Smithfield Foods, Inc. — Form 10-Q Summary
Period: Quarter ended September 28, 2014, with nine-month results; filed November 7, 2014. The request metadata says “2013 Q3,” but the filing covers 2014 Q3 and compares it with the 2013 predecessor period. The comparison is affected by WH Group’s September 26, 2013 acquisition and purchase-accounting adjustments, so the periods are not fully comparable.
Business context and results
Smithfield is a global hog producer and pork processor, with Fresh Pork, Packaged Meats, Hog Production, International and Corporate segments. It changed its fiscal year-end to December 29, 2013, and reorganized its former Pork segment into Fresh Pork and Packaged Meats beginning in Q2 2014; segment results were recast for comparison.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $3,702.3 million | $3,337.2 million | $10,938.4 million | $10,001.9 million |
| Gross profit | $454.0 million | $288.6 million | $1,319.2 million | $853.8 million |
| Operating profit | $250.1 million | $78.6 million | $706.7 million | $227.2 million |
| Net income | $155.3 million | $35.4 million | $403.5 million | $86.0 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $4.1 million | $(101.1) million |
Q3 gross, operating and net margins were approximately 12.3%, 6.8% and 4.2%, respectively, versus 8.6%, 2.4% and 1.1% a year earlier. Nine-month margins were approximately 12.1%, 6.5% and 3.7%, versus 8.5%, 2.3% and 0.9%.
Q3 sales rose 11%, while operating profit increased 218% and net income increased 340%. Management attributed the improvement chiefly to higher pork and packaged-meat selling prices, lower hog-raising costs, lower feed costs, and improved Mexican joint-venture earnings. Interest expense was $39.3 million for the quarter and $120.5 million for nine months. Effective tax rates were 26% for Q3 and 31% for nine months, up from 21% and 19%, respectively.
Cash, debt and liquidity
- Nine-month operating cash flow was only $4.1 million despite $403.5 million of net income; changes in operating assets and liabilities and other items used $531.0 million. Investing cash flow was $(179.5) million, including $187.8 million of capital expenditures; financing cash flow was $36.1 million.
- Cash declined to $58.8 million from $193.4 million at December 29, 2013. Total current assets were $3,502.5 million and current liabilities $1,189.8 million.
- Balance-sheet long-term debt and capital-lease obligations totaled approximately $3,070.8 million, including the current portion, compared with $3,045.9 million at year-end. The filing separately reports carrying value of long-term debt, including current portion, of $3,045.4 million; the figures differ because the balance-sheet line includes capital leases.
- Credit facilities had $953.8 million of unused capacity; together with cash, management reported liquidity of approximately $1.0 billion and said available liquidity and operating cash flow should meet needs for at least 12 months. The securitization facility had only $6.2 million available at quarter-end.
- Derivative-related cash settlements and margin requirements were $104.7 million during the nine months. Net broker deposits were $152.3 million at quarter-end, and deposits during the period ranged from $38.5 million to $382.0 million.
Segments and material changes
- Fresh Pork: Q3 operating loss narrowed to $12.5 million from $22.9 million. Higher selling prices were partly offset by raw-material costs and lower volume. Hogs processed fell 9% to 6.1 million, with PEDv cited as a major factor.
- Packaged Meats: Q3 operating profit rose to $111.3 million from $77.6 million, on higher selling prices and 4% volume growth.
- Hog Production: Q3 operating profit rose to $139.6 million from $48.5 million, primarily on higher live-hog prices and lower feed costs. Hogs sold fell 13% to 3.3 million.
- International: Q3 operating profit increased to $40.3 million from $17.3 million, reflecting higher sales volume, lower European raw-material costs and greater Mexican joint-venture income.
- The company completed the merger of two major pork operating businesses into Smithfield Farmland in Q2 2014. It also finalized the purchase-price allocation for WH Group’s acquisition in Q3, with no material measurement-period adjustments.
Outlook, risks and contingencies
Management expected modest packaged-meat volume growth and strong margins, and projected that operating initiatives and synergies would support earnings through the remainder of 2014 and into 2015. It anticipated normalized Fresh Pork margins and above-normal Hog Production margins, assuming no resurgence of PEDv, and cited a large U.S. corn and soybean crop as a potential cost benefit. These are qualitative expectations, not numeric earnings guidance; management cautioned that commodity markets make forecasting difficult.
- PEDv had affected company herds and reduced hog volumes; future operational and market-price effects were uncertain.
- Commodity, foreign-exchange and interest-rate exposure is managed partly through derivatives. At September 28, derivative liabilities were $131.3 million net of derivative netting, before cash-collateral presentation; derivative values and margin calls can materially affect liquidity. Deferred net hedge losses in accumulated other comprehensive loss were $99.0 million after tax, with $28.7 million before tax expected to be reclassified to earnings within 12 months.
- The WTO ruled against the U.S. 2013 Country of Origin Labeling rule in October 2014. The company said potential industry cost and trade effects could not yet be assessed.
- New North Carolina nuisance complaints named Murphy-Brown and sought unspecified damages and relief. Earlier Wake County cases were dismissed without prejudice; the company intends to defend the newer claims and could not estimate a reasonably possible loss beyond defense costs. A $8.0 million lease guarantee also remained outstanding.
- Planned annual capital expenditures were $300–$350 million over the next several years. The company estimated its group-housing conversion program at approximately $360 million in total and targeted completion at company-owned farms by the end of 2017.
Most important facts for investors to verify
- Confirm the reporting period: this is a 2014 Q3 filing, not a 2013 Q3 filing, and acquisition accounting limits year-over-year comparability.
- Assess whether strong earnings convert into cash: nine-month operating cash flow was $4.1 million, with substantial working-capital and derivative-margin effects.
- Monitor PEDv, hog availability and commodity prices, which drove significant volume and profit changes and remain key uncertainties.
- Review debt, facility availability and derivative collateral needs, particularly the limited remaining capacity under the securitization facility.
- Track developments in North Carolina litigation and the WTO Country of Origin Labeling dispute; damages and broader economic effects were not quantified.