Smithfield Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2011, ended October 31, 2010; comparisons are with the periods ended November 1, 2009. Unaudited consolidated results. Smithfield is a pork processor and hog producer, reporting Pork, Hog Production, International, Other and Corporate segments.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Sales | $2,998.8 million | $2,692.4 million | $5,900.1 million | $5,407.7 million |
| Gross profit | $432.7 million | $168.3 million | $800.4 million | $267.0 million |
| Operating profit (loss) | $278.1 million | $1.8 million | $455.7 million | $(73.0) million |
| Net income (loss) | $143.7 million | $(26.4) million | $220.0 million | $(134.1) million |
| Diluted EPS | $0.86 | $(0.17) | $1.32 | $(0.90) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $237.8 million | $130.2 million |
Q2 gross margin was approximately 14.4%, versus 6.3% a year earlier; operating margin was approximately 9.3%, versus 0.1%. Six-month gross margin was approximately 13.6%, versus 4.9%; operating margin was approximately 7.7%, versus a loss of 1.3% of sales.
Q2 sales rose 11%, while cost of sales rose 2%. For the six months, sales increased 9% and cost of sales declined 1%. Earnings rebounded substantially, principally reflecting improved hog production results and stronger fresh pork performance. Packaged meats profit declined amid higher raw material costs.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $237.8 million, compared with $130.2 million. Investing cash outflow was $37.5 million, including $68.3 million of capital expenditures; financing cash outflow was $222.8 million. Cash fell $22.0 million from May 2, 2010, to $429.2 million.
- At October 31, 2010, current assets were $3,573.2 million and current liabilities $1,614.2 million; working capital was approximately $1,959 million and the current ratio approximately 2.2. Inventories were $1,956.6 million, up from $1,836.9 million at year-end.
- Debt-related balance-sheet lines were $38.5 million of notes payable, $463.1 million of current long-term debt and capital leases, and $2,325.9 million of long-term debt and capital leases. The filing reports $2,761.2 million carrying value for long-term debt including its current portion; the debt and capital-lease line items do not reconcile exactly to that figure.
- Management reported approximately $1.3 billion of liquidity at October 31: $429.2 million cash, $855.6 million available under the $1.0 billion ABL facility, and $42.5 million available under international lines. No ABL borrowings were outstanding; the facility had $144.4 million of letters of credit. Management said liquidity and operating cash flow should meet needs for at least 12 months.
- Capital expenditures were expected to remain below depreciation in fiscal 2011. Approved projects had $119 million of estimated remaining expenditures. Management said there were no substantial debt obligations due until fiscal 2014, while noting the ABL facility’s July 2012 maturity and earlier-maturity conditions tied to refinancing or repaying 2011 notes.
Segments and material changes
- Pork: Q2 operating profit increased to $188.9 million from $173.7 million. Fresh pork profit rose to $113.4 million from $44.3 million, supported by higher market prices and lower slaughter levels; packaged meats profit fell to $75.5 million from $129.4 million due to higher input costs that could not be fully passed through. Pork sales volume declined 11% overall, while average selling prices increased 24%.
- Hog Production: Q2 operating profit was $78.3 million versus a $194.7 million loss. Domestic live hog prices averaged $56.13 per hundredweight, up 54%; raising costs were approximately flat at $53.00. The prior-year period was affected by depressed hog prices. Current-quarter results included a $19.1 million insurance-related benefit, breeding-stock sale gains and $15.3 million of cost-savings charges.
- International: Q2 operating profit was $44.1 million versus $43.0 million. Six-month profit was $68.6 million, essentially unchanged. Lower Romanian government subsidies weighed on results; higher Mexican joint-venture earnings provided support.
- Corporate: Q2 operating loss widened to $30.2 million from $19.4 million, mainly due to higher variable compensation and transaction-related professional fees.
- Segment reporting was reorganized in fiscal 2011: hog production operations in Poland, Romania and Mexico moved from Hog Production to International; prior-year segment figures were restated.
Outlook, risks and unusual items
- Management cautioned that volatile commodity markets make forecasts difficult. It expected fresh pork margins to ease from Q2 record levels but remain above historical norms, supported by tight supplies, low freezer stocks, export demand and a weaker U.S. dollar. Packaged meats were expected to remain solidly profitable, with margins above historical levels; management forecast average margins above $0.10 per pound for the balance of fiscal 2011.
- Management expected seasonal pressure on hog production margins in the third quarter. Domestic raising costs were expected to remain in the mid-$50s per hundredweight for fiscal 2011. A multiyear cost-savings initiative was expected to reduce base raising costs by about $2 per hundredweight when fully realized, currently anticipated by fiscal 2014; management did not expect a significant fiscal 2011 benefit.
- In December 2010, Smithfield completed the sale of its 49% Butterball interest and related turkey assets for $167.0 million. The Other segment was not expected to contribute further income or loss for the rest of the fiscal year.
- Subsequent to quarter-end, Smithfield tendered for and repurchased $318.4 million face amount of 2011 notes for $332.4 million; an approximately $14 million loss was expected in Q3. During Q2 it had repurchased $203.8 million face amount for $210.7 million and recorded a $7.3 million loss.
- A December agreement in principle set a $208 million settlement for the Patrick Cudahy plant fire; after $75.5 million in advances, $132.5 million was expected in Q3. Management anticipated a Q3 gain of approximately $120–$125 million.
- Key exposures include hog, grain and other commodity prices, hedging-related margin collateral, interest and foreign-exchange rates, food safety and livestock disease, debt and access to capital, litigation, and regulation. The EPA’s partial E15 waiver and proposed GIPSA rules could affect feed costs or industry practices; the company said impacts were not yet assessable. Joint-venture debt guarantees included up to $74.5 million for Norson, of which $60.8 million was outstanding, and $13.0 million of lease guarantees related to the former Smithfield Beef business.
- The filing reported no material changes to previously disclosed risk factors, no significant new litigation matters, and effective disclosure controls as of October 31, 2010. A Missouri nuisance case against Smithfield was dismissed as to the company; other claims remained pending. The company estimated its costs associated with the Souderton wastewater matters at approximately $3.1 million.
Most important facts for investors to verify
- How much of the earnings rebound reflects sustainable operating performance versus higher cyclical hog and pork prices, breeding-stock gains and the $19.1 million insurance-related benefit?
- Whether packaged-meats margins recover as higher livestock costs flow through pricing, and whether fresh pork margins remain above historical norms.
- Actual proceeds, accounting gain and cash-flow effects from the Butterball sale and Patrick Cudahy fire settlement.
- Post-quarter debt repurchases, the resulting debt balance and liquidity, and the ABL facility’s maturity/refinancing conditions.
- Execution, remaining costs and timing of the Hog Production cost-savings initiative, alongside feed-price, subsidy, regulatory and litigation risks.