What changed in this filing

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Item 2. Management’s Discussion and Analysis

2013-12-06 compared with 2013-09-06 · 247 added, 185 removed, 146 unchanged (75% of the section changed)

2 unchanged sentences

EXECUTIVE OVERVIEW

On September 26, 2013 (the Merger Date), pursuant to the Agreement and Plan of Merger dated May 28, 2013 (the Merger Agreement) with Shuanghui International Holdings Limited, a corporation formed under the laws of the Cayman Islands (Shuanghui), the Company merged with Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of Shuanghui (the 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 Shuanghui.

Upon completion of the Merger, Shuanghui acquired all outstanding shares of Smithfield 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 .

Shuanghui 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.

Shuanghui is a pioneer in the Chinese meat processing industry with over 30 years of history.

Shuanghui's businesses include hog production, meat processing, fresh meat and packaged meats production and distribution.

The merging of Shuanghui'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.

As part of Shuanghui'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.

We are the largest hog producer and pork processor in the world.

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The Corporate segment provides management and administrative services to support our other segments.

First Quarter of Fiscal 2014 Summary

Net income was $39.5 million , or $.27 per diluted share, in the first quarter of fiscal 2014 compared to net income of $61.7 million , or $.40 per diluted share, in the same quarter last year.

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 :

Pork segment operating profit decreased by $57.2 million due to higher raw material costs and weakness in certain export markets.

Hog Production segment operating profit increased by $43.4 million primarily due to 6% higher market hog prices.

International segment operating profit decreased by $13.9 million , hurt by higher feed costs in Eastern Europe and Mexico.

Corporate segment results decreased by $6.8 million primarily due to acquisition related costs and fees associated with the Shuanghui and KCS transactions, which are described below.

Definitive Merger Agreement

On May 28, 2013, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Shuanghui International Holdings Limited (Shuanghui) and Sun Merger Sub, Inc., a wholly owned subsidiary of Shuanghui (Merger Sub), pursuant to which Merger Sub will merge with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Shuanghui.

At the effective time of the Merger, each share of the Company's common stock issued and outstanding immediately prior to such effective time (other than shares held by the Company or its wholly owned subsidiaries, or by Shuanghui or Merger Sub) will be automatically converted into the right to receive $34.00 in cash, without interest and less any applicable withholding taxes (the Merger Consideration).

In addition, upon completion of the Merger, all then-outstanding stock-based compensation awards, whether vested or unvested, will be converted into the right to receive the Merger Consideration, less the exercise price of such awards, if any.

A special meeting of the Company's shareholders (the Special Meeting) has been scheduled for September 24, 2013 for the purpose of voting on the approval of the Merger Agreement, the related plan of merger and the Merger.

The closing of the Merger is subject to various conditions, including the condition that the Merger Agreement and the related plan of merger be approved by the affirmative vote of the holders of a majority of all of the outstanding shares of the Company's common stock entitled to vote thereon at the Special Meeting.

The closing of the Merger is also subject to certain regulatory approvals and other customary closing conditions.

Additional information about the Merger and the Merger Agreement is set forth in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on May 29, 2013 and in the Company's definitive proxy statement filed with the SEC on August 19, 2013 (the Proxy Statement) with respect to the Special Meeting.

The Merger will provide us with the opportunity to expand our offering of products to China through Shuanghui's distribution network.

Shuanghui will gain access to high-quality, competitively-priced and safe U.S.

products, as well as our best practices and operational expertise.

We do not anticipate any changes in how we do business operationally in the U.S.

and throughout the world.

The Merger would provide our shareholders with significant and immediate cash value for their investment, and would ensure that we continue to execute on our strategic priorities while maintaining our brand excellence, community involvement, and our commitment to environmental stewardship and animal welfare.

The Merger will be financed through a combination of cash provided by Shuanghui, rollover of certain existing Company debt and the proceeds of the Merger Sub Notes.

The Merger Agreement does not contain a financing condition.

The Merger is expected to close in the second half of calendar 2013.

The financing of the Merger is more fully explained under "Additional Matters Affecting Liquidity" below.

If the Merger is consummated, it is currently contemplated that the Merger will be accounted for as a business combination using the acquisition method of accounting.

As such, it is expected that our financial statements in the future will vary in important respects from our historical consolidated financial statements.

The purchase consideration is expected to be allocated to our tangible and intangible assets, liabilities and noncontrolling interests based on their respective fair values as of the date of the Merger.

Certain of these adjustments will impact future net income.

Strategies for Growth

Our strategies for growth include:

Capitalize on export opportunities.

We believe our balanced geographic footprint will position us to capitalize on growing pork consumption trends across Europe, Asia and the Americas.

We have an experienced international sales force and management team to support this growth.

Increase capital investment to upgrade facilities with new machinery and equipment to improve our competitive cost structure and achieve least cost and best in class operations.

We expect $300 million to $350 million in annual capital expenditures over the next several years to fund this investment.

Continue higher investment in marketing and advertising programs to build brand equity and grow sales.

Our plan is to increase our annual marketing and advertising expenditures by double digits for the foreseeable future.

Currently, marketing and advertising expense represents approximately 2% of domestic packaged meats sales.

Build a strong product pipeline to drive packaged meats volume and margins.

We have established a culture of innovation, focusing on five strategic areas:

packaging, health and wellness, convenience, taste and pork consumer solutions.

These platforms have a strong focus on product differentiation highlighting quality and convenience, better-for-you foods, including lower sodium, lean protein, and natural ingredients, and new taste experiences.

Emphasize our hog production assets as a strategic point of difference.

We believe that our vertically integrated platform is a competitive advantage for the Company as it allows us to meet customer specifications.

Both domestic and export customers are asking for differentiated products, from gestation pen pork to ractopamine-free meat, and we are uniquely positioned to fill this demand.

Our facilities in Clinton, North Carolina and Bladen County, North Carolina are 100% ractopamine-free.

Summary of Results

Net loss for the three months ended October 27, 2013 was $4.2 million , consisting of net loss of $16.6 million for the Successor period and net income of $12.4 million for the Predecessor period, compared to net income of $10.9 million in the second quarter of fiscal 2013 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net loss for the three months ended October 27, 2013 compared to net income for the three months ended October 28, 2012:

Pork segment operating profit decreased $123.8 million as a significant increase in domestic live hog prices was only slightly offset by both higher packaged meat sales prices and higher fresh meat market prices.

Results in the Hog Production segment improved 141% as a result of significant increase in domestic live hog prices.

International operating profit decreased $21.1 million due significantly higher raising costs and lower average selling prices.

As a result of the Merger, we recognized professional fees of $34.7 million and additional interest expense of $17.3 million during the three months ended October 27, 2013.

See "Significant Events Affecting Results of Operations" below for further discussion.

Porcine Epidemic Diarrhea Virus (PEDv)

The USDA has identified PEDv in the United States for the first time.

PEDv is an industry wide issue, but it is currently affecting primarily Midwest swine operators.

Currently, there has only been a very limited impact from the virus on the Company's hog raising operations.

Nevertheless, we are subject to risks relating to our ability to maintain animal health and control PEDv.

Therefore, we are unable to predict whether the disease will impact our operations or market prices in the future.

The USDA has identified PEDv in the United States for the first time in 2013.

PEDv is an industry-wide issue and has a significant presence in U.S.

Our herds are proportionately affected as PEDv continues to spread throughout the U.S.

We are subject to risks related to our ability to maintain animal health and control PEDv.

We are unable to predict whether, or to what extent, the disease will impact our operations or market prices in the future.

Renewable Fuel Standard

On November 15, 2013, the Environmental Protection Agency ( EPA) proposed the volume requirements and associated percentage standards that would apply under the Renewable Fuel Standard (RFS) program in calendar year 2014 for cellulosic bio-fuel, biomass-based diesel, advanced bio-fuel, and total renewable fuel.

EPA’s proposal reduces the volume of renewable fuels mandated by statute and reflects EPA’s current estimate of what will actually be produced in 2014.

EPA will consider public comments before setting the final standard.

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 .

31367 (May 24, 2013) (the 2013 Rule).

The 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.

USDA also provided a six month educational period for retailers until November 23, 2013.

Judicial challenges to these rule-makings by a coalition of industry groups are pending in the United States District Court for the District of Columbia.

The Canadian and Mexican governments are also challenging the 2013 Rule before the Dispute Settlement Body of the WTO.

If the Canadian and Mexican WTO challenge is successful, then USDA will be faced with the choice of re-formulating another country of origin regulation, seeking amendments to the underlying statute, or subjecting U.S.

industries to substantial retaliatory tariffs.

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.

The commodity markets affecting our business fluctuate on a daily basis.

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The outlook statements that follow must be viewed in this context.

The first quarter is seasonally the weakest period for fresh pork and should be the least profitable for the Company in fiscal 2014.

We will continue to execute our long-term strategic growth plan to improve earnings and migrate the Company more towards a value-added consumer packaged meats company.

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The combination of those gains, an improving product mix toward differentiated, branded and value-added products, as well as loosening export market restrictions in our fresh pork business and higher contributions from our international meat processing business, should provide significant long-term growth potential for Smithfield.

For fiscal 2014, we expect fresh pork operating profit on a per head basis to average in the low to mid-single digits.

We expect our packaged meats business to continue to post strong results in fiscal 2014 with operating margins averaging in the middle part of our newly established normalized range of $.15 to $.20 per pound.

Lower raising costs, higher hog prices and improved efficiencies and productivity in our Hog Production segment should result in operating margins in the mid-single digits on a per head basis for fiscal 2014.

In our International segment, we anticipate improvement in results for the remainder of fiscal 2014.

The remainder of calendar 2013 should reflect strong pork margins above the normalized range for fresh pork and within our packaged meats normalized range.

Seasonally low hog prices will offset improved efficiencies and productivity in our Hog Production segment with operating margins expected below the normalized range.

International segment results should show improvement.

RESULTS OF OPERATIONS

Significant Events Affecting Results of Operations

Shuanghui Merger

In connection with the Merger, we incurred $20.7 million and $18.0 million of professional fees during the Successor and Predecessor periods, respectively.

The $18.0 million incurred in the Predecessor period includes $4.0 million which were previously recognized in the three months ended July 28, 2013.

These fees are recognized in merger related costs on the consolidated condensed statements of income.

In addition, the Merger Sub deferred $17.3 million of debt issuance costs for a financing arrangement.

We recognized these deferred costs in interest expense during the Successor period upon termination of the financing arrangement following the Merger.

All of these charges are reflected in the results of our Corporate segment.

Shuanghui's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company.

The preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed by Shuanghui in the Merger reflects preliminary fair value estimates based on management analysis, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized.

Our earnings for the Successor period were negatively impacted by $17.1 million as a result of the fair value step-up of our assets and liabilities, including a $24.8 million increase in cost of sales as a result of the fair value step-up of our inventory.

Acquisition of Kansas City Sausage, LLC

In May 2013 (fiscal 2014), we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $36.0 million in cash.

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.

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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 retail and foodservice sales annually.

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.

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Consolidated Results of Operations

The tables presented below compare our results of operations for the three months ended July 28, 2013 and July 29, 2012 .

Sales and cost of sales

The tables presented below compare our results of operations for the three and six months ended October 27, 2013 and October 28, 2012 .

As used in the tables, "NM" means "not meaningful."

Three Months Ended October 27, 2013 and October 28, 2012

September 27 - October 27,

July 29 - September 26,

Three Months Ended

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Cost of sales

Gross profit margin

The following items explain the significant changes in sales and gross profit:

Sales increased significantly due to higher volumes across all segments, higher pork prices in the U.S.

and the acquisition of KCS.

The decline in gross margin was primarily caused by higher raw material costs and weakness in certain export markets.

Selling, general and administrative expenses (SG&A)

Three Months Ended

(in millions)

Selling, general and administrative expenses

The increase in SG&A is primarily attributable to acquisition related costs associated with the Shuanghui and KCS transactions.

(Income) loss from Equity Method Investments

Three Months Ended

(in millions)

Mexican joint ventures

All other equity method investments

(Income) loss from equity method investments

The decline in profitability of our Mexican joint ventures was largely driven by unfavorable foreign currency transaction losses.

Interest expense

Three Months Ended

(in millions)

Merger related costs

Income from equity method investments

Operating profit

Interest expense

Loss on debt extinguishment

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Sales and Gross Profit

Sales increased primarily as the result of higher average selling prices in Pork and Hog Production segments.

Gross profit decreased primarily as the result of an 18% increase in domestic live hog prices.

As noted in "Significant Events Affecting Results of Operations," the current year also included an additional $24.8 million in cost of sales during the Successor period as a result of the fair value step-up of our inventory.

Merger Related Costs

As noted in "Significant Events Affecting Results of Operations," we incurred professional fees during the Successor and Predecessor periods in the current year as a result of the Merger.

Income from Equity Method Investments

The decline in profitability in the current year is primarily driven by lower selling prices in the meat processing operations and unfavorable foreign currency transaction losses at our Mexican joint ventures.

Interest Expense and Loss on Debt Extinguishment

As noted in "Significant Events Affecting Results of Operations," interest expense for the Successor period includes $17.3 million of debt issuance costs originally deferred by the Merger Sub.

In the prior year, 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

Three Months Ended

Taxable income relative to permanent items and the mix of income between jurisdictions for the Successor period impacted the effective tax rate.

The Predecessor periods are also impacted by income relative to permanent items for the period, the mix of income between jurisdictions, and state income tax credits.

Six Months Ended October 27, 2013 and October 28, 2012

September 27 - October 27,

April 29 - September 26,

Six Months Ended

(in millions)

Cost of sales

Selling, general and administrative expenses

Merger related costs

(Income) loss from equity method investments

Operating profit

Interest expense

Loss on debt extinguishment

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Sales and Gross Profit

Sales increased primarily as the result of higher average selling prices in Pork and Hog Production segments.

Gross profit decreased primarily as the result of a 12% increase in domestic live hog prices.

Merger Related Costs

As noted in "Significant Events Affecting Results of Operations," we incurred professional fees during the Successor and Predecessor periods in the current year as a result of the Merger.

(Income) Loss from Equity Method Investments

Interest Expense and Loss on Debt Extinguishment

As noted in "Significant Events Affecting Results of Operations," interest expense for the Successor period includes $17.3 million of debt issuance costs originally deferred by the Merger Sub.

In the prior year, 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

Effective tax rate

The decline in income tax expense is attributable to the decrease in pre-tax profitability.

Taxable income relative to permanent items and the mix of income between jurisdictions for the Successor period impacted the effective tax rate.

The Predecessor periods are also impacted by income relative to permanent items for the period, the mix of income between jurisdictions, and state income tax credits.

Segment Results

The following information reflects the results from each respective segment prior to the elimination of inter-segment sales.

The following information reflects the results from each respective segment for the three and six months ended October 27, 2013 and October 28, 2012 .

Three Months Ended October 27, 2013 and October 28, 2012

September 27 - October 27,

July 29 - September 26,

Three Months Ended

(in millions, unless indicated otherwise)

Fresh pork (1)

Packaged meats

Operating profit (loss):

Fresh pork (1)

Packaged meats

Sales volume:

(in millions)

Packaged Meats

Average unit selling price:

Hog Production

International

Total segment sales

Intersegment sales

Consolidated sales

Operating profit:

Packaged Meats

Hogs processed

Average domestic live hog prices (per hundredweight) (3)

Hog Production

International

Consolidated operating profit

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Includes by-products and rendering.

Fresh pork and packaged meats operating profits represent management's estimated allocation of total Pork segment operating profit.

Represents the average live hog market price as quoted by the Iowa-Southern Minnesota hog market.

In addition to the information provided in the table above, the following items explain the significant changes in Pork segment sales and operating profit:

Sales were positively impacted by higher slaughter volumes and weights, solid demand for pork in the U.S., which drove pork prices higher, and the acquisition of KCS.

Fresh pork operating margin decreased to a loss of $5 per head from a loss of $2 per head as sales margins were adversely impacted by weakness in certain export markets.

The first quarter is historically the most difficult time of the year for fresh pork.

Packaged meats operating margin decreased to $.16 per pound from a record $.21 per pound as a result of higher raw material costs, particularly bellies.

Current year sales increased despite 3% lower volume in the Pork segment.

The increase was driven by an overall 9% increase in average selling prices.

Current year fresh pork operating profit significantly decreased despite an 8% increase in average selling prices primarily as a result of an 18% increase in domestic live hog prices.

Packaged meats operating profit in the current year decreased as a 12% increase in selling prices was more than offset by higher raw material costs.

Operating profit in the Successor period for packaged meats was $20.7 million lower due to the fair value step-up of our inventory.

See "Significant Events Affecting Results Operations" for further discussion.

Hog Production Segment

Three Months Ended

(in millions, unless indicated otherwise)

Operating profit

Average domestic live hog prices (per hundredweight) (1)

Raising costs (per hundredweight) (2)

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Represents the average live hog market price as quoted by the Iowa-Southern Minnesota hog market.

These prices do not reflect premiums we receive or the impact of hedging on our actual sales price.

Includes the effects of grain derivative contracts designated in hedging relationships.

Does not include the effects of grain derivative contracts that are not designated in hedging relationships for accounting purposes.

In addition to the information provided in the table above, the following items explain the significant changes in Hog Production segment sales and operating profit:

Sales and operating profit were positively impacted by higher sales volumes and higher live hog market prices.

Sales and operating profit were positively impacted by higher sales premiums for ractopamine-free hogs and improvements in productivity resulting from the cost savings initiative.

Raising costs increased as a result of higher priced feed.

Current year sales and operating profit benefited from an 18% increase in domestic live hog prices.

International Segment

Three Months Ended

As a result of fluctuations in foreign exchange rates, sales and operating profit in the current year were higher by 5% and 2% , respectively.

Sales were positively impacted by a 16% increase in current year volume which was offset by a 4% decrease in average selling prices.

Current year operating profit was negatively impacted by an 11% increase in raising costs in both Poland and Romania along with lower equity income from our Mexican joint ventures.

Corporate Segment

Current year results include fees related to the Merger.

See "Significant Events Affecting Results of Operations" for further discussion.

Six Months Ended October 27, 2013 and October 28, 2012

September 27 - October 27,

April 29 - September 26,

Six Months Ended

(in millions)

United Kingdom

Operating profit (loss):

United Kingdom

Average unit selling price (3)

Hogs processed

Raising costs (per hundredweight)

Average unit selling price (3)

Hogs processed

Raising costs (per hundredweight)

Packaged Meats

Hog Production

International

Total segment sales

Intersegment sales

Consolidated sales

Operating profit:

Packaged Meats

Hog Production

International

Consolidated operating profit

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Includes the results from our equity method investments in Mexico and our investment in CFG.

Percentages computed based on local currency amounts.

Excludes the sale of live hogs

In addition to the information provided in the table above, the following items explain the significant changes in International segment sales and operating profit:

Sales volumes in our Polish operations increased primarily due to a 19% increase in hogs processed.

Higher volumes of lower value by-products that resulted from more processed hogs effectively diminished the overall average unit selling price in the current year.

Higher hog raising costs negatively impacted operating profit in Poland.

Sales and operating profit in Romania benefitted from significantly higher sales prices, but profitability declined as a result of substantially higher hog feed costs.

Results from our Mexican joint ventures decreased by $2.6 million primarily due to unfavorable foreign currency transaction losses.

Fresh pork and packaged meats operating profits represent management's estimated allocation of total Pork segment operating profit.

Current year sales increased as the result of increases in average selling prices and volume of 7% and 1% , respectively.

Current year fresh pork operating profit significantly decreased despite a 6% increase in average selling prices primarily as a result of a 12% increase in domestic live hog prices

Packaged meats operating profit in the current year decreased as a 10% increase in selling prices was more than offset by higher raw material costs.

Operating profit in the Successor period for packaged meats was $20.7 million lower due to fair value step-up of our inventory.

See "Significant Events Affecting Results of Operations" for further discussion.

Hog Production Segment

Current year sales and operating profit benefited from a 12% increase in domestic live hog prices and a 4% increase in volume.

International Segment

As a result of fluctuations in foreign exchange rates, sales and operating profit in the current year were higher by 3% and 2% , respectively.

Sales were positively impacted by a 17% increase in current year volume which was partially offset by a 6% decrease in average selling prices.

Current year operating profit was negatively impacted by 12% and 13% increases in raising costs in both Poland and Romania, respectively, along with lower equity income from our Mexican joint ventures.

Corporate Segment

Three Months Ended

(in millions)

Operating loss

Operating results in the corporate segment declined primarily due to acquisition related expenses incurred in connection with the Shuanghui and KCS transactions.

Current year results include fees related to the Merger.

See "Significant Events Affecting Results of Operations" for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

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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 July 28, 2013 , our liquidity position was approximately $1.0 billion , comprised of $823.2 million in availability under our credit facilities and $192.8 million in cash and cash equivalents.

As of October 27, 2013 , our liquidity position was approximately $801.7 million , comprised of $667.6 million in availability under our credit facilities and $134.1 million in cash and cash equivalents.

On July 31, 2013, the 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).

The 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 the Merger Sub, including the 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.

Sources of Liquidity

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Credit Facilities

July 28, 2013

October 27, 2013

Outstanding Letters of Credit

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Operating Activities

Three Months Ended

September 27 - October 27,

April 29 - September 26,

Six Months Ended

(in millions)

1 unchanged sentence

The following items explain the significant changes in cash flows from operating activities:

Cash paid for domestic grain and other feed ingredients increased approximately $117 million .

In fiscal 2014, we paid $5.4 million for the settlement of derivative contracts and for margin requirements compared to $67.9 million received in fiscal 2013.

Cash paid to outside hog suppliers increased approximately $33 million due to a 6% increase in domestic live hog market prices.

Cash received from customers increased significantly due to increased sales.

Cash received from customers increased due to increased average selling prices in the Pork segment.

In the current year, we paid $26.1 million for the settlement of derivative contracts and for margin requirements compared to $93.7 million received in prior year.

Cash paid to outside hog suppliers increased due to a 12% increase in domestic live hog market prices.

Investing Activities

Three Months Ended

September 27 - October 27,

April 29 - September 26,

Six Months Ended

(in millions)

Acquisition of Smithfield Foods, Inc.

Capital expenditures

Acquisitions, net of cash acquired

Net expenditures from breeding stock transactions

Net proceeds (expenditures) from breeding stock transactions

Proceeds from the sale of property, plant and equipment

Net cash flows from investing activities

The following items explain the significant investing activities for the three months ended July 28, 2013 and July 29, 2012 :

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 $32.8 million , net of cash acquired, for a 50% interest in KCS.

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.

Capital expenditures included $21.3 million related to our Kinston, North Carolina plant expansion project.

The remaining capital expenditures primarily related to plant and hog farm improvement projects.

The following items explain the significant investing activities for the six months ended October 27, 2013 and October 28, 2012 :

As part of the Merger, Shuanghui paid approximately $4.9 billion in connection with the Merger to acquire all of our outstanding common stock and settle all vested and unvested stock-based compensation awards.

Capital expenditures during both the current and 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 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 interests in KCS held by the seller.

In October 2012, we paid $23.1 million , net of cash acquired, for a 70% interest in American Skin Food Group, LLC.

Financing Activities

Three Months Ended

September 27 - October 27,

April 29 - September 26,

Six Months Ended

(in millions)

Net proceeds from equity contribution

Proceeds from the issuance of long-term debt

Principal payments on long-term debt and capital lease obligations

Net proceeds from revolving credit facilities and notes payable

Proceeds from Securitization Facility

Payments on Securitization Facility

Net proceeds (payments) on revolving credit facilities

Repurchase of common stock

Debt issuance cost and other

Net cash flows from financing activities

The following items explain the significant financing activities for the three months ended July 28, 2013 and July 29, 2012 :

The following items explain the significant financing activities for the six months ended October 27, 2013 and October 28, 2012 :

As part of the Merger, we received approximately $4.2 billion , net of certain transaction costs, in equity contributions from Shuanghui.

Merger Sub issued the Merger Sub Notes as part of the financing for the Merger.

Also, the 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.

In September 2013, we repaid our $200.0 million floating rate unsecured term loan due in February 2014.

In July 2013, we repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million .

In May 2013, we repaid the remaining outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million .

We drew $275.0 million on our Inventory Revolver and $170.0 million on our Securitization Facility to repay the aforementioned notes and for working capital needs.

We repurchased 7,421,231 shares of our common stock for $145.3 million as part of the Share Repurchase Program, which is more fully explained under "Additional Matters Affecting Liquidity."

In the current year, we drew $485.0 million on our Inventory Revolver and $120.0 million on our Securitization Facility to repay other long-term debt, as noted above.

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 of $694.4 million of our outstanding senior notes due in May 2013 and July 2014.

We repurchased 10,823,296 shares of our common stock for $212.3 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.

Interest Rate Spread

As of July 28, 2013 , the interest rates on borrowings under the Inventory Revolver and the Securitization Facility were LIBOR plus 3.25% and the lender's cost of funds of 0.22% plus 1.15% , respectively.

The Inventory Revolver interest rate spread is based on a pricing-level grid in the agreement and 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 the other specified agents and arrangers, as amended).

As of October 27, 2013 , the interest rates on borrowings under the Inventory Revolver and the Securitization Facility were LIBOR plus 3.25% and the lender's cost of funds of 0.23% plus 1.15% , respectively.

The Inventory Revolver interest rate spread 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 the other specified agents and arrangers, as amended).

As part of our business, we are a party to various financial guarantees and other commitments as described below.

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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 July 28, 2013 , we continued to guarantee $9.9 million of leases that were transferred to JBS S.A.

As of October 27, 2013 , we continued to guarantee $9.7 million of leases that were transferred to JBS S.A.

in connection with the sale of Smithfield Beef, Inc.

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These capital expenditures are expected to be funded with cash flows from operations and/or borrowings under credit facilities.

Share Repurchase Program

In June 2012 (fiscal 2013), we announced that our board of directors had approved a new share repurchase program authorizing us to buy up to $250.0 million of our common stock over the next 24 months in addition to the $250.0 million authorized during fiscal 2012 (Share Repurchase Program).

In July 2012 (fiscal 2013), our board of directors approved an increase of $100.0 million to the authorized amount under the Share Repurchase Program.

Share repurchases may be made on the open market, or in privately negotiated transactions.

The number of shares repurchased, and the timing of any buybacks, will depend on corporate cash balances, business and economic conditions, and other factors, including investment opportunities.

The program may be discontinued at any time.

The Merger Agreement generally prohibits the Company from repurchasing any of its shares prior to completion of the Merger.

Since the inception of the Share Repurchase Program in June 2011 (fiscal 2012) and through July 28, 2013 , we have repurchased 28,244,783 shares of our common stock for $575.9 million , including related fees.

As of July 28, 2013 , we had approximately 24.5 million available for future repurchases under the Share Repurchase Program.

In January 2007 (fiscal 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.

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.

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We will continue the conversion as planned with the objective of completing conversions for all sows on Company-owned farms by the end of 2017.

Definitive Merger Agreement

The Merger Agreement contains certain termination rights for the Company and Shuanghui.

Upon termination of the Merger Agreement under specified customary circumstances, the Company will be required to pay Shuanghui a termination fee.

If the Merger Agreement is terminated in connection with the Company entering into an alternative acquisition agreement in respect of a superior proposal or making a change of recommendation, or in certain other customary circumstances, the termination fee payable by the Company to Shuanghui will be $175.0 million .

The Merger Agreement also provides that Shuanghui will be required to pay the Company a reverse termination fee of $275.0 million (which is not exclusive in the case of a willful breach by Shuanghui) if the Merger Agreement is terminated under certain circumstances in connection with a willful breach by Shuanghui, termination primarily caused by the failure to obtain required U.S.

or foreign antitrust or other regulatory approvals (other than the Committee on Foreign Investment in the United States), or termination as a result of the failure by Shuanghui to receive the proceeds of its committed debt financing and consummate the Merger.

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) 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 will become unsecured obligations of the Company ranking equally in right of payment with all of our existing and future senior unsecured indebtedness.

As a result, our cash interest payments are expected to increase significantly in future periods.

Risk Management Activities

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Conversely, when the value of our open derivative contracts increases, our brokers may be required to deliver margin deposits to us for a portion of the increase.

During the three months ended July 28, 2013 , margin deposits posted by us ranged from $29.6 million to $80.7 million .

The average daily amount on deposit with brokers during the three months ended July 28, 2013 was $54.8 million .

As of July 28, 2013 , the net amount on deposit with brokers was $80.7 million .

During the six months ended October 27, 2013 , margin deposits posted by us ranged from $21.7 million to $106.4 million .

The average daily amount on deposit with brokers during the six months ended October 27, 2013 was $58.6 million .

As of October 27, 2013 , the net amount on deposit with brokers was $26.4 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.

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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.

Contractual Obligations and Commercial Commitments

The following table provides information about our contractual obligations and commercial commitments as of October 27, 2013 by providing an update to the commitment table set forth in our Annual Report on Form 10-K for the fiscal year ended April 28, 2013 .

Payments Due By Period

(in millions)

Long-term debt

Capital lease obligations, including interest

Operating leases

Capital expenditure commitments

Purchase obligations:

Hog procurement (1)

Contract hog growers (2)

Grain procurement (3)

——————————————

Through the 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.

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.

Includes fixed price forward grain purchase contracts totaling $128.6 million .

Also includes unpriced forward grain purchase contracts which, if valued as of October 27, 2013 market prices, would be $285.7 million .

These forward grain contracts are accounted for as normal purchases.

As a result, they are not recorded in the balance sheet.

Includes guaranteed royalty payments totaling $250.0 million to Nathan's Famous Inc.

(Nathan's) over an 18 year contractual term that commenced 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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These risks and uncertainties include, but are not limited to:

the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement, the failure to receive, on a timely basis or otherwise, approval of the Merger proposal by the Company's shareholders or the approval of government or regulatory agencies with regard to the Merger, the failure of one or more conditions to the closing of the Merger Agreement to be satisfied, the failure of Shuanghui to obtain the necessary financing in connection with the Merger Agreement, the amount of the costs, fees, expenses and charges related to the Merger Agreement or Merger, risks arising from the Merger's diversion of management's attention from our ongoing business operations, risks that our stock price may decline significantly if the Merger is not completed, the ability of the Company to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners pending the completion of the Merger, 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 make effective acquisitions and successfully integrate newly acquired businesses into existing operations, and other risks and uncertainties described under Part I, Item 1A.

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 Shuanghui International Holdings Limited, t he ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations, and other risks and uncertainties described under Part I, Item 1A.

“Risk Factors” in Smithfield's Annual Report on Form 10-K for the fiscal year ended April 28, 2013 .

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What changed 10-Q

Item 2. Management’s Discussion and Analysis