Smithfield Foods, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2011, ended January 30, 2011; comparable periods ended January 31, 2010. Amounts are unaudited and in U.S. dollars.
Business context and financial performance
Smithfield is a global hog producer and pork processor, with operations reported in Pork, Hog Production, International, Other and Corporate segments. It operates in a cyclical industry exposed to livestock, grain and other commodity-price volatility.
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Sales | $3,186.2 million | $2,884.7 million | $9,086.3 million | $8,292.4 million |
| Gross profit / margin | $457.2 million / 14% | $284.2 million / 10% | $1,257.6 million / 14% | $551.2 million / 7% |
| Operating profit | $372.7 million | $96.5 million | $828.4 million | $23.5 million |
| Net income (loss) | $202.6 million | $37.3 million | $422.6 million | $(96.8) million |
| Diluted earnings (loss) per share | $1.21 | $0.22 | $2.53 | $(0.63) |
| Operating cash flow | Not stated for the quarter | $390.6 million | $142.5 million |
Q3 sales increased 10% year over year. The quarter’s reported operating profit and earnings included a $120.6 million gain from final settlement of the Cudahy fire insurance claim. Interest expense fell to $60.3 million from $67.2 million; the quarter also included a $14.1 million loss on debt extinguishment. Nine-month cost of sales included $26.7 million of Hog Production cost-savings charges, while the prior-year period included $59.3 million of impairment and restructuring charges.
Segments and material changes
- Pork: Q3 operating profit rose to $254.8 million from $152.8 million. Fresh pork profit improved substantially as pork prices rose relative to live-hog costs; packaged-meats profit declined 12% to $124.5 million as higher raw-material costs were not fully passed to consumers.
- Hog Production: Q3 operating loss narrowed to $2.3 million from $78.1 million, reflecting higher live-hog prices. Nine-month results turned to $139.8 million profit from a $453.0 million loss, though the current period included asset-sale gains and a $19.1 million insurance-litigation settlement benefit.
- International: Q3 operating profit was $34.5 million, broadly comparable with $35.6 million. Romanian operations faced weak demand and lower government subsidies; management also cited strong Polish performance.
- Corporate and Other: Corporate reported $86.2 million Q3 operating profit, primarily reflecting the fire-insurance gain. The company completed the sale of its Butterball interest and related turkey assets in December for $167.0 million, subject to customary working-capital adjustments.
Management reported domestic live-hog prices averaging $49.73 per hundredweight in Q3, up 12% year over year, and $54.54 for the nine-month period, up 33%. Nine-month sales volume in the Pork segment fell 7%, while average selling prices rose 18%.
Cash, debt and liquidity
- At January 30, 2011, cash and cash equivalents were $577.9 million, compared with $451.2 million at May 2, 2010. Total current assets were $3,504.6 million and current liabilities $1,628.0 million.
- Current and long-term debt and capital-lease obligations on the balance sheet totaled approximately $2.47 billion; the filing reports $529.3 million as current and $1,940.5 million as long-term. The current portion rose from $72.8 million at fiscal year-end.
- Nine-month operating cash flow was $390.6 million. Investing activities provided $280.6 million, including asset-disposition and insurance proceeds; financing activities used $541.7 million, including $550.1 million of principal payments. Capital expenditures were $112.1 million. Operating cash flow less capital expenditures was $278.5 million.
- Management estimated liquidity of approximately $1.4 billion: $577.9 million cash, $754.0 million available under the ABL facility and $43.8 million available under international facilities. It stated these resources and expected operating cash flows should meet needs for at least 12 months.
- The company repurchased $522.2 million face value of 2011 Notes for $543.1 million through January 30, 2011. A subsequent tender offer, completed February 9, used $450.0 million to repurchase 2013 and 2014 Notes with a combined face value of $390.9 million; an approximately $71 million loss was expected in Q4 FY2011.
Outlook, risks and unusual items
- Management expected fresh-pork margins to moderate from Q3 record levels but remained optimistic about the Pork segment into Q4 FY2011 and early FY2012. It expected packaged-meats margins to remain historically strong and average above $0.10 per pound through the balance of FY2011 and into FY2012.
- Management expected modest near-term profitability in domestic hog production, while forecasting higher feed-driven raising costs. The cost-savings initiative was expected to improve base raising costs by about $2 per hundredweight when fully realized, anticipated by FY2014; estimated remaining initiative expenses were $7.5 million.
- International outlook was mixed: management expected continued strength in Poland and positive contributions from Mexico, but did not expect Romanian meat operations to be profitable for the remainder of FY2011. It cited recessionary conditions, weak demand and higher raw-material costs as risks.
- The company cited volatile commodity prices, food safety and livestock disease, debt and interest-rate exposure, foreign-exchange movements, regulation, litigation, customer credit and execution of restructuring as risks. Commodity hedging may require substantial margin deposits; net broker deposits were $89.3 million at January 30.
- Potential effects of the EPA’s E15 fuel waivers and a proposed USDA GIPSA rule were uncertain. The company said it could not yet assess their full economic impact.
- The filing reported a $208.0 million settlement of the Cudahy fire-insurance claim, of which $120.6 million was recognized as a gain. It also disclosed guarantees including $61.3 million outstanding under a joint-venture debt guarantee and $12.7 million of lease guarantees.
- Management said controls and procedures were effective and reported no material changes in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed litigation or risk factors.
Important facts for investors to verify
- The MD&A says Q3 FY2010 had a net loss of $37.3 million, but the income statement reports net income of $37.3 million. Verify the correct comparative result; the filing text is inconsistent.
- Separate recurring operating performance from the $120.6 million insurance gain, the $19.1 million settlement benefit, asset-sale gains, and debt-extinguishment losses.
- Review the subsequent $450.0 million debt tender, the expected $71 million loss, and the resulting debt maturities and liquidity after quarter-end.
- Assess whether cash generation can withstand higher grain and livestock costs, derivative collateral swings, and expected capital spending; verify the assumptions underlying management’s margin and cost-savings outlook.