Smithfield Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended October 28, 2012; comparisons are to the corresponding fiscal 2012 periods. Smithfield is a global hog producer and pork processor, with Pork, Hog Production, International and Corporate segments.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $3,225.8 million, down 3% | $6,317.1 million, down 1% |
| Gross profit / margin | $377.3 million / 12%, versus $419.6 million / 13% | $709.5 million / 11%, versus $826.7 million / 13% |
| Operating profit | $178.3 million, versus $224.7 million | $310.1 million, versus $397.9 million |
| Net income | $10.9 million; diluted EPS $0.07 | $72.6 million; diluted EPS $0.48 |
| Net cash from operating activities | Not presented for the quarter | $(190.5) million, versus $(66.3) million |
Quarterly results included a $120.7 million loss on debt extinguishment; excluding the effect of this unusual charge, reported pretax income would have been materially higher, though the filing does not provide an adjusted earnings figure. Interest expense was $41.5 million for the quarter and $84.0 million for six months, below prior-year levels.
At October 28, cash was $123.6 million, down from $324.3 million at April 29. Total current assets were $3,657.2 million and current liabilities $1,611.9 million. Credit facilities provided $1,067.1 million of unused capacity; management described total liquidity, including cash, as approximately $1.2 billion. Balance-sheet debt and capital lease obligations totaled $2,350.6 million, including $498.9 million classified as current.
Six-month cash use reflected operating outflows of $190.5 million and investing outflows of $153.5 million, partly offset by $144.3 million of financing inflows. Operating cash flow was pressured by working-capital and other operating changes, higher grain payments, and lower customer receipts.
Material changes and segment results
- Pork: Quarterly operating profit rose to $194.3 million from $171.2 million, mainly from lower raw-material costs and stronger packaged-meat performance. Packaged-meat profit was $99.6 million, up 33%; fresh-pork profit was slightly lower. For six months, segment profit was $312.9 million versus $307.9 million.
- Hog Production: Quarterly operating loss was $32.6 million versus profit of $63.9 million; six-month loss was $9.5 million versus profit of $133.6 million. Lower hog prices and higher feed costs drove the deterioration. The reported segment results included derivative gains of $55.2 million for the quarter and $63.3 million for six months.
- International: Quarterly operating profit increased to $40.9 million from $17.3 million; six-month profit rose to $56.7 million from $17.3 million. Better Polish and Romanian results were partly offset by foreign-exchange translation and weaker CFG equity income.
- Sales and gross margin weakened overall as lower domestic fresh-meat prices and higher U.S. hog-raising costs outweighed volume gains. Foreign-currency translation also reduced International sales.
Debt, capital allocation and notable items
- Smithfield issued $1.0 billion of 6.625% senior unsecured notes due 2022 and used proceeds to repurchase 2013 and 2014 notes. The refinancing extended maturities, removed an early-maturity trigger on the inventory revolver and released liens on real estate and fixed assets. The $400 million principal amount of 4% convertible notes due June 2013 remained a near-term maturity.
- The Rabobank $200 million term loan maturity was extended to May 2018; its amended terms include a minimum interest-coverage covenant of 1.75 to 1.0 beginning in fiscal Q3 2013.
- Smithfield repurchased 10.8 million shares for $212.3 million during the six months. Subsequent to quarter-end, it repurchased 7 million shares from COFCO for $147.8 million. As of November 29, $24.5 million remained available under the buyback program.
- The company acquired a 70% interest in American Skin Food Group for $23.3 million in cash. The acquired business makes pork-rind products; purchase accounting values, including goodwill and noncontrolling interests, remained subject to adjustment.
- A global settlement resolved substantially all disclosed Missouri nuisance litigation; the settlement was not materially different from the existing accrual and did not materially affect quarterly earnings.
Outlook, risks and contingencies
- Management forecast fiscal 2013 fresh-pork profitability within a normalized range of $3–$7 per head. Packaged meats margins were expected at the high end of a normalized $0.12–$0.17 per pound, with 2–3% volume growth.
- Management expected Hog Production to report a loss in fiscal Q3 and full-year results to range from a marginal loss to a marginal profit per head. It cited elevated feed prices, with hedges expected to mitigate some of the impact, and projected raising costs to decline to the mid-$60s per hundredweight by fiscal year-end.
- International segment operating profit was expected in the upper half of its normalized $50–$125 million range for fiscal 2013. Management anticipated modest near-term contributions from CFG and Mexican hog-production ventures.
- Management said liquidity and credit availability should meet working-capital and financial obligations for at least the next 12 months. Remaining fiscal 2013 capital spending was estimated at $110–$130 million, including about $26 million for the Kinston plant expansion.
- Risks include volatile hog, grain and other commodity prices; hedge-related collateral requirements; interest-rate and currency movements; food safety and livestock disease; and debt, regulatory and litigation exposures. The filing identifies a possible impairment risk in the 37%-owned CFG investment: estimated fair value had declined 10–20% over 18 months, although management concluded it still exceeded carrying value at quarter-end.
- In November 2012, Iowa regulators notified Farmland Foods of a planned civil enforcement action alleging wastewater effluent-limit violations at its Denison facility. The company anticipated seeking resolution and said any ultimate liability was not expected to materially harm financial position or operations; it had submitted a capital request of approximately $6 million for facility upgrades.
Investor verification points
- Assess underlying earnings apart from the $120.7 million debt-extinguishment loss and the effects of commodity derivatives.
- Monitor the June 2013 convertible-note maturity, refinancing or repayment plans, and compliance with the new interest-coverage covenant.
- Track operating cash conversion, seasonal inventory and receivables, and available revolving-credit capacity.
- Test management’s hog-price, feed-cost and segment-margin assumptions against subsequent results.
- Review CFG valuation sensitivities and whether European operating conditions or its share price create an impairment charge.
- Follow the Denison wastewater matter, required upgrades and any penalties, along with completion of Missouri settlement dismissals.