Business context and reporting period
Smithfield Foods, Inc. filed this Form 10-K for the 52-week fiscal year ended April 28, 2013. It is an annual report, not a report for calendar 2012 Q4; it also provides quarterly results for fiscal 2013. Smithfield was a vertically integrated pork producer and processor, with Pork, Hog Production, International and Corporate reporting segments.
A significant subsequent event: on May 28, 2013, Smithfield agreed to be acquired by Shuanghui International for $34.00 per share in cash, subject to shareholder, regulatory and other closing conditions. The transaction had not closed as of the filing.
Financial performance and liquidity
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Sales | $13.221 billion | $13.094 billion |
| Gross profit / margin | $1.320 billion / 10% | $1.549 billion / 12% |
| Operating profit | $519.3 million | $722.6 million |
| Net income | $183.8 million; $1.26 diluted EPS | $361.3 million; $2.21 diluted EPS |
| Cash from operations | $172.7 million | $570.1 million |
| Capital expenditures | $278.0 million | $290.7 million |
| Debt at year-end | $2.479 billion | $1.937 billion |
At April 28, 2013, cash was $310.6 million, working capital was $1.806 billion, and stated liquidity was approximately $1.6 billion, including $1.3 billion of credit-facility availability. Credit availability is subject to borrowing-base limits. Shareholders’ equity was $3.097 billion. Long-term pension liability was $697.0 million; pension plans’ reported funded deficit was $702.6 million.
Material changes versus the prior year
- Sales rose 1%, but gross profit fell 15% and net income fell 49%. Higher feed costs and lower U.S. pork prices pressured gross margin.
- Hog Production swung from $166.1 million operating profit to a $119.1 million loss, mainly due to lower hog prices and higher raising costs. Raising costs increased to $67.82 per hundredweight from $63.93; average live-hog prices declined 6% to $60.86.
- Pork segment operating profit edged up to $631.6 million. Packaged-meats profit improved to $470.0 million, while fresh-pork profit declined to $161.6 million.
- International operating profit increased to $108.2 million from $42.8 million, including stronger Eastern European performance and the absence of the prior-year $38.7 million share of CFG restructuring charges.
- Fiscal 2013 included $120.7 million of debt-extinguishment losses. Operating cash flow dropped substantially, reflecting, among other items, increased feed payments, lower customer receipts and Missouri settlement payments.
Fiscal 2013 fourth-quarter sales were $3.321 billion, operating profit $72.9 million and net income $29.7 million, compared with $3.209 billion, $154.2 million and $79.5 million, respectively, in fiscal 2012’s fourth quarter.
Outlook, risks and unusual items
- For fiscal 2014, management expected fresh-pork operating profit to average in the mid-single digits per head, despite weak near-term margins; packaged-meats margins in the low-to-middle part of a normalized range of $0.15–$0.20 per pound; and Hog Production margins in the mid-single digits per head, supported by lower raising costs and improved efficiency. Management expected some International segment weakness in Q1 followed by stronger results later in the year. These are forecasts, not results.
- Management planned annual capital spending of $300–$350 million over the next several years, increased marketing investment, and continued emphasis on branded/value-added products. The Kinston plant expansion was expected to be completed in the first half of fiscal 2014.
- The Shuanghui merger carried execution and regulatory risk, including shareholder approval, antitrust reviews and possible CFIUS-related action. Termination fees could be payable: up to $175 million by Smithfield in specified circumstances, or a $275 million reverse fee by Shuanghui in specified circumstances.
- Key business risks include volatile hog and feed prices, disease and food-safety events, export restrictions, customer concentration, labor matters, environmental regulation and litigation, foreign-exchange exposure, and substantial debt. Fiscal 2013 debt maturities included $675.1 million due within one year; a $200 million Bank of America term loan was scheduled to mature in February 2014.
- Smithfield completed a global settlement resolving substantially all Missouri nuisance litigation; payments and insurance recoveries affected operating cash flow. The Denison, Iowa wastewater enforcement matter remained under discussion; management did not expect a material adverse effect. Environmental consent-decree obligations remained in Missouri and North Carolina.
- Auditors issued unqualified opinions on the financial statements and internal controls. Management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether the $34-per-share Shuanghui transaction closed, and the status of approvals, financing and any termination provisions.
- Near-term debt repayment and refinancing needs, covenant compliance, and actual borrowing availability under facilities with borrowing-base restrictions.
- Whether feed costs, hog prices and pork margins support management’s fiscal 2014 outlook, particularly in Hog Production.
- Cash generation, working-capital needs and planned $300–$350 million annual capital expenditures.
- The valuation sensitivity of the 37% CFG investment: Smithfield reported no impairment, but disclosed that fair-value headroom had narrowed and continued deterioration could lead to a charge.
- Developments in environmental and nuisance litigation, animal-care transition costs, pension funding, and the Denison wastewater matter.