ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
The following table lists our material plants and other physical properties. Based on a five day week, our weekly domestic pork slaughter capacity was 581,000 head and our domestic packaged meats capacity was 64.0 million pounds, as of December 28, 2014. During 2014, the average weekly domestic capacity utilization for pork slaughter and packaged meats was 91% and 84%, respectively. We believe these properties are adequate and suitable for our needs.
Location
Segment
Operation
Smithfield Farmland Plant
Bladen County, North Carolina
Fresh Pork
Slaughtering and cutting hogs
Smithfield Farmland Plant
Smithfield, Virginia
Fresh Pork and Packaged Meats
Slaughtering and cutting hogs; fresh and packaged pork products
Smithfield Farmland Plant
Kinston, North Carolina
Packaged Meats
Production of boneless cooked hams, deli hams and sliced deli products
Smithfield Farmland Plant
Clinton, North Carolina
Fresh Pork and Packaged Meats
Slaughtering and cutting hogs; fresh and packaged pork products
Smithfield Farmland Plant
Wilson, North Carolina
Packaged Meats
Production of bacon
John Morrell Plant
Sioux Falls, South Dakota
Fresh Pork and Packaged Meats
Slaughtering and cutting hogs; fresh and packaged pork products
John Morrell Plant
Springdale, OH
Packaged Meats
Production of hot dogs and luncheon meats
Curly’s Foods, Inc. Plant
(operated by John Morrell)
Sioux City, Iowa
Fresh Pork and Packaged Meats
Production of raw and cooked ribs and other BBQ items
Armour-Eckrich Meats
(operated by John Morrell)
St. Charles, Illinois
Packaged Meats
Production of bulk and sliced dry sausages
Armour-Eckrich Meats
(operated by John Morrell)
Omaha, Nebraska
Packaged Meats
Production of bulk and sliced dry sausages
Armour-Eckrich Meats
(operated by John Morrell)
Peru, Indiana
Packaged Meats
Production of pre-cooked bacon
Armour-Eckrich Meats
(operated by John Morrell)
Junction City, Kansas
Packaged Meats
Production of smoked sausage
Armour-Eckrich Meats
(operated by John Morrell)
Mason City, Iowa
Packaged Meats
Production of boneless bulk and sliced ham products
Armour-Eckrich Meats
(operated by John Morrell)
St. James, Minnesota
Packaged Meats
Production of sliced luncheon meats
Location
Segment
Operation
Smithfield Farmland Plant
Crete, Nebraska
Fresh Pork and Packaged Meats
Slaughtering and cutting hogs; fresh and packaged pork products
Smithfield Farmland Plant
Monmouth, Illinois
Fresh Pork and Packaged Meats
Slaughtering and cutting hogs; fresh and packaged pork products
Smithfield Farmland Plant
Denison, Iowa
Fresh Pork and Packaged Meats
Slaughtering and cutting hogs; fresh and packaged pork products
Smithfield Farmland Plant
Milan, Missouri
Fresh Pork
Slaughtering and cutting hogs; fresh pork
Smithfield Farmland Plant
Wichita, Kansas
Packaged Meats
Production of hot dogs and luncheon meats
Cook’s Hams Plant
(operated by Smithfield Farmland)
Lincoln, Nebraska
Packaged Meats
Production of smoked hams and other smoked meats
Cook’s Hams Plant
(operated by Smithfield Farmland)
Grayson, Kentucky
Packaged Meats
Production of spiral hams and smoked ham products
Cook’s Hams Plant
(operated by Smithfield Farmland)
Martin City, Missouri
Packaged Meats
Production of spiral hams
Patrick Cudahy Plant
(operated by John Morrell)
Cudahy, Wisconsin
Packaged Meats
Production of bacon, dry sausage and refinery products
Animex Plant
Szczecin, Poland
International
Slaughtering and deboning hogs; production of packaged and other pork products
Animex Plant
Starachowice, Poland
International
Slaughtering and deboning hogs; production of packaged and other pork products
Animex Plant
Elk, Poland
International
Slaughtering and deboning hogs; production of packaged and other pork products
Animex Plant
Morliny, Poland
International
Production of packaged and other pork and beef products
Animex Plant
Ilawa, Poland
International
Slaughtering of turkey and geese; production of fresh and packaged poultry products
Animex Plant
Suwalki, Poland
International
Slaughtering of chicken; production of fresh and packaged poultry products
Animex Plant
Opole, Poland
International
Slaughtering of chicken; production of fresh and packaged poultry products
Location
Segment
Operation
Animex Plant
Debica, Poland
International
Production of packaged poultry products
Smithfield Prod Plant
Timisoara, Romania
International
Slaughtering, deboning and rendering hogs
Corporate Headquarters
Smithfield, Virginia
Corporate
Management and administrative support services for other segments
The Hog Production segment owns and leases numerous hog production and grain storage facilities, as well as feedmills, mainly in North Carolina, Utah, Missouri, Iowa, Colorado and Virginia, with additional facilities in Oklahoma, Texas, Illinois, South Carolina, Pennsylvania, South Dakota and Kansas.
Also, the International segment owns and leases numerous hog production and grain storage facilities, as well as feedmills, in Poland and Romania.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
We and certain of our subsidiaries are parties to the environmental litigation matters discussed in “Item 1. Business-Regulation” above. Apart from those matters and the matters listed below, we and our affiliates are parties to various lawsuits arising in the ordinary course of business. In the opinion of management, any ultimate liability with respect to the ordinary course matters will not have a material adverse effect on our financial position or results of operations.
North Carolina Nuisance Litigation
In August, September and October 2014, 25 complaints were filed in the Eastern District of North Carolina by 515 individual plaintiffs against our wholly owned subsidiary, Murphy-Brown, alleging causes of action for nuisance and related claims. The complaints stemmed from the nuisance cases previously filed in the Superior Court of Wake County. On February 23, 2015, all 25 complaints were amended and one complaint was severed into two separate actions. The 26 currently pending complaints were filed on behalf of 541 plaintiffs and relate to approximately 14 company-owned and 75 contract farms. All 26 complaints include causes of action for temporary nuisance and negligence and seek recovery of an unspecified amount of compensatory, special and punitive damages, as well as unspecified injunctive and equitable relief. Murphy-Brown is in the process of responding to the complaints in all 26 cases. The Company believes that the claims are unfounded and intends to defend the suits vigorously.
Neuse Riverkeeper Foundation and Waterkeeper Alliance NOI
From time to time we receive notices from regulatory authorities and others asserting that we are not in compliance with certain environmental laws and regulations. In some instances, litigation ensues.
On March 13, 2014, the Neuse Riverkeeper Foundation and Waterkeeper Alliance submitted a 60-day Notice of Intent (NOI) to file a citizen suit against the Company, our wholly owned subsidiary Murphy-Brown, a contract grower, the landowner, and certain individual employees of either Murphy-Brown or the contract grower related to alleged violations of the Clean Water Act at a hog farm in Greene County, North Carolina. The Company is continuing to investigate the allegations and is in the process of responding.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the name and age, position and business experience during the past five years of each of our executive officers. Our board of directors (the "Board" or "Board of Directors") elects executive officers to hold office until the next annual meeting of the Board, until their successors are elected or until their resignation or removal.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Prior to the Merger, our common stock was listed on the New York Stock Exchange under the symbol "SFD." As a result of the Merger, our common stock ceased to be traded on the New York Stock Exchange after close of market on September 26, 2013. Smithfield Foods, Inc. is wholly owned by a subsidiary of WH Group.
DIVIDENDS
We have never paid a cash divided on our common stock. Subject to the limitations in certain of our debt agreements, we expect to pay dividends to WH Group starting in 2016 based on a certain percentage of our net income. The terms of certain of our debt agreements limit the payment of cash dividends on our common stock. We would only pay cash dividends from assets legally available for that purpose.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
On September 26, 2013, we were acquired by an indirect subsidiary of WH Group in a merger transaction accounted for as a business combination. Unless the context otherwise requires, all references to “Successor” refer to Smithfield Foods, Inc. and all its subsidiaries for the period subsequent to the Merger. All references to “Predecessor” refer to Smithfield Foods, Inc. and all its subsidiaries for all periods prior to the Merger. In addition, the Merger was accounted for under the acquisition method of accounting, which resulted in purchase price allocations that affect the comparability of results of operations for periods before and after the Merger.
The following table shows selected consolidated financial data and other operational data for each of the periods indicated. This financial data has been derived from our audited consolidated financial statements. The financial data for the eight months ended December 29, 2013 (the Transition Period) have been derived from our audited consolidated financial statements, but have not been audited. You should read the information in conjunction with “Item 8. Financial Statements and Supplementary Data” and “Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following information in conjunction with the audited consolidated financial statements and the related notes in “Item 8. Financial Statements and Supplementary Data.”
EXECUTIVE OVERVIEW
We are the largest hog producer and pork processor in the world. In the United States, we are also the leader in numerous packaged meats categories with popular brands including Smithfield®, Eckrich®, Farmland®, 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 five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. The Fresh Pork segment consists of our U.S. fresh pork operations. The Packaged Meats segment consists of our U.S. packaged meats operations. 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. See "Item 8. Financial Statements and Supplementary Data-Note 15-Reportable Segments" for additional information about changes to our reportable segments during the current year.
In February 2015, we announced an organizational realignment and key senior management appointments that unify all of our independent operating companies, brands, marketing and employees under one corporate umbrella. Moving to a more centralized structure allows for a more efficient and effective approach to customers, best utilizes management talent, maximizes the manufacturing platform and plant efficiency and optimizes marketing, innovation and brand management.
WH Group Merger
On September 26, 2013 (the Merger Date), pursuant to the Agreement and Plan of Merger dated May 28, 2013 (the Merger Agreement) with WH Group Limited, formerly Shuanghui International Holdings Limited, a corporation formed under the laws of the Cayman Islands and hereinafter referred to as WH Group, the Company merged with Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of WH Group (Merger Sub), in a transaction hereinafter referred to as the Merger. As a result of the Merger, the Company survived as a wholly owned subsidiary of WH Group.
WH Group is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's largest meat processing enterprise and China's largest publicly traded meat products company as measured by market capitalization. WH Group is a pioneer in the Chinese meat processing industry with over 30 years of history. WH Group's businesses include hog production, meat processing, fresh meat and packaged meats production and distribution. The merging of WH Group's distribution network with our strong management team, leading brands and vertically integrated model is allowing us to provide high-quality, competitively-priced and safe U.S. meat products to consumers in markets around the world. As part of WH Group's international platform, we expect our best practices in large-scale farming, food safety standards, environmental stewardship and animal welfare to set the global industry standard.
This transaction enabled Smithfield to continue to execute on its strategic priorities while maintaining brand excellence and commitment to environmental stewardship and animal welfare. We have established Smithfield as the world's leading vertically integrated pork processor and hog producer with best-in-class operations and outstanding food safety practices. Operationally, we have become part of an enterprise that shares our belief in global opportunities and our commitment to the highest standards of product safety and quality. With our shared expertise and leadership, we continue to work on accelerating a global expansion strategy as part of WH Group.
The Merger was accounted for as a business combination using the acquisition method of accounting. WH Groups's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. The difference in the cost basis of the Company before and after the Merger impacts the comparability of results.
Change in Fiscal Year
On January 16, 2014, the Company elected to change its fiscal year end from the 52 or 53 week period which previously ended on the Sunday nearest to April 30 to the 52 or 53 week period which ends on the Sunday nearest to December 31. The change became effective at the end of the period ended December 29, 2013. Unless otherwise noted, all references to 2014 in this report are to the twelve months ended December 28, 2014. The comparable financial data for the twelve months ended December 29, 2013 is unaudited.
2014 Summary
Net income was $556.1 million in 2014, compared to net income of $120.7 million for the twelve months ended December 29, 2013. The following summarizes the operating results of each of our reportable segments and other significant items impacting pre-tax income for 2014 compared to the twelve months ended December 29, 2013:
▪
Fresh Pork operating profit increased $20.7 million primarily as a result of higher fresh pork market prices.
▪
Packaged Meats operating profit increased $81.8 million as a result of higher average selling prices and the unfavorable impact of the fair value step-up of inventories in the prior year due to the Merger.
▪
Hog Production operating profit increased $366.1 million as a result of significantly higher live hog market prices and lower feed costs.
▪
International operating profit increased $95.3 million due to higher sales volume and lower raw material costs in our European operations as well as an increase in equity income from our joint ventures in Mexico.
▪
Corporate results improved by $29.2 million due to the impact of merger related costs incurred in the prior year, partially offset by higher variable compensation cost in the current year. See "Significant Events Affecting Results of Operations" below for further discussion.
Porcine Epidemic Diarrhea Virus (PEDv)
The USDA identified PEDv in the United States for the first time in 2013. During 2014, the U.S. pork market was significantly impacted by the spreading of PEDv, a disease that only infects pigs, not humans or other livestock, which has been an industry-wide issue and continues to have a presence in U.S. swine. Our herds in several regions in which we operate were affected in 2014 as PEDv spread throughout the U.S. There are confirmed cases of PEDv in the U.S. in 2015; however, the outbreak currently appears to be less severe than in 2014. The USDA and the industry continue to monitor the situation. We are subject to risks related to our ability to maintain animal health and control PEDv. We are unable to predict the extent the disease will impact our operations or market prices in the future.
Renewable Fuel Standard
The federal Renewable Fuel Standard (RFS) program requires that bio-fuels be blended into transportation fuels at ever-increasing volumes up to 36 billion gallons in 2030. In October 2010, the Environmental Protection Agency (EPA) granted a “partial waiver” to a statutory bar under the Clean Air Act prohibiting fuel manufacturers from introducing fuel additives that are not “substantially similar” to those already approved and in use for vehicles of model year (MY) 1975 or later. Prior to EPA's decision, the ethanol content of gasoline in the United States was limited to 10 percent (E10), which created a barrier, commonly referred to as the “blendwall,” to the expansion of blended bio-fuels as prescribed by the RFS. The EPA's decision allows fuel manufacturers to increase the ethanol content of gasoline to 15 percent (E15) for use in MY 2007 and newer light-duty motor vehicles, including passenger cars, light-duty trucks and medium-duty passenger vehicles. In January 2011, the EPA granted another partial waiver authorizing E15 use in MY 2001-2006 light-duty motor vehicles. Judicial challenges to these rulemakings by a coalition of industry groups were dismissed.
In 2013, the EPA issued a proposed rule that would have reduced the volume of renewable fuels mandated by statute and reflected the EPA’s estimate of what would actually be produced in 2014. However, the EPA has not yet issued the final rule for 2014 production volumes, nor has it issued a proposed rule for 2015 production volumes. Representative Bob Goodlatte (R-VA) has re-introduced legislation in the 114th Congress that would eliminate the corn ethanol mandate, cap the blendwall at E10, and require the EPA to set cellulosic standards at production levels. Although the long-term impact of the RFS is currently unknown, studies have shown that expanded corn-based ethanol production has driven up the price of livestock feed and led to commodity-price volatility. We cannot presently assess the full economic impact of the RFS program on the meat processing industry or on our operations.
Country of Origin Labeling
Following a World Trade Organization (WTO) panel ruling on a complaint by Canada and Mexico that existing U.S. country- of-origin labeling (COOL) requirements violated the United States’ WTO obligations, USDA published a new rule effective May 23, 2013, Mandatory Country of Origin Labeling of Beef, Pork, Lamb, Chicken, Goat Meat, Wild and Farm-Raised Fish and Shellfish, Perishable Agricultural Commodities, Peanuts, Pecans, Ginseng, and Macadamia Nuts. 78 Fed. Reg. 31367 (May 24, 2013) (the 2013 Rule). The 2013 Rule requires, in part, that labels on covered meat products must list separately, in sequence, the specific country where the animal was "born," the country where it was "raised," and the country where it was "slaughtered." The rule also prohibits combining or commingling of meats with different "Born, Raised, and Slaughtered" combinations in the same package at retail.
On March 28, 2014 and on July 29, 2014, the U.S. Court of Appeals for the District of Columbia Circuit rejected a judicial challenge to these rulemakings by a coalition of industry groups. As of February 9, 2015, industry opponents dropped their lawsuit against the Department of Agriculture. The Canadian and Mexican governments challenged the 2013 Rule before the Dispute Settlement Body (DSB) of the WTO. On October 20, 2014, the DSB issued panel reports finding in favor of Canada and Mexico and against the United States' 2013 Rule. The U.S. Trade Representative has appealed the WTO determination and the appeal decision is expected in late spring. If the Canadian and Mexican WTO challenge is ultimately successful, then USDA will be faced with the choice of re-formulating another country of origin regulation, seeking amendments to the underlying statute from Congress, or subjecting U.S. industries to substantial retaliatory tariffs that could begin as early as summer 2015. Although the long-term impact of COOL is currently unknown, industry groups have indicated that the rules impose additional costs on the industry including costs associated with segregation of livestock, record-keeping and new packaging and labeling along with potential retaliatory trade measures under WTO rules. We cannot presently assess the full economic impact of COOL on the meat processing industry or on our operations.
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.
With the launch of our recently announced organizational realignment, we are taking steps to build on our positive results in 2014 as we continue to solidify Smithfield’s position as a global leader in branded packaged meats. Our organizational realignment is about growth and harmonization and we currently expect to further evolve the company without closing any locations or reducing our workforce.
There are a plethora of benefits to moving to a centralized structure and unifying all our resources and brands together as ‘One Smithfield,’ which should position us to take advantage of growth opportunities with the following goals:
•
Leveraging Smithfield’s size and scope in pork industry;
•
Approaching the market more efficiently and effectively;
•
Best utilizing management talent across company;
•
Aligning with the way in which our customers operate;
•
Maximizing our manufacturing platform and plant efficiency;
•
Optimizing operations in areas like brand management, manufacturing, sales, and marketing; and
•
Strengthening marketing, brand building and innovation across all brands.
PEDv has not been a major issue for us this past fall, but the virus does remain a potential uncertainty going forward. We expect U.S. market hog supplies to rebound in 2015, although lower prices and reduced energy costs should generate additional demand in the export markets, as well as domestically. Lower pork prices should also allow us to leverage additional synergistic opportunities with WH Group.
We are sharply focused on growth and believe that Smithfield is in an ideal position to continue to achieve strong results in 2015.
RESULTS OF OPERATIONS
Significant Events Affecting Results of Operations
WH Group Merger
In connection with the Merger, we incurred $23.9 million and $18.0 million of professional fees during the three months ended December 29, 2013 and five months ended September 26, 2013, respectively. These fees are recognized in merger related costs on the consolidated statements of income and reflected in the results of our Corporate segment. In addition, Merger Sub deferred $17.3 million of debt issuance costs for a financing arrangement. We recognized these deferred costs in interest expense during the three months ended December 29, 2013 upon termination of the financing arrangement following the Merger.
WH Group's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed by WH Group in the Merger reflects fair value estimates based on management analysis, including work performed by third-party valuation specialists. This work was finalized during the third quarter of 2014 with no material adjustments. Our pre-tax earnings for the twelve months ended December 29, 2013 were negatively impacted by $37.7 million as a result of the fair value adjustments to our assets and liabilities, including a $45.4 million increase in cost of sales as a result of the fair value step-up of our inventories.
Acquisition of Kansas City Sausage, LLC
In May 2013, we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $36.0 million in cash. KCS operates in Des Moines, Iowa and Kansas City, Missouri. In Des Moines, KCS produces premium raw materials for sausage, as well as value-added products, including boneless hams and hides. The Kansas City plant is a modern sausage processing facility and is designed for optimum efficiency to provide retail and foodservice customers with high quality products. With our strong ongoing focus on building our packaged meats business, and with 15% of the U.S. sow population, this joint venture is a logical fit for the Company. It is expected to provide a growth platform in two key packaged meats categories - breakfast sausage and dinner sausage - and to allow us to expand our product offerings to our customers. These categories represent over $4.0 billion in industry retail and foodservice sales annually.
KCS is managed by its Board of Directors, which makes decisions that most significantly impact the economic performance of KCS. We have the right to nominate and elect the majority of the members of the Board of Directors of KCS, and based on the associated voting rights, we have determined that we have a controlling financial interest in KCS. As a result, the acquisition of our interest in KCS was accounted for in the Fresh Pork and Packaged Meats segments using the acquisition method of accounting. In 2014, KCS generated over $300 million in sales.
Missouri Litigation
During the twelve months ended April 29, 2012, we engaged in global settlement negotiations and recognized $22.2 million in net charges associated with the expected settlement of the Missouri Litigation. The charges were recognized in selling, general and administrative expenses in the Hog Production segment. During the twelve months ended April 28, 2013, the parties to the litigation reached an agreement and consummated the global settlement.
CFG Consolidation Plan
In December 2011, the board of Campofrío Food Group (CFG) approved a multi-year plan to consolidate and streamline its manufacturing operations to improve operating efficiencies and increase utilization (the CFG Consolidation Plan). The CFG Consolidation Plan included the disposal of certain assets, employee redundancy costs and the contribution of CFG's French cooked ham business into a newly formed joint venture. As a result, we recorded our share of CFG's charges totaling $38.7 million in equity in (income) loss of affiliates within the International segment in the third quarter of fiscal 2012.
Consolidated Results of Operations
The tables presented below compare our results of operations for the twelve months ended December 28, 2014, December 29, 2013, April 28, 2013 and April 29, 2012.
The twelve months ended December 29, 2013 reflects the combined results of predecessor and successor periods. This combined information does not purport to represent what our consolidated results of operations would have been if the Merger had taken place on December 31, 2012, nor have we made any attempt to either include or exclude expenses or income that would have resulted had the Merger actually occurred on December 31, 2012.
The Transition Period reflects the combined results of predecessor and successor periods. This combined information does not purport to represent what our consolidated results of operations would have been if the Merger had taken place on April 29, 2013, nor have we made any attempt to either include or exclude expenses or income that would have resulted had the Merger actually occurred on April 29, 2013.
As used in the tables below, "NM" means "not meaningful."
Twelve Months Ended December 28, 2014 and December 29, 2013
Sales and Gross Profit
•
Sales increased primarily as a result of higher domestic pork market prices.
•
Gross profit increased primarily as a result of higher average selling prices and lower hog raising costs, which more than offset the increase in pork processing raw material costs. As noted in "Significant Events Affecting Results of Operations--WH Group Merger," the twelve months ended December 29, 2013 included an additional $45.4 million in cost of sales as a result of the fair value step-up of our inventory.
Selling, General and Administrative Expenses (SG&A)
•
The increase in SG&A is primarily attributable to higher variable compensation expenses stemming from higher year-over-year operating results, partially offset by lower pension expense.
Merger Related Costs
•
We incurred an aggregate of $41.9 million of professional fees in the twelve months ended December 29, 2013 as a result of the Merger.
Income from Equity Method Investments
•
The increase in profitability in the current year is primarily driven by higher hog prices in Mexico. Additionally, favorable changes to income tax rates positively impacted equity income from CFG.
Interest Expense
•
Interest expense for the twelve months ended December 29, 2013 included $17.3 million of debt issuance costs originally deferred by Merger Sub.
Income Tax Expense
•
For the twelve months ended December 28, 2014, taxable income relative to permanent items, the mix of income between jurisdictions and foreign restructurings impacted the effective tax rate. The effective tax rate for the twelve months ended December 29, 2013 was also impacted by income relative to permanent items for the period, the mix of income between jurisdictions and state income tax credits.
Eight Months Ended December 29, 2013 and December 30, 2012
Sales and Gross Profit
•
Sales increased primarily as a result of higher average selling prices in the Fresh Pork, Packaged Meats and Hog Production segments and an 18% increase in volume in the International segment.
•
Gross profit decreased primarily as the result of an 8% increase in domestic live hog prices. As noted in "Significant Events Affecting Results of Operations--WH Group Merger," the eight months ended December 29, 2013 included an additional $45.4 million in cost of sales as a result of the fair value step-up of our inventory.
Selling, General and Administrative Expenses
•
Advertising costs during the eight months ended December 29, 2013 were approximately $20.0 million higher than during the eight months ended December 30, 2012 as we continued our investment in marketing and advertising programs focused on building brand equity and growing sales.
Merger Related Costs
•
As noted in "Significant Events Affecting Results of Operations," we incurred an aggregate of $41.9 million of professional fees during the eight months ended December 29, 2013 as a result of the Merger.
Loss (Income) from Equity Method Investments
•
The decline in profitability was primarily driven by lower selling prices in the meat processing operations of our Mexican joint ventures. Also, tax law changes in Mexico negatively impacted our joint ventures. during the eight months ended December 29, 2013.
Interest Expense and Loss on Debt Extinguishment
•
As noted in "Significant Events Affecting Results of Operations," interest expense for the eight months ended December 29, 2013 includes $17.3 million of debt issuance costs originally deferred by Merger Sub.
•
In the eight months ended December 30, 2012, we recognized losses of $120.7 million on the repurchase of $694.4 million of our outstanding senior notes due in May 2013 and July 2014.
Income Tax Expense
•
The effective tax rate was impacted in all periods presented by income relative to permanent items, the mix of income between jurisdictions and state income tax credits.
Twelve Months Ended April 28, 2013 and April 29, 2012
Sales and Gross Profit
•
Sales increased slightly as higher volumes across all segments were largely offset by lower domestic fresh meat and hog market prices and the effects of foreign currency translation.
•
The decline in gross profit margin was primarily caused by higher hog feed costs and lower pork prices in the U.S.
Selling, General and Administrative Expenses (SG&A)
•
The twelve months ended April 29, 2012 included $22.2 million in net charges associated with the Missouri litigation.
•
The twelve months ended April 29, 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011, we terminated negotiations to purchase the additional interest.
•
Pension and other post-retirement benefit expenses increased $26.4 million.
(Income) Loss from Equity Method Investments
•
CFG's results for twelve months ended April 29, 2012 included $38.7 million of charges related to the CFG Consolidation Plan.
•
Results from our Mexican joint ventures declined due to higher feed costs, lower hog prices and lower meat sales volumes.
Interest Expense
•
Interest expense decreased due to lower average interest rates resulting from the refinancing of our 10% senior secured notes due July 2014 (2014 Notes) and our 7.75% senior unsecured notes due May 2013 (2013 Notes) as described under "Liquidity and Capital Resources" below.
Loss on Debt Extinguishment
Twelve Months Ended April 28, 2013
•
We recognized losses of $120.7 million on the repurchase of $694.4 million of our outstanding senior notes due in May 2013 and July 2014.
Twelve Months Ended April 29, 2012
•
We recognized losses of $11.0 million on the repurchase of $59.7 million of our 2014 Notes.
•
We recognized a loss on debt extinguishment of $1.2 million in the first quarter associated with the refinancing of our working capital facilities in June 2011.
Income Tax Expense
The following items explain the significant changes in the effective tax rate from the twelve months ended April 29, 2012 to twelve months ended April 28, 2013:
•
Tax credits increased due in part to the passage of the American Taxpayer Relief Act of 2012 that retroactively reinstated the Research and Development, Work Opportunity and Welfare to Work tax credits.
•
We released $11.1 million in deferred tax asset valuation allowances in the twelve months ended April 28, 2013, primarily related to the utilization of tax losses in foreign jurisdictions.
•
The mix of earnings from foreign operations, which are taxed at lower rates, was higher in the twelve months ended April 28, 2013.
Segment Results
The following information reflects the comparative results from each respective segment:
Twelve Months Ended December 28, 2014 and December 29, 2013
Fresh Pork
•
Current year sales increased 12% due to a 15% increase in average selling prices partially offset by a 3% decrease in volume.
•
Current year operating profit increased 27%. Operating profit per head increased from $2.61 to $3.47 due to higher fresh pork market prices, which more than offset higher raw material costs.
•
We processed 27.9 million hogs during 2014, a decrease of 4%, largely attributable to PEDv. However, average hog weights were up 2%, which helped to offset the overall decline in volume.
Packaged Meats
•
Current year sales increased 10% due to a 10% increase in average selling prices. Current year sales volume totaled 2.8 billion pounds, which remained relatively unchanged from the twelve months ended December 29, 2013.
•
Current year operating profit increased to $0.16 per pound from $0.13 per pound due to higher average selling prices. Additionally, the prior year included $38.7 million, or $0.01 per pound, of non-cash costs related to the fair value step-up of inventories due to the Merger. See "Significant Events Affecting Results of Operations" for further discussion.
Hog Production
•
Current year sales decreased due to lower sales volume, partially offset by higher domestic live hog market prices. Head sold during the year amounted to 14.7 million hogs, a decrease of 10% from the twelve months ended December 29, 2013. PEDv was a significant factor in the volume decline and favorably impacted market prices.
•
Current year operating profit benefited from a 20% increase in domestic live hog market prices and lower feed costs.
International
•
Current year sales were positively impacted by an 18% increase in volume of 1.5 billion pounds, driven largely by a 13% increase in hogs processed in Europe, and partially offset by an 11% decrease in average selling prices. We processed 4.3 million hogs during 2014. The effects of foreign currency translation also positively impacted sales by approximately $18 million.
•
Current year operating profit was positively impacted by higher sales and lower feed costs in Europe along with higher equity income from our Mexican joint ventures. Additionally, favorable changes to income tax rates positively impacted equity income from CFG.
Corporate
•
Operating results in the Corporate segment were improved from last year due to the impact of $41.9 million of merger related costs in the prior year, partially offset by higher variable compensation expense in the current year driven by improved operating results.
Eight Months Ended December 29, 2013 and December 30, 2012
Fresh Pork
•
Sales increased during the Transition Period as a result of a 6% increase in average selling prices and a 1% increase in volume.
•
Operating profit decreased despite the increase in average selling prices primarily as a result of an 8% increase in domestic live hog prices.
Packaged Meats
•
Sales increased during the Transition Period as a result of a 9% increase in average selling prices.
•
Operating profit in the current year decreased as the increase in selling prices was more than offset by higher raw material costs. Additionally, operating profit in the Transition Period included $38.7 million of additional non-
cash costs related to the fair value step-up of our inventories. See "Significant Events Affecting Results of Operations" for further discussion.
Hog Production
•
Transition Period sales benefited from an 8% increase in domestic live hog prices and a 3% increase in head sold.
•
Hog Production operating profit improved by $97.2 million mainly due to higher live hog market prices.
International
•
As a result of fluctuations in foreign exchange rates, International segment sales and operating profit in the Transition Period were both positively impacted by approximately 3%.
•
Sales and operating profit in the transition period were positively impacted by an 18% increase in volume which was partially offset by a 10% decrease in average selling prices.
•
Transition Period operating profit was also negatively impacted by 8% and 6% increases in raising costs in both Poland and Romania, respectively, along with significantly lower equity income from our Mexican joint ventures.
Corporate
•
The Transition Period includes fees related to the Merger. See "Significant Events Affecting Results of Operations" for further discussion.
Twelve Months Ended April 28, 2013 and April 29, 2012
Fresh Pork
•
Sales declined 3% due to a 6% decrease in average selling prices, partially offset by a 3% increase in volume as a result of higher slaughter levels and hog weights.
•
Operating profit decreased to $6 per head from $8 per head due to lower fresh pork market prices.
•
We processed 28.5 million hogs, an increase of 3% from the twelve months ended April 29, 2012.
Packaged Meats
•
Sales increased 2% due to a 4% increase in volume partially offset by a 1% decrease in average selling prices. Sales volume totaled 2.8 billion pounds and 2.7 billion pounds for the twelve months ended April 28, 2013 and April 29, 2012, respectively.
•
Operating profit increased to $0.17 per pound from $0.15 per pound due to lower raw material costs.
Hog Production
•
Sales increased due to higher volumes, which more than offset the impact of lower market hog prices. Head sold during the twelve months ended April 28, 2013 amounted to 16.0 million hogs, an increase of 1% from the twelve months ended April 29, 2012.
•
Operating profit was negatively impacted by higher hog supplies, resulting in a 6% decrease in live hog prices, and increased domestic raising costs, including the effects of grain derivative contracts designated in hedging relationships for accounting purposes, primarily as a result of higher priced feed.
•
Operating profit for the twelve months ended April 28, 2013 included gains of $91.2 million compared to $58.6 million for the twelve months ended April 29, 2012 on lean hog derivative contracts and grain derivative contracts that are not designated in hedging relationships for accounting purposes.
•
Operating profit for the twelve months ended April 29, 2012 included $22.2 million in net charges associated with the Missouri litigation as well as accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri.
International
•
Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased sales by 8% and decreased operating profit by $11.5 million.
•
Sales and operating profit for the twelve months ended April 28, 2013 benefited from significantly higher volumes in our Polish operations due to a 19% increase in the number of hogs processed. Unit sales prices in our Polish operations increased in several key product categories; however, higher volumes of lower value by-products that resulted from more processed hogs effectively diminished the overall average unit selling price compared to twelve months ended April 29, 2012.
•
Sales and operating profit in our Romanian operations improved on significantly higher average unit selling prices and sales volumes, which benefited from the approval to export pork products to European Union member countries beginning in the fourth quarter of the twelve months ended April 29, 2012. Sales and hog slaughter volumes benefited from an expansion in our hog production operations in the second quarter of the twelve months ended April 29, 2012.
•
Operating profit for the twelve months ended April 29, 2012 included $38.7 million of charges related to the CFG Consolidation Plan.
•
Equity income from our Mexican joint ventures decreased by $4.1 million due to higher feed costs and unfavorable changes in foreign exchange rates.
Corporate
•
The twelve months ended April 29, 2012 included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011, we terminated negotiations to purchase the additional interest.
LIQUIDITY AND CAPITAL RESOURCES
Summary
Our cash requirements consist primarily of the purchase of raw materials used in our hog production and pork processing operations, long-term debt obligations and related interest, lease payments for real estate, machinery, vehicles and other equipment, and expenditures for capital assets, other investments and other general business purposes. Our primary sources of liquidity are cash we receive as payment for the products we produce and sell, as well as our credit facilities.
We believe that our current liquidity position is strong and that our cash flows from operations and availability under our credit facilities will be sufficient to meet our working capital needs and financial obligations for at least the next twelve months. As of December 28, 2014, our liquidity position was $1.8 billion, comprised of $1.3 billion in availability under our credit facilities and $433.5 million in cash and cash equivalents.
Sources of Liquidity
We have available a variety of sources of liquidity and capital resources, both internal and external. These sources provide funds required for current operations, acquisitions, integration costs, debt retirement and other capital requirements.
Accounts Receivable and Inventories
The meat processing industry is characterized by high sales volume and rapid turnover of inventories and accounts receivable. Because of the rapid turnover rate, we consider our meat inventories and accounts receivable highly liquid and readily convertible into cash. The Hog Production segment also has rapid turnover of accounts receivable. Although inventory turnover in the Hog Production segment is slower, mature hogs are readily convertible into cash. Borrowings under our credit facilities are used, in part, to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs.
Credit Facilities
Cash Flows
Operating Activities
The following items explain the significant changes in cash flows from operating activities for the periods presented:
Twelve Months Ended December 28, 2014 vs. Twelve Months Ended December 28, 2013
▪
Cash received from customers increased due to higher average meat selling prices.
▪
Cash paid for grain and other ingredients purchased by the Hog Production segment decreased approximately $656.6 million from the prior year.
▪
Cash paid to outside hog suppliers increased due to a 20% increase in average domestic live hog prices.
▪
Cash paid to outside meat suppliers increased due to higher fresh meat market prices, particularly pork and beef.
▪
The current year included net tax payments of $178.8 million for income taxes as compared to net
refunds of $16.5 million in the prior year.
▪
In the current year, we paid $179.6 million for the settlement of derivative contracts and for margin requirements compared to $37.1 million in the prior year.
▪
Cash interest payments increased approximately $23.2 million.
The following items explain the significant changes in cash flows from operating activities for the periods presented:
Eight Months Ended December 29, 2013 vs. Eight Months Ended December 30, 2012
▪
Cash received from customers increased due to a 6% and 9% increase in average selling prices in the Fresh Pork and Packaged Meats segments, respectively, and an 18% increase in sales volume in the International segment.
▪
Cash paid for grain and other feed ingredients purchased by the Hog Production segment decreased approximately $65.4 million despite a significant increase in total pounds purchased.
▪
In the prior year eight month period, we paid cash to settle the Missouri litigation.
▪
In the eight months ended December 29, 2013, we paid $53.8 million for the settlement of derivative contracts and for margin requirements compared to $91.0 million received in prior year.
▪
Cash paid to outside hog suppliers increased due to an 8% increase in domestic live hog market prices.
The following items explain the significant changes in cash flows from operating activities for the periods presented:
Twelve Months Ended April 28, 2013 vs. Twelve Months Ended April 29, 2012
•
Cash paid for grain and other feed ingredients purchased by the Hog Production segment increased approximately $372 million.
•
Cash received for the settlement of commodity derivative contracts and for margin requirements decreased $103.4 million in fiscal 2013.
•
Cash received from customers decreased primarily as a result of lower domestic selling prices.
•
We paid cash to settle the Missouri litigation in the twelve months ended April 28, 2013.
•
Expenditures for advertising increased as part of our strategy to build brand equity and grow sales.
•
Cash paid to outside hog suppliers was lower due to a 6% decrease in average domestic live hog market prices.
•
Income tax payments decreased $222.0 million as a result of significant tax refunds during the twelve months ended April 28, 2013 and lower domestic taxable income.
•
We contributed $17.7 million to our qualified and non-qualified pension plans in the twelve months ended April 28, 2013 compared to $142.8 million in the twelve months ended April 29, 2012.
Investing Activities
The following items explain the significant investing activities for the periods presented:
Twelve Months Ended December 28, 2014
▪
Capital expenditures primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.
▪
In April 2014, Kansas City Sausage Company, LLC (KCS) bought a meat processing business for $11.0 million.
Twelve Months Ended December 28, 2013
▪
WH Group paid $4.9 billion in connection with the Merger to acquire all of our common stock and settle all vested and unvested stock-based compensation awards.
▪
Capital expenditures primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.
▪
We paid $33.7 million, net of cash acquired, for a 50% interest in KCS. Also, we advanced $10.0 million to the seller of KCS in exchange for a promissory note, which is secured by the remaining membership interests in KCS held by the seller.
The following items explain the significant investing activities for the periods presented:
Eight Months Ended December 29, 2013
•
WH Group paid $4.9 billion in connection with the Merger to acquire all of our common stock and settle all vested and unvested stock-based compensation awards.
•
In May 2013, we paid $32.8 million, net of cash acquired, for a 50% interest in KCS. Also, we advanced $10.0 million to the seller of KCS in exchange for a promissory note, which is secured by the remaining membership interest in KCS held by the seller.
•
Capital expenditures primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.
Eight Months Ended December 30, 2012
•
Capital expenditures during the prior year primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.
•
In October 2012, we paid $23.1 million, net of cash acquired, for a 70% interest in American Skin Food Group, LLC.
The following items explain the significant investing activities for the periods presented:
Twelve Months Ended April 28, 2013
•
Capital expenditures included $45.9 million related to our Kinston, North Carolina plant expansion project. The remaining capital expenditures primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.
•
We paid $24.0 million, net of cash acquired, for a 70% interest in American Skin Food Group, LLC.
Twelve Months Ended April 29, 2012
•
Capital expenditures included $32.8 million related to our Kinston, North Carolina plant expansion project and $30.9 million related to the Cost Savings Initiative. The remaining capital expenditures primarily related to plant and hog farm improvement projects.
Financing Activities
The following items explain the significant investing activities for the periods presented:
Twelve Months Ended December 28, 2013
▪
As part of the Merger, WH Group purchased all of our common stock as of the Merger Date. The amount paid by WH Group, net of certain transaction costs is deemed to be an equity contribution by WH Group to the Company.
▪
Merger Sub issued the Merger Sub Notes as part of the financing for the Merger. Also, Merger Sub incurred $20.4 million in transaction fees in connection with the issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Sub, including Merger Sub's obligations under the Merger Sub Notes.
•
We made an early repayment of our $200.0 million floating rate unsecured term loan due in February 2014 and we repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million, and we repaid the outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million.
▪
We drew $145.0 million, net of repayments, on our Inventory Revolver and $105.0 million, net of repayments, on our Securitization Facility, to repay other long-term debt, as noted above.
The following items explain the significant investing activities for the periods presented:
Eight Months Ended December 29, 2013
•
As part of the Merger, WH Group purchased all of our common stock as of the Merger Date. The amount paid by WH Group, net of certain transaction costs is deemed to be an equity contribution by WH Group to the Company.
•
Merger Sub issued the Merger Sub Notes as part of the financing for the Merger. Also, Merger Sub incurred $20.4 million in transaction fees in connection with the issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Sub, including Merger Sub's obligations under the Merger Sub Notes.
•
We made an early repayment of our $200.0 million floating rate unsecured term loan due in February 2014, repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million, and repaid the outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million.
•
We drew $145.0 million on our Inventory Revolver and $105.0 million on our Securitization Facility, net of repayments, to repay other long-term debt, as noted above.
Eight Months Ended December 30, 2012
•
In August 2012, we issued $1.0 billion of our 2022 Notes at a price equal to 99.5% of their face value. We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $694.4 million of our outstanding senior notes due in May 2013 and July 2014.
•
We repurchased 19,068,079 shares of our common stock for $386.4 million as part of a previously approved share repurchase program.
•
We incurred $18.0 million in transaction fees in connection with the issuance of the 2022 Notes, which are being amortized over their ten-year life.
The following items explain the significant financing activities for the periods presented:
Twelve Months Ended April 28, 2013
•
In August 2012, we issued $1.0 billion of our 2022 Notes at a price equal to 99.5% of their face value. We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $589.4 million of our 2014 Notes and $105.0 million of our 2013 Notes.
•
We repurchased 19,068,079 shares of our common stock for $386.4 million as part of the Share Repurchase Program.
•
We incurred $18.0 million in transaction fees in connection with the issuance of the 2022 Notes, which are being amortized over their ten-year life.
Twelve Months Ended April 29, 2012
•
We redeemed the remaining $77.8 million of our 7% senior unsecured notes due August 2011 and repurchased $59.7 million of our 2014 Notes.
•
We repurchased 9,176,704 shares of our common stock for $189.5 million as part of the Share Repurchase Program.
•
We received $20.0 million of cash previously held in a deposit account to serve as collateral for overdrafts on certain of our bank accounts and $3.9 million of cash from the counterparty of our interest rate swap contract which expired in August 2011.
•
We paid $11.0 million of debt issuance costs in connection with the refinancing of the ABL Credit Facility.
Capitalization
Interest Rate Spread
As of December 28, 2014, the interest rates on borrowings under the Inventory Revolver and the Securitization Facility were LIBOR plus 2.75% and 0.30% plus 1.05%, respectively. The interest rate spread for the Inventory Revolver is based on a pricing-level grid in the agreement and is determined by our Funded Debt to EBITDA ratio (as defined in the Second Amended and Restated Credit Agreement, dated as of June 9, 2011, among the Company, specified subsidiaries of the Company, Rabobank Nederland, New York Branch, as Administrative Agent, specified lenders, and other specified agents and arrangers, as amended).
Guarantees
As part of our business, we are party to various financial guarantees and other commitments as described below. These arrangements involve elements of performance and credit risk that are not included in the consolidated balance sheet. We could become liable in connection with these obligations depending on the performance of the guaranteed party or the occurrence of future events that we are unable to predict. If we consider it probable that we will become responsible for an obligation, we will record the liability in our consolidated balance sheet.
As of December 28, 2014, we continued to guarantee $7.7 million of leases that were transferred to JBS S.A. in connection with the sale of Smithfield Beef, Inc which closed in October 2008. This guaranty may remain in place until the leases expire through February 2022.
Additional Matters Affecting Liquidity
Capital Projects
We anticipate annual capital expenditures in the range of $325 million to $380 million over the next several years to upgrade facilities with new machinery and equipment in order to improve our competitive cost structure and achieve least cost/best in class operations. These expenditures are expected to be funded with cash flows from operations and/or borrowings under credit facilities.
Group Pens
In January 2007, we announced a voluntary, ten-year program to phase out individual gestation stalls at our company-owned sow farms and replace the gestation stalls with group pens. We currently estimate the total cost of our transition to group pens to be approximately $360.0 million, including associated maintenance and repairs. This program represents a significant financial commitment and reflects our desire to be more animal friendly, as well as to address the concerns and needs of our customers. As of the end of 2014, we had completed conversions to group housing for over 71% of our sows on company-owned farms. We remain on track to finish conversion to group housing for all sows on company-owned farms by the end of 2017. Our hog production operations in Poland and Romania completed their conversions to group housing facilities a number of years ago.
In January 2014, we announced the recommendation that all of our contract sow growers join with us in converting their facilities to group housing systems for pregnant sows. We asked contract sow growers to convert by 2022 and offered a sliding scale of incentives to accelerate that timetable through the receipt of contract extensions upon completion of the conversion.
Risk Management Activities
We are exposed to market risks primarily from changes in commodity prices, and to a lesser degree, interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative instruments to hedge our exposure to changing prices and rates, as more fully described under “Derivative Financial Instruments” below. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative portfolio. When the value of our open derivative contracts decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease. Conversely, when the value of our open derivative contracts increase, our brokers may be required to deliver margin deposits to us for a portion of the increase. During 2014, margin deposits posted by us ranged from $7.1 million to $382.0 million. The average daily amount we held on deposit with our brokers during 2014 was $170.2 million. As of December 28, 2014, the net amount on deposit with our brokers was $20.0 million.
The effects, positive or negative, on liquidity resulting from our risk management activities tend to be mitigated by offsetting changes in cash prices in our core business. For example, in a period of rising grain prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in spot markets. These offsetting changes do not always occur, however, in the same amounts or in the same period, with lag times of as much as twelve months.
Pension Plan Funding
Funding requirements for our pension plans are determined based on the funded status measured at the end of each year. The values of our pension obligation and related assets may fluctuate significantly, which may in turn lead to a larger underfunded status in our pension plans and a higher funding requirement. We contributed $167.1 million to our qualified pension plans in 2014. We do not expect to have a funding requirement in 2015.
2015 Tender Offer
In January 2015, we commenced a cash tender offer for our 2017, 2018, 2021 and 2022 Notes, subject to a maximum aggregate purchase price of up to $275 million (2015 Tender Offer). The 2015 Tender Offer expired in February 2015. As a result of the 2015 Tender Offer, we paid $275 million to repurchase $258 million of principal. As a result of these repurchases, we will recognize losses on debt extinguishment of approximately $12.1 million in the first quarter of 2015, including the write-off of related unamortized premiums and debt issuance costs.
Contractual Obligations and Commercial Commitments
The following table provides information about our contractual obligations and commercial commitments as of December 28, 2014:
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(1)
Through the Fresh Pork and International segments, we have purchase agreements with certain hog producers. Some of these arrangements obligate us to purchase all of the hogs produced by these producers. Other arrangements obligate us to purchase a fixed amount of hogs. Due to the uncertainty of the number of hogs that we are obligated to purchase and the uncertainty of market prices at the time of hog purchases, we have estimated our obligations under these arrangements. Future payments were estimated using current live hog market prices, available futures contract prices and internal projections adjusted for historical quality premiums.
(2)
Through the Hog Production segment, we use independent farmers and their facilities to raise hogs produced from our breeding stock. Under multi-year contracts, the farmers provide the initial facility investment, labor and front line management in exchange for a performance-based service fee payable upon delivery. We are obligated to pay this service fee for all hogs delivered. We have estimated our obligation based on expected hogs delivered from these farmers.
(3)
Includes fixed price forward grain purchase contracts totaling $15.4 million. Also includes unpriced forward grain purchase contracts which, if valued as of December 28, 2014 market prices, would be $254.2 million. These forward grain contracts are accounted for as normal purchases. As a result, they are not recorded in the balance sheet.
(4)
Includes guaranteed royalty payments totaling $250.0 million to Nathan's Famous Inc. (Nathan's) over an 18 year contractual term commencing in March 2014. In December 2012, John Morrell signed an agreement with Nathan's to become Nathan's exclusive licensee to manufacture and sell branded hot dog, sausage and corn beef products in the retail market. Under the terms of the agreement, guaranteed minimum royalty payments are $10.0 million for the first year and increase at a compounded average annual rate of 3.2% over the contract term.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have a material current effect, or that are reasonably likely to have a material future effect, on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risks primarily from changes in commodity prices, as well as interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative instruments to hedge our exposure to changing prices and rates.
Derivative instruments are recorded in the balance sheet as either assets or liabilities at fair value. For derivatives that qualify and have been designated as cash flow or fair value hedges for accounting purposes, changes in fair value have no net impact on earnings, to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings (commonly referred to as the “hedge accounting” method). For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in current period earnings (commonly referred to as the “mark-to-market” method). Under this guidance, we may elect either method of accounting for our derivative portfolio, assuming all the necessary requirements are met. We have in the past availed ourselves of either acceptable method and expect to do so in the future. We believe all of our derivative instruments represent economic hedges against changes in prices and rates, regardless of their designation for accounting purposes.
When available, we use quoted market prices to determine the fair value of our derivative instruments. This may include exchange prices, quotes obtained from brokers, or independent valuations from external sources, such as banks. In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value.
The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. The following table presents the fair values of our open derivative financial instruments in the consolidated balance sheets (1):
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(1)
Negative amounts represent net liabilities
Sensitivity Analysis
The following table presents the sensitivity of the fair value of our open derivative contracts to a hypothetical 10% change in market prices or foreign exchange rates, as of December 28, 2014 and December 29, 2013:
Commodities Risk
Our meat processing and hog production operations use various raw materials, primarily live hogs, corn, soybean meal and wheat, which are actively traded on commodity exchanges. We hedge these commodities when we determine conditions are appropriate to mitigate the inherent price risks. While this hedging may limit our ability to participate in gains from favorable commodity fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material prices. Commodities underlying our derivative instruments are subject to significant price fluctuations. Any requirement to mark-to-market the positions that have not been designated or do not qualify for hedge accounting could result in volatility in our results of operations. We attempt to closely match the hedging instrument terms with the hedged item’s terms. Gains and losses resulting from our commodity derivative contracts are recorded in cost of sales except for lean hog contracts that are designated in cash flow hedging relationships, which are recorded in sales, and are offset by increases and decreases in cash prices in our core business (with such increases and decreases reflected in the same income statement line items). For example, in a period of rising grain prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in spot markets. However, under the “mark-to-market” method described above, these offsetting changes do not always occur in the same period, with lag times of as much as twelve months.
Interest Rate and Foreign Currency Exchange Risk
We periodically enter into interest rate swaps to hedge our exposure to changes in interest rates on certain financial instruments and to manage the overall mix of fixed rate and floating rate debt instruments. We also periodically enter into foreign exchange forward contracts to hedge exposure to changes in foreign currency rates on foreign denominated assets and liabilities as well as forecasted transactions denominated in foreign currencies.
The following tables present the effects on our consolidated financial statements of pre-tax gains and losses on derivative instruments designated in cash flow hedging relationships:
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our experience and our understanding of the current facts and circumstances. Actual results could differ from those estimates. The following is a summary of certain accounting policies and estimates we consider critical. Our accounting policies are more fully discussed in Note 1 in “Item 8. Financial Statements and Supplementary Data.”
Description
Judgments and Uncertainties
Effect if Actual Results Differ From Assumptions
Contingent liabilities
We are subject to lawsuits, investigations and other claims related to the operation of our farms, labor, livestock procurement, securities, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fees.
A determination of the amount of reserves and disclosures required, if any, for these contingencies are made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of loss is reasonably possible or probable.
Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages or fees, and the effectiveness of strategies or other factors beyond our control.
We have not made any material changes in the accounting methodology used to establish our contingent liabilities during the periods presented in this Form 10-K.
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our contingent liabilities.
Description
Judgments and Uncertainties
Effect if Actual Results Differ From Assumptions
Marketing and advertising costs
We incur advertising, customer incentive and consumer incentive costs to promote products through marketing programs. These programs include cooperative advertising, volume discounts, in-store display incentives, coupons and other programs.
Advertising costs are charged in the period incurred except for certain production costs, which are expensed upon the first airing of the advertisement. We accrue customer and consumer incentive costs based on the estimated performance, historical utilization and redemption of each program.
Except for certain amounts related to cooperative advertising arrangements, cash consideration given to customers is considered a reduction in the price of our products, thus recorded as a reduction to sales. The remainder of marketing and advertising costs is recorded as a selling, general and administrative expense.
Recognition of the costs related to these programs contains uncertainties due to judgment required in estimating the potential performance and redemption of each program.These estimates are based on many factors, including experience of similar promotional programs.
We have not made any material changes in the accounting methodology used to establish our marketing accruals during the periods presented in this Form 10-K.
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our marketing accruals. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
Description
Judgments and Uncertainties
Effect if Actual Results Differ
From Assumptions
Impairment Considerations of Equity Method Investments
Each quarter, we review the carrying value of our investments and consider whether indicators of impairment exist. Examples of impairment indicators include a history or expectation of future operating losses and declines in a quoted share price, among other factors. If an impairment indicator exists, we must evaluate the fair value of our investment to determine if a loss in value, which is other than temporary, has occurred. If we consider any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the affiliate’s industry), then a write-down of the investment to its estimated fair value would be recorded.
In assessing the fair value of an investment, we consider a variety of information, including, when available, independent third party valuation reports, which incorporate generally accepted valuation techniques, and quoted market prices for our investment adjusted for any influence premium that should be applied to the market price based on our ability to exert significant influence over the operational and strategic decisions of the company. We also consider the history of our investment's cash flows, expectations about future cash flows and market multiples for comparable businesses.
We have not made any material changes in the accounting methodology used to evaluate impairment of equity method investments during the periods presented in this Form 10-K.
Accrued self insurance
We are self insured for certain losses related to health and welfare, workers’ compensation, auto liability and general liability claims.
We use an independent third-party actuary to assist in the determination of certain of our self-insurance liabilities. We and the actuary consider a number of factors when estimating our self-insurance liability, including claims experience, demographic factors, severity factors and other actuarial assumptions.
We periodically review our estimates and assumptions with our third-party actuary to assist us in determining the adequacy of our self-insurance liability.
Our self-insurance liabilities contain uncertainties due to assumptions required and judgment used. Costs to settle our obligations, including legal and healthcare costs, could increase or decrease causing estimates of our self-insurance liabilities to change. Incident rates, including frequency and severity, could increase or decrease causing estimates in our self-insurance liabilities to change.
We have not made any material changes in the accounting methodology used to establish our self-insurance liabilities during the periods presented in this Form 10-K.
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our self-insurance liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material. A 10% increase in the estimates as of December 28, 2014, would result in an increase in the amount we recorded for our insurance liabilities of approximately $10.2 million.
Description
Judgments and Uncertainties
Effect if Actual Results Differ
From Assumptions
Impairment of long-lived assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Examples include a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition.
When evaluating long-lived assets for impairment, we compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. Impairment is recorded if the estimated future cash flows are less than the carrying value of the asset. The impairment is the excess of the carrying value over the fair value of the long-lived asset.
During 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we had no significant impairments of long-lived assets.
Our impairment analysis contains uncertainties due to judgment in assumptions and estimates surrounding undiscounted future cash flows of the long-lived asset, including forecasting useful lives of assets and selecting the discount rate that reflects the risk inherent in future cash flows.
We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the periods presented in this Form 10-K.
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments of long- lived assets. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to future impairment losses that could be material.
Description
Judgments and Uncertainties
Effect if Actual Results Differ
From Assumptions
Impairment of goodwill and other non-amortized intangible assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a prescribed two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any.
The first step in the two-step impairment test is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.
The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
We estimate the fair value of our reporting units by applying valuation multiples and/or estimating future discounted cash flows.
The selection of multiples and cash flows is dependent upon assumptions regarding future levels of operating performance as well as business trends and prospects, and industry, market and economic conditions.
A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. When estimating future discounted cash flows, we consider the assumptions that hypothetical marketplace participants would use in estimating future cash flows. In addition, where applicable, an appropriate discount rate is used, based on our cost of capital or location-specific economic factors.
The fair values of trademarks have been calculated using a royalty rate method. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace.
Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.
We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill and other intangible assets during the periods presented in this Form 10-K.
As of December 28, 2014, we had $1.6 billion of goodwill and $1.3 billion of other non-amortizable intangible assets, consisting mainly of trademarks. Our goodwill is included in the following segments:
Fresh Pork - $32.2 million
Packaged Meats - $1,518.3 million
International - $71.8 million
Hog Production - $3.9 million
As a result of the first step of our 2014 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value. Therefore, the second step was not necessary. A hypothetical 10% decrease in the estimated fair value of our reporting units would not result in a material impairment.
Our 2014 other non-amortizable intangible asset impairment analysis did not result in an impairment charge. A hypothetical 10% decrease in the estimated fair value of our intangible assets would not result in a material impairment.
Description
Judgments and Uncertainties
Effect if Actual Results Differ
From Assumptions
The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit).
For our other non-amortizable intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other intangible assets. However, we could be required to evaluate the recoverability of goodwill and other intangible assets prior to the required annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a decline in market capitalization.
Description
Judgments and Uncertainties
Effect if Actual Results Differ
From Assumptions
Income taxes
We estimate total income tax expense based on statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we earn income.
Federal income taxes include an estimate for taxes on earnings of foreign subsidiaries expected to be remitted to the United States and be taxable, but not for earnings considered indefinitely invested in the foreign subsidiary.
Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.
Valuation allowances are recorded when it is likely a tax benefit will not be realized for a deferred tax asset.
We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due. This analysis is performed in accordance with the applicable accounting guidance.
Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
Changes in projected future earnings could affect the recorded valuation allowances in the future.
Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate.
Our analysis of unrecognized tax benefits contain uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds.
We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.
To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our recorded liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement may require use of our cash and result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement could be recognized as a reduction in our effective tax rate in the period of resolution.
Description
Judgments and Uncertainties
Effect if Actual Results Differ
From Assumptions
Pension Accounting
We provide the majority of our U.S. employees with pension benefits. We account for our pension plans in accordance with the applicable accounting guidance, which requires us to recognize the funded status of our pension plans in our consolidated balance sheets and to recognize, as a component of other comprehensive income (loss), the gains or losses and prior service costs or credits that arise during the period, but are not recognized in net periodic benefit cost.
We use an independent third-party actuary to assist in the determination of our pension obligation and related costs.
We generally contribute the minimum amount required under government regulations to our qualified pension plans. We funded $167.1 million, $18.8 million, $17.7 million, and $142.8 million to our qualified pension plans during the twelve months ended December 28, 2014, the eight months ended December 29, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 28, 2012, respectively. We do not expect to have a funding requirement in 2015 for our qualified pension plans.
The measurement of our pension obligation and costs is dependent on a variety of assumptions regarding future events. The key assumptions we use include discount rates, salary growth, retirement ages/mortality rates and the expected return on plan assets.
These assumptions may have an effect on the amount and timing of future contributions. The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match our expected benefit payment stream. The salary growth assumption reflects our long-term actual experience, the near-term outlook and assumed inflation. Retirement rates are based primarily on actual plan experience. Mortality rates were previously based on mandated mortality tables. During 2014, we used a new mortality table based on the Mercer Industry Longevity Experience Study (MILES). Both tables have flexibility to consider industry specific groups, such as blue collar or white collar. The expected return on plan assets reflects asset allocations, investment strategy and historical returns of the asset categories. The effects of actual results differing from these assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.
The following weighted average assumptions were used to determine our benefit obligation and net benefit cost for 2014:
• 5.25% - Discount rate to determine net benefit cost
• 4.30% - Discount rate to determine pension benefit obligation
• 7.50% - Expected return on plan assets
• 4.00% - Salary growth
If actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
An additional 0.50% decrease in the discount rate used to measure our projected benefit obligation would have further reduced the funded status by $112.5 million as of December 28, 2014, and would have resulted in an additional $2.2 million in net pension cost for the twelve months ended December 28, 2014.
A 0.50% decrease in expected return on plan assets would have resulted in an additional $5.6 million in net pension cost for the twelve months ended December 28, 2014.
In addition to higher net pension cost, a significant decrease in the funded status of our pension plans caused by either a devaluation of plan assets or a decline in the discount rate would result in higher pension funding requirements.
Derivatives Accounting
See “Derivative Financial Instruments” above for a discussion of our derivative accounting policy.
Recent Accounting Pronouncements
See Note 1 in “Item 8. Financial Statements and Supplementary Data” for information about recently issued accounting standards not yet adopted by us, including their potential effects on our financial statements.
FORWARD-LOOKING INFORMATION
This report contains “forward-looking” statements within the meaning of the federal securities laws. The forward-looking statements include statements concerning our outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Our forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These risks and uncertainties include, but are not limited to, the availability and prices of live hogs, feed ingredients (including corn), raw materials, fuel and supplies, food safety, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, risks associated with our indebtedness, including cost increases due to rising interest rates or changes in debt ratings or outlook, hedging risk, adverse weather conditions, operating efficiencies, changes in foreign currency exchange rates, access to capital, the cost of compliance with and changes to regulations and laws, including changes in accounting standards, tax laws, environmental laws, agricultural laws and occupational, health and safety laws, adverse results from litigation, actions of domestic and foreign governments, labor relations issues, credit exposure to large customers, the ability to realize the anticipated strategic benefits of the acquisition of Smithfield Foods, Inc. by WH Group, the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations and other risks and uncertainties described under “Item 1A. Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking statements because actual results may differ materially from those expressed in, or implied by, the statements. Any forward-looking statement that we make speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our exposure to market risk is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Derivative Financial Instruments” of this Annual Report on Form 10-K.
All statements other than historical information required by this item are forward-looking statements. The actual impact of future market changes could differ materially because of, among others, the factors discussed in this Annual Report on Form 10-K.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholder of Smithfield Foods, Inc.
Smithfield, Virginia
We have audited the accompanying consolidated balance sheets of Smithfield Foods Inc. and subsidiaries (the "Company") as of December 28, 2014 and December 29, 2013, and the related consolidated statements of income, comprehensive income, shareholder's equity, and cash flows for the year ended December 28, 2014 and the periods from September 27, 2013 to December 29, 2013 (Successor) and from April 29, 2013 to September 26, 2013 (Predecessor). Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Smithfield Foods Inc. and subsidiaries as of December 28, 2014 and December 29, 2013, and the results of their operations and their cash flows for the year ended December 28, 2014 and the periods from September 27, 2013 to December 29, 2013 (Successor) and from April 29, 2013 to September 26, 2013 (Predecessor), in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the financial statements, on September 26, 2013, WH Group Limited (WH Group), formerly Shuanghui International Holdings Limited, acquired all of the outstanding shares of the Company and WH Group's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company.
/s/ DELOITTE & TOUCHE LLP
Richmond, VA
March 25, 2015
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholder of Smithfield Foods, Inc.
Smithfield, Virginia
We have audited the accompanying consolidated balance sheets of Smithfield Foods, Inc. and subsidiaries as of April 28, 2013 and April 29, 2012, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended April 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smithfield Foods, Inc. and subsidiaries at April 28, 2013 and April 29, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 28, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
June 18, 2013, except for Note 13, as to which the date is March 25, 2015
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
See Notes to Consolidated Financial Statements
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
See Notes to Consolidated Financial Statements
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
See Notes to Consolidated Financial Statements
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
See Notes to Consolidated Financial Statements
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(in millions)
See Notes to Consolidated Financial Statements
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY - (Continued)
(in millions)
See Notes to Consolidated Financial Statements
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Smithfield Foods, Inc., together with its subsidiaries ("Smithfield," "the Company,” “we,” “us” or “our”), is the largest hog producer and pork processor in the world. We produce and market a wide variety of fresh meat and packaged meats products both domestically and internationally. We conduct our operations through five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. See Note 15-Reportable Segments for additional information about changes to our reportable segments during the current year.
On September 26, 2013 (the Merger Date), pursuant to the Agreement and Plan of Merger dated May 28, 2013 (the Merger Agreement) with WH Group Limited, formerly Shuanghui International Holdings Limited, a corporation formed under the laws of the Cayman Islands hereinafter referred to as WH Group, the Company merged with Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of WH Group (Merger Sub), in a transaction hereinafter referred to as the Merger. As a result of the Merger, the Company survived as a wholly owned subsidiary of WH Group. See Note 2-Merger and Acquisitions for further information on the Merger.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-K and Regulation S-X. The information reflects all normal recurring adjustments which we believe are necessary to present fairly the financial position and results of operations for all periods included.
The Merger was accounted for as a business combination using the acquisition method of accounting. WH Groups's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. Accordingly, the consolidated financial statements are presented for two periods, Predecessor and Successor, which represent the accounting periods preceding and succeeding the completion of the Merger. The Predecessor and Successor periods have been separated by a vertical line on the face of the consolidated financial statements to highlight the fact that the financial information for such periods has been prepared under two different historical-cost bases of accounting.
Certain prior year amounts have been reclassified to conform to current year presentation.
Change in Fiscal Year End
On January 16, 2014, the Company elected to change its fiscal year end from the 52 or 53 week period which previously ended on the Sunday nearest to April 30 to the 52 or 53 week period which ends on the Sunday nearest to December 31. The change became effective at the end of the period ended December 29, 2013. Unless otherwise noted, all references to 2014 in this report are to the twelve months ended December 28, 2014.
For comparative purposes, the Consolidated Statements of Income for the eight months ended December 29, 2013 and December 30, 2012 are presented as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly owned subsidiaries, as well as all majority owned subsidiaries and other entities for which we have a controlling interest. Entities that are 50% owned or less are accounted for under the equity method when we have the ability to exercise significant influence. We use the cost method of accounting for investments in which our ability to exercise significant influence is limited. All intercompany transactions and accounts have been eliminated. Consolidating the results of operations and financial position of variable interest entities for which we are the primary beneficiary does not have a material effect on sales, net income, or on our financial position for the fiscal periods presented.
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations and cash flows in foreign currencies are translated into U.S. dollars using the average exchange rate over the course of the year. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of shareholder's equity in accumulated other comprehensive income (loss) and included in other comprehensive income (loss) for each period. Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in selling, general and administrative expenses as incurred. We recorded net losses on foreign currency transactions of $4.0 million in 2014, net gains of $0.2 million, $0.3 million and $1.1 million in the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively, and net losses of $7.4 million in the twelve months ended April 29, 2012.
Our Polish operations have different fiscal period end dates. As such, we have elected to consolidate the results of these operations on a one-month lag. We do not believe the impact of reporting the results of these entities on a one-month lag is material to the consolidated financial statements.
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which require us to make estimates and use assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The majority of our cash is concentrated in demand deposit accounts or money market funds. The carrying value of cash equivalents approximates market value.
Accounts Receivable
Accounts receivable are recorded net of the allowance for doubtful accounts. We regularly evaluate the collectibility of our accounts receivable based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer and historical experience. Based on our evaluation, we record reserves to reduce the related receivables to amounts we reasonably believe are collectible. Our reserve for uncollectible accounts receivable was $7.5 million and $3.2 million as of December 28, 2014 and December 29, 2013, respectively.
Inventories
Inventories consist of the following:
Livestock are valued at the lower of the average cost of production or market and further adjusted for changes in the fair value of livestock that are hedged. Costs include feed, medications, contract grower fees and other production expenses. Fresh and packaged meats are valued based on USDA and other market prices and adjusted for the cost of further processing. Costs for fresh and packaged meats include meat, labor, supplies and overhead. Average costing is primarily utilized to account for fresh and packaged meats and grains. Manufacturing supplies principally consist of ingredients and packaging materials.
Derivative Financial Instruments and Hedging Activities
See Note 4-Derivative Financial Instruments for our policy.
Property, Plant and Equipment, Net
Property, plant and equipment is generally stated at historical cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Assets held under capital leases are classified in property, plant and equipment, net and depreciated over the lease term. The depreciation of assets held under capital leases is included in depreciation expense. The cost of assets held under capital leases was $28.5 million and $28.6 million at December 28, 2014 and December 29, 2013, respectively. The assets held under capital leases had accumulated depreciation of $1.2 million and $0.6 million at December 28, 2014 and December 29, 2013, respectively. Depreciation expense is included in either cost of sales or selling, general and administrative (SG&A) expenses, as appropriate. Depreciation expense totaled $223.7 million, $53.7 million, $104.8 million, $235.3 million and $238.6 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively.
Interest is capitalized on property, plant and equipment over the construction period. Total interest capitalized was $1.1 million, $0.4 million, $0.7 million, $4.8 million and $2.8 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively.
Property, plant and equipment, net, consists of the following:
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Intangible assets with finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows.
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a prescribed two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any.
The first step in the two-step impairment test is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is estimated by applying valuation multiples and/or estimating future discounted cash flows. The selection of multiples is dependent upon assumptions regarding future levels of operating performance as well as business trends and prospects, and industry, market and economic conditions. When estimating future discounted cash flows, we consider the assumptions that hypothetical marketplace participants would use in estimating future cash flows. In addition, where applicable, an appropriate discount rate is used, based on an industry-wide average cost of capital or location-specific economic factors. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.
The second step compares the implied fair value of goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit). If the implied fair value of goodwill exceeds the carrying amount, goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
Based on the results of our annual goodwill impairment tests, as of our testing date, no impairment indicators were noted for all the periods presented.
Intangible assets consist of the following:
The fair values of trademarks are calculated using a royalty rate method. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace. If the carrying value of our indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. Intangible assets with finite lives are reviewed for recoverability when indicators of impairment are present using estimated future undiscounted cash flows related to those assets. We have determined that no impairments of our intangible assets existed for any of the periods presented.
Amortization expense for intangible assets was $6.8 million, $1.7 million, $1.7 million, $3.1 million and $3.0 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively. As of December 28, 2014, the estimated amortization expense associated with our intangible assets for each of the next five years is expected to be $6.8 million.
Debt Issuance Costs, Premiums and Discounts
Debt issuance costs, premiums and discounts are amortized into interest expense over the terms of the related loan agreements using the effective interest method or other methods which approximate the effective interest method.
Investments
See Note 5-Investments for our policy.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to amounts more likely than not to be realized.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items.
We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due. We accrue interest and penalties related to unrecognized tax benefits in other liabilities and recognize the related expense in income tax expense.
Pension Accounting
We recognize the funded status of our defined benefit pension plans in the consolidated balance sheets. We measure our pension and other postretirement benefit plan obligations and related plan assets as of the last day of our year. The measurement of our pension obligations and related costs is dependent on the use of assumptions and estimates. These assumptions include discount rates, salary growth, mortality rates and expected returns on plan assets. Changes in assumptions and future investment returns could potentially have a material impact on our expenses and related funding requirements.
We also recognize in other comprehensive income (loss), the net of tax results of the gains or losses and prior service costs or credits that arise during the period but are not recognized in net periodic benefit cost. These amounts are adjusted out of accumulated other comprehensive income (loss) as they are subsequently recognized as components of net periodic benefit cost.
Self-Insurance Programs
We are self-insured for certain levels of general and vehicle liability, property, workers’ compensation, product recall and health care coverage. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current period earnings.
Contingent Liabilities
We are subject to lawsuits, investigations and other claims related to the operation of our farms, labor, livestock procurement, securities, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fees.
A determination of the amount of accruals and disclosures required, if any, for these contingencies is made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of material loss is at least reasonably possible or probable.
Our contingent liabilities contain uncertainties because the eventual outcome will result from future events. Our determination of accruals and any reasonably possible losses in excess of those accruals require estimates and judgments related to future changes in facts and circumstances, interpretations of the law, the amount of damages or fees, and the effectiveness of strategies or other factors beyond our control. If actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
Revenue Recognition
We recognize revenues from product sales upon delivery to customers or when title passes. Revenue is recorded at the invoice price for each product net of estimated returns and sales incentives provided to customers. Sales incentives include various rebate and trade allowance programs with our customers, primarily discounts and rebates based on achievement of specified volume or growth in volume levels.
Advertising and Promotional Costs
Advertising and promotional costs are expensed as incurred except for certain production costs, which are expensed upon the first airing of the advertisement. Promotional sponsorship costs are expensed as the promotional events occur. Advertising costs totaled $165.8 million, $48.0 million, $63.5 million, $143.1 million and $122.9 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively, and are included in SG&A.
Shipping and Handling Costs
Shipping and handling costs are reported as a component of cost of sales.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs totaled $75.3 million, $23.2 million, $31.9 million, $80.9 million and $75.9 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists (ASU 2013-11). This update does not have a significant impact on our consolidated condensed balance sheet.
In May 2014, the FASB and International Accounting Standards Board (IASB) issued Accounting Standards Update 2014-09, Revenues from Contracts with Customers (ASU 2014-09). The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU applies to all contracts with customers, except those that are within the scope of other topics in the FASB Accounting Standards Codification. Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition. The new guidance is effective for fiscal year and interim periods within those years beginning after December 15, 2016 and early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The guidance is not currently effective for us and has not been applied to our financial statements. We are currently in the process of evaluating the potential impact of future adoption but at this time do not anticipate it will have a material impact on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (ASU 2014-15). The new guidance is effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The impact of adoption will not effect our consolidated financial statements.
NOTE 2:
MERGER AND ACQUISITIONS
WH Group Merger
On May 28, 2013, we entered into the Merger Agreement with WH Group and Merger Sub. The Merger was consummated on the Merger Date, and as a result, Merger Sub merged with and into the Company, with the Company surviving as a wholly owned subsidiary of WH Group. Upon completion of the Merger, all outstanding shares of Smithfield were cancelled and the Company's shareholders received $34.00 in cash (the Merger Consideration) for each share of common stock held prior to the effective time of the Merger. Additionally, all outstanding stock-based compensation awards, both vested and unvested, were converted into the right to receive the Merger Consideration, less the exercise price of such awards, if any. The total consideration paid in connection with the Merger was approximately $4.9 billion.
On July 31, 2013, Merger Sub issued $500.0 million aggregate principal amount of 5.25% senior notes due August 1, 2018 and $400.0 million aggregate principal amount of 5.875% senior notes due August 1, 2021 (together, the Merger Sub Notes). Merger Sub incurred $20.4 million in transaction fees in connection with issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Sub, including Merger Sub's obligations under the Merger Sub Notes. Proceeds from the Merger Sub Notes were held in escrow prior to the Merger Date and used in funding the Merger. The proceeds were used to fund a portion of the total consideration paid, repay certain outstanding debt of the Company and pay certain transaction fees associated with the Merger.
WH Group is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's largest meat processing enterprise and China's largest publicly traded meat products company as measured by market capitalization. WH Group is a pioneer in the Chinese meat processing industry with over 30 years of history. WH Group's businesses include hog production, meat processing, fresh meat and packaged meats production and distribution. The merging of WH Group's distribution network with our strong management team, leading brands and vertically integrated model will allow us to provide high-quality, competitively priced and safe U.S. meat products to consumers in markets around the world.
WH Group's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. The consolidated balance sheets, as of December 28, 2014 and December 29, 2013, reflect various fair value estimates and analyses, including work performed by third-party valuation specialists. This work was finalized during the third quarter of 2014 with no material adjustments.
The following is a summary of the allocation of the total purchase consideration to the estimated fair values of our assets acquired, liabilities assumed and noncontrolling interests by WH Group in the transaction:
Accounts receivable and accounts payable, as well as certain other current and non-current assets and liabilities, were valued at their existing carrying values as they approximated fair value of those items at the time of the Merger, based on management's judgments and estimates.
Inventories were valued using a net realizable value approach with the exception of manufacturing supplies and other inventories, which were valued using the replacement cost approach.
Property, plant and equipment have been valued using a combination of the market approach and the indirect cost approach which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional and economic factors.
Intangible assets acquired include trademarks, customer relations assets, contractual relationships and rights with fair values of $1.3 billion, $55.0 million, $40.0 million and $3.0 million, respectively. The customer relations assets, contractual relationships and rights will be amortized over useful lives of 14 years, 17 years and 12 years, respectively. The trademarks are not subject to amortization.
Trademarks, including trade names, have been valued using the relief from royalty method. We utilized a bottoms-up approach to assess the appropriate royalty rates for trade names focused on consideration of the profitability of each trade name, the implied premium margin earned on branded versus private label sales of similar products for each trade name, market studies and third-party comparable licensing agreements.
Customer relations assets were determined using the multi-period excess earnings methodology utilizing our forecasted metrics and/or a market participant distributor model. Contractual relationships were valued based on the time and associated costs that would be required to recreate the existing relationships in addition to the lost profits over this time period using the avoided costs or lost profits method. Rights were also valued using an avoided costs or lost profits method.
The benefit obligation for both our qualified and non-qualified defined benefit pension plans was remeasured as of the Merger Date with the assistance of an independent third-party actuary.
Existing long-term debt assumed in the Merger was fair valued based on quoted market prices. Long-term debt assumed included our outstanding 6.625% senior unsecured notes due August 2022 (the 2022 Notes) and our outstanding 7.75% senior unsecured notes due July 2017 (the 2017 Notes).
Deferred income tax assets and liabilities as of the Merger Date represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and the liabilities assumed as a result of the Merger and their tax basis.
Goodwill reflects the amount of the total consideration paid that exceeded the fair value of the identifiable assets acquired, liabilities assumed and noncontrolling interests. Goodwill recognized as a result of the Merger and is not deductible for tax purposes. See Note 15-Reportable Segments for the allocation of goodwill to our reportable segments.
In connection with the Merger, we incurred $23.9 million and $18.0 million of professional fees during the three months ended December 29, 2013 and the five months ended September 26, 2013, respectively. These fees are recognized in merger related costs on the consolidated statements of income. In addition, Merger Sub deferred $17.3 million of debt issuance costs for a financing arrangement. We recognized these deferred costs in interest expense during the three months ended December 29, 2013 upon termination of the financing arrangement following the Merger. All of these charges are reflected in the results of our Corporate segment.
The following unaudited pro forma financial data summarizes the Company's results of operations as if the Merger had occurred as of April 30, 2012. The pro forma data is for informational purposes only and may not necessarily reflect the actual results of operations had the Merger been consummated on April 30, 2012.
The most significant pro forma adjustments were to reflect the impact of fair value step-ups of both assets and liabilities (e.g., inventory, property, plant and equipment, long-term debt) and fees and expenses related to the Merger noted above.
Kansas City Sausage, LLC
In May 2013, we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $36.0 million in cash. Upon closing, in addition to the cash purchase price, we advanced $10.0 million to the seller in exchange for a promissory note, which is secured by the remaining membership interests in KCS held by the seller (the Advance Note). The Advance Note was recorded in other assets in the consolidated balance. Additionally, we entered into a revolving loan agreement with KCS, under which we agreed to make loans from time to time up to an aggregate principal amount of $20.0 million. The aggregate amount of any obligations incurred under the revolving loan agreement is secured by a first priority security interest in all of the assets of KCS.
KCS is a leading U.S. sausage producer and sow processor with annual revenues exceeding $300.0 million in 2014. The merging of KCS's low-cost, efficient operations and high-quality products with our strong brands and sales and marketing team should contribute growth to our packaged meats business. KCS operates in Des Moines, Iowa and Kansas City, Missouri. In Des Moines, KCS produces premium raw materials for sausage, as well as value-added products, including boneless hams and hides.
KCS is managed by its Board of Directors, which makes decisions that most significantly impact the economic performance of KCS. We have the right to nominate and elect the majority of the members of the Board of Directors of KCS, and based on the associated voting rights, we have determined that we have a controlling financial interest in KCS. As a result, the acquisition of our interest in KCS was accounted for in the Fresh Pork and Packaged Meats segments using the acquisition method of accounting, which requires, among other things, that assets acquired, liabilities assumed and noncontrolling interests in the acquiree be recognized at their fair values as of the acquisition date. The purchase price allocation includes assets acquired, excluding goodwill, of $39.2 million, liabilities assumed of $10.7 million, goodwill of $43.5 million and redeemable noncontrolling interests of $36.0 million.
Our initial estimate of the fair value of the noncontrolling interests was measured based on market multiples for similar companies in our industry and consideration of the terms of the acquisition, which provide the noncontrolling interest holder the right to exercise a put option at any time after the fifth anniversary of the acquisition, which would obligate us to redeem their interest. The noncontrolling interests is classified outside of equity as redeemable noncontrolling interests in the consolidated condensed balance sheet. The redemption amount is the greater of $45.0 million or the result of a computed amount based on a fixed multiple of earnings. We have elected to accrete changes in the redemption amount of the noncontrolling interest over the five year period until it becomes redeemable. If the noncontrolling interests had been redeemable as of December 28, 2014, the redemption amount would have been $45.0 million.
American Skin Food Group, LLC
In September 2012, we acquired a 70% controlling interest in American Skin Food Group, LLC (American Skin) for $24.2 million in cash.
Located in Burgaw, North Carolina, American Skin manufactures and supplies pork rinds to the snack food industry. By leveraging our coordinated sales and marketing team, we believe American Skin can expand into new markets both domestically and internationally, which could substantially increase current sales of approximately $25.0 million and net income of approximately $3.0 million annually over the next five to seven years with minimal additional plant investment.
The acquisition of American Skin was accounted for in the Packaged Meats segment using the acquisition method of accounting. The purchase price allocation includes assets acquired, excluding goodwill, of $18.7 million, liabilities assumed of $0.5 million, goodwill of $16.4 million and noncontrolling interests of $10.4 million.
Goodwill was recognized to reflect the amount of the enterprise fair value that exceeded the fair value of the identifiable assets acquired and liabilities assumed. The amount of goodwill that is expected to be deductible for tax purposes is $10.5 million.
The fair value of the noncontrolling interests was measured based on market multiples for similar public companies and consideration of the terms of the acquisition, which provide the noncontrolling interests holders the right to exercise a put option, which would obligate us to redeem their interests. The redemption amount is based on a fixed multiple of earnings, which is consistent with the formula utilized in determining the purchase price for our 70% interest.
NOTE 3: DISPOSAL OF LONG-LIVED ASSETS
Portsmouth, Virginia Plant
In November 2011, we announced that we would shift the production of hot dogs and lunchmeat from The Smithfield Packing Company, Inc.'s (Smithfield Packing) Portsmouth, Virginia plant to our Kinston, North Carolina plant and permanently close the Portsmouth facility. The Kinston facility was expanded to handle the additional production and incorporates state of the art technology and equipment, which is expected to produce significant production efficiencies and cost reductions. The expansion of the Kinston facility and the closure of the Portsmouth facility were completed in the second half of calendar year 2013.
As a result of this decision, we performed an impairment analysis of the related assets at the Portsmouth facility in the second quarter of the twelve months ended April 29, 2012 and determined that the net cash flows expected to be generated over the anticipated remaining useful life of the plant are sufficient to recover its book value. As such, no impairment existed. However, we revised depreciation estimates to reflect the use of the related assets at the Portsmouth facility over their shortened useful lives. As a result, we recognized accelerated depreciation charges of $4.4 million and $3.3 million in cost of sales during the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively. Also, in connection with this decision, we wrote-down inventory by $0.8 million in cost of sales and accrued $0.6 million for employee severance in SG&A in the second quarter of the twelve months ended April 29, 2012. All of these charges are reflected in the Packaged Meats segment.
NOTE 4: DERIVATIVE FINANCIAL INSTRUMENTS
Our meat processing and hog production operations use various raw materials, primarily live hogs, corn, soybean meal and wheat, which are actively traded on commodity exchanges. We hedge these commodities when we determine conditions are appropriate to mitigate price risk. While this hedging may limit our ability to participate in gains from favorable commodity fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material prices. We attempt to closely match the commodity contract terms with the hedged item. We also periodically enter into interest rate swaps to hedge exposure to changes in interest rates on certain financial instruments and foreign exchange forward contracts to hedge certain exposures to fluctuating foreign currency rates.
We record all derivatives in the balance sheet as either assets or liabilities at fair value. Accounting for changes in the fair value of a derivative depends on whether it qualifies and has been designated as part of a hedging relationship. For derivatives that qualify and have been designated as hedges for accounting purposes, changes in fair value have no net impact on earnings, to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings (commonly referred to as the “hedge accounting” method). For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in current period earnings (commonly referred to as the “mark-to-market” method). We may elect either method of accounting for our derivative portfolio, assuming all the necessary requirements are met. We have in the past availed ourselves of either acceptable method and expect to do so in the future. We believe all of our derivative instruments represent economic hedges against changes in prices and rates, regardless of their designation for accounting purposes.
Changes in commodity prices could have a significant impact on cash deposit requirements under our broker and counter-party agreements. Additionally, certain of our derivative contracts contain credit risk related contingent features, which would require us to post additional cash collateral to cover net losses on open derivative instruments if our credit rating was downgraded. As of December 28, 2014, the net liability position of our open derivative instruments that are subject to credit risk related contingent features was not material.
We are exposed to losses in the event of nonperformance or nonpayment by counter-parties under financial instruments. Although our counter-parties primarily consist of financial institutions that are investment grade, there is still a possibility that one or more of these companies could default. However, a majority of our financial instruments are exchange traded futures contracts held with brokers and counter-parties with whom we maintain margin accounts that are settled on a daily basis, thereby limiting our credit exposure to non-exchange traded derivatives. Determination of the credit quality of our counter-parties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. As of December 28, 2014, we had no significant credit exposure on non-exchange traded derivative contracts. No significant concentrations of credit risk existed as of December 28, 2014.
The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. All derivative contracts are recorded in prepaid expenses and other current assets or accrued expenses and other current liabilities within the consolidated balance sheets, as appropriate.
The following tables present the fair values of our open derivative financial instruments on a gross basis:
The majority of our derivatives are exchange traded futures contracts held with brokers, subject to netting arrangements that are enforceable during the ordinary course of business. Additionally, we have a smaller portfolio of over-the-counter derivatives that are held by counterparties under netting arrangements found in typical master netting agreements. These agreements legally allow for net settlement in the event of bankruptcy. We offset the fair values of derivative assets and liabilities, along with the related cash collateral, that are executed with the same counter-party under these arrangements in the consolidated balance sheet.
The following tables reconcile the gross amounts of derivative assets and liabilities to the net amounts presented in our consolidated balance sheets and the related effects of cash collateral under netting arrangements that provide a legal right of offset of assets and liabilities:
See Note 12-Fair Value Measurements for additional information about the fair value of our derivatives.
Hedge Accounting Method
Cash Flow Hedges
We enter into derivative instruments, such as futures, swaps and options contracts, to manage our exposure to the variability in expected future cash flows attributable to commodity price risk associated with the forecasted sale of live hogs and fresh pork, and the forecasted purchase of corn, wheat and soybean meal. In addition, we enter into interest rate swaps to manage our exposure to changes in interest rates associated with our variable interest rate debt, and we enter into foreign exchange contracts to manage our exposure to the variability in expected future cash flows attributable to changes in foreign exchange rates associated with the forecasted purchase or sale of assets denominated in foreign currencies. As of December 28, 2014, we had no cash flow hedges for forecasted transactions beyond March 2016.
When cash flow hedge accounting is applied, derivative gains or losses are recognized as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The ineffective portion of derivative gains and losses is recognized as part of current period earnings. Derivative gains and losses, when reclassified into earnings, are recorded in cost of sales for grain contracts, sales for lean hog contracts, interest expense for interest rate contracts and SG&A expenses for foreign exchange contracts. Gains and losses on derivatives designed to hedge price risk associated with fresh pork sales are recorded in the Hog Production segment.
During 2014, the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:
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Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
The following tables present the effects on our consolidated financial statements of pre-tax gains and losses on derivative instruments designated in cash flow hedging relationships for the periods indicated:
For the periods presented, foreign exchange contracts were determined to be highly effective. We have excluded from the assessment of effectiveness differences between spot and forward rates, which we have determined to be immaterial.
During the twelve months ended April 29, 2012, we discontinued cash flow hedge accounting on certain grain contracts as it became probable that the original forecasted transactions would not transpire. As a result of this change, the table above for the twelve months ended April 29, 2012 includes gains of $12.0 million on grain contracts de-designated from hedging relationships that were reclassified from accumulated other comprehensive income (loss) into earnings in the twelve months ended April 29, 2012.
As of December 28, 2014, there were deferred net gains of $26.4 million, net of tax of $17.1 million, in accumulated other comprehensive income (loss). We expect to reclassify $1.9 million ($1.2 million net of tax) of the deferred net gains on closed commodity contracts into earnings in 2015. We are unable to estimate the unrealized gains or losses to be reclassified into earnings in 2015 related to open contracts as their values are subject to change.
Fair Value Hedges
We enter into derivative instruments (primarily futures contracts) that are designed to hedge changes in the fair value of live hog inventories and firm commitments to buy grains. When fair value hedge accounting is applied, derivative gains and losses are recognized in earnings currently along with the change in fair value of the hedged item attributable to the risk being hedged. The gains or losses on the derivative instruments and the offsetting losses or gains on the related hedged items are recorded in cost of sales for commodity contracts.
During 2014, the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:
The following tables present the effects on our consolidated statements of income of gains and losses on derivative instruments designated in fair value hedging relationships and the related hedged items for the periods indicated:
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Includes losses of $7.5 million in the twelve months ended April 28, 2013 and gains of $5.1 million in the twelve months ended April 29, 2012, representing differences between the spot and futures prices for fair value hedges of hog inventory, which are recorded directly into earnings as they occur. There were no fair value hedges of hog inventory during 2014 nor during the three months ended December 29, 2013 nor during the five months ended September 26, 2013 and, therefore, no differences between spot and futures prices were recognized in those periods.
We recognized gains of $2.8 million and $4.1 million in 2014 and the five months ended September 26, 2013, losses of $2.5 million in the twelve months ended April 28, 2013 and gains of $6.0 million in twelve months ended April 29, 2012, respectively, on closed commodity derivative contracts as the underlying cash transactions affected earnings.
Mark-to-Market Method
Derivative instruments that are not designated as a hedge, have been de-designated from a hedging relationship, or do not meet the criteria for hedge accounting are marked-to-market with the unrealized gains and losses together with actual realized gains and losses from closed contracts being recognized in current period earnings. Under the mark-to-market method, gains and losses are recorded in cost of sales for commodity contracts and SG&A for foreign exchange contracts.
During 2014, the range of notional volumes associated with open derivative instruments using the “mark-to-market” method was as follows:
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Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
The following table presents the amount of gains (losses) recognized in the consolidated statements of income on derivative instruments using the “mark-to-market” method by type of derivative contract for the periods indicated:
The table above reflects gains and losses from both open and closed contracts including, among other things, gains and losses related to contracts designed to hedge price movements that occur entirely within the period presented. The table includes amounts for both realized and unrealized gains and losses. The table is not, therefore, a simple representation of unrealized gains and losses recognized in the income statement during any period presented.
NOTE 5: INVESTMENTS
Investments consist of the following:
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Beginning in June 2014, our investment in CFG is through our interest in Sigma & WH Europe, as described below.
We record our share of earnings and losses from our equity method investments in (income) loss from equity method investments. Some of these results are reported on a one-month lag which, in our opinion, does not materially impact our consolidated financial statements.
In November 2013, Mexican processed meats producer Sigma Alimentos (Sigma) announced its intention to tender for all of CFG’s outstanding shares (CFG Tender Offer). In December 2013, we announced our intention to participate in the CFG Tender Offer by retaining our 37% interest in CFG. In June 2014, we finalized our shareholder agreement with Sigma creating a new entity called Sigma & WH Food Europe, S.L. (Sigma & WH Europe) to hold all shares of CFG owned by Sigma and the Company. At the formation of Sigma & WH Europe, both the Company and Sigma contributed all of our shares of CFG to Sigma & WH Europe in exchange for the same number of shares in Sigma & WH Europe. Effective September 19, 2014, CFG's common stock ceased to trade on the Madrid Exchange. As of December 28, 2014, Sigma & WH Europe owned approximately 98% of the outstanding shares of CFG. The CFG Tender Offer and the shareholder agreement with Sigma had no impact on the book value of our investment in CFG.
(Income) loss from equity method investments consists of the following:
In December 2011, the board of CFG approved a multi-year plan to consolidate and streamline its manufacturing operations to improve operating efficiencies and increase utilization (the CFG Consolidation Plan). The CFG Consolidation Plan includes the disposal of certain assets, employee redundancy costs and the contribution of CFG's French cooked ham business into a newly formed joint venture. As a result, we recorded our share of CFG's charges totaling $38.7 million in (income) loss from equity method investments within the International segment in the twelve months ended April 29, 2012.
The following summarized financial information for Sigma & WH Europe is based on its financial statements and translated into U.S. Dollars:
NOTE 6: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
NOTE 7: DEBT
Long-term debt consists of the following:
As noted in Note 2-Merger and Acquisitions, existing long-term debt assumed by WH Group was adjusted to fair value based on quoted market prices. Premiums shown above represent the unamortized balance of the fair value adjustment to our 2022 Notes and 2017 Notes.
Scheduled principal payments on long-term debt for the next five years are as follows:
2022 Notes
In August 2012, we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes at a price equal to 99.5% of their face value in a registered public offering (2022 Notes). We received net proceeds of $981.2 million, after underwriting discounts and commissions and offering expenses, upon settlement of the 2022 Notes in August 2012. We incurred $18.0 million in transaction fees in connection with issuance of the 2022 Notes, which were being amortized over the ten-year life of the notes.
The unamortized amount of transaction fees incurred in connection with the issuance of the 2022 Notes was written off when we performed the allocation of the total purchase consideration to the assets and liabilities assumed by WH Group in the Merger.
Debt Extinguishments
2011 Notes
During the twelve months ended April 29, 2012, we redeemed the remaining $77.8 million of our 7% senior unsecured notes due August 2011.
2013 Notes and 2014 Notes
During the twelve months ended April 29, 2012, we repurchased $59.7 million of our 10% senior secured notes due July (2014 Notes) for $68.3 million and recognized losses on debt extinguishment of $11.0 million, including the write-off of related unamortized discounts and debt costs.
In conjunction with the issuance of the 2022 Notes in July 2012, we commenced a tender offer to purchase any and all of our outstanding 7.75% senior unsecured notes due May 2013 (2013 Notes) and any and all of our outstanding 2014 Notes (the July 2012 Tender Offer). The July 2012 Tender Offer expired in August 2012. As a result of the July 2012 Tender Offer, we paid $649.4 million to repurchase 2013 Notes and 2014 Notes with face values of $105.0 million and $456.6 million, respectively. Also in August 2012, we exercised the redemption feature available under our 2014 Notes and paid $155.5 million to repurchase the remaining $132.8 million of our 2014 Notes. Net proceeds from the issuance of the 2022 Notes were used to make all of the repurchases of the 2013 Notes and 2014 Notes. As a result of these repurchases, we recognized losses on debt extinguishment totaling $120.7 million in the twelve months ended April 28, 2013, including the write-off of related unamortized discounts, premiums and debt issuance costs.
In May 2013, we repaid the remaining outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million.
2017 Notes and 2022 Notes
During the three months ended December 29, 2013, we repurchased $15.6 million and $0.4 million of our 2017 Notes and 2022 Notes, respectively, for $18.1 million and recognized losses on debt extinguishment of $1.7 million.
Debt Assumed
On July 31, 2013, Merger Sub issued the Merger Sub Notes as part of the financing for the acquisition of the Company. Upon the consummation of the Merger and release of the proceeds from escrow, the Merger Sub Notes became unsecured obligations of the Company ranking equally in right of payment with all of our existing and future senior unsecured indebtedness. The proceeds were used in part to repay the outstanding $200.0 million due on our Bank of America Term Loan. See Note 2-Merger and Acquisitions for further information on the Merger Sub Notes.
Working Capital Facilities
In June 2011, we refinanced our asset-based revolving credit agreement totaling $1.0 billion that supported short-term funding needs and letters of credit (the ABL Credit Facility) into two separate facilities: (1) an inventory-based revolving credit facility totaling $925.0 million, with an option to expand up to $1.225 billion (the Inventory Revolver), and (2) an accounts receivable securitization facility totaling $275.0 million (the Securitization Facility). We may request working capital loans and letters of credit under both facilities. As a result of the refinancing, we recognized a loss on debt extinguishment of $1.2 million in the first quarter of the twelve months ended April 29, 2012 for the write-off of unamortized debt issuance costs associated with the ABL Credit Facility.
In January 2013, we partially exercised the accordion feature of our Second Amended and Restated Credit Agreement and increased the borrowing capacity of the Inventory Revolver from a total of $925.0 million to a total of $1.025 billion. All other terms and conditions of the Inventory Revolver were unchanged, including the limitation on the actual amount of credit that is available from time to time under the Inventory Revolver as a result of borrowing base valuations of our inventory, accounts receivable and certain cash balances.
We have the right to further exercise the accordion feature and increase its total revolving commitment by an additional aggregate amount not to exceed $200.0 million, to the extent that any one or more new or existing lenders commit to being a lender for the additional amount and certain other customary conditions are met.
Availability under the Inventory Revolver is a function of the level of eligible inventories, subject to reserves. The Inventory Revolver matures in June 2016. The unused commitment fee and the interest rate spreads are a function of our leverage ratio (as defined in the Second Amended and Restated Credit Agreement). As of December 28, 2014, the unused commitment fee rate and interest rate were 0.50% and LIBOR plus 2.75%, respectively. The Inventory Revolver includes financial covenants. The ratio of our funded debt to capitalization (as defined in the Second Amended and Restated Credit Agreement) may not exceed 0.5 to 1.0, and our EBITDA to interest expense ratio (as defined in the Second Amended and Restated Credit Agreement) may not be less than 2.5 to 1.0. We and our material U.S. subsidiaries are jointly and severally liable for, as primary obligors, the obligations under the Inventory Revolver, and those obligations are secured by a first priority lien on certain personal property, including cash and cash equivalents, deposit accounts, inventory, intellectual property, and certain equity interests. We incurred approximately $9.7 million in transaction fees in connection with the Inventory Revolver, which were being amortized over its five-year life. The unamortized amount of transaction fees incurred in connection with the Inventory Revolver was written off when we performed the allocation of the total purchase consideration to the assets and liabilities assumed by WH Group in the Merger.
In December 2014, we amended our Securitization Facility and increased the borrowing capacity from a total of $275.0 million to a total of $325.0 million. As a result of the amended agreement, our maturity date was extended from May 2016 to December 2017, the interest rate spread was decreased from 1.15% to 1.05% and the unused commitment fee decreased from 0.45% to 0.40%.
As part of the arrangement, all accounts receivable of our major Fresh Pork and Packaged Meats subsidiaries are sold to a wholly owned “bankruptcy remote” special purpose vehicle (SPV). The SPV pledges the receivables as security for loans and letters of credit. The SPV is included in our consolidated financial statements and therefore, the accounts receivable owned by it are included in our consolidated balance sheet. However, the accounts receivable owned by the SPV are separate and distinct from our other assets and are not available to our other creditors should we become insolvent. As of December 28, 2014, the SPV held $660.5 million of accounts receivable and we had no outstanding borrowings on the Securitization Facility.
The unused commitment fee rate and the interest rate under the Securitization Facility were 0.40% and 0.30% plus 1.05% as of December 28, 2014, respectively. We incurred approximately $1.3 million in transaction fees in connection with the financing of the Securitization Facility in 2011, which were being amortized over its original three-year life. The unamortized amount of transaction fees incurred in connection with the Securitization Facility was written off when we performed the allocation of the total purchase consideration to the assets and liabilities assumed by WH Group in the Merger.
As of December 28, 2014, we had aggregate credit facilities and credit lines totaling $1.5 billion. Our unused capacity under these credit facilities and credit lines was $1.3 billion. These facilities and lines are generally at prevailing market rates. We pay commitment fees on the unused portion of the facilities.
Average borrowings under credit facilities and credit lines were $443.2 million, $541.7 million, $349.4 million, $105.4 million and $99.8 million at average interest rates of 3.0%, 3.0%, 3.0%, 5.2% and 4.9% during 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively. Maximum borrowings were $946.7 million, $759.3 million, $719.3 million, $229.9 million and $245.3 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively. Total outstanding borrowings were $50.1 million as of December 28, 2014 and $314.1 million as of December 29, 2013 with average interest rates of 3.0% and 2.8%, respectively.
Rabobank Term Loan
In August 2012, we amended our $200.0 million term loan with Rabobank. As a result of the amended agreement, our maturity date was extended from June 2016 to May 2018 and the interest rate increased to an annual rate equal to LIBOR plus 4%, or at our election, a base rate plus 3%.
The amended agreement contains affirmative and negative covenants that, among other things, limit or restrict our ability to create liens and encumbrances; incur debt; make acquisitions and investments; dispose of or transfer assets; pay dividends or make other payments in respect of our stock; in each case, subject to certain qualifications and exceptions that are generally consistent with the terms and conditions of the 2022 Notes. In addition, the amended agreement contains a financial covenant requiring us to maintain a minimum interest coverage ratio (ratio of consolidated EBITDA to consolidated interest expense) of not less than 1.75 to 1.0 commencing with our third quarter of the twelve months ended April 28, 2013.
Convertible Notes
In July 2008, we issued $400 million aggregate principal amount of 4% convertible senior notes due June 30, 2013 (the Convertible Notes) in a registered offering. The Convertible Notes were senior unsecured obligations.
In connection with the issuance of the Convertible Notes, we entered into separate convertible note hedge transactions with respect to our common stock to reduce potential economic dilution upon conversion of the Convertible Notes, and separate warrant transactions (collectively referred to as the Call Spread Transactions). We purchased call options that permitted us to acquire up to approximately 17.6 million shares of our common stock, subject to adjustment, which is the number of shares initially issuable upon conversion of the Convertible Notes. In addition, we sold warrants permitting the purchasers to acquire up to approximately 17.6 million shares of our common stock, subject to adjustment. See Note 11-Equity for more information on the Call Spread Transactions.
In July 2013, we repaid the outstanding principal amount on our Convertible Notes totaling $400.0 million. In October 2013, we paid $79.4 million to holders of the warrants to unwind the contracts due to the change of control related to the Merger.
NOTE 8: LEASE OBLIGATIONS, COMMITMENTS AND GUARANTEES
Lease Obligations
We lease facilities and equipment under non-cancelable operating leases. The terms of each lease agreement vary and may contain renewal or purchase options. Rental payments under operating leases are charged to expense on the straight-line basis over the period of the lease. Rental expense under operating leases of real estate, machinery, vehicles and other equipment was $43.0 million, $11.7 million, $19.2 million, $47.1 million and $46.5 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively.
Future rental commitments under non-cancelable operating leases as of December 28, 2014 are as follows:
As of December 28, 2014, future minimum lease payments under capital leases were approximately $25.2 million. The present value of the future minimum lease payments was $24.9 million. The long-term portion of capital lease obligations was $23.7 million and $24.6 million as of December 28, 2014 and December 29, 2013, respectively, and the current portion was $1.2 million and $1.2 million as of December 28, 2014 and December 29, 2013, respectively.
Commitments
We have agreements, expiring through 2022, to use cold storage warehouses owned by partnerships, of which we are 50% partners. We have agreed to pay prevailing competitive rates for use of the facilities, subject to aggregate guaranteed minimum annual fees. In 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we paid $20.7 million, $4.5 million, $7.4 million, $16.6 million and $14.0 million, respectively, in fees for use of the facilities. We had investments in the partnerships of $4.2 million as of December 28, 2014 and $3.0 million as of December 29, 2013, respectively.
We have purchase commitments with certain livestock producers that obligate us to purchase all the livestock that these producers deliver. Other arrangements obligate us to purchase a fixed amount of livestock. We also use independent farmers and their facilities to raise hogs produced from our breeding stock in exchange for a performance-based service fee payable upon delivery. We estimate the future obligations under these commitments based on available commodity livestock futures prices and internal projections about future hog prices, expected quantities delivered and anticipated performance. Our estimated future obligations under these commitments are as follows:
As of December 28, 2014, we were also committed to purchase approximately $269.6 million under forward grain contracts payable in 2015.
We had $40.2 million of committed funds related to approved capital expenditure projects as of December 28, 2014. These projects are expected to be funded with cash flows from operations and/or borrowings under credit facilities.
Guarantees
As part of our business, we are a party to various financial guarantees and other commitments as described below. These arrangements involve elements of performance and credit risk that are not included in the consolidated balance sheet as of December 28, 2014. We could become liable in connection with these obligations depending on the performance of the guaranteed party or the occurrence of future events that we are unable to predict. If we consider it probable that we will become responsible for an obligation, we will record the liability on our consolidated balance sheet.
As of December 28, 2014, we continued to guarantee $7.7 million of leases that were transferred to JBS S.A. in connection with the sale of Smithfield Beef, Inc which closed in October 2008. This guaranty may remain in place until the leases expire through February 2022.
NOTE 9: INCOME TAXES
Income tax expense consists of the following:
A reconciliation of taxes computed at the federal statutory rate to the effective tax rate is as follows:
We had income taxes receivable of $64.4 million and $36.7 million as of December 28, 2014 and December 29, 2013, respectively, in prepaid expenses and other current assets. Additionally, we had current taxes payable of $1.2 million and $1.0 million as of December 28, 2014 and December 29, 2013, respectively, in other current liabilities.
The tax effects of temporary differences consist of the following:
The following table presents the classification of deferred taxes in our balance sheets as of December 28, 2014 and December 29, 2013:
Management makes an assessment to determine if its deferred tax assets are more likely than not to be realized. Valuation allowances are established in the event that management believes the related tax benefits will not be realized. The valuation allowance primarily relates to state credits, state net operating loss carryforwards and losses in foreign jurisdictions for which no tax benefit was recognized. During 2014, the valuation allowance decreased by $7.4 million which is primarily due to foreign valuation allowance releases and expirations. During the three months ended December 29, 2013, the valuation allowance increased by $4.6 million which is primarily the net of purchase price allocations related to the Merger and the utilization of tax losses in foreign jurisdictions. During the five months ended September 26, 2013, the valuation allowance decreased by $5.8 million resulting primarily from the utilization of tax losses in foreign jurisdictions.
The tax credits, carryforwards and net operating losses expire from 2014 to 2034.
There were foreign subsidiary net earnings that were considered permanently reinvested of $110.2 million and $17.0 million as of December 28, 2014 and December 29, 2013, respectively. It is not reasonably determinable as to the amount of deferred tax liability that would need to be provided if such earnings were not reinvested.
A reconciliation of the beginning and ending liability for unrecognized tax benefits is as follows:
We operate in multiple taxing jurisdictions, both within the U.S. and outside of the U.S., and are subject to examination from various tax authorities. The liability for unrecognized tax benefits included $4.9 million and $4.5 million of accrued interest as of December 28, 2014 and December 29, 2013, respectively. We recognized $0.3 million of net interest expense during 2014, $0.5 million of net interest income during the eight months ended December 29, 2013, $0.4 million of net interest expense during the twelve months ended April 28, 2013 and $3.5 million of net interest income during the twelve months ended April 29, 2012, respectively, in income tax expense. The liability for unrecognized tax benefits included $13.0 million as of December 28, 2014 and $13.3 million as of December 29, 2013, that if recognized, would impact the effective tax rate.
We are currently being audited in several tax jurisdictions and remain subject to examination until the statute of limitations expires for the respective tax jurisdiction. Within specific countries, we may be subject to audit by various tax authorities, or subsidiaries operating within the country may be subject to different statute of limitations expiration dates. We have concluded all U.S. federal income tax matters through the tax year ended September 26, 2013. We are currently under U.S federal examination for the tax years ended December 29, 2013 and December 28, 2014.
Based upon the expiration of statutes of limitations and/or the conclusion of tax examinations in several jurisdictions as of December 28, 2014, we believe it is reasonably possible that the total amount of previously unrecognized tax benefits may decrease by up to $3.8 million within twelve months of December 28, 2014.
Beginning with the three months ended December 29, 2013, the Company, with its respective subsidiaries, is included in its U.S. parent company's consolidated federal income tax group and consolidated income tax return. The members of the consolidated group have elected to allocate income taxes among the members of the group by the separate return method, under which the parent company credits the subsidiary for income tax reductions resulting from the subsidiary's inclusion in the consolidated return, or the parent company charges the subsidiary for its allocated share of the consolidated income tax liability.
NOTE 10: PENSION AND OTHER RETIREMENT BENEFIT PLANS
Company Sponsored Defined Benefit Pension Plans
We provide the majority of our U.S. employees with pension benefits. Salaried employees are provided benefits based on years of service and average salary levels. Hourly employees are provided benefits of stated amounts for each year of service.
The following table presents a reconciliation of the pension benefit obligation, plan assets and the funded status of these pension plans:
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(1)
The beginning of the year is December 30, 2013 and April 29, 2013 for the period ending December 28, 2014 and December 29, 2013, respectively.
(2)
Benefit payments for our defined benefit pension plans during the three months ended December 29, 2013 and the five months ended September 26, 2013 were $39.4 million and $27.2 million, respectively. Benefit payments for our qualified defined benefit pension plans during the three months ended December 29, 2013 and the five months ended September 26, 2013 were $16.1 million and $26.0 million, respectively.
(3)
Excludes the assets and related activity of our non-qualified defined benefit pension plans. The fair value of assets related to our non-qualified plans was $107.9 million and $124.1 million as of December 28, 2014 and December 29, 2013, respectively. We made $6.6 million of cash contributions to our non-qualified plans in the twelve months ended December 28, 2014. We made no cash contributions to our non-qualified plans in the three months ended December 29, 2013 nor the five months ended September 26, 2013. Benefits paid for our non-qualified plans were $26.7 million, $23.3 million and $1.2 million for the twelve months ended December 28, 2014, the three months ended December 29, 2013 and the five months ended September 26, 2013, respectively.
The accumulated benefit obligation for all defined benefit pension plans was $1.7 billion and $1.6 billion as of December 28, 2014 and December 29, 2013, respectively. The accumulated benefit obligation for all of our defined benefit pension plans exceeded the fair value of plan assets for all periods presented.
The following table shows the pre-tax unrecognized items included as components of accumulated other comprehensive income (loss) related to our defined benefit pension plans as of the dates indicated:
We expect to recognize $4.7 million of the actuarial loss in net periodic pension cost in 2015.
The following table presents the components of the net periodic pension cost for the periods indicated:
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(1)
A settlement loss was recognized as the result of terminated vested participants in our qualified plans electing an early cash payout.
The following table shows our weighted average assumptions for the periods indicated:
We use an independent third-party actuary to assist in the determination of assumptions used and the measurement of our pension obligation and related costs. We review and select the discount rate to be used in connection with our pension obligation annually. In determining the discount rate, we used a hypothetical model that used the yield on corporate bonds (rated AA or better) that coincides with the cash flows of the plans’ estimated benefit payouts. The model uses a yield curve approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective cash flow. Using imputed interest rates, the model sums the present value of each cash flow stream to calculate an equivalent weighted average discount rate. We use this resulting weighted average discount rate to determine our final discount rate.
During 2014, we used a new mortality table based on the Mercer Industry Longevity Experience Study (MILES). The mortality table has the flexibility to consider industry specific groups, such as blue collar or white collar.
To determine the expected long-term return on plan assets, we consider the current and anticipated asset allocations, as well as historical and estimated returns on various categories of plan assets. Long-term trends are evaluated relative to market factors such as inflation, interest rates and fiscal and monetary polices in order to assess the capital market assumptions. Over the 5-year period ended December 28, 2014 and December 29, 2013, the average rate of return on plan assets was approximately 9.81% and 12.11%, respectively. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense in future periods.
Pension plan assets may be invested in cash and cash equivalents, equities, debt securities, insurance contracts and real estate. Our investment policy for the pension plans is to balance risk and return through a diversified portfolio of high-quality equity and fixed income securities. Equity targets for the pension plans are as indicated in the following table. Maturity for fixed income securities is managed such that sufficient liquidity exists to meet near-term benefit payment obligations. The plans retain outside investment advisors to manage plan investments within parameters established by our plan trustees.
The following table presents the fair value of our qualified pension plan assets by major asset category as of December 28, 2014 and December 29, 2013. The allocation of our pension plan assets is based on the target range presented in the following table.
See Note 12-Fair Value Measurements for additional information about the fair value of our pension assets.
We generally contribute the minimum amount required under government regulations to our qualified pension plans, plus amounts necessary to maintain an 80% funded status in order to avoid benefit restrictions under the Pension Protection Act. We do not expect to have a funding requirement in 2015 for our qualified pension plans.
Expected future benefit payments for our defined benefit pension plans are as follows:
Multiemployer Defined Benefit Pension Plans
In addition to our Company sponsored defined benefit pension plans, we contribute to several multiemployer defined benefit pension plans under collective bargaining agreements that cover certain of our union-represented employees. The risks of participating in such plans are different from the risks of single-employer plans, in the following respects:
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Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
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If a participating employer ceases to contribute to a multiemployer plan, the unfunded obligation of the plan may be borne by the remaining participating employers.
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If we were to withdraw from a multiemployer plan, we may be required to pay the plan an amount based on the underfunded status of the plan and on the history of our participation in the plan prior to withdrawal. This is referred to as a withdrawal liability.
Each multiemployer plan in which we participate has a certified zone status as currently defined by the Pension Protection Act of 2006. The zone status is based on information provided to us and other participating employers by each plan and is certified by the plan's actuary. The following are descriptions of the zone status types based on criteria established under the Internal Revenue Code (IRC):
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"Red” Zone-Plan has been determined to be in “critical status” and is generally less than 65% funded. A rehabilitation plan, as required under the IRC, must be adopted by plans in the "red" zone. Plan participants may be responsible for the payment of surcharges, in addition to the contribution rate specified in the applicable collective bargaining agreement, for a plan in “critical status,” in accordance with the requirements of the IRC.
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"Yellow” Zone-Plan has been determined to be in “endangered status” and is generally less than 80% funded. A funding improvement plan, as required under the IRC, must be adopted.
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"Green” Zone-Plan has been determined to be neither in “critical status” nor in “endangered status,” and is generally at least 80% funded.
All plans in which we participate were in the "green" zone for the two most recent benefit plan years that have been certified.
The following table summarizes our contributions to multiemployer plans (1):
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(1)
Contributions represent the amounts we contributed to the plans during the periods ending in the specified year. Our contributions to each plan did not exceed 5% of total plan contributions for any plan year presented.
(2)
Represents the Employer Identification Number and the three-digit plan number assigned to a plan by the Internal Revenue Service.
(3)
We have multiple collective bargaining agreements associated with the United Food and Commercial Workers International Union Industry Pension Fund. These agreements are currently scheduled to expire in October 2015, May 2016, January 2018 and December 2018.
Other Employee Benefit Plans
We sponsor defined contribution pension plans (401(k) plans) covering substantially all U.S. employees. Our contributions vary depending on the plan but are based primarily on each participant’s level of contribution and cannot exceed the maximum allowable for tax purposes. Total contributions were $18.2 million, $4.1 million, $8.0 million, $15.0 million, and $13.9 million in 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, twelve months ended April 28, 2013 and twelve months ended April 29, 2012 , respectively.
We also provide health care and life insurance benefits for certain retired employees. These plans are unfunded and generally pay covered costs reduced by retiree premium contributions, co-payments and deductibles. We retain the right to modify or eliminate these benefits. We consider disclosures related to these plans immaterial to the consolidated financial statements and related notes.
NOTE 11: EQUITY
Common Stock
Upon completion of the Merger, all outstanding shares of Smithfield were cancelled and the Company's shareholders received the Merger Consideration for each share of common stock held prior to the effective time of the Merger.
As a result of the Merger, all of the outstanding shares of Merger Sub were converted into 1,000 shares of common stock of the Company, no par value, and such shares are owned by a wholly owned subsidiary of WH Group. There are no other shares of stock outstanding in the Company. See Note 2-Merger and Acquisitions for further information on the Merger.
Common Stock Repurchases
During the twelve months ended April 28, 2013, we repurchased 19,068,079 shares of our common stock for $386.4 million, including related fees. The price of the repurchased shares was allocated among common stock, additional paid-in capital and retained earnings in our consolidated condensed balance sheet in accordance with applicable accounting guidance.
From June 2011 through the Merger Date, we repurchased 28,244,783 shares of our common stock for $575.9 million, including related commissions, at an average price of $20.38.
Stock-Based Compensation
During 2014, WH Group adopted a share incentive plan to provide incentives to various executives and management of WH Group and its subsidiaries (the WH Group Incentive Plan). The WH Group stock trades on the Stock Exchange of Hong Kong Limited.
In 2014, 160,500,000 stock options were granted to Smithfield executives and management under the WH Group Incentive Plan. Stock options granted under the WH Group Incentive Plan are subject to graded vesting over five years and were valued in five separate tranches, according to the expected life of each tranche. We recognized $9.2 million of compensation expense for the stock options in 2014. The related income tax benefit recognized was $3.4 million. There was no compensation expense capitalized as part of inventory or fixed assets.
The fair value of each option granted was estimated on the date of grant using a binomial option pricing model. The expected annual volatility was based on the historical volatility of comparable companies. The following table summarizes the assumptions made in determining the fair value of stock options granted in 2014(1):
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(1)
The options granted in 2014 were valued in separate tranches according to the expected life of each tranche. The above table reflects the weighted average risk free interest rate and expected option life of each tranche. The expected dividend yield was the same for all options granted in 2014.
The following table summarizes stock option activity under the WH Group Incentive Plan during 2014:
The weighted average grant-date fair value of options granted during 2014 was $0.42 USD ($3.22 HKD). As of December 28, 2014, there was $53.7 million of total unrecognized compensation cost related to nonvested stock options granted under the WH Group Incentive Plan. That cost is expected to be recognized over a weighted average period of 3.1 years. No options vested during 2014.
During the twelve months ended May 3, 2009, we adopted the 2008 Incentive Compensation Plan (the Incentive Plan), which replaced the 1998 Stock Incentive Plan and provided for the issuance of non-statutory stock options and other awards to employees, non-employee directors and consultants.
Upon completion of the Merger, all then-outstanding stock-based compensation awards, whether vested or unvested, were converted into the right to receive the Merger Consideration, less the exercise price of such awards, if any. As a result, we made aggregate cash payments totaling $82.1 million to plan participants following the Merger, which were included as a component of the purchase price consideration. The Incentive Plan was discontinued as a result of the Merger. Stock-based compensation expense was $2.0 million, $8.4 million, and $11.0 million for the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively. The related income tax benefits recognized were $0.4 million, $1.8 million, and $2.4 million, for the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, respectively. There was no compensation expense capitalized as part of inventory or fixed assets during the five months ended September 26, 2013, twelve months ended April 28, 2013 and twelve months ended April 29, 2012.
Call Spread Transactions
In connection with the issuance of the Convertible Notes (see Note 7-Debt), we entered into separate convertible note hedge transactions with respect to our common stock to minimize the impact of potential economic dilution upon conversion of the Convertible Notes, and separate warrant transactions.
We purchased call options in private transactions that permitted us to acquire up to approximately 17.6 million shares of our common stock at an initial strike price of $22.68 per share, subject to adjustment, for $88.2 million. In general, the call options allowed us to acquire a number of shares of our common stock initially equal to the number of shares of common stock issuable to the holders of the Convertible Notes upon conversion. These call options terminated upon the maturity of the Convertible Notes.
We also sold warrants in private transactions for total proceeds of approximately $36.7 million. The warrants permitted the purchasers to acquire up to approximately 17.6 million shares of our common stock at an initial exercise price of $30.54 per share, subject to adjustment.
In July 2013, we repaid the outstanding principal amount on our Convertible Notes totaling $400.0 million. As part of the settlement of the Convertible Notes, we delivered 3,894,476 shares of our common stock to the holders of the notes. Simultaneously, we exercised a call option, which we entered into in connection with the original issuance of the Convertible Notes, entitling us to receive 3,894,510 shares from the counter-parties. As a result, we retired 34 net shares of our common stock upon the settlement of the Convertible Notes.
In October 2013, we paid $79.4 million to holders of the warrants to unwind the contracts due to the change of control related to the Merger.
Stock Held in Trust
We maintain a non-qualified defined Supplemental Pension Plan (the Supplemental Plan) the purpose of which is to provide supplemental retirement income benefits for those eligible employees whose benefits under the tax-qualified plans are subject to statutory limitations. A grantor trust has been established for the purpose of satisfying the obligations under the plan. The shares of the Company's stock held by the Supplemental Plan were converted to cash as a result of the Merger.
As part of the Incentive Plan director fee deferral program, we purchased shares of our common stock on the open market for the benefit of the plan's participants. These shares were held in a rabbi trust until transferred to the participants. The shares held by the rabbi trust were converted to cash as a result of the Merger.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following:
Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss) and the related effects on net income of amounts reclassified out of other comprehensive income (loss):
NOTE 12: FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to consider and reflect the assumptions of market participants in fair value calculations. These factors include nonperformance risk (the risk that an obligation will not be fulfilled) and credit risk, both of the reporting entity (for liabilities) and of the counterparty (for assets).
We use, as appropriate, a market approach (generally, data from market transactions), an income approach (generally, present value techniques), and/or a cost approach (generally, replacement cost) to measure the fair value of an asset or liability. These valuation approaches incorporate inputs such as observable, independent market data that we believe are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.
The FASB has established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:
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Level 1-quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.
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Level 2-observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
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Level 3-unobservable for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.
We have classified assets and liabilities measured at fair value based on the lowest level of input that is significant to the fair value measurement. For the periods presented, we had no transfers of assets or liabilities between levels within the fair value hierarchy. The timing of any such transfers would be determined at the end of each reporting period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities, including assets held in a rabbi trust used to fund the Supplemental Plan, that were measured at fair value on a recurring basis as of December 28, 2014 and December 29, 2013:
The following are descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value on a recurring basis:
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Derivatives-Derivatives classified within Level 1 are valued using quoted market prices. In some cases where quoted market prices are not available, we value the derivatives using market based pricing models that utilize the net present value of estimated future cash flows to calculate fair value, in which case the measurements are classified within Level 2. These valuation models make use of market-based observable inputs, including exchange traded prices and rates, yield curves, credit curves, and measures of volatility.
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Bond securities-Bond securities are valued at quoted market prices and are classified within Level 1.
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Insurance contracts-Insurance contracts are valued at their cash surrender value using the daily asset unit value (AUV) which is based on the quoted market price of the underlying securities and classified within Level 2.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. We had no significant assets or liabilities that were measured and recorded at fair value on a nonrecurring basis during 2014 or the Transition Period, except for the preliminary allocation of the total purchase consideration to the estimated fair values of our assets acquired and liabilities assumed by WH Group as part of the Merger. We finalized the allocation in the third quarter of 2014 with no material adjustments. See Note 2-Merger and Acquisitions for further information on the Merger.
Pension Plan Assets
The following table summarizes our qualified pension plan assets measured at fair value on a recurring basis (at least annually) as of December 28, 2014 and December 29, 2013:
The following are descriptions of the valuation methodologies and key inputs used to measure pension plan assets recorded at fair value:
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Cash and cash equivalents-Cash equivalents include highly liquid investments with original maturities of three months or less. Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value. Actively traded money market funds are measured at their NAV, which approximates fair value, and classified as Level 1. The fair value of certain money market funds for which quoted prices are available but traded less frequently have been classified as Level 2.
▪
Equity securities-When available, the fair value of equity securities are based on quoted prices in active markets and classified as Level 1. Level 1 financial instruments include highly liquid instruments with quoted prices, such as equities and mutual funds traded in active markets.
If quoted prices are not available, fair values are obtained from pricing services, broker quotes or other model-based valuation techniques with observable inputs and classified as Level 2. The nature of these equity securities include securities for which quoted prices are available but traded less frequently, securities whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data and securities that are valued using other financial instruments, the parameters of which can be directly observed. Level 2 equity securities include preferred stock and mutual funds not actively traded.
▪
Fixed income-The fair values of fixed income instruments are obtained from pricing services, broker quotes or other model-based valuation techniques with observable inputs and classified as Level 2. The nature of these fixed income instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data and securities that are valued using other financial instruments, the parameters of which can be directly observed. Level 2 fixed income instruments include mutual funds, asset-backed securities, corporate debt securities, emerging market securities and government debt securities.
•
Alternative Investments-The fair values of alternative investments are obtained from pricing services, broker quotes or other model-based valuation techniques with observable inputs and classified as Level 2. The nature of these alternative investments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data and securities that are valued using other financial instruments, the parameters of which can be directly observed. Level 2 alternative investments include diversified investment funds, domestic options contracts and futures contracts.
▪
Limited partnerships-The valuation of limited partnership investments requires the use of significant unobservable inputs due to the absence of quoted market prices, inherent lack of liquidity and long-term nature of such assets and are classified as Level 3. These investments are initially valued at cost with quarterly valuations performed utilizing available market data to determine the fair value of these investments. Such market data consists primarily of the observations of trading multiples of public companies considered comparable to the investments with adjustments for investment-specific issues, the lack of liquidity and other items.
▪
Insurance contracts-The valuation of these guaranteed annuity insurance contracts is primarily based on quoted prices in active markets with adjustments for unobservable inputs caused by the unique nature of applying investment earnings as part of the participation guarantee. Due to these unobservable inputs and the long-term nature of these investments, the contracts are classified as Level 3.
The following table summarizes the changes in our Level 3 pension plan assets for the twelve months ended December 28, 2014 and the eight months ended December 29, 2013:
Other Financial Instruments
We determine the fair value of public debt using Level 2 inputs based on quoted market prices. The carrying amount of all other debt approximates fair value as those instruments are based on variable interest rates. The following table presents the fair value and carrying value of long-term debt, including the current portion of long-term debt as of December 28, 2014 and December 29, 2013:
The carrying amounts of cash and cash equivalents, accounts receivable, notes payable and accounts payable approximate their fair values because of the relatively short-term maturity of these instruments.
NOTE 13: RELATED PARTY TRANSACTIONS
The following table presents amounts owed from and to related parties as of December 28, 2014 and December 29, 2013:
Sales on the consolidated statements of income during 2014 and the three months ended December 29, 2013 include $183.2 million and $10.2 million, respectively, of sales to other subsidiaries of WH Group.
One of our vice presidents of our Hog Production segment holds an ownership interests in JCT LLC (JCT). JCT owns certain farms that produce hogs under contract with the Hog Production segment. During 2014, the eight months ended December 29, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we paid $1.7 million, $1.4 million, $6.2 million and $7.9 million, respectively, to JCT for the production of hogs. During the eight months ended December 29, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we received $0.2 million, $2.6 million and $3.1 million, respectively, from JCT for reimbursement of associated farm and other support costs. We received no amounts from JCT during 2014 for reimbursement of associated farm and other support costs.
Also, multiple other vice presidents of the Hog Production segment hold ownership interests in Seacoast, LLC, Advantage Farms, LLC, Old Oak Farms LLC, Pork Partners, Inc. and Lisbon 1 Farms Inc. These companies produce and raise hogs for us under contractual arrangements that are consistent with third party grower contracts. During 2014, the eight months ended December 29, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we paid service fees of $2.8 million, $1.1 million, $1.5 million and $1.7 million, respectively, to these companies. In 2014, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we received $0.1 million, $0.2 million and $0.4 million, respectively, from these companies for reimbursement of associated farm and other support costs. We received no amounts from these companies during the eight months ended December 29, 2013 for reimbursement of associated farm and other support costs.
Wendell Murphy, a former director of the Company, and his immediate family members hold ownership interests in multiple farms that conduct business with us. These farms either produce hogs for us or produce and sell feed ingredients to us. In the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we paid $51.6 million and $52.2 million, respectively, to these entities for hogs, feed ingredients and reimbursement of associated farm and other support costs. As a result of the Merger, Mr. Murphy is no longer a director of the Company.
We believe that the terms of the foregoing arrangements were no less favorable to us than if entered into with unaffiliated companies.
NOTE 14: REGULATION AND CONTINGENCIES
Like other participants in the industry, we are subject to various laws and regulations administered by federal, state and other government entities, including the United States Environmental Protection Agency (EPA) and corresponding state agencies, as well as the United States Department of Agriculture, the Grain Inspection, Packers and Stockyard Administration, the United States Food and Drug Administration, the United States Occupational Safety and Health Administration, the Commodities and Futures Trading Commission and similar agencies in foreign countries.
We from time to time receive notices and inquiries from regulatory authorities and others asserting that we are not in compliance with such laws and regulations. In some instances, litigation ensues. In addition, individuals may initiate litigation against us.
North Carolina Nuisance Litigation
In July, August and September 2013, 25 complaints were filed in the Superior Court of Wake County, North Carolina by 479 individual plaintiffs against Smithfield and our wholly owed subsidiary, Murphy-Brown alleging causes of actions for nuisance and related claims. All 25 complaints were dismissed without prejudice in September and October 2014.
In August, September and October 2014, 25 complaints were filed in the Eastern District of North Carolina by 515 individual plaintiffs against our wholly owned subsidiary, Murphy-Brown, alleging causes of action for nuisance and related claims. The complaints stemmed from the nuisance cases previously filed in the Superior Court of Wake County. On February 23, 2015, all 25 complaints were amended and one complaint was severed into two separate actions. The 26 currently pending complaints were filed on behalf of 541 plaintiffs and relate to approximately 14 company-owned and 75 contract farms. All 26 complaints include causes of action for temporary nuisance and negligence and seek recovery of an unspecified amount of compensatory, special and punitive damages, as well as unspecified injunctive and equitable relief. Murphy-Brown is in the process of responding to the complaints in all 26 cases. The Company believes that the claims are unfounded and intends to defend the suits vigorously.
Our policy for establishing accruals and disclosures for contingent liabilities is contained in Note 1-Summary of Significant Accounting Policies. We established a reserve estimating our expenses to defend against these and similar potential claims on the Successor's opening balance sheet. Consequently, expenses and other liabilities associated with these claims for subsequent periods will not affect our profits or losses unless our reserve proves to be insufficient or excessive. However, legal expenses incurred in our and our subsidiaries’ defense of these claims and any payments made to plaintiffs through unfavorable verdicts or otherwise will negatively impact our cash flows and our liquidity position. Given that these matters are in its very preliminary stages and given the inherent uncertainty of the outcome for these and similar potential claims, we cannot estimate the reasonably possible loss or range of loss for these loss contingencies outside the expenses we will incur to defend against these claims. We will continue to review whether an additional accrual is necessary and whether we have the ability to estimate the reasonably possible loss or range of loss for these matters.
NOTE 15: REPORTABLE SEGMENTS
Our operating segments are determined on the basis of how we internally report and evaluate financial information used to make operating decisions and assess performance. For external reporting purposes, we aggregate operating segments which have similar economic characteristics, products, production processes, types or classes of customers and distribution methods into reportable segments based on a combination of factors, including products produced and geographic areas of operations.
Prior to the second quarter of 2014, we conducted our operations through four reportable segments: Pork, Hog Production, International and Corporate. Over the past several years, the Pork segment has undergone significant structural change and consolidation. In the second quarter of 2014, two of the largest Pork segment operating companies, The Smithfield Packing Company, Inc. and Farmland Foods, Inc., merged to form Smithfield Farmland Corp (Smithfield Farmland). With this merger, only two large operating companies remain; Smithfield Farmland, which produces both fresh pork and packaged meats, and John Morrell Food Group, which is predominately a packaged meats company. Based on the evolution of the Pork segment over the past several years and the recent merger of Smithfield Farmland, the former Pork segment has been reorganized from an independent operating company structure to a product division structure to more closely align with the way in which the chief operating decision maker (CODM) views the business, assesses segment performance and allocates resources.
Therefore, the former Pork segment now consists of two reportable segments; the Fresh Pork segment and the Packaged Meats segment. As such, beginning with the second quarter of 2014, our reportable segments are: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. The changes to our reportable segments have been applied retrospectively for all periods presented. During all periods presented, our CODM has been the President and Chief Executive Officer of the Company.
Fresh Pork Segment
The Fresh Pork segment consists of our U.S. fresh pork operations. The Fresh Pork segment processes live hogs and produces a wide variety of fresh pork products in the U.S. and markets them nationwide and to numerous foreign markets, including China, Japan, Mexico, Russia and Canada. Fresh pork products include loins, butts, picnics and ribs, among others. The Fresh Pork segment processed 27.9 million hogs during 2014.
Packaged Meats Segment
The Packaged Meats segment consists of our U.S. packaged meats operations. The Packaged Meats segment utilizes fresh pork and other raw meat products to produce a wide variety of packaged meats products in the U.S. and markets them primarily in the U.S. Packaged meats products include smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli and luncheon meats, speciality products such as pepperoni, dry meat products, and ready-to-eat, prepared foods such as pre-cooked entrees and pre-cooked bacon and sausage. The Packaged Meats segment sales volume totaled 2.8 billion pounds in 2014.
Hog Production Segment
The Hog Production segment consists of our hog production operations located in the U.S. The Hog Production segment operates numerous facilities with approximately 894,000 sows and produced 14.7 million hogs in 2014. The Hog Production segment produces approximately 47% of the Fresh Pork segment's live hog requirements.
The following table shows the percentages of Hog Production segment revenues derived from hogs sold internally and externally, and other products for the periods indicated:
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(1)
Consists primarily of grains, feed and gains (losses) on derivatives.
International Segment
The International segment includes 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. Our international meat processing operations produce a wide variety of fresh pork, poultry and packaged meats products, including cooked hams, sausages, hot dogs, bacon and canned meats. The International segment processed 4.3 million hogs and sold 489.3 million pounds and 533.7 million pounds of packaged meats and fresh pork, respectively, during 2014.
The following table shows the percentages of International segment revenues derived from packaged meats, fresh meats and hog production for the periods indicated:
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(1)
Includes feathers, by-products and rendering.
(2)
Includes external hog and feed sales.
Corporate Segment
The Corporate segment provides management and administrative services to support our other segments.
Segment Results
The following tables present information about the results of operations and the assets of our reportable segments. The information contains certain allocations of expenses that we deem reasonable and appropriate for the evaluation of results of operations. We do not allocate income taxes to segments. Segment assets exclude intersegment account balances as we believe their inclusion would be misleading or not meaningful. We believe all intersegment sales are at prices that approximate market.
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(1)
We do not reflect transfers of Fresh Pork to Packaged Meats as sales. In WH Group's segment reporting the Fresh Pork segment includes transfers of fresh pork to the Packaged Meats segment as sales. As such, Fresh Pork segment information reported by WH Group includes an additional $2.4 billion and $601.7 million of sales for the twelve months ended December 28, 2014 and the three months ended December 29, 2013, respectively.
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(1)
Given the nature of the Fresh Pork and Packaged Meats operations, many of their assets are shared and not allocated. Accordingly, we have disclosed the assets on a combined basis, consistent with how they are reported to the CODM.
(2)
$1.2 billion of trademarks related to our domestic brands are owned by certain holding companies included within Corporate. Additionally, $660.5 million and $539.0 million of accounts receivable were held by the SPV and included within Corporate as of December 28, 2014 and December 29, 2013, respectively (see Note 7-Debt for further information).
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(1)
Given the nature of the Fresh Pork and Packaged Meats operations, many of their assets are shared and not allocated. Accordingly, we have disclosed the capital expenditures on a combined basis, consistent with how they are reported to the CODM.
The following table shows the change in the carrying amount of goodwill by reportable segment for the periods noted:
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(1)
Predecessor goodwill was allocated to the Pork segment. Upon changing our segments in 2014, to segregate the Fresh Pork and Packaged Meats components into separate reportable segments, we did not reallocate historical goodwill balances to the new segments as it was not practicable to do so.
(2)
See Note 2-Merger and Acquisitions for discussion of acquisition.
(3)
Other goodwill adjustments primarily include the effects of foreign currency translation.
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(1)
Purchase accounting adjustments relate to adjustments recognized in connection with the purchase price allocation due to the Merger. We consider these adjustments immaterial to the Successor opening balance sheet and as such, did not retrospectively apply the adjustments to the Successor opening balance sheet.
(2)
Other goodwill adjustments primarily include the effects of foreign currency translation and an immaterial business acquisition during the second quarter of 2014.
The following table presents our consolidated sales attributed to operations by geographic area for 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012:
The following table presents our long-lived assets attributed to operations by geographic area as of December 28, 2014 and December 29, 2013:
NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION
NOTE 17: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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(1)
2013 represents the twelve months ended December 29, 2013.
The following significant infrequent or unusual items impacted our quarterly results in the twelve months ended December 29, 2013. There were no significant infrequent or unusual items that impacted our quarterly results in 2014.
•
Operating profit in the third and fourth quarters included professional fees related to the Merger of $18.0 million and $23.9 million, respectively.
•
Gross profit in the fourth quarter included $45.4 million of non-cash costs related to the fair value step-up of inventories due to the Merger.
NOTE 18: SUBSEQUENT EVENTS
2015 Tender Offer
In January 2015, we commenced a cash tender offer for our 2017, 2018, 2021 and 2022 Notes, subject to a maximum aggregate purchase price of up to $275 million (2015 Tender Offer). The 2015 Tender Offer expired in February 2015. As a result of the 2015 Tender Offer, we paid $275 million to repurchase $258 million of principal. As a result of these repurchases, we will recognize losses on debt extinguishment of approximately $12 million in the first quarter of 2015, including the write-off of related unamortized premiums and debt issuance costs.
Schedule II
SMITHFIELD FOODS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
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(1)
Activity primarily includes the reserves recorded in connection with the creation of the opening balance sheets of entities acquired and currency translation adjustments.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 28, 2014. Based on that evaluation, management, including the CEO and CFO, has concluded that our disclosure controls and procedures were effective as of December 28, 2014.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to management and the board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 28, 2014. In making this assessment, we used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on this evaluation under the framework in Internal Control - Integrated Framework issued by COSO, management concluded that our internal control over financial reporting was effective as of December 28, 2014.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In the quarter ended December 28, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item regarding our executive officers is included in Part I of this report on Form 10-K.
The information required by this Item will be contained in a Form 10-K/A to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our twelve month period ended December 28, 2014.
The information required by this Item will be contained in a Form 10-K/A to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our twelve month period ended December 28, 2014.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be contained in a Form 10-K/A to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our twelve month period ended December 28, 2014.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will be contained in a Form 10-K/A to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our twelve month period ended December 28, 2014.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be contained in a Form 10-K/A to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our twelve month period ended December 28, 2014.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements:
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Consolidated Statements of Income - for the twelve months ended December 28, 2014 (Successor); September 27, 2013 to December 29, 2013 (Successor); April 29, 2013 to September 26, 2013 (Predecessor) and for the twelve months ended April 28, 2013 and April 29, 2012 (Predecessor)
▪
Consolidated Statements of Comprehensive Income - for the twelve months ended December 28, 2014 (Successor); September 27, 2013 to December 29, 2013 (Successor); April 29, 2013 to September 26, 2013 (Predecessor) and for the twelve months ended April 28, 2013 and April 29, 2012 (Predecessor)
▪
Consolidated Balance Sheets as of December 28, 2014 and December 29, 2013
▪
Consolidated Statements of Cash Flows - for the twelve months ended December 28, 2014 (Successor); September 27, 2013 to December 29, 2013 (Successor); April 29, 2013 to September 26, 2013 (Predecessor) and for the twelve months ended April 28, 2013 and April 29, 2012 (Predecessor)
▪
Consolidated Statements of Shareholder's Equity - for the twelve months ended December 28, 2014 (Successor); September 27, 2013 to December 29, 2013 (Successor); April 29, 2013 to September 26, 2013 (Predecessor) and for the twelve months ended April 28, 2013 and April 29, 2012 (Predecessor)
▪
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
2. Financial Statement Schedule - Schedule II-Valuation and Qualifying Accounts
Certain financial statement schedules are omitted because they are not applicable or the required information is included herein or is shown in the consolidated financial statements or related notes filed as part of this report.
3. Exhibits
Exhibit 10.1(b)**
-
Amendment No. 1 to Smithfield Foods, Inc. Change in Control Executive Severance Plan, dated May 28, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013).
Exhibit 10.2(a)
-
Amended and Restated Term Loan Agreement, dated as of August 31, 2012, among the Company, certain subsidiaries of the Company that may from time to time be party thereto, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 6, 2012).
Exhibit 10.2(b)
-
First Amendment to Amended and Restated Term Loan Agreement, dated as of January 31, 2013, among the Company, and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as the Lender and the Administrative Agent (incorporated by reference to Exhibit 10.8(b) to the Company’s Annual Report on Form 10-K filed with the SEC on June 18, 2013).
Exhibit 10.2(c)
-
Consent Letter of Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as Administrative Agent and sole Lender, dated July 12, 2013, related to the Amended and Restated Term Loan Agreement, dated as of August 31, 2012 (as amended by that certain First Amendment to Amended and Restated Term Loan Agreement dated as of January 31, 2013), among the Company, certain subsidiaries of the Company that may from time to time be party thereto, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 15, 2013).
Exhibit 10.2(d)
-
Second Amendment to Amended and Restated Term Loan Agreement, dated as of January 16, 2014, among the Company, and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as the Lender and the Administrative Agent. (incorporated by reference to Exhibit 10.5(f) to the Company’s Transition Report on Form 10-K filed with the SEC on March 20, 2014).
Exhibit 10.3(a)
-
Amended and Restated Intercreditor Agreement, dated as June 9, 2011, among Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.“Rabobank Nederland”, New York Branch, as administrative agent for the ABL Parties, U.S. Bank National Association, as collateral agent for the Term Debt Secured Parties, Smithfield Receivables Funding LLC, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.“Rabobank Nederland”, New York Branch, as Administrative Agent under the Credit and Security Agreement and each of the Loan Parties party thereto (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed with the SEC on June 18, 2012).
Exhibit 10.3(b)
-
First Amendment to Amended and Restated Intercreditor Agreement, dated as of January 31, 2013, among Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.“Rabobank Nederland”, New York Branch, as administrative agent for the ABL Parties, Smithfield Receivables Funding LLC, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.“Rabobank Nederland”, New York Branch, as Administrative Agent under the Credit and Security Agreement and each of the Loan Parties party thereto (incorporated by reference to Exhibit 10.10(b) to the Company’s Annual Report on Form 10-K filed with the SEC on June 18, 2013).
Exhibit 10.4(a)
-
Second Amended and Restated Credit Agreement, dated as of June 9, 2011, among the Company, the subsidiaries of the Company party thereto, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as Administrative Agent, the lenders party thereto, and the other agents and arrangers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2011).
Exhibit 10.4(b)
-
First Amendment to Second Amended and Restated Credit Agreement, dated as of January 31, 2013, among the Company, the subsidiaries of the Company party thereto, the banks and other lending institutions party thereto and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as Administrative Agent (incorporated by reference to Exhibit 10.11(b) to the Company’s Annual Report on Form 10-K filed with the SEC on June 18, 2013).
Exhibit 10.4(c)
-
Second Amended and Restated Pledge and Security Agreement, dated as of June 9, 2011, among the Company, the subsidiaries of the Company party thereto and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2011).
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*
Filed herewith.
**
Management contract or compensatory plan or arrangement of the Company required to be filed as an exhibit.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: SMITHFIELD FOODS, INC.
By:
/s/ C. LARRY POPE
C. Larry Pope
President and Chief Executive Officer
Date: March 25, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.