Smithfield Foods, Inc. — Form 10-Q Summary
Business and period. Smithfield produces and markets fresh pork and packaged meats, with hog production and international operations. This report covers the three months ended July 28, 2013, the first quarter of fiscal 2014; comparisons are with the three months ended July 29, 2012.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $3,393.3 million | $3,091.3 million |
| Gross profit / margin | $304.2 million / 9% | $332.2 million / 11% |
| Operating profit | $97.3 million | $131.8 million |
| Net income | $39.5 million | $61.7 million |
| Diluted earnings per share | $0.27 | $0.40 |
| Operating cash flow | $13.1 million | $67.3 million |
- Sales rose about 10%, driven by higher volumes and U.S. pork prices, plus the Kansas City Sausage acquisition. Net income fell about 36%; higher raw material costs and weaker export markets reduced gross profit and margins.
- Segment operating profit: Pork was $61.4 million, down from $118.6 million; Hog Production was $66.5 million, up from $23.1 million; International was $1.9 million, down from $15.8 million; Corporate loss was $32.5 million, versus $25.7 million.
- Within Pork, fresh pork reported a $36.5 million operating loss, compared with a $12.0 million loss; packaged meats profit was $97.9 million, down from $130.6 million. Packaged-meats margin declined to $0.16 per pound from a record $0.21.
- Cash and equivalents were $192.8 million at quarter-end, down from $310.6 million at April 28, 2013. Current assets were $3,468.8 million and current liabilities $1,234.3 million.
- Total debt and capital lease obligations were $2,501.6 million ($210.9 million current and $2,290.7 million long-term), versus $2,505.3 million at April 28. The company repaid $400 million of convertible notes and $55 million of senior notes, largely using revolving and securitization borrowings.
- Credit facilities totaled $1,443.4 million, with $823.2 million available. Management described liquidity as approximately $1.0 billion, including cash. Investing cash outflow was $123.3 million, including $76.4 million in capital expenditures and the KCS investment and advance.
Material developments and outlook
- Merger: Smithfield agreed to be acquired by Shuanghui for $34 per share in cash, subject to shareholder approval, regulatory approvals, and other conditions. The shareholder vote was scheduled for September 24, 2013, and closing was expected in the second half of calendar 2013. Merger Sub issued $900 million of notes on July 31 to help finance the transaction; if the merger closes and proceeds are released, the notes become Smithfield obligations. Management expected cash interest payments to increase significantly.
- Kansas City Sausage: Smithfield acquired a 50% interest for $36 million cash, advanced the seller $10 million under a secured note, and agreed to provide a revolving facility of up to $20 million. Smithfield concluded it controls the venture and consolidates it. Initial acquisition accounting remained subject to change; the seller’s interest has a redemption amount of at least $45 million under specified terms.
- Guidance: Management expected fiscal 2014 fresh-pork operating profit in the low-to-mid single digits per head, packaged-meats margins in the middle of its normalized $0.15–$0.20 per pound range, and Hog Production margins in the mid-single digits per head. It anticipated International results would improve during the rest of the year. The company also projected annual capital expenditures of $300–$350 million over the next several years.
- Management said the first quarter is seasonally the weakest for fresh pork and cautioned that daily commodity-price fluctuations make forecasting difficult. Growth priorities include packaged meats, brand investment, exports, facility upgrades, and product innovation.
- Smithfield reported limited current impact from newly identified U.S. PEDv cases but could not predict future effects on its operations or market prices. Commodity price changes can also affect derivative collateral needs; cash on deposit with brokers was $80.7 million at quarter-end.
Risks, contingencies, and unusual items
- Seven North Carolina nuisance lawsuits had been filed by 167 plaintiffs by late August 2013, seeking unspecified compensatory and punitive damages. Counsel had also submitted mediation notices for approximately 500 additional claimants, and about 300 others had threatened claims. Smithfield denied the allegations, intended to defend the cases, made no accrual, and said it could not estimate a reasonably possible loss.
- The company’s 37% investment in Campofrío had a carrying value above the Madrid-traded share price. Smithfield concluded fair value still exceeded carrying value, but said the fair-value decline had eroded the cushion and increased impairment risk.
- Other disclosed exposures include commodity, foreign-exchange and interest-rate risks; a $9.9 million lease guarantee; and merger-related termination fees of up to $175 million payable by Smithfield in specified circumstances, or a $275 million reverse termination fee payable by Shuanghui in specified circumstances.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Shuanghui merger received shareholder and regulatory approvals, closed on the expected terms, and resulted in the anticipated debt and interest obligations.
- Whether Pork and International profitability recovered, and whether Hog Production gains offset pressure from feed and other input costs.
- Available liquidity and borrowing costs, including the effect of working-capital needs and derivative margin requirements.
- Developments in the North Carolina claims and whether Smithfield later accrued or could estimate any loss.
- Whether Campofrío’s performance and valuation assumptions changed enough to require an impairment charge.