What changed in this filing

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Item 1A. Risk Factors

2015-03-25 compared with 2013-06-18 · 53 added, 86 removed, 157 unchanged (47% of the section changed)

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Any of the following risks could materially adversely affect our business, operations, industry, financial position or future financial results.

Merger Risk Factors

The announcement and pendency of the Merger could adversely affect our business, financial results and operations.

The announcement and pendency of the proposed Merger could cause disruptions in and create uncertainty surrounding our business, which could have an adverse effect on our business, financial results and operations, regardless of whether the Merger is completed.

These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Merger:

the diversion of significant management time and resources towards the completion of the Merger;

the impairment of our ability to attract, retain and motivate key personnel, including our senior management;

difficulties maintaining relationships with customers, suppliers and other business partners;

the inability to pursue alternative business opportunities or make appropriate changes to our business because of requirements in the Merger Agreement that we conduct our business in all material respects only in the ordinary course of business and not engage in certain kinds of transactions prior to the completion of the proposed Merger;

the potential for litigation relating to the Merger and the costs related thereto;

higher costs of accessing funds in the debt markets.

The proposed Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.

On May 28, 2013, we entered into the Merger Agreement with Shuanghui.

The Merger Agreement is an executory contract subject to numerous closing conditions beyond our control, and there is no guarantee that these conditions will be satisfied in a timely manner or at all.

Completion of the Merger is subject to various conditions, including the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of all of the outstanding shares of our common stock entitled to vote thereon, and certain other conditions, including, among other things, the receipt of certain regulatory approvals.

If any of the conditions to the proposed Merger are not satisfied (or waived by the other party), we may not complete the Merger.

In addition, the Merger Agreement may be terminated under certain specified circumstances, including a change in the recommendation of our board of directors or our termination of the Merger Agreement to enter into an agreement for a superior proposal, as defined in the Merger Agreement.

Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including the following:

If the Merger is not completed, and there are no other parties willing and able to acquire us at a price of $34.00 per share or higher, on terms acceptable to us, our stock price will likely decline as our stock has recently traded at prices based on the proposed per share consideration for the Merger.

We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, for which we will have received little or no benefit if the Merger is not completed.

Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger.

A failed Merger may result in negative publicity and a negative impression of us in the investment community.

Upon termination of the Merger Agreement by the Company or Shuanghui under specified circumstances, our remedy may be limited to receipt of a reverse termination fee of $275 million from Shuanghui, and under some circumstances, we would not be entitled to receive any termination fee.

Upon termination of the Merger Agreement by the Company or Shuanghui under specified circumstances, including a termination by us in order to accept a superior proposal as defined in the Merger Agreement, we would be required to pay a termination fee of up to $175 million.

Our costs of accessing funds in the debt and capital markets may be higher than before execution of the Merger Agreement as a result of credit rating downgrades that could occur while the proposed Merger is pending.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed Merger.

The Merger Agreement contains provisions that restrict our ability to entertain a third party proposal to acquire us.

These provisions include the general prohibition other than pursuant to the limited “go-shop” provision on our soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, and the requirement that we pay a termination fee of $175 million (which amount is reduced to $75 million under specified conditions) if the Merger Agreement is terminated in specified circumstances.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition transaction, even one that may be deemed of greater value than the proposed Merger to our shareholders.

Furthermore, even if a third party elects to propose an acquisition, the requirement on our part to pay a termination fee may result in that third party offering a lower value to our shareholders than such third party might otherwise have offered.

Business Risk Factors

Our results of operations are cyclical and could be adversely affected by fluctuations in the commodity prices for hogs and grains.

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environmental and conservation regulations,

import and export restrictions such as trade barriers resulting from, among other things, health concerns,

import and export restrictions such as trade barriers resulting from, among other things, food safety concerns and developments in international relations,

economic conditions,

weather, including weather impacts on our water supply and the impact on the availability and pricing of grains,

weather, including the impact of weather on our water supply and the availability and pricing of grains,

energy prices, including the effect of changes in energy prices on our transportation costs and the cost of feed, and

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We cannot assure you that all or part of any increased costs experienced by us from time to time can be passed along to consumers of our products, in a timely manner or at all.

Hog prices demonstrate a cyclical nature over periods of years, reflecting the supply of hogs on the market.

These fluctuations can be significant as shown in recent years with average domestic live hog prices going from $44 per hundredweight in fiscal 2010 to $65 per hundredweight in fiscal 2012.

Hog prices demonstrate a cyclical nature over periods of years, changing market supply and demand of hogs on the market.

These fluctuations can be significant, as shown in recent years, with average domestic live hog prices going from $61 per hundredweight for the twelve months ended April 28, 2013 to $79 per hundredweight in 2014.

Further, hog raising costs are largely dependent on the fluctuations of commodity prices for corn and other feed ingredients.

For example, our fiscal 2013 results of operations were negatively impacted by higher feed and feed ingredient costs which increased hog raising costs to $68 per hundredweight in fiscal 2013 compared to $54 per hundred weight in fiscal 2011.

When hog prices are lower than our hog production costs which occurred in fiscal 2013, our non-vertically integrated competitors may have a cost advantage.

Additionally, commodity pork prices demonstrate a cyclical nature over periods of years, reflecting changes in the supply of fresh pork and competing proteins on the market, especially beef and chicken.

For example, our results of operations for the twelve months ended April 28, 2013 were negatively impacted by higher feed and feed ingredient costs which increased hog raising costs to $68 per hundredweight compared to $54 per hundred weight for the twelve months ended May 1, 2011 .

When hog prices are lower than our hog production costs which occurred in the twelve months ended April 28, 2013 , our non-vertically integrated competitors (i.e., those without significant hog production operations) may have a cost advantage over us.

Additionally, commodity pork prices demonstrate a cyclical nature over periods of years, reflecting changes in the supply of fresh pork and competing animal proteins on the market, especially beef and chicken.

We attempt to manage certain of these risks through the use of our risk management and hedging programs.

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

Livestock health problems could adversely impact production, the supply of raw materials and consumer confidence in all of our operating segments.

From time to time, we have experienced outbreaks of certain livestock diseases and we may experience additional occurrences of disease in the future.

Disease can reduce the number of offspring produced, hamper the growth of livestock to finished size, result in expensive vaccination programs and require in some cases the destruction of infected livestock, all of which could adversely affect our production or ability to sell or export our products.

Livestock health problems could adversely impact our production, our supply of raw materials and consumer confidence in all of our operating segments.

From time to time, we have experienced outbreaks of livestock diseases and we may experience additional occurrences of disease in the future.

Disease can reduce the number of offspring produced, hamper the growth of livestock to finished size, result in expensive vaccination programs and require in some cases the destruction of infected livestock, any of which could adversely affect our production or ability to sell or export our products.

For example, during 2013, the USDA identified the first case of Porcine Epidemic Diarrhea Virus (PEDv).

Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Overview-Porcine Epidemic Diarrhea Virus (PEDv)” for additional details.

Adverse publicity concerning any disease or health concern could also cause customers to lose confidence in the safety and quality of our food products, particularly as we expand our branded pork products.

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For example, past outbreaks of avian influenza in various parts of the world reduced the global demand for poultry and thus created a temporary surplus of poultry both domestically and internationally.

This poultry surplus placed downward pressure on poultry prices which in turn reduced meat prices including pork both in the U.S.

This poultry surplus placed downward pressure on poultry prices, which in turn reduced meat prices including pork prices both in the U.S.

and internationally.

The occurrence of similar events in the future could materially and adversely affect our business, financial condition, results of operations and prospects.

Our operations are subject to the general risks associated with the food industry, including perceived or real health risks related to our products or the food industry generally and risks associated with government regulations.

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product tampering,

product labeling,

the possible unavailability and expense of product liability insurance,

the potential cost and disruption of a product recall, and

disruption to operations if government inspectors are unavailable due to furloughs.

Adverse publicity concerning any perceived or real health risk associated with our products could also cause customers to lose confidence in the safety and quality of our food products, which could adversely affect our ability to sell our products, particularly as we expand our branded products business.

product labeling errors,

the expense and possible unavailability of product liability insurance, and

the potential cost and disruption of a product recall.

Negative publicity relating to our products, brands, operations, industry or products similar to ours may adversely affect consumer perceptions of our products and result in decreased demand for our products.

In particular, negative publicity relating to one of our 12 core brands may be particularly harmful since we face risks from brand concentration.

Adverse publicity concerning any perceived or real health risk associated with our brands or our products could also cause customers to lose confidence in the safety and quality of our food products, which could adversely affect our ability to sell our reputation, business, financial condition, results of operation and prospects, particularly as we expand our branded products business.

We could also be adversely affected by perceived or real health risks associated with similar products produced by others to the extent such risks cause customers to lose confidence in the safety and quality of such products generally and, therefore, lead customers to opt for other meat options that are perceived as safe.

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However, we cannot assure you that such systems, even when working effectively, will eliminate the risks related to food safety.

These organisms and pathogens can also be introduced to our products as a result of improper handling at the further processing, foodservice or consumer level.

These organisms and pathogens can also be introduced to our products as a result of improper handling in transportation or at the further processing, foodservice or consumer level.

In addition to the risks caused by our processing operations and the subsequent handling of the products, we may encounter the same risks if any third party tampers with our products.

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Any product contamination also could subject us to product liability claims, adverse publicity and government scrutiny, investigation or intervention, resulting in increased costs and decreased sales as customers lose confidence in the safety and quality of our food products.

Any of these events could have an adverse impact on our operations and financial results.

Our manufacturing facilities and products, including the processing, packaging, storage, distribution, advertising and labeling of our products, are subject to extensive federal, state and foreign laws and regulations in the food safety area, including constant government inspections and governmental food processing controls.

Any of these events could have an adverse impact on our reputation, business, financial condition, results of operations and prospects.

Our manufacturing facilities and products, including the processing, packaging, storage, distribution, advertising and labeling of our products, are subject to extensive federal, state and foreign laws and regulations in the food safety area, including regular government inspections and governmental food processing controls.

Loss of or failure to obtain necessary permits and registrations could delay or prevent us from meeting current product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect operating results.

If we are found to be out of compliance with applicable laws and regulations, particularly if it relates to or compromises food safety, we could be subject to civil remedies, including fines, injunctions, recalls or asset seizures, as well as potential criminal sanctions, any of which could have an adverse effect on our financial results.

In addition, future material changes in food safety regulations could result in increased operating costs or could be required to be implemented on schedules that cannot be met without interruptions in our operations.

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We also face the risk of lawsuits even if we are operating in compliance with applicable regulations.

For example, before we acquired PSF and subsequent to our acquisition of PSF, certain nuisance suits in Missouri resulted in jury verdicts against PSF.

In fiscal 2013, we consummated a global settlement that resolved the vast majority of the outstanding nuisance litigation in Missouri.

Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Missouri litigation” for additional details.

However, we cannot assure you that additional environmental related lawsuits, including additional nuisance claims, will not arise in the future.

For example, 26 nuisance suits seeking recovery of an unspecified amount of compensatory, special and punitive damages, as well as unspecified injunctive and equitable relief are currently pending against our subsidiary Murphy-Brown in North Carolina.

Legal Proceedings--North Carolina Nuisance Litigation” for additional details.

Although the Company believes that the claims are unfounded and intends to defend the suits vigorously, we cannot assure you that we will be successful, that additional nuisance claims will not arise in the future, or that the accruals for this litigation will not have to be substantially increased.

In addition, new environmental issues could arise that would cause currently unanticipated investigations, assessments or expenditures.

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Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position.

As of April 28, 2013 , we had:

As of December 28, 2014 , we had:

approximately $2.7 billion of indebtedness;

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in connection with the sale of Smithfield Beef, Inc.;

aggregate unused capacity available totaling approximately $1.3 billion under (1) our inventory based revolving credit facility up to $1.025 billion , with an option to expand up to $1.225 billion (the Inventory Revolver), (2) our accounts receivable securitization facility up to $275.0 million (the Securitization Facility) and (3) our other credit facilities, such total taking into account outstanding borrowings of $82.3 million and $82.3 million of outstanding letters of credit under the Securitization Facility.

Because the borrowing capacity under the Inventory Revolver and Securitization Facility depend, in part, on inventory and accounts receivable levels, respectively, that fluctuate from time to time, such amounts may not reflect actual borrowing capacity.

aggregate unused capacity available totaling approximately $1.3 billion under (1) our inventory based revolving credit facility with capacity up to $1.025 billion , with an option to expand up to $1.225 billion (the Inventory Revolver), (2) our accounts receivable securitization facility with capacity up to $325.0 million (the Securitization Facility) and (3) our other credit facilities with capacity of $122.0 million , such total taking into account outstanding borrowings of $50.1 million and $92.7 million of outstanding letters of credit under the Securitization Facility.

Because the borrowing capacity under the Inventory Revolver and Securitization Facility depend, in part, on inventory and accounts receivable levels, respectively, which fluctuate from time to time, such amounts may not reflect actual borrowing capacity.

Our indebtedness may increase from time to time for various reasons, including fluctuations in operating results, working capital needs, capital expenditures and potential acquisitions or joint ventures.

In addition, due to the volatile nature of the commodities markets, we may have to borrow significant amounts to cover any margin calls under our risk management and hedging programs.

During fiscal 2013 , margin deposits posted by us ranged from $(67.9) million to $77.5 million (negative amounts representing margin deposits we have received from our brokers).

During 2014 , margin deposits posted by us ranged from $7.1 million to $382.0 million .

Our consolidated indebtedness level could significantly affect our business because:

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it could make us more vulnerable to downturns in general economic or industry conditions or in our business.

Further, our debt agreements restrict the payment of dividends to shareholders and, under certain circumstances, may limit additional borrowings, investments, the acquisition or disposition of assets, mergers and consolidations, transactions with affiliates, the creation of liens and the repayment of certain debt.

Should market conditions deteriorate, or our operating results be depressed in the future, we may have to request amendments to our covenants and restrictions.

Further, our debt agreements, under certain circumstances, may limit additional borrowings, investments, the payment of dividends, the acquisition or disposition of assets, mergers and consolidations, transactions with affiliates, the creation of liens and the repayment of certain debt.

Should market conditions deteriorate, or our operating results be depressed in the future, we may have to request amendments or waivers to our covenants and restrictions under our debt agreements.

There can be no assurance that we will be able to obtain such relief should it be needed in the future.

A breach of any of these covenants or restrictions could result in a default that would permit our senior lenders, including lenders under the Inventory Revolver, the Securitization Facility, the Rabobank Term Loan, the Bank of America Term Loan and the holders of our senior unsecured notes, as the case may be, to declare all amounts outstanding under the Inventory Revolver, the Securitization Facility, the Rabobank Term Loan, the Bank of America Term Loan or the senior unsecured notes to be due and payable, together with accrued and unpaid interest, and the commitments of the relevant lenders to make further extensions of credit under the Inventory Revolver and the Securitization Facility could be terminated.

A breach of any of these covenants or restrictions could result in a default that would permit our senior lenders, including lenders under the Inventory Revolver, the Securitization Facility, the Rabobank term loan (Rabobank Term Loan) and the holders of our senior unsecured notes, as the case may be, to declare all amounts outstanding under the Inventory Revolver, the Securitization Facility, the Rabobank Term Loan or the senior unsecured notes to be due and payable, together with accrued and unpaid interest, and the commitments of the relevant lenders to make further extensions of credit under the Inventory Revolver and the Securitization Facility could be terminated.

If we were unable to repay our secured indebtedness to our lenders, these lenders could proceed against the collateral securing that indebtedness, which could include substantially all of our working capital assets in the United States.

Our future ability to comply with financial covenants and other conditions, make scheduled payments of principal and interest, or refinance existing borrowings depends on future business performance that is subject to economic, financial, competitive and other factors, including the other risks set forth in this Item 1A.

Our future ability to comply with financial covenants and other conditions, make scheduled payments of principal and interest, or refinance existing borrowings depends on future business performance which is subject to economic, financial, competitive and other factors, including the other risks set forth in this Item 1A.

Any failure to comply with the covenants of our debt agreements could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our operations are subject to the risks associated with acquisitions and investments in joint ventures.

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These transactions present financial, managerial and operational challenges, including:

diversion of management attention from other business concerns,

diversion of management attention from managing our existing business,

difficulty with integrating businesses, operations, personnel and financial and other systems,

lack of experience in operating in the geographical market of the acquired business,

lack of experience in operating in the geographical or product markets of the acquired business,

increased levels of debt potentially leading to associated reduction in ratings of our debt securities and adverse impact on our various financial ratios,

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may present unique difficulties and increase our exposure to those risks associated with international operations.

We could experience financial or other setbacks if any of the businesses that we have acquired or may acquire in the future have problems of which we are not aware or liabilities that exceed expectations.

We may experience financial or other set-backs if any of the businesses that we have acquired or may acquire in the future have problems of which we are not aware or liabilities that exceed expectations.

Our numerous equity investments in joint ventures, partnerships and other entities, both within and outside the U.S., are periodically involved in modifying and amending their credit facilities and loan agreements.

The ability of these entities to refinance or amend their facilities on a successful and satisfactory basis, and to comply with the covenants in their financing facilities, affects our assessment of the carrying value of any individual investment.

As of April 28, 2013 , none of our equity investments represented more than 5% of our total consolidated assets.

As of December 28, 2014 , none of our equity investments represented more than 5% of our total consolidated assets.

If we determine in the future that an investment is impaired, we would be required to record a non-cash impairment charge, which could substantially affect our reported earnings in the period of such charge.

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We are subject to risks associated with our international sales and operations.

Sales to international customers accounted for approximately 23% of our net sales in fiscal 2013 .

Sales to international customers accounted for approximately 23% of our net sales in 2014 .

We conduct foreign operations in Poland, Romania and the United Kingdom and export our products to more than 40 countries.

In addition, we are engaged in joint ventures in Mexico and have a significant investment in Western Europe.

As of April 28, 2013 , approximately 27% of our long-lived assets were associated with our foreign operations.

As of December 28, 2014 , approximately 16% of our long-lived assets were associated with our foreign operations.

Because of the growing market share of U.S.

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foreign currency exchange controls.

Negative consequences relating to these risks and uncertainties could jeopardize or limit our ability to transact business in one or more of those markets where we operate or in other developing markets and could adversely affect our financial results.

Our operations are subject to the general risks of litigation.

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Moreover, the process of litigating cases, even if we are successful, may be costly, and may approximate the cost of damages sought.

These actions could also expose us to adverse publicity, which might adversely affect our brands, reputation and/or customer preference for our products.

Litigation trends and expenses and the outcome of litigation cannot be predicted with certainty and adverse litigation trends, expenses and outcomes could adversely affect our financial results.

These actions could also expose us to adverse publicity, which might adversely affect our brands, reputation and/or customer preference for our products and distract management from other tasks.

Litigation trends and expenses and the outcome of litigation cannot be predicted with certainty and adverse litigation trends, expenses and outcomes could adversely affect our business, financial condition, results of operations and prospects.

We depend on availability of, and satisfactory relations with, our employees.

As of April 28, 2013 , we had approximately 46,950 employees, 20,600 of whom are covered by collective bargaining agreements or are members of labor unions.

As of December 28, 2014 , we had approximately 48,240 employees, 18,747 of whom are covered by collective bargaining agreements or are members of labor unions.

Our operations depend on the availability, retention and relative costs of labor and maintaining satisfactory relations with employees and the labor unions.

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Immigration reform continues to attract significant attention in the public arena and the U.S.

If new immigration legislation is enacted, such laws may contain provisions that could increase our costs in recruiting, training and retaining employees.

Also, although our hiring practices comply with the requirements of federal law in reviewing employees' citizenship or authority to work in the U.S., increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of our workforce or our operations at one or more of our facilities, thereby negatively impacting our business.

We cannot assure you that these activities or consequences will not adversely affect our financial results in the future.

If new immigration legislation is enacted, such laws may contain provisions that could increase our costs in recruiting, training and retaining employees and increase our costs of complying with federal law in reviewing employees' immigration status.

Furthermore, increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of our workforce or our operations.

There can be no assurance that these activities or consequences will not adversely affect our business, financial condition, results of operations or prospects in the future.

The continued consolidation of customers could negatively impact our business.

Our ten largest customers represented approximately 28% of net sales for fiscal 2013 .

Our ten largest customers represented approximately 27% of net sales for 2014 .

We do not have long-term sales agreements (other than to certain third-party hog customers) or other contractual assurances as to future sales to these major customers.

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There are inherent uncertainties related to these factors and to management's judgment in applying these factors to the assessment of goodwill recoverability.

Goodwill reviews are prepared using estimates of the fair value of reporting units based on market multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) and/or on the estimated present value of future discounted cash flows.

We could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of our business or market capitalization declines.

For example, at the end of the third quarter of fiscal 2009, we performed an interim test of the carrying amount of goodwill related to our U.S.

hog production operations.

We undertook this test due to the significant losses incurred in our hog production operations and decline in the market price of our common stock at that time.

We determined that the fair value of our U.S.

hog production reporting unit exceeded its carrying value by more than 20%.

Therefore goodwill was not impaired.

However, these types of events and the resulting analyses could result in non-cash goodwill impairment charges in the future.

Impairment charges could substantially affect our reported earnings in the periods of such charges.

In addition, impairment charges would negatively impact our financial ratios and could limit our ability to obtain financing in the future.

As of April 28, 2013 , we had $782.4 million of goodwill, which represented approximately 10% of total assets.

As of December 28, 2014 , we had $1.6 billion of goodwill, which represented approximately 16% of total assets.

Deterioration of economic conditions could negatively impact our business.

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impair the financial condition of some of our customers, suppliers or counterparties to our derivative instruments, thereby increasing customer bad debts, non-performance by suppliers or counterparty failures negatively impacting our treasury operations;

negatively impact global demand for protein products, which could result in a reduction of sales, operating income and cash flows;

negatively impact global demand for our products, which could result in a reduction of sales, operating income and cash flows;

decrease the value of our investments in equity and debt securities, including our company-owned life insurance and pension plan assets, which could result in higher pension cost and statutorily mandated funding requirements;

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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-K

Item 1A. Risk Factors