Smithfield reports ‘healthy’ balance sheet, $1.7 billion liquidity

By Paul Deckelman’

New York, April 14 – Smithfield Foods, Inc. closed out the 2014 fiscal fourth quarter and full fiscal year with what its chief financial officer called a “healthy” balance sheet – and “certainly very, very healthy liquidity” of some $1.7 billion.

“We’re de-leveraging very, very quickly,” Kenneth M. Sullivan declared. “In fact, we have less debt today, bringing you current through today, than we did at the date of the Shuanghui merger, just 18 months ago.”

Fresh pork, packaged meats and hog producer Smithfield, based in the eponymous Virginia town, was acquired in mid-2013 by China’s largest meat-processing company, Shuanghui International Holdings Ltd. – now called WH Group – for $4.72 billion, or a $7.1 billion transaction including debt assumption.

As of the end of the quarter and fiscal year on Dec. 28, 2014, the company’s balance sheet showed total debt of $2.72 billion, down from $3.02 billion at the end of 2013. The company had $433.5 million of cash and equivalents on hand, bringing net debt down to just under $2.3 billion; the year before, cash and equivalents had totaled $193.4 million, for net debt of $2.83 billion. Interest expense for the full year was $159 million, or $21 million below 2013 levels.

Sullivan, who also serves as the company’s executive vice president, told analysts on a Tuesday conference call discussing the results that the company’s net debt as a percentage of its total capitalization was 34%, and its leverage ratio of net debt as a multiple of adjusted EBITDA was “just about 2 times.”

Bonds dominate capital structure

According to its most recent 10-K filing with the Securities and Exchange Commission, covering the 2014 fiscal fourth quarter and full year, the biggest piece of outstanding debt at year-end was Smithfield’s $1,014,000,000 of 6 5/8% senior notes due 2022.

The capital structure also included three other tranches of junk-rated (B1/BB) senior notes – $519 million of 7¾% notes due 2017, $500 million of 5¼% notes due 2018 and $400 million of 5 7/8% notes due 2021.

Besides the bonds, there was $200 million of floating-rate senior unsecured term loan debt due 2018 and $84 million of assorted small pieces of debt coming due between this year and 2019, at interest rates ranging from zero percent to 3.13%.

Besides its $433 million of cash and equivalents, year-end liquidity also included just under $1.4 billion of borrowing capacity available under the company’s various credit facilities. There were no borrowings outstanding against its $1,025,000,000 asset-based inventory revolving credit agreement. It had $232.3 million available under a securitization facility, whose $325 million total size was reduced by $92.7 million of letters of credit, and it had $71.9 million equivalent of availability under international facilities whose $122 million equivalent size was lowered by $50.1 million equivalent of outstanding borrowings.

Sullivan said that earlier this month Smithfield renewed its revolver, which will now extend through May of 2020, versus the June 2016 expiration of its previous revolver. Borrowings will bear interest at Libor plus 175 basis points to 275 bps, with the exact margin varying based on the company’s ratio of consolidated funded debt to consolidated EBITDA.

“But the short story,” said Sullivan, “is that it also provides us for an accordion of $375 million of additional capacity, a foreign-currency sub facility equivalent to $100 million, and an increase in swingline borrowing of $50 to $150 million.”

The CFO further noted that since the end of fiscal 2014, “we’ve continued to execute on reducing our financing costs.” He said that in February, Smithfield repurchased $258 million of its long-term notes via a capped tender offer for a total cost of $275 million.

It accepted for purchase $55 million of its then-outstanding $500 million of 7¾% notes due 2017; $48,161,000 of its then-outstanding $500 million of 5¼% notes due 2018; $44,948,000 of its then-outstanding 5 7/8% notes due 2021; and $109,999,000 of its then-outstanding $999,625,000 of 6 5/8% notes due 2022.

Sullivan said that the company funded the tender offer from available cash and borrowings from its securitization facility, with Smithfield paying the lender’s cost of funds of 0.30% plus 1.05% on those borrowings. As a result, he said, “in practice, we executed a more than 5% interest rate arbitrage” between its cost of funds under the securitization facility and the interest rates on the bond debt being taken out.

“As of today, all but $20 million of the borrowings on the securitization facility have been repaid,” he continued.

“The transaction will save the company $12 million annually in lower finance costs, after we take a one-time loss on debt extinguishment of about $12.8 million. You can expect that in the first quarter of 2015.”

With liquidity totaling $1.7 billion and “no meaningful debt maturities anywhere on the horizon,” the CFO said, balance sheet or capital-structure concerns are “simply a non-issue ... we expect to be in a strong liquidity position for the foreseeable future.”

M&A ahead?

During the question-and-answer-portion of the conference call that followed his formal presentation, an analyst asked Sullivan whether the company might be looking for merger-and-acquisition opportunities, particularly for its packaged meats business.

He replied that “the direction we have from The WH Group is to focus on debt reduction, and I think we’ve done that very well. Our balance sheet really is in great shape. I will tell you that in the 18 months since the merger, our focus has been on that debt reduction.”

That having been said, he continued that “I do think that we’re quickly approaching the point where we can afford to be looking externally at [M&A] opportunities, certainly, in the packaged meats – that is our focus and we are committed to growth in that end of the business, both organically, and if the situation is right, through acquisitions.

“So I would tell you that while we were inward-focused for a long period of time, I think we are now able to look outward.”

© 2015 Prospect News.
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