Smithfield touts summer bond transactions for extending maturities, eliminating expensive debt

By Paul Deckelman

New York, Dec. 6 - Smithfield Foods, Inc. was living a little less high on the hog during the fiscal second quarter of 2012, posting sharply reduced net earnings versus the year-ago period and a modest comedown in adjusted earnings.

The company's chief executive officer, however, pointed out that this was mostly due to a big earnings charge that the live hog and packaged pork products producer took in connection with a major initiative to fix up its balance sheet.

"We took a big charge this quarter related to buying back some very high-cost debt, which was refinanced with a new piece of debt at a much lower interest rate and a longer maturity," C. Larry Pope, the company's president and CEO, declared on Thursday's conference call following the release of results for the fiscal quarter ended Oct. 28.

The Smithfield, Va.-based meatpacker posted net earnings of $10.9 million, or 7 cents per diluted share, in the most recent quarter, well down from year-earlier results of $120.7 million, or 74 cents per share.

The slide was largely attributable to a loss from debt extinguishment of $120.7 million, or 54 cents per share, in connection with the various debt transactions Smithfield undertook during the quarter.

On an adjusted basis, the drop in earnings was considerably more modest than on a net basis - 61 cents in the most recent quarter versus 76 cents a year earlier. Pope characterized the company's overall performance for the quarter as "very solid."

Smithfield's executive vice president and chief financial officer, Robert W. "Bo" Manly, IV, told analysts on the conference call, "The company took advantage of very favorable capital markets to refinance a major portion of our long-term debt."

Big deal funds buyback

Smithfield came to market with a quickly shopped $1 billion of 6 5/8% senior notes due 2022 on July 18. The bonds priced at 99.5 to yield 6.694%, after the deal was upsized from an originally planned $650 million.

Manly said: "The transaction was the catalyst to dramatically improve our debt structure, stretching maturities to 2022, while locking in some of the lowest rates in our company history."

Smithfield used the proceeds from the deal to redeem $694 million of principal amount of existing high-coupon and short-maturity debt - its 7¾% senior notes due 2013 and its 10% senior secured notes due 2014.

The company tendered for both series of notes, with holders ultimately submitting $104.863 million of the 7¾% notes, or 65.5% of the $159.997 million then outstanding. They tendered $456.245 million of the 10% notes, or 77.4% of the $589.352 million outstanding amount.

After the early tender deadline had expired on July 31, Smithfield called the remaining $133.107 million of the 10% notes for redemption on Aug. 31.

After paying the cost of the tender premiums, the call premium on the remaining 10% paper, accrued interest and fees, the company was left with about $170 million of cash proceeds from its bond deal for its balance sheet, Manly said.

He said that the tender for the 2014 secured notes, and the company's separate re-negotiation in early September of its $200 million term loan following the bond transactions, eliminated all debt security interest and liens, freeing up all of the company's fixed assets. Taking out the secured 10% notes allowed the conversion of the term loan debt to unsecured, freeing up its collateral.

The term loan's maturity was also extended to May 2018 from June 2016. With those transactions out of the way, only the $55.107 million remaining 7¾% notes due in May 2013 notes and Smithfield's $400 million of 4% convertible notes due in June 2013 remain as short-term obligations, Manly said.

"While all capital market options remain available, we anticipate that we will repay these bonds with cash on hand and available short-term credit lines, if necessary. This will leave no significant debt maturities until 2017," the CFO added.

Pope stated: "From our standpoint, we are in the final stages of cleaning up the high-priced debt overhang we have been laboring under since 2008. This will be finally cleaned up next summer when the $400 million convertible note issue matures and is retired."

Manly said that the August re-financing "was neutral to interest expense, as lower borrowing rates were offset by increased debt."

However, including some debt retirement which took place earlier in the year, interest costs overall fell by 6% from a year ago. He said that forecast interest expense for the full 2013 fiscal year remains about $170 million to $175 million.

'High' liquidity

Liquidity "remains high and cash flow projections for the year remain strong," the CFO said. "We ended the second quarter with $1.2 billion in cash and available liquidity and continue to remain above $1 billion."

Manly did say that shrinking of equity from stock purchases the company did - it bought back 3.4 million shares for $67 million during the quarter, plus another 8.2 million shares for $174 million subsequent to quarter's end - as well as "modest addition of debt in the refinancing and fractionally lower EBITDA have moved our credit metrics in a slightly negative direction."

He said that EBITDA interest coverage declined to 4.7 times debt from 5.7 previously, while the company's ratio of net debt as a percentage of total capitalization increased to 41%. The leverage ratio of debt to EBITDA rose to 2.6 times from 2.1 time. But, he added, "credit metrics remain historically strong."

He said, "We do not view these ranges as troublesome and we do not see this as any indication we have changed our philosophy of conservative balance sheet management and respect for equity holders."

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