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Item 2. Management’s Discussion and Analysis

2014-05-14 compared with 2013-12-06 · 102 added, 244 removed, 149 unchanged (70% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following information in conjunction with the unaudited consolidated condensed financial statements and the related notes in this Quarterly Report and the audited financial statements and the related notes as well as Management’s Discussion and Analysis of Financial Condition and Results of Operation contained in our Annual Report on Form 10-K for the fiscal year ended April 28, 2013 .

You should read the following information in conjunction with the unaudited consolidated condensed financial statements and the related notes in this Quarterly Report and the audited financial statements and the related notes as well as Management’s Discussion and Analysis of Financial Condition and Results of Operation contained in our Transition Report on Form 10-K for the eight months ended December 29, 2013 .

On September 26, 2013, we merged with a wholly owned subsidiary of WH Group in a 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.

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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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.

Net income for the three months ended March 30, 2014 was $105.3 million compared to net income of $18.2 million in the three months ended March 31, 2013 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the three months ended March 30, 2014 compared to net income for the three months ended March 31, 2013 :

Pork segment operating profit increased $51.4 million as a result of significantly higher meat prices.

Hog Production segment operating results increased $69.9 million as a result of a significant increase in domestic live hog market prices and lower raising costs.

International operating profit increased $22.6 million due to higher sales and lower raw material costs in our European operations as well as an increase in equity income from our joint ventures in Mexico.

Porcine Epidemic Diarrhea Virus (PEDv)

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.

The United States Department of Agriculture (USDA) identified PEDv in the United States for the first time in 2013.

PEDv, a disease that only infects pigs, not humans or other livestock, is an industry-wide issue and has a significant presence in U.S.

Our herds in several regions in which we operate are 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.

We are unable to predict the 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.

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.

On November 15, 2013, the EPA proposed volume requirements and associated percentage standards that would apply under the 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’s proposal reflects a concern that existing transportation infrastructure is unprepared for higher blends of bio-fuels in transportation fuels such as E15 and that the reduction in required volumes will maintain a blending percentage at E10 through 2014.

EPA will consider public comments before setting the final standard.

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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.

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.

Judicial challenges to these rule-makings by a coalition of industry groups are pending.

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

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

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.

We believe this plan will produce broad-based gains in volume, market share and distribution across our core brands and key product categories.

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.

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.

2014 is off to a great start with record first quarter earnings.

Looking forward, continued strong fundamentals driven by reduced hog and pork supplies, organic growth opportunities, as well as synergies with WH Group should fuel significantly improved year over year results.

Hog production volumes will be lower due to PEDv, pushing hog and pork prices higher.

The combination of lower corn costs and higher hog prices will generate strong hog production margins.

At the same time, as part of WH Group’s global platform, we will continue to efficiently allocate resources by adjusting our Chinese exports to maximize value.

We will also continue to grow our business organically by strengthening our brand positioning and lowering costs through improved efficiencies and productivity across all business segments.

As such, we expect normalized operating margins, on a full year basis, in our fresh pork, packaged meats and international businesses despite higher input costs.

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, 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.

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 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 Pork segment using the acquisition method of accounting.

Currently, KCS generates approximately $200 million in sales annually.

Consolidated Results of Operations

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

The tables presented below compare our results of operations for the three months ended March 30, 2014 and March 31, 2013 .

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 March 30, 2014 and March 31, 2013

Three Months Ended

March 30, 2014

March 31, 2013

(in millions)

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Selling, general and administrative expenses

Merger related costs

Income from equity method investments

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Interest expense

Loss on debt extinguishment

(Loss) income before income taxes

Non operating income

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.

Sales increased primarily as a result of higher domestic meat prices.

Gross profit increased primarily as the result of higher sales and lower hog raising costs which more than offset the increase in pork processing raw material costs.

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, an increase in professional fees and smaller gains on non-qualified retirement plan assets.

These increases in SG&A were partially offset by lower pension expense.

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

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.

The increase in profitability in the current year is primarily driven by higher hog prices in Mexico.

Income Tax Expense

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.

Taxable income relative to permanent items, the mix of income between jurisdictions, and the expiration of certain federal tax credits as of December 31, 2013 impacted the effective tax rate for the current year.

The prior year was impacted by income relative to permanent items, the mix of income between jurisdictions, state income tax credits, and federal legislation during that period that reinstated certain federal tax credits retroactively to January 1, 2012.

Segment Results

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,

The following information reflects the results from each respective segment for the three months ended March 30, 2014 and March 31, 2013 .

Three Months Ended March 30, 2014 and March 31, 2013

Three Months Ended

March 30, 2014

March 31, 2013

(in millions)

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

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

Current year sales increased 6% despite 2% lower volume in the Pork segment due to the timing of Easter.

The increase was driven by an overall 8% 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

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

International Segment

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)

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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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.

Current year fresh pork operating profit significantly increased due to higher fresh pork market prices which more than offset higher raw material costs.

Packaged meats operating profit in the current year increased 13% due to a 7% increase in average selling prices.

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.

Current year sales and operating results benefited from a 16% increase in domestic live hog market prices.

Lower feed costs also benefited operating results in the current year.

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

Current year results include fees related to the Merger.

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

Sales were positively impacted by a 27% increase in volume which was partially offset by a 17% decrease in average selling prices.

These changes were driven by a 17% and 8% increase in hogs processed in Poland and Romania, respectively.

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.

Current year results were negatively impacted by professional fees associated with the preparation of the postponed initial public offering of WH Group and post-merger activity as well as an increase in variable compensation.

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 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.

As of March 30, 2014 , our liquidity position was approximately $825.1 million , comprised of $735.5 million in availability under our credit facilities and $89.6 million in cash and cash equivalents.

Sources of Liquidity

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Credit Facilities

October 27, 2013

March 30, 2014

Outstanding Letters of Credit

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Operating Activities

September 27 - October 27,

April 29 - September 26,

Six Months Ended

Three Months Ended

March 30, 2014

March 31, 2013

(in millions)

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

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.

In the current year, we paid $286.6 million for the settlement of derivative contracts and for margin requirements compared to $33.7 million in the prior year.

Cash paid to outside hog suppliers increased due to a 16% increase in domestic live hog market prices, resulting in higher inventory levels.

The change in our fiscal year resulted in variable compensation payments being made in the first quarter of 2014.

No such payments were included in the first quarter of 2013.

Cash paid for interest increased approximately $14.3 million .

Cash received from customers increased due to an 8% increase in average selling prices in the Pork segment and 27% increase in sales volume in the International segment.

However, lower volumes of domestic packaged meat sales due to the timing of Easter partially offsets the increase in cash receipts.

Cash paid for domestic grain and other feed ingredients decreased approximately $236.1 million .

Investing Activities

September 27 - October 27,

April 29 - September 26,

Six Months Ended

Three Months Ended

March 30, 2014

March 31, 2013

(in millions)

Acquisition of Smithfield Foods, Inc.

Capital expenditures

Acquisitions, net of cash acquired

Net proceeds (expenditures) from breeding stock transactions

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Net cash flows from investing activities

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.

The following items explain the significant investing activities for the three months ended March 30, 2014 and March 31, 2013 :

Capital expenditures during both the current year 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.

Financing Activities

September 27 - October 27,

April 29 - September 26,

Six Months Ended

Three Months Ended

March 30, 2014

March 31, 2013

(in millions)

Net proceeds from equity contribution

Proceeds from the issuance of long-term debt

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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 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 .

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.

The following items explain the significant financing activities for the three months ended March 30, 2014 and March 31, 2013 :

In the current year, we drew $280.0 million on our Inventory Revolver and $40 million, net of repayments, on our Securitization Facility, primarily to cover margin requirements on our commodity derivative contracts.

Interest Rate Spread

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 of March 30, 2014 , 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 0.21% plus 1.15% , respectively.

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

As of March 30, 2014 , we continued to guarantee $9.2 million of leases that were transferred to JBS S.A.

in connection with the sale of Smithfield Beef, Inc.

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Capital Projects

We anticipate annual capital expenditures in the range of $300 million to $350 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 and best in class operations.

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

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

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.

We anticipate the full cost of our transition to group pens will total 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 calendar year 2013, we had completed conversions to group housing for over 54% of our sows on company-owned farms.

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.

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 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.

Growers who commit to convert to group housing will receive contract extensions upon completion of the conversion.

Risk Management Activities

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To mitigate these risks, we utilize derivative instruments to hedge our exposure to changing prices and rates, as more fully described under “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Derivative Financial Instruments” in our Annual Report on Form 10-K for the fiscal year ended April 28, 2013 .

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Derivative Financial Instruments” in our Transition Report on Form 10-K for the eight months ended December 29, 2013 .

Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative portfolio.

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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 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 .

During the three months ended March 30, 2014 , margin deposits posted by us ranged from $38.5 million to $382.0 million .

The average daily amount we posted with our brokers during the three months ended March 30, 2014 was $131.9 million .

As of March 30, 2014 , the net amount on deposit with our brokers was $334.2 million .

Subsequent to March 30, 2014 , the required amount on deposit to our brokers has decreased allowing us to repay a portion of the outstanding borrowings on our Inventory Revolver.

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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There have been no significant updates to our critical accounting policies and estimates described in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended April 28, 2013 .

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Transition Report on Form 10-K for the eight months ended December 29, 2013 .

FORWARD-LOOKING STATEMENTS

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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 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 .

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 Part I, Item 1A.

“Risk Factors” in Smithfield's Transition Report on Form 10-K for the eight months ended December 29, 2013 .

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis