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SFD > SEC Filings for SFD > Form 10-Q on 6-Dec-2012All Recent SEC Filings

Show all filings for SMITHFIELD FOODS INC

Form 10-Q for SMITHFIELD FOODS INC


6-Dec-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following information in conjunction with the unaudited consolidated condensed financial statements and the related notes in this Quarterly Report and the audited financial statements and the related notes as well as Management's Discussion and Analysis of Financial Condition and Results of Operation contained in our Annual Report on Form 10-K for the fiscal year ended April 29, 2012.
EXECUTIVE OVERVIEW We are the largest hog producer and pork processor in the world. We are also the leader in numerous packaged meats categories with popular brands including Farmland®, Smithfield®, Eckrich®, Armour® and John Morrell®. We are committed to providing good food in a responsible way and maintaining robust animal care, community involvement, employee safety, environmental, and food safety and quality programs.
We produce and market a wide variety of fresh meat and packaged meats products both domestically and internationally. We operate in a cyclical industry and our results are significantly affected by fluctuations in commodity prices for livestock (primarily hogs) and grains. Some of the factors that we believe are critical to the success of our business are our ability to:
? maintain and expand market share, particularly in packaged meats,

? develop and maintain strong customer relationships,

? continually innovate and differentiate our products,

? manage risk in volatile commodities markets, and

? maintain our position as a low cost producer of live hogs, fresh pork and packaged meats.

We conduct our operations through four reportable segments: Pork, Hog Production, International and Corporate, each of which is comprised of a number of subsidiaries, joint ventures and other investments. The Pork segment consists mainly of our three wholly-owned U.S. fresh pork and packaged meats subsidiaries. The Hog Production segment consists of our hog production operations located in the U.S. The International segment is comprised mainly of our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico. The Corporate segment provides management and administrative services to support our other segments. Second Quarter of Fiscal 2013 Summary
Net income was $10.9 million, or $.07 per diluted share, in the second quarter of fiscal 2013 compared to net income of $120.7 million, or $.74 per diluted share, in the same quarter last year. The following summarizes the operating results of each of our reportable segments and other significant items impacting pre-tax income for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012:
? Pork segment operating profit increased by $23.1 million primarily as a result of lower raw material costs.

? Hog Production segment operating profit decreased $96.5 million primarily as a result of lower hog prices and higher feed costs.

? International segment operating profit increased by $23.6 million driven by positive hog production fundamentals and higher meat volumes.

? During the second quarter of fiscal 2013, we recognized a loss of $120.7 million on the repurchase of $589.4 million of our 2014 Notes and $105.0 million of our 2013 Notes.


Debt Refinancing
In August 2012 (fiscal 2013), we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes (2022 Notes) at a price equal to 99.5% of their face value. We used the net proceeds to repurchase $694.4 million of outstanding senior notes coming due in May 2013 and July 2014. As a result of these repurchases, we recognized losses on debt extinguishment of $120.7 million in the second quarter of fiscal 2013. We also extended the maturity date of our $200.0 million term loan from June 2016 (fiscal 2017) to May 2018 (fiscal 2019). These activities have significantly improved our debt maturity profile, removed the early maturity trigger on our inventory-based revolving credit facility (the Inventory Revolver), and released the encumbrances of our real estate and fixed assets. With the exception of the $400.0 million aggregate principal amount of our 4% senior unsecured convertible notes due June 2013 (fiscal 2014), we have no substantial debt obligations coming due until fiscal 2018 as a result of these refinancing activities.
Share Repurchase Program
In June 2012 (fiscal 2013), we announced that our board of directors had approved a new share repurchase program authorizing us to buy up to $250.0 million of our common stock over the next 24 months in addition to the $250.0 million authorized during fiscal 2012 (the Share Repurchase Program). In July 2012 (fiscal 2013), our board of directors approved an increase of $100.0 million to the authorized amount under the Share Repurchase Program. Share repurchases may be made on the open market or in privately negotiated transactions. The number of shares repurchased, and the timing of any buybacks, will depend on corporate cash balances, business and economic conditions, and other factors, including investment opportunities. The program may be discontinued at any time.
Since the inception of the Share Repurchase Program in June 2011 (fiscal 2012) and through November 29, 2012, we have repurchased 28,244,783 shares of our common stock for $575.9 million, including related commissions, at an average price of $20.38 per share. As of November 29, 2012, we had $24.5 million available for future repurchases under the Share Repurchase Program. Strategies for Growth
We are focused on top and bottom line growth in our base business. Our strategies for growth include:
? Focus On Twelve Core Brands-In connection with our Pork segment restructuring, which was completed in fiscal 2011, we rationalized our large brand portfolio and began to focus our marketing support on twelve major brand names: Smithfield, Farmland, John Morrell, Gwaltney, Armour, Eckrich, Margherita, Carando, Kretschmar, Cook's, Curly's and Healthy Ones. Approximately three-quarters of our domestic retail packaged meats sales are branded products, with nearly 90% of those branded sales being core brands.

? Invest in Advertising to Activate Brands-We have begun to invest more heavily in marketing talent and advertising campaigns to drive consumer awareness. In December 2011 (fiscal 2012), we entered into a multi-year sponsorship agreement with the Richard Petty Motorsports NASCAR team to help activate our brands with consumer-focused marketing.

? Build a Strong Innovation Pipeline-We are driving consumer relevant product innovation by focusing on delivering convenience oriented products such as our Smithfield marinated pork products, convenient packaging such as our Smithfield bacon pouch pack and healthier, reduced sodium products. In fiscal 2012, we opened a 37,000 square foot research and development center with three state of the art kitchens, a dedicated cutting room, multimedia technology, and a pilot plant that simulates full scale manufacturing processes. This facility allows us to co-develop prototypes with customers and make quick product modifications for speed to the market.

? Coordinated Sales and Marketing Team-In connection with our Pork segment restructuring plan, we merged two independent fresh pork sales forces and consolidated our international sales organizations for our U.S. pork companies into one group responsible for exports. The restructured sales groups provide for a more coordinated and focused strategy to access markets and service customers.


Outlook
The commodity markets affecting our business fluctuate on a daily basis. In this operating environment, it is difficult to forecast industry trends and conditions. The outlook statements that follow must be viewed in this context.
• Pork-Fresh pork profitability improved considerably in the second quarter after a disappointing first quarter, fueled by product mix improvements toward branded value-added products, retail feature activity and continued solid export demand. Looking forward, we see positive fundamentals in the fresh pork complex. Lower global protein supplies and continued strength in export demand, bolstered by relatively high pork prices around the world, should support healthy fresh pork profitability within the normalized range of $3-$7 per head for fiscal 2013.

Operating margins in our packaged meats business were very strong in the first half of fiscal 2013, benefiting from lower raw material costs, an enhanced product mix and increased investment in marketing and consumer advertising. At the same time, we grew packaged meats volumes by 3%, including growth in our core brands of 4%. We are executing on our strategy to grow our packaged meats business and it is producing broad-based gains in market share and distribution. Looking forward, we expect our packaged meats business to continue to lead this segment, delivering consistent growth with increased market share and broader distribution of our core brands. Packaged meats operating margins should be at the high end of the normalized range of $.12 to $.17 per pound with 2-3% volume growth for fiscal 2013.

• Hog Production-Live hog market prices averaged $62 per hundredweight in the first half of fiscal 2013, 9% lower than a year ago. As we move into the second half of the year, hog prices should move seasonally higher from current levels. Lower supplies of competing proteins should also be supportive of healthy hog prices going forward.

Raising costs averaged $68 per hundredweight in the first half of fiscal 2013, up 6% from the prior year. Summer drought conditions in the United States caused sharp increases in feed grain prices. Corn prices have declined somewhat since the highs that were reached during the summer months, but remain at elevated levels. However, we expect hedge positions placed prior to the run-up in grain prices will mitigate, to a meaningful extent, the negative impact on our raising costs. We expect our raising costs to decline to the mid $60s per hundredweight by the end of fiscal 2013, as the blended effect of hedge gains and spot corn prices are averaged into cost over the remainder of the year.
In summary, the current hog production environment is difficult, but our risk management strategy should dampen the effects of high priced grain for the balance of the fiscal year. Consequently, we expect to produce results that are better than the industry average. We expect to report a loss in the Hog Production segment for the third quarter of fiscal 2013. For the full fiscal year, Hog Production segment results are expected to range from a marginal loss to a marginal profit on a per head basis.

• International-For the first half of fiscal 2013, operating profit in our International segment was $56.7 million, more than triple the same period last year. Our European hog production operations should continue to benefit from lower hog supplies on the continent. Our Mexican hog production joint ventures are currently operating in a challenging production environment. We expect only modest profitability in these operations for the balance of fiscal 2013. Before meaningful contributions to segment profitability can be expected, additional improvements in live hog prices and/or feed grain cost will be needed.

On the meat processing side of our international business, we expect profitable results from our Polish meat operations for the balance of fiscal 2013, despite higher raw material costs. Recent approval to export pork products out of Romania to European Union member countries should continue to benefit results from our Romanian meat operations. We also expect a solid contribution from our Mexican meat operations.
Finally, in the third quarter of fiscal 2012, CFG announced a multi-year comprehensive plan to consolidate and streamline its manufacturing operations, which should improve operating results over the long-term. In the near-term, however, we expect only modest positive contributions from CFG.
In total, we anticipate operating profits from this segment will be in the upper half of the normalized range of $50 million to $125 million for fiscal 2013.


RESULTS OF OPERATIONS
Significant Events Affecting Results of Operations Missouri Litigation
Premium Standard Farms, Inc. (PSF), the Company and certain of our other subsidiaries are parties to litigation in Missouri involving a number of claims alleging that hog farms owned or under contract with the defendants interfered with the plaintiffs' use and enjoyment of their properties. During fiscal 2012 and continuing in fiscal 2013, we engaged in global settlement negotiations with counsel representing nearly all of the plaintiffs in the nuisance litigation and numerous carriers of commercial general liability and pollution liability policies. In fiscal 2012, based on these negotiations, we recognized $22.2 million in net charges associated with the Missouri litigation in selling, general and administrative expenses in the Hog Production segment, including $39.0 million in charges during the first quarter of fiscal 2012. During the second quarter of fiscal 2013, the parties to the litigation reached an agreement and consummated a global settlement that resolved substantially all of the nuisance litigation. Pursuant to the agreement, all pending cases previously disclosed, with one minor exception, will be dismissed with prejudice. In addition, we reached agreements with the insurance carriers under which we received payments that we used to pay a portion of the settlement.
The global settlement, was not materially different than the accrual we maintained for the settled litigation and, therefore, did not materially affect our profits or losses in the second quarter of fiscal 2013. Payments made by us under the global settlement and payments we received from the insurance carriers are included in our cash flows from operations for the six months ended October 28, 2012.
Missouri Hog Farms
In the first quarter of fiscal 2012, we made a decision to permanently idle certain farm assets in Missouri. Depreciation estimates were revised to reflect the shortened useful lives of the assets. As a result, we recognized accelerated depreciation charges of $3.2 million and $7.5 million in cost of sales for the three and six months ended October 30, 2011, respectively. These charges are reflected in the Hog Production segment. These assets were fully depreciated by the end of the third quarter of fiscal 2012. Consolidated Results of Operations
The tables presented below compare our results of operations for the three and six months ended October 28, 2012 and October 30, 2011. As used in the tables, "NM" means "not meaningful."

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