Smithfield Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended October 30, 2011. Comparisons are with the corresponding fiscal 2011 periods. Smithfield produces and markets pork, packaged meats, and hogs through its Pork, Hog Production, International, and Corporate segments.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $3,312.6 million, up 10% | $6,406.8 million, up 9% |
| Gross profit and margin | $419.6 million; 13%, versus 14% | $826.7 million; 13%, versus 14% |
| Operating profit | $224.7 million, down from $278.1 million | $397.9 million, down from $455.7 million |
| Net income | $120.7 million, versus $143.7 million | $202.8 million, versus $220.0 million |
| Diluted earnings per share | $0.74, versus $0.86 | $1.23, versus $1.32 |
| Operating cash flow | $(66.3) million for the six months, versus $237.8 million generated in the prior-year period |
- Higher selling prices and volumes lifted sales, but higher raw-material costs pressured profitability. Domestic live-hog market prices rose 22% in the quarter and 20% over six months; hog-raising costs rose 20% and 18%, respectively.
- Quarterly Pork segment operating profit fell to $171.2 million from $188.9 million; Hog Production profit fell to $63.9 million from $78.3 million; International profit fell to $17.3 million from $44.1 million. Corporate operating loss was $27.7 million.
- Interest expense declined 33% in the quarter and 31% over six months, reflecting debt reductions under Project 100. Debt-extinguishment losses were $6.4 million for the quarter and $7.6 million for six months.
- Cash and cash equivalents were $136.4 million at period-end, down from $374.7 million at May 1, 2011. Current assets were $3,257.9 million and current liabilities $1,166.4 million.
- Management reported approximately $1.1 billion of liquidity: $952.8 million available under credit facilities and $136.4 million of cash. Net debt to total capitalization was 37%.
- Long-term debt and capital lease obligations were $2,089.3 million, with a further $73.7 million current portion. Operating cash flow was affected by higher payments for hogs and grain, $132.1 million of pension contributions, and changes in operating assets and liabilities. Capital expenditures were $139.4 million.
Material changes and unusual items
- The company refinanced its $1.0 billion asset-based revolver into a $925 million inventory revolver and a $275 million receivables securitization facility. It also refinanced a $200 million term loan, extending its maturity to June 2016. The inventory revolver has financial covenants and may mature earlier under specified conditions.
- During the six months, Smithfield repurchased 5.5 million shares for $110.6 million, funded from cash on hand. It also made a voluntary $100 million pension contribution; expected fiscal 2012 pension contributions were approximately $140 million.
- In the first quarter, the company recorded a $39 million charge related to Missouri nuisance litigation. It said a global settlement with substantially all plaintiffs was probable, but no agreement had been signed; the maximum additional exposure could not be reasonably estimated. A separate $11.1 million jury judgment was affirmed, and the company said it would pay it plus interest.
- The announced closure of the Portsmouth, Virginia plant and production shift to Kinston, North Carolina entails an estimated $85 million expansion. Completion was expected by fiscal 2013. The company recorded $0.4 million accelerated depreciation, $0.8 million of inventory write-downs, and $0.6 million of severance costs in the quarter, and expected $7.6 million of further accelerated depreciation over 18 months.
- Accelerated depreciation tied to permanently idled Missouri hog-farm assets was $3.2 million for the quarter and $7.5 million for six months; a further $0.7 million was expected in the third quarter.
- Smithfield reported no impairment of its Campofrío Food Group investment at October 30, despite market-price volatility and carrying value exceeding the underlying share-market value at period-end. Management said an extended or persistent decline could result in a future impairment.
- Other exposures include guarantees of up to $87 million of joint-venture debt (with $60 million outstanding) and $11.9 million of leases transferred in the Smithfield Beef sale.
Outlook and risks
- Pork: Management remained optimistic about fresh-pork performance for the balance of fiscal 2012, citing exports, particularly to Asia, and supportive market conditions. It targeted 3% full-year packaged-meats volume growth and expected packaged-meats margins to average $0.10–$0.15 per pound. Weaker export demand could pressure margins.
- Hog Production: Favorable grain hedges and expected easing in feed costs were expected to moderate raising costs. Management did not expect meaningful third-quarter operating profit but anticipated full-year results within a normalized range.
- International: Management was cautiously optimistic about modest profitability for the balance of fiscal 2012, while warning that recessionary conditions in Europe could continue to pressure Campofrío results.
- Results remain sensitive to volatile hog and grain prices, export demand, foreign exchange, livestock disease, food safety, regulation, litigation, interest rates, and access to capital. Management said cash flows and available credit were expected to meet working-capital and financial obligations for at least twelve months.
Important facts for investors to verify
- Progress and final terms of the Missouri litigation settlement, including whether the $39 million accrual is sufficient and what insurance recoveries are available.
- Whether export demand and fresh-pork margins remain strong, and whether higher raw-material and hog-raising costs are contained.
- Actual cash generation, pension contributions, capital spending, and liquidity after share repurchases and planned facility investments.
- Compliance with credit-facility covenants and the conditions that could accelerate the inventory revolver’s maturity.
- Whether Campofrío’s market valuation and operating performance change the company’s impairment assessment.