All NPD hogs produced under these sub-licenses are supplied to the Company. The Company believes the hogs produced by these genetic lines are the leanest hogs commercially available and enable it to market highly differentiated pork products. Management believes that the leanness and increased meat yields of these hogs will, over time, improve the Company’s profitability with respect to both fresh pork and processed meat. In fiscal 2002, the Company processed 5.1 million NPD hogs.

Hog Production Operations.    The Hog Production Group is the world’s largest hog producer. This Group uses advanced management techniques to produce premium quality hogs on a large scale as a low cost producer. The Company develops breeding stock, optimizes diets for its hogs at each stage of the growth process, processes feed for its hogs and designs and builds hog confinement facilities. The Company believes its economies of scale and production methods, together with its use of the advanced NPD genetics in approximately 52% of the its breeding sows, make it a low cost producer.

The Hog Production Group uses a three-site production process consisting of sow, nursery and finishing sites. Production of market hogs begins in a facility known as a sow site. The Group’s average commercial sow site is designed to house approximately 2,400 sows. The sow’s purpose is to conceive, give birth to and nurse piglets which will be raised to become market hogs. Approximately 18 days after birth, the piglets are separated from the sows and transported to a separate nursery site. At each nursery site, the piglets are fed a closely monitored diet and grow to approximately 45 pounds, a process which takes approximately seven weeks. Once the hogs reach the desired weight, the Hog Production Group transports them to a finishing site where they are maintained and fed until reaching a market weight of approximately 250 pounds, a process which takes approximately 20 weeks. When the hogs reach market weight, they are transported to the Meat Processing Group’s plants or sold to unrelated third parties.

The Hog Production Group also utilizes independent farmers and their facilities to raise hogs produced from the Group’s breeding stock. Under multi-year contracts, the farmer provides the initial facility investment, labor and front line management in exchange for a service fee. This contract farming is utilized primarily in the nursery and finishing stages where animal growth, feed and survival rates are most critical and are easily adapted to an incentive-based contract payment. Currently, approximately 69% of the Hog Production Group’s market hogs come from contract farms.

As of July 2002, the Hog Production Group operated numerous hog production facilities, primarily in North Carolina, Utah and Virginia with additional hog production facilities in Colorado, South Carolina, Illinois, Texas and Oklahoma. Except for some expansion activity in Utah and Colorado, the Hog Production Group’s farm sites are mature operations with static production volume.

Nutrient Management and Other Environmental Issues.    All of the Hog Production Group’s hog production facilities have been designed to meet or exceed all applicable zoning and other government regulations. These regulations require, among other things, maintenance of separation distances between farms and nearby residences, schools, churches, public use areas and businesses, rivers, streams and wells and adherence to required construction standards.

Hog production facilities generate significant quantities of manure, which must be managed properly to protect public health and the environment. The Company believes that the best technology currently available for the management of swine manure is the lagoon and sprayfield system. This system utilizes earthen lagoons to treat the manure before it is applied to agricultural fields by spray application. The nitrogen and phosphorus in the treated manure serve as a crop fertilizer. Lagoon and sprayfield systems require permits under state, and in some instances, federal law. The permits impose standards and conditions on the design and operation of the systems to ensure that they protect public health and the environment.

The Hog Production Group follows a number of other protocols to minimize the impact of its operations to the environment, including: ongoing employee training regarding environmental controls; walk-around inspections at all sites by trained personnel; formal emergency response plans that are regularly updated; and collaborations with manufacturers regarding testing and developing new equipment.

On July 25, 2000, in furtherance of the Company’s continued commitment to responsible environmental stewardship, Smithfield Foods, Inc. and its North Carolina-based hog production companies voluntarily entered into an agreement with the Attorney General of North Carolina designed to enhance water quality in the State of North Carolina through a series of initiatives to be undertaken by the Company while protecting its access to swine operations in North Carolina. These initiatives emphasize operations of the Company’s hog production subsidiaries in the State of North Carolina, particularly areas devastated by hurricanes in the fall of 1999. Under one of these initiatives, the Company has identified those farms owned by, or under contract to, operating subsidiaries with buildings or lagoons located in the flood plain, and have provided assistance to some of its independent contract growers to implement measures to protect water quality should these structures experience flooding in the future. The Company is also working with its hog production and other operating subsidiaries to develop and implement formal environmental management systems. The Company has developed and implemented these systems on all hog production operations east of the Mississippi River, and will be implementing the systems in all United States production operations over the next year. The Company believes that the environmental management systems developed by its hog production operations will, when fully implemented, be a model program, not only in the pork production industry, but among agribusinesses nationally. In April 2001, Carroll’s Foods was recognized as the first livestock operation in the United States to receive the ISO 14001 certification for its environmental management system. ISO 14001 is a standard published by the International Organization for Standardization, which establishes a coordinated framework of controls to manage environmental protection within an organization. To obtain ISO 14001 certification, an organization must meet a rigorous and comprehensive set of requirements and criteria developed by experts from all over the

The Company has also assumed a leadership role in the development of more effective waste management technologies to address concerns over the potential environmental impact of the current system of anaerobic lagoons and spray fields. Under the North Carolina agreement, the Company has committed to implement environmentally superior technologies for the management of swine waste at its subsidiaries’ farms in North Carolina within three years after a determination is made that such technologies are both environmentally superior and economically feasible to construct and operate at such farms. A representative of North Carolina State University with advice from peer review panels appointed by him will make such determinations. The Company has also agreed to provide financial and technical assistance to those farms under contract to its subsidiaries as necessary to facilitate their implementation of such technologies. The Company has also committed to pay $15.0 million to help defray the costs of identifying, developing and evaluating such potential technologies. The Company has further committed up to $2.0 million a year for 25 years to assist in the preservation of wetlands and other natural areas in eastern North Carolina and to promote similar environmental enhancement activities.

The Company has an ongoing Environmental Compliance Committee, which was established by the Board of Directors in January 2000 and oversees various environmental initiatives within the Company. Members of this committee include, among others, the Company’s General Counsel, its Senior Vice President-Corporate Engineering and Environmental Affairs, and senior officers from its principal operating subsidiaries. In addition, the Company’s initiatives under the North Carolina agreement are overseen by senior corporate management and the Attorney General of North Carolina.

Regulation Generally.    Like other participants in the meat processing industry, the Company is subject to various laws and regulations administered by federal, state and other government entities, including the Environmental Protection Agency and corresponding state agencies as well as the United States Department of Agriculture, the United States Food and Drug Administration and the United States Occupational Safety and Health Administration. Management believes that the Company presently is in compliance with all these laws and regulations in all material respects, and that continued compliance with these standards will not have a material adverse effect on the Company’s financial position or results of operations. In addition, the EPA has proposed to extensively modify its regulations governing confined animal feeding operations. These proposed modifications are scheduled to be finalized by December 2002 and could have a significant impact on the Company’s hog production operations. The Company is committed to responsible environmental stewardship in its operations, as discussed in “Business—Environmental Stewardship.”

The Company from time to time receives notices from regulatory authorities and others asserting that it is not in compliance with some laws and regulations. In some instances, litigation ensues, including the matters discussed below. Although the suits below remain pending and relief, if granted, would be costly, the Company believes that their ultimate resolution will not have a material adverse effect on the Company’s financial position or annual results of operations.

Water Keeper Alliance Inc. Litigation.    The Water Keeper Alliance Inc., an environmental activist group from the State of New York, has recently filed or caused to be filed a series of lawsuits against the Company and its subsidiaries and properties, as described below.

In June 2000, Neuse River Foundation, Richard J. Dove, d/b/a The Neuse Riverkeeper, D. Boulton Baldridge, d/b/a The Cape Fear Riverkeeper, New River Foundation, Inc., Tom Mattison, d/b/a The New Riverkeeper and The Water Keeper Alliance filed a lawsuit in the General Court of Justice, Superior Court

In February 2001, Thomas E. Jones and twelve other individuals filed a lawsuit in the North Carolina General Court of Justice, Superior Court Division, Wake County, against Smithfield Foods, Inc., three of its subsidiaries, Wendell H. Murphy, Sr., Wendell H. Murphy, Jr., and Joseph W. Luter, III, referred to as the “Jones Suit.” The Jones Suit alleged, among other things, claims based on negligence, trespass, strict liability and unfair trade practices related to the operation of swine waste disposal lagoons and sprayfields in North Carolina. The lawsuit sought numerous and costly remedies, including injunctive relief to end all use of hog waste disposal lagoons in North Carolina, unspecified but costly remediation efforts and other damages. On March 27, 2001, the Superior Court granted the Company’s motion and dismissed the lawsuit. The plaintiffs noted their appeal on April 11, 2001. The plaintiffs’ appeal has been fully briefed and is awaiting oral argument.

Also in February 2001, Water Keeper Alliance Inc., Thomas E. Jones d/b/a Neuse Riverkeeper, and Neuse River Foundation filed two lawsuits in the United States District Court for the Eastern District of North Carolina against Smithfield Foods, Inc., one of the Company’s subsidiaries, and two of that subsidiary’s hog production facilities in North Carolina, referred to as the “Citizens Suits.” The Citizens Suits allege, among other things, violations of various environmental laws at each facility and the failure to obtain federal permits at each facility. The lawsuits seek remediation costs, injunctive relief and substantial civil penalties. The Company and its subsidiaries’ motions to dismiss were denied and these cases are set for trial in October 2003. The Company has investigated the allegations made in the Citizens Suits and believes that the outcome of these lawsuits will not have a material adverse effect on the Company’s financial condition or results of operations.

The Company has also received notices from several organizations, including the Water Keeper Alliance, of their intent to file additional lawsuits against the Company under various federal environmental statutes regulating water quality, air quality and management of solid waste. These threatened lawsuits may seek civil penalties, injunctive, relief and remediation costs. However, the Company is unable to determine whether any of these notices will result in suit being filed.

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, referred to as 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 certain 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 20 days within which to file an amended complaint. On March 15, 2002, the plaintiffs filed their second amended complaint. On June 24, 2002, the District Court granted the Company’s and Mr. Luter’s motion to dismiss the plaintiffs’ second amended complaint with prejudice and issued an order imposing monetary sanctions against the plaintiffs’ attorneys. The plaintiffs noted their appeal on July 24, 2002. The Company continues to believe that the Anderson Suit is baseless and without merit and the Company will defend the suit vigorously.

The Company believes that all of the litigation described above represents the agenda of special advocacy groups including the Water Keeper Alliance Inc. The plaintiffs in these cases have stated that federal and state environmental agencies have declined to bring any of these suits and, indeed, have criticized these agencies.

As of April 28, 2002, the Meat Processing Group had approximately 36,500 employees, approximately 15,300 of whom are covered by collective bargaining agreements expiring between December 20, 2002 and April 3, 2007, and the Hog Production Group had approximately 4,500 employees, none of whom are covered by collective bargaining agreements. Replacements for collective bargaining agreements that expired October 31, 2001 and April 30, 2002 are still being negotiated. While the Company believes that its relationship with its employees is satisfactory, the Company is involved in several proceedings on appeal to the National Labor Relations Board concerning two meat processing facilities. In one proceeding before the National Labor Relations Board, an administrative law judge has directed that a bargaining order be entered against the Company. The outcome of these appeals may determine whether approximately 1,800 employees will be union represented or whether new representation elections will be conducted to determine this issue.

The following table lists the Company’s material plants and other physical properties. These properties are suitable for the Company’s needs.

The Hog Production Group owns and leases numerous hog production facilities, primarily in North Carolina, Utah and Virginia, with additional hog production facilities in Colorado, South Carolina, Illinois, Texas and Oklahoma. A substantial number of these owned facilities are pledged under related loan agreements.

Smithfield Foods and certain of its subsidiaries are parties to several environmental litigation matters discussed under “Business—Regulation” above. Apart from those matters, Smithfield Foods and its subsidiaries and affiliates are parties in various lawsuits arising in the ordinary course of business. In the opinion of management, any ultimate liability with respect to these ordinary course matters will not have a material adverse effect on the Company’s financial position or results of operations.

No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

The following table sets forth the name and age, position with the Company and business experience during the past five years of each of the executive officers of the Company. The Board of Directors elects executive officers to hold office until the next annual meeting of the Board of Directors or until their successors are elected, or until their resignation or removal.

The Common Stock of the Company trades on The New York Stock Exchange under the symbol “SFD.” The following table shows the high and low sales price of the Common Stock of the Company for each quarter of fiscal 2002 and 2001, all of which are adjusted for the two-for-one stock split in the form of a stock dividend effected in September 2001.

As of July 10, 2002, there were 1,194 record holders of the Common Stock. In addition, there were on such date 199 record holders of the Exchangeable Shares issued by Smithfield Foods’ subsidiary Smithfield Canada Limited, an Ontario corporation. The terms of such Exchangeable Shares are incorporated by reference as an exhibit to this Annual Report on Form 10-K.

The Company has never paid a cash dividend on its Common Stock and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the terms of certain of the Company’s debt agreements prohibit the payment of cash dividends on the Common Stock. The payment of cash dividends, if any, would be made only from assets legally available for that purpose and would depend on the Company’s financial condition, results of operations, current and anticipated capital requirements, restrictions under then existing debt instruments and other factors then deemed relevant by the board of directors.

The following table summarizes our equity compensation plans as of April 28, 2002:

The selected consolidated financial data set forth below for the fiscal years indicated were derived from the Company’s audited consolidated financial statements. The information should be read in conjunction with the Company’s consolidated financial statements (including the notes thereto) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in, or incorporated by reference into this report.

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 statements and the notes to the consolidated financial statements.

The Company is comprised of a Meat Processing Group (the “MPG”) and a Hog Production Group (the “HPG”). The MPG consists primarily of 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 U.S. and certain joint venture investments outside the U.S.

The following acquisitions affect the comparability of the results of operations for fiscal year 2002, 2001 and 2000:

In October of fiscal 2002, the Company acquired Packerland Holdings, Inc. and its affiliated companies for 6.3 million shares of the Company’s common stock plus assumed debt and other liabilities. In June of fiscal 2002, the Company acquired Moyer Packing Company for $90.5 million in cash and assumed debt. Packerland Holdings and Moyer Packing represent the Company’s newly formed beef processing operations. Prior to the acquisitions, Packerland Holdings and Moyer Packing had combined annual sales of approximately $2 billion.

In September of fiscal 2002, the Company acquired the remaining common shares of Schneider Corporation, for 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 of fiscal 2002, the Company acquired substantially all of the assets and business of Gorges/Quik-to-Fix Foods, Inc. for $31.0 million in cash. Prior to the acquisition, Quik-to-Fix Foods had annual sales of approximately $140 million.

In the Company’s third quarter of fiscal 2001, Schneider increased its investment in Saskatchewan-based Mitchell’s Gourmet Foods Inc. to 54%, requiring the Company to consolidate Mitchell’s Gourmet Foods accounts and to discontinue using the equity method of accounting for Mitchell’s Gourmet Foods. For the fiscal year ended October 2000, Mitchell’s Gourmet Foods had annual sales of approximately $190 million.

In January of fiscal 2000, the Company acquired Murphy Farms, Inc. and its affiliated companies for 22.6 million shares of the Company’s common stock and the assumption of $203.0 million in debt, plus other liabilities.

In August of fiscal 2000, the Company acquired the capital stock of Société Financière de Gestion et de Participation S.A. (“SFGP”), a private-label processed meats manufacturer in France. Prior to the acquisition, SFGP had annual sales of approximately $100 million.

Each of these acquisitions was accounted for using the purchase method of accounting. The accompanying consolidated financial statements include the financial position and results of operations from the dates of acquisition.

Sales increased $1.5 billion, or 24.7%, reflecting $1.3 billion of incremental sales of acquired businesses in fiscal 2002 and 2001 and a 4.3% increase in unit selling prices in the MPG. See the following sections for comments on sales changes by business segment.

Gross profit increased $144.0 million, or 15.2%, primarily the result of higher pork margins in the MPG, the inclusion of $67.5 million of gross profit of acquired businesses and lower raising costs in the HPG. Higher MPG margins were the result of product mix in processed meats, a favorable operating environment for fresh pork and a strong emphasis on branded and value-added fresh pork categories. Gross margin percentage decreased to 14.9% from 16.1% primarily due to the acquisitions of beef operations. The beef operations are primarily non-branded, fresh meat businesses with accompanying lower margins. Excluding the beef operations, current year gross margin percentage increased to 16.9% on improved product mix and margins in processed meats.

Selling, general and administrative expenses increased $93.0 million, or 20.6%. This increase was primarily due to the inclusion of $54.4 million in expenses of acquired businesses, increased advertising and promotion of branded fresh and processed meats, and a $5.0 million loss incurred as a result of a fire at a Circle Four farm in Utah. These increases were partially offset by the elimination of goodwill amortization from the adoption of the Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) in fiscal 2002. Had SFAS 142 been effective in fiscal 2001, selling, general and administrative expenses would have been reduced by $8.8 million.

Depreciation expense increased $15.1 million, or 12.1%, due to the inclusion of depreciation expense of acquired businesses.

Interest expense increased $5.4 million, or 6.0%, due to the inclusion of the debt of acquired businesses and additional borrowings associated with the acqusitions and the Company’s share repurchase program, partially offset by a decrease in the average interest rates on the revolving credit facility and other variable rate debt.

The effective income tax rate increased to 38.0% in fiscal 2002 as compared to 37.4% in fiscal 2001. The increase was due to the increase in the valuation allowance for losses at foreign operations. The Company had a valuation allowance of $28.8 million and $20.2 million related to income tax assets as of April 28, 2002 and April 29, 2001, respectively, primarily the result of losses in foreign jurisdictions for which no tax benefit was recognized.

Net income and net income per diluted share for fiscal 2002 and 2001, adjusted for nonrecurring items, are presented below.

Earnings per diluted share, as shown in the preceding table, was also affected by the issuance of shares in connection with the acquisition of Packerland Holdings and the purchase of Schneider’s remaining shares in fiscal 2002 and the retirement of shares under the Company’s share repurchase program in fiscal 2002 and 2001.

Sales increased by $749.5 million, or 14.6%, on a 12.0% increase in unit selling prices in the MPG and the incremental sales of acquired businesses in fiscal 2001 and 2000. See the following sections for comments on sales changes by business segment.

Gross profit increased $254.8 million, or 36.7%, primarily the result of the inclusion of Murphy Farms, sharply improved margins in the HPG due to higher live hog prices and higher margins in the MPG. Higher MPG margins were the result of more favorable product mix and increased focus on margin improvement.

Selling, general and administrative expenses increased $60.3 million, or 15.4%, primarily on the inclusion of selling, general and administrative expenses of acquired businesses, increased promotion of processed meats and expenses related to the attempted merger with IBP, inc. Also in fiscal 2001, the Company recognized a $5.1 million gain on the sale of a plant in Canada that is reported in selling, general and administrative expenses.

Depreciation expense increased $14.9 million, or 13.6%, primarily related to the inclusion of the depreciation expense of acquired businesses and increased depreciation expense in the existing business reflecting capital expenditures to increase processed meats, case-ready and other value-added fresh pork capacities.

Interest expense increased $17.0 million, or 23.7%, primarily due to the inclusion of interest expense on assumed debt of acquired businesses, additional borrowings associated with the Company’s investment in the common stock of IBP and the share repurchase program, partially offset by lower average borrowing costs.

In fiscal 2001, the Company sold 8.2 million shares of IBP common stock resulting in a pretax gain of $79.0 million.

The effective income tax rate was 37.4% for fiscal 2001 and 2000. The Company had a valuation allowance of $20.2 million and $5.3 million related to income tax assets as of April 29, 2001 and April 30, 2000, respectively, primarily the result of losses in foreign jurisdictions for which no tax benefit was recognized.

Reflecting the factors previously discussed, net income increased to $223.5 million, or $2.03 per diluted share, in fiscal 2001 up from $75.1 million, or $.76 per diluted share, in fiscal 2000. Excluding the gain on the sale of IBP common stock and the plant in Canada, net of related expenses and income taxes, net income increased to $174.9 million, or $1.59 per diluted share. Earnings per diluted share was also affected by the issuance of shares in connection with the acquisition of Murphy Farms in fiscal 2000 and the retirement of shares under the Company’s share repurchase program in fiscal 2001 and 2000.

MPG sales increased $1.5 billion, or 26.2%, due to an 18.6% increase in fresh and processed meats sales volume and a 4.3% increase in average unit selling prices of pork products. The sales volume increases were

Operating profit in the MPG increased $62.8 million due to higher margins in both fresh and processed meats, partially offset by increased advertising and promotional costs and a $5.1 million gain on the sale of a plant in Canada in fiscal 2001. The Company’s beef operations contributed $10.0 million to operating profit. Fresh meat margins increased as the Company continued its emphasis on the branded, value-added fresh pork categories. Increased processed meat margins reflected higher pricing and improved product mix.

MPG sales increased $600.6 million, or 12.0%, on a significant increase in unit selling prices and the inclusion of the sales of acquired businesses. The unit selling price increase was primarily attributable to higher live hog costs and a greater proportion of branded and value-added fresh pork in the sales mix. In fiscal 2001, fresh pork volume increased 2.2%, primarily on branded fresh pork and case-ready while processed meats volume remained relatively flat. Sales volume of other products (primarily by-products) decreased 5.5%. Excluding acquired businesses, sales volume decreased 2.1%, the result of a 3.9% decrease in processed meats volume partially offset by a 0.8% increase in fresh pork volume. Sales volume decreases in processed meats in the base business reflected the elimination of certain lower margin business due in part to plant closures in Poland and the U.S. These decreases were partially offset by the inclusion of the sales volume of Mitchell’s Gourmet Foods and SFGP.

Operating profit in the MPG increased $12.3 million, the result of sharply higher margins on processed meats offset by lower margins on fresh pork. Margins in processed meats reflected better pricing, lower production costs and improved product mix. Fresh pork margins were down, largely the result of higher live hog costs which were partially offset by an improved product mix resulting from the growth in the branded, value-added and case-ready categories. MPG operating profit also increased due to a $5.1 million gain on the sale of a plant in Canada and the incremental operating profit from acquired businesses.

HPG sales increased $39.5 million, or 3.2%, due to a small increase in head sold, offset by a slight decrease in live hog prices. HPG had sales of $1.0 billion, at current prices, to the MPG which are eliminated in the Company’s Consolidated Statements of Income.

Operating profit in the HPG decreased $14.7 million due to a 1.7% decrease in live hog prices and a $5.0 million loss incurred as a result of a fire at a Circle Four farm in Utah, partially offset by the impact of favorable commodity hedging contracts and lower raising costs.

HPG sales increased by $490.5 million due to the inclusion of a full year of the sales of Murphy Farms compared to only four months in fiscal 2000. HPG sales also benefited from a 10.5% increase in live hog prices in the base business. With the acquisition of Murphy Farms in fiscal 2000, hogs sold in fiscal 2001 increased to 11.8 million from 7.7 million in the comparable period in fiscal 2000. The HPG had sales of $0.9 billion, at current prices, to the MPG which are eliminated in the Company’s Consolidated Statements of Income.

Operating profit in the HPG increased $181.7 million primarily as a result of sharply higher live hog prices, relatively stable grain costs and increased volume from the Murphy Farms acquisition. In addition, the HPG realized cost savings on production efficiencies between the hog production units and the MPG plants.

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 considers the MPG meat inventories and accounts receivable highly liquid and readily convertible into cash. The Company’s hog production operations also have rapid turnover of accounts receivable. Inventory turnover in the HPG is slower; however, mature hogs are readily convertible into cash. Borrowings under the Company’s credit facilities are used to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs. 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.

Cash provided by operations increased to $298.6 million in fiscal 2002 from $218.3 million in fiscal 2001. This increase was primarily attributed to higher earnings, excluding gains on the sale of IBP common stock of $7.0 million and $79.0 million in fiscal 2002 and 2001, respectively. Changes in operating assets and liabilities used $43.9 million of cash in fiscal 2002 compared to $56.4 million in fiscal 2001, primarily due to less cash deposited for commodity hedging commitments, offset by higher accounts receivable balances resulting from a growth in revenue.

Cash used in investing activities was $277.3 million in fiscal 2002 compared to $59.8 million in fiscal 2001. The increase was primarily due to the cost of business acquisitions in fiscal 2002 and the net proceeds from the sale of IBP stock in the prior year. During fiscal 2002, the Company invested $167.0 million in business acquisitions, primarily related to the acquisitions of Moyer Packing and Quik-to-Fix Foods. Capital expenditures totaled $171.0 million primarily related to fresh pork and processed meats expansion and plant improvement projects and additional hog production facilities. In addition, the Company had proceeds of $38.9 million during fiscal 2001 from the sale of property, plant and equipment, primarily the result of the sale of a plant in Canada. As of April 28, 2002, the Company had definitive commitments of $70.8 million for capital expenditures, primarily for processed meats expansion and production efficiency projects.

The Company’s financing activities in fiscal 2002 resulted in a net use of $7.7 million of cash. Fiscal 2002 financing activities included the issuance of $300.0 million of eight-year 8.0% senior unsecured notes in October 2001. Net proceeds of the issuance were used 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 4.6 million shares of the Company’s common stock. In the first quarter of fiscal 2002, a new credit facility was placed at Animex Sp. z.o.o., the Company’s Polish subsidiary. This facility provides for up to $100.0 million of financing and replaced numerous short-term and long-term borrowings from local Polish lenders. The facility, which expires in fiscal 2007, is secured by substantially all Animex assets and is guaranteed by the Company. In October 2001, Schneider issued $41.6 million (CDN $65.0 million) of 15-year 7.5% debentures. The debentures are secured by certain assets of Schneider and are guaranteed by the Company. Separately, Schneider also extended its $28.8 million (CDN $45.0 million) committed credit facility to fiscal 2004. In December 2001, the Company entered into a five-year $750.0 million revolving credit agreement. The

In February 2002, the Company’s board of directors approved a new 2.0 million share repurchase program. As of July 15, 2002, the Company has 1.7 million shares remaining which can be repurchased under this authorization.

The Company is exposed to market risks primarily from changes in commodity prices, as well as changes in interest rates and foreign exchange rates. To mitigate these risks, the Company enters into various hedging transactions that have been authorized pursuant to the Company’s policies and procedures. The Company believes the risk of default or nonperformance on contracts with counterparties is not significant.

The Company’s meat processing and hog production operations use various raw materials, primarily live hogs, live cattle, corn and soybean meal, which are actively traded on commodity exchanges. These commodities are subject to price fluctuations due to factors beyond the Company’s control such as economic and political conditions, supply and demand of these raw materials and competing products, weather, governmental regulation and other circumstances. The Company hedges these commodities when and to the extent management determines conditions are appropriate to mitigate these price risks. While this may limit the Company’s ability to participate in gains from favorable commodity fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material losses. The Company attempts to closely match the commodity contract terms with the hedged item. As of April 28, 2002, the sensitivity of the Company’s open contracts to a hypothetical 10% change in their market price was $4.3 million.

The Company enters into interest rate swaps to hedge exposure to changes in interest rates on certain financial instruments and periodically enters into foreign exchange forward contracts to hedge certain of its foreign currency exposure. As of April 28, 2002, the sensitivity of the Company’s open interest rate and foreign currency contracts to a hypothetical adverse 10% change in interest rates and foreign exchange rates was $0.6 million and $2.2 million, respectively.

The preparation of the Company’s Consolidated Financial Statements requires management to make certain estimates and assumptions, which affect the amounts reported in the Company’s Consolidated Financial Statements. These estimates may differ from actual results. The following is a summary of accounting policies that require management’s estimates and assumptions and are considered critical by the Company.

The Company adopted SFAS 142 in fiscal 2002. Accordingly, the Company no longer amortizes goodwill and certain other intangible assets on a periodic basis. Instead, SFAS 142 requires that these assets be tested at least annually for impairment. This test involves comparing the fair value of each reporting unit to the unit’s

The Company uses derivative financial instruments to manage exposures to fluctuations in commodity prices and accounts for the use of such instruments in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” as amended (SFAS 133). SFAS 133 requires a quarterly historical assessment of the effectiveness of the instrument to hedge changes in the fair value of the hedged item. In rare circumstances, volatile activity in the commodity markets could cause this assessment to temporarily reflect the instrument as an ineffective hedge and hedge accounting would be discontinued. In addition, the Company routinely hedges forecasted transactions. In the unusual circumstance that these transactions fail to occur, hedge accounting would be discontinued. In both situations, the discontinuance of hedge accounting would require changes in the fair value of the derivative instrument to be recognized in current period earnings. Management believes that the assumptions and methodologies used in the accounting for derivative financial instruments are the most appropriate and reasonable for the Company’s hedging program.

As a participant in the meat processing and hog production industries, the Company is subject to risks and uncertainties which, have had at times, and may in the future have, material adverse effects on its results of operations and financial position.

The Company is largely dependent on the cost and supply of hogs, cattle, feed ingredients and the selling price of our products and competing protein products, all of which are determined by constantly changing market forces of supply and demand as well as other factors over which the Company has little or no control. These other factors include fluctuations in the size of North American hog and cattle herds, environmental and conservation regulations, import and export restrictions, economic conditions, weather and livestock diseases. The Company manages these risks through the use of financial instruments, which are described above.

The Company is subject to risks affecting the food industry generally, including risks posed by food spoilage and contamination, consumer product liability claims, product tampering and the potential cost and disruption of a product recall.

The Company’s manufacturing facilities and products are subject to constant federal inspection and extensive regulation in the food safety area (see also Note 12). The Company has systems in place to monitor food safety risks throughout all stages of the manufacturing process (including the production of raw materials in the HPG). However, the Company cannot assure that compliance with procedures and regulations will necessarily mitigate the risk related to food safety nor that the impact of a product contamination will not have a material adverse impact to the financial statements.

The Company’s operations are subject to extensive and increasingly stringent federal, state and local laws and regulations pertaining to, among other things, the discharge of materials into the environment and the handling and utilization or disposition of materials and organic wastes or other potential contaminants. See Note 12 for further discussion of regulatory compliance as it relates to environmental risk. Failure to comply with these laws and regulations and future changes to them may result in significant costs including civil and criminal penalties, liability for damages and negative publicity.

The Company has incurred, and will continue to incur, significant capital and operating expenditures to comply with these laws and regulations. The Company closely monitors compliance with regulatory requirements through a variety of environmental management systems. However, the Company cannot assure that additional environmental issues will not require currently unanticipated investigation, assessment or expenditures, or that requirements applicable to the Company will not be altered in ways that will require it to incur significant additional costs.

The Company is subject to risks relating to its ability to maintain animal health status in the HPG. Livestock health problems could adversely impact production, supply of raw material to the MPG and consumer confidence.

The Company monitors herd health on a daily basis and has bio-security procedures and employee training programs in place throughout the hog production network to reduce the risk related to potential exposure of hogs to infectious diseases. Although there have been no reported cases of major livestock disease outbreaks in North America, there have been adverse effects in the livestock industries of Europe and South America from disease, and the Company cannot assure that livestock disease will not have a material adverse affect on its business.

Recently Congress considered legislation that would have prohibited meat packers from owning livestock except under limited circumstances. This legislation did not pass, but the Company cannot assure that similar legislation affecting its operations will not be adopted at the federal or state levels in the future. Such legislation, if adopted, could have a materially adverse impact on the Company’s operations and its financial statements. The Company has and will continue to aggressively challenge any such legislation.

The Company has made numerous acquisitions in recent years and regularly reviews opportunities for strategic growth through acquisitions. These acquisitions may involve large transactions and present financial, managerial and operational challenges including difficulty in integrating personnel and systems, assumption of unknown liabilities and potential disputes with the sellers and other service or product suppliers.

The Company’s operations and investment activities depend upon access to debt and equity capital markets. The Company and certain of its operating subsidiaries have entered into separate debt agreements that contain financial covenants tied to working capital, net worth, leverage, interest coverage, fixed charges and capital expenditures, among other things. The debt agreements restrict the payment of dividends to shareholders and under certain circumstances may limit additional borrowings and the acquisition or disposition of assets.

As currently structured, a breach of a covenant or restriction in any of the agreements could result in a default that would in turn default other agreements allowing the affected lenders to accelerate the repayment of

This report contains “forward-looking” statements within the meaning of the federal securities laws. The forward-looking statements include statements concerning our 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. Forward-looking 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 availability and prices of live hogs and cattle, raw materials and supplies, food safety, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, hedging risk, operating efficiencies, changes in interest rate and foreign currency exchange rates, access to capital, the cost of compliance with environmental and health standards, adverse results from on-going litigation, actions of domestic and foreign governments and the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations.

Incorporated by reference to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

All statements other than historical information incorporated in this Item 7A are forward looking statements. The actual impact of future market changes could differ materially because of, among others, the factors discussed in this Annual Report on Form 10-K.

The consolidated financial statements listed in Item 14(a) hereof are incorporated herein by reference and are filed as a part of this report beginning on page F-1.

None.

(a)  Information required by this Item regarding directors and all persons nominated or chosen to become directors is incorporated by reference from the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 28, 2002 under the headings entitled “Nominees for Election to Three-Year Terms,” “Directors whose Terms do not Expire this Year” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

(b)  Information required by this Item regarding the executive officers of the Company is included in Part I, Item 4A of this Annual Report on Form 10-K.

Information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 28, 2002 under the headings entitled “Summary Compensation Table,” “Option Grants in Last Fiscal Year,” “Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values,” “Pension Plan Table,” and “Compensation Committee Interlocks and Insider Participation” and the last paragraph under the heading entitled “Board of Directors and Committees.”

Information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 28, 2002 under the headings entitled “Principal Shareholders” and “Common Stock Ownership of Executive Officers and Directors.”

Information required by this Item is incorporated by reference from the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on August 28, 2002 under a heading entitled “Other Transactions.”

(a)  1. and 2.  Index to Financial Statements and Financial Statement Schedule

An “Index to Financial Statements and Financial Statement Schedule” has been filed as a part of this Form 10-K Annual Report on page F-1 hereof.

3.  Exhibits

(b)  Reports on Form 8-K.

Date: July 29, 2002

We have audited the accompanying consolidated balance sheet of Smithfield Foods, Inc. (a Virginia corporation) and subsidiaries as of April 28, 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated balance sheet of Smithfield Foods, Inc. and subsidiaries as of April 29, 2001, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the two years in the period ended April 29, 2001, were audited by other auditors whose report dated June 5, 2001, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Smithfield Foods, Inc. and subsidiaries as of April 28, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the Consolidated Financial Statements, effective, April 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”