Smithfield Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended July 29, 2012; comparative period ended July 31, 2011. Smithfield produces and markets fresh and packaged meats and operates through Pork, Hog Production, International and Corporate segments.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Sales | $3,091.3 million | $3,094.2 million |
| Gross profit / margin | $332.2 million / about 10.7% | $407.1 million / about 13.2% |
| Operating profit | $131.8 million | $173.2 million |
| Net income | $61.7 million | $82.1 million |
| Diluted earnings per share | $0.40 | $0.49 |
| Operating cash flow | $67.3 million | $(64.2) million |
| Capital expenditures | $61.2 million | $62.9 million |
Sales were essentially flat, while gross profit fell 18% and net income fell about 25%. Lower gross margin primarily reflected higher Hog Production raising costs. SG&A declined to $201.1 million from $238.7 million, in part because the prior-year quarter included a $39.0 million Missouri litigation charge and $5.7 million of CFG acquisition-related fees. Interest expense decreased to $42.5 million from $48.1 million. The effective tax rate was 31%, compared with 34%.
Segment results: Pork operating profit declined to $118.6 million from $136.7 million: fresh pork recorded a $12.0 million loss versus $35.4 million profit, while packaged meats profit rose to $130.6 million from $101.3 million, a record $0.21 per pound. Hog Production profit dropped to $23.1 million from $69.7 million, principally due to higher feed costs. International operating profit improved to $15.8 million from break-even, with gains in Poland and Romania. Corporate operating loss narrowed to $25.7 million from $33.2 million.
Financial position, liquidity and capital allocation
At July 29, 2012, cash was $208.1 million, down from $324.3 million at April 29. Total assets were $7.37 billion and total equity was $3.29 billion. Debt and capital lease obligations totaled $1.99 billion on the balance sheet, including $616.2 million classified as current, largely after reclassification of notes due in 2013. The filing reports long-term debt, including current portion, at a carrying value of $1.962 billion.
Available liquidity was approximately $1.3 billion: $208.1 million cash plus $1.1 billion of available credit capacity. The company reported no borrowings on its Inventory Revolver or Securitization Facility; international facilities had $67.4 million outstanding. Management said operating cash flow and credit availability should meet working-capital needs and financial obligations for at least twelve months.
Financing cash outflow was $118.6 million, including $145.3 million to repurchase 7.4 million shares. Net cash declined $116.2 million during the quarter. Operating cash flow improved year over year, aided by lower pension contributions and higher domestic income-tax receipts. Capital spending was $61.2 million, including $21.3 million for the Kinston, North Carolina plant expansion. The company anticipated a further $190–$210 million of capital expenditures during the remainder of fiscal 2013.
Material changes, outlook and risks
- Debt refinancing after quarter-end: In August 2012, Smithfield issued $1.0 billion of 6.625% senior unsecured notes due 2022, receiving $981.2 million net. Proceeds funded repurchases of 2013 and 2014 notes. The company expected an approximately $121 million debt-extinguishment loss in fiscal Q2. It also extended a $200 million term loan to May 2018. Management said the transactions improved maturities, removed the Inventory Revolver’s early-maturity trigger and released real-estate and fixed-asset encumbrances. The $400 million principal amount of 4% convertible notes due June 2013 remained outstanding.
- Management outlook: For fiscal 2013, management expected fresh pork profitability to be within the normalized range of $3–$7 per head, with improving margins after a seasonally weak first quarter. Packaged meats margins were expected at the high end of the normalized $0.12–$0.17 per pound range, with 2–3% volume growth. Hog Production was expected to range from a marginal loss to a marginal profit; raising costs were forecast to average in the mid-$60s per hundredweight, with hedges expected to partly offset higher grain prices. International operating profit was expected in the upper half of its $50–$125 million normalized range. Management cautioned that volatile commodity markets make forecasts difficult.
- Key operating exposures: Results are sensitive to hog and grain prices, supply and demand, feed costs, weather, export demand, foreign exchange and derivative-market movements. U.S. drought conditions had sharply increased feed-grain prices. Derivatives can also create collateral and liquidity demands; $72.5 million of broker deposits was included in current assets at quarter-end.
- Legal and valuation matters: A global settlement after quarter-end resolved substantially all Missouri nuisance litigation, with one minor exception. The settlement was not materially different from the recorded accrual; related future cash flows were not expected to materially affect liquidity. Smithfield’s CFG investment carrying value exceeded its quoted market price, indicating a possible impairment; management concluded fair value exceeded carrying value based on broader valuation evidence, including an independent valuation.
- Other commitments: Smithfield and its joint venture partners guaranteed up to $87.0 million of Norson debt, of which $62.0 million was outstanding. The company also guaranteed $11.1 million of leases transferred in the Smithfield Beef sale. The group-pen conversion program was estimated to cost about $300 million, with completion targeted by the end of 2017.
Important facts for investors to verify
- Whether packaged-meats growth and margin strength can offset continued pressure in fresh pork and Hog Production.
- How feed-price movements and hedge positions affect raising costs, earnings and collateral needs.
- Execution and accounting impact of the August refinancing, including the expected $121 million extinguishment loss and remaining convertible-note maturity.
- Progress against fiscal 2013 segment outlook and capital-spending plans.
- Developments in the Missouri settlement and whether CFG’s fair value continues to support its carrying amount.
- Funding and timing of share repurchases, group-pen conversions and other cash commitments.