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Item 7. Management’s Discussion and Analysis

2015-03-25 compared with 2013-06-18 · 588 added, 433 removed, 364 unchanged (74% of the section changed)

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Financial Statements and Supplementary Data.”

Our fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest April 30.

All fiscal years presented in this discussion consisted of 52 weeks.

Unless otherwise stated, the amounts presented in the following discussion are based on continuing operations for all fiscal periods included.

EXECUTIVE OVERVIEW

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

In the United States, we are also the leader in numerous packaged meats categories with popular brands including Farmland®, Smithfield®, Eckrich®, Armour® and John Morrell®.

In the United States, we are also the leader in numerous packaged meats categories with popular brands including Smithfield®, Eckrich®, Farmland®, Armour® and John Morrell®.

We are committed to providing good food in a responsible way and maintaining robust animal care, community involvement, employee safety, environmental, and food safety and quality programs.

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maintain our position as a low cost producer of live hogs, fresh pork and packaged meats.

We conduct our operations through four reportable segments:

Pork, Hog Production, International and Corporate, each of which is comprised of a number of subsidiaries, joint ventures and other investments.

A fifth reportable segment, the Other segment, contains the results of our former turkey production operations and our previous 49% interest in Butterball, LLC (Butterball), which were sold in December 2010 (fiscal 2011).

The Pork segment consists mainly of our three wholly-owned U.S.

fresh pork and packaged meats subsidiaries:

The Smithfield Packing Company, Inc.

(Smithfield Packing), Farmland Foods, Inc.

and John Morrell Food Group (John Morrell).

We conduct our operations through five reportable segments:

Fresh Pork, Packaged Meats, Hog Production, International and Corporate.

The Fresh Pork segment consists of our U.S.

fresh pork operations.

The Packaged Meats segment consists of our U.S.

packaged meats operations.

The Hog Production segment consists of our hog production operations located in the U.S.

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

Fiscal 2013 Summary

Net income was $183.8 million , or $1.26 per diluted share, in fiscal 2013 , compared to net income of $361.3 million , or $2.21 per diluted share, in fiscal 2012 .

The following summarizes the operating results of each of our reportable segments and other significant items impacting pre-tax income for fiscal 2013 compared to fiscal 2012 :

Pork segment operating profit increased $7.9 million as improvements in packaged meats profitability were largely offset by lower fresh pork profitability both being driven inversely by lower fresh meat market prices.

Hog Production segment operating profit decreased $285.2 million primarily as a result of lower hog prices and higher feed costs.

International segment operating profit increased $65.4 million .

The prior year included certain charges recognized by CFG, of which our share was $38.7 million .

Profitability improved significantly in our Eastern European operations.

Corporate segment results improved by $8.6 million .

The prior year included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG.

In June 2011, we terminated negotiations to purchase the additional interest.

Losses on debt extinguishment were $120.7 million in the current year compared to $12.2 million in the prior year.

Definitive Merger Agreement

As discussed in "Part I—Item 1.

Business—Merger Agreement," on May 28, 2013 (fiscal 2014), we entered into the Merger Agreement with Shuanghui International Holdings Limited (Shuanghui).

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.

Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share in cash.

Upon completion of the Merger, all then-outstanding stock-based compensation awards, whether vested or unvested, will be converted into the right to receive cash of $34.00 per share (without interest), less the exercise price of such awards, if any.

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, as well as debt financing which has been committed by Morgan Stanley Senior Funding, Inc.

and a syndicate of banks.

The Merger Agreement does not contain a financing condition.

The closing of the Merger is subject to certain conditions, including, among others, approval by our shareholders, the receipt of approval under applicable U.S.

and specified foreign antitrust and anti-competition laws, and if review by CFIUS has concluded, the absence of any action by the President of the United States to block or prevent the consummation of the Merger and other customary closing conditions.

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

Debt Refinancing

In August 2012 (fiscal 2013), we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes (2022 Notes) at a price equal to 99.5% of their face value.

We used the net proceeds to repurchase $694.4 million of outstanding senior notes coming due in May 2013 and July 2014.

As a result of these repurchases, we recognized losses on debt extinguishment of $120.7 million in the second quarter of fiscal 2013.

We also extended the maturity date of our $200.0 million Rabobank Term Loan from June 2016 (fiscal 2017) to May 2018 (fiscal 2019).

These activities have significantly improved our debt maturity profile, removed the early maturity trigger on our inventory-based revolving credit facility (the Inventory Revolver), and released the encumbrances on our real estate and fixed assets.

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 subsequent 24 months in addition to the $250.0 million authorized during fiscal 2012 (the 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 our 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 the completion of the Merger

Since the inception of the Share Repurchase Program in June 2011 (fiscal 2012) and through April 28, 2013 , we have repurchased 28,244,783 shares of our common stock for $575.9 million , including related commissions, at an average price of $20.38 per share.

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

Strategy for Growth

We are focused on top and bottom line growth and transforming the Company into a more value-added consumer packaged meats company.

Our strategy includes growing our base business, further improving our cost structure and targeting branded and value-added acquisitions.

The fundamental tenets of our organic growth plan include:

Increased 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 in our business.

Continued 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 1% of packaged meats sales.

Establish a culture of innovation to build a strong product pipeline to drive packaged meats volume and margins.

Our innovation initiative will be focused in 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.

As of April 28, 2013 , our facilities in Clinton, North Carolina and Bladen County, North Carolina were 100% ractopamine-free.

Our facility in Milan, Missouri is expected to be 100% ractopamine-free by the end of the first quarter of fiscal 2014.

In addition to our organic growth strategy, we intend to apply a disciplined approach in acquiring branded and value-added companies while maintaining a conservative balance sheet.

Our strategy is to target modest-sized companies that can be easily integrated into our existing business.

We would expect to finance such acquisitions with a combination of cash generated from our existing businesses and debt.

For example, in May 2013 (fiscal 2014), we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $35.0 million in cash, subject to a customary post-closing adjustment for differences between working capital at closing and an agreed-upon target.

KCS is a leading U.S.

sausage producer and sow processor.

We intend to merge KCS's low-cost, efficient operations and high-quality products with our strong brands and sales and marketing team to continue to grow our packaged meats business.

The venture operates in Des Moines, Iowa and Kansas City, Missouri.

In Des Moines, the venture 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 provides a growth platform in two key packaged meats categories — breakfast sausage and dinner sausage — and will allow us to expand our product offerings to our customers.

These categories represent over $4.0 billion in retail and foodservice sales annually.

We expect the acquired stake in KCS to be immediately accretive to earnings.

Financial Statements and Supplementary Data-Note 15 — Reportable Segments " for additional information about changes to our reportable segments during the current year.

In February 2015, we announced an organizational realignment and key senior management appointments that unify all of our independent operating companies, brands, marketing and employees under one corporate umbrella.

Moving to a more centralized structure allows for a more efficient and effective approach to customers, best utilizes management talent, maximizes the manufacturing platform and plant efficiency and optimizes marketing, innovation and brand management.

WH Group Merger

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

As a result of the Merger, the Company survived as a wholly owned subsidiary of WH Group.

WH Group is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's largest meat processing enterprise and China's largest publicly traded meat products company as measured by market capitalization.

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

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

The merging of WH Group's distribution network with our strong management team, leading brands and vertically integrated model is allowing us to provide high-quality, competitively-priced and safe U.S.

meat products to consumers in markets around the world.

As part of WH Group's international platform, we expect our best practices in large-scale farming, food safety standards, environmental stewardship and animal welfare to set the global industry standard.

This transaction enabled Smithfield to continue to execute on its strategic priorities while maintaining brand excellence and commitment to environmental stewardship and animal welfare.

We have established Smithfield as the world's leading vertically integrated pork processor and hog producer with best-in-class operations and outstanding food safety practices.

Operationally, we have become part of an enterprise that shares our belief in global opportunities and our commitment to the highest standards of product safety and quality.

With our shared expertise and leadership, we continue to work on accelerating a global expansion strategy as part of WH Group.

The Merger was accounted for as a business combination using the acquisition method of accounting.

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

The difference in the cost basis of the Company before and after the Merger impacts the comparability of results.

Change in Fiscal Year

On January 16, 2014, the Company elected to change its fiscal year end from the 52 or 53 week period which previously ended on the Sunday nearest to April 30 to the 52 or 53 week period which ends on the Sunday nearest to December 31.

The change became effective at the end of the period ended December 29, 2013.

Unless otherwise noted, all references to 2014 in this report are to the twelve months ended December 28, 2014 .

The comparable financial data for the twelve months ended December 29, 2013 is unaudited.

Net income was $556.1 million in 2014 , compared to net income of $120.7 million for the twelve months ended December 29, 2013 .

The following summarizes the operating results of each of our reportable segments and other significant items impacting pre-tax income for 2014 compared to the twelve months ended December 29, 2013 :

Fresh Pork operating profit increased $20.7 million primarily as a result of higher fresh pork market prices.

Packaged Meats operating profit increased $81.8 million as a result of higher average selling prices and the unfavorable impact of the fair value step-up of inventories in the prior year due to the Merger.

Hog Production operating profit increased $366.1 million as a result of significantly higher live hog market prices and lower feed costs.

International operating profit increased $95.3 million due to higher sales volume and lower raw material costs in our European operations as well as an increase in equity income from our joint ventures in Mexico.

Corporate results improved by $29.2 million due to the impact of merger related costs incurred in the prior year, partially offset by higher variable compensation cost in the current year.

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

Porcine Epidemic Diarrhea Virus (PEDv)

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

During 2014, the U.S.

pork market was significantly impacted by the spreading of PEDv, a disease that only infects pigs, not humans or other livestock, which has been an industry-wide issue and continues to have a presence in U.S.

Our herds in several regions in which we operate were affected in 2014 as PEDv spread throughout the U.S.

There are confirmed cases of PEDv in the U.S.

however, the outbreak currently appears to be less severe than in 2014.

The USDA and the industry continue to monitor the situation.

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

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

Renewable Fuel Standard

The federal Renewable Fuel Standard (RFS) program requires that bio-fuels be blended into transportation fuels at ever-increasing volumes up to 36 billion gallons in 2030.

In October 2010, the Environmental Protection Agency (EPA) granted a “partial waiver” to a statutory bar under the Clean Air Act prohibiting fuel manufacturers from introducing fuel additives that are not “substantially similar” to those already approved and in use for vehicles of model year (MY) 1975 or later.

Prior to EPA's decision, the ethanol content of gasoline in the United States was limited to 10 percent (E10), which created a barrier, commonly referred to as the “blendwall,” to the expansion of blended bio-fuels as prescribed by the RFS.

The EPA's decision allows fuel manufacturers to increase the ethanol content of gasoline to 15 percent (E15) for use in MY 2007 and newer light-duty motor vehicles, including passenger cars, light-duty trucks and medium-duty passenger vehicles.

In January 2011, the EPA granted another partial waiver authorizing E15 use in MY 2001-2006 light-duty motor vehicles.

Judicial challenges to these rulemakings by a coalition of industry groups were dismissed.

In 2013, the EPA issued a proposed rule that would have reduced the volume of renewable fuels mandated by statute and reflected the EPA’s estimate of what would actually be produced in 2014.

However, the EPA has not yet issued the final rule for 2014 production volumes, nor has it issued a proposed rule for 2015 production volumes.

Representative Bob Goodlatte (R-VA) has re-introduced legislation in the 114th Congress that would eliminate the corn ethanol mandate, cap the blendwall at E10, and require the EPA to set cellulosic standards at production levels.

Although the long-term impact of the RFS is currently unknown, studies have shown that expanded corn-based ethanol production has driven up the price of livestock feed and led to commodity-price volatility.

We cannot presently assess the full economic impact of the RFS program on the meat processing industry or on our operations.

Country of Origin Labeling

Following a World Trade Organization (WTO) panel ruling on a complaint by Canada and Mexico that existing U.S.

country- of-origin labeling (COOL) requirements violated the United States’ WTO obligations, USDA published a new rule effective May 23, 2013, Mandatory Country of Origin Labeling of Beef, Pork, Lamb, Chicken, Goat Meat, Wild and Farm-Raised Fish and Shellfish, Perishable Agricultural Commodities, Peanuts, Pecans, Ginseng, and Macadamia Nuts .

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

The 2013 Rule requires, in part, that labels on covered meat products must list separately, in sequence, the specific country where the animal was "born," the country where it was "raised," and the country where it was "slaughtered." The rule also prohibits combining or commingling of meats with different "Born, Raised, and Slaughtered" combinations in the same package at retail.

On March 28, 2014 and on July 29, 2014, the U.S.

Court of Appeals for the District of Columbia Circuit rejected a judicial challenge to these rulemakings by a coalition of industry groups.

As of February 9, 2015, industry opponents dropped their lawsuit against the Department of Agriculture.

The Canadian and Mexican governments challenged the 2013 Rule before the Dispute Settlement Body (DSB) of the WTO.

On October 20, 2014, the DSB issued panel reports finding in favor of Canada and Mexico and against the United States' 2013 Rule.

Trade Representative has appealed the WTO determination and the appeal decision is expected in late spring.

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

industries to substantial retaliatory tariffs that could begin as early as summer 2015.

Although the long-term impact of COOL is currently unknown, industry groups have indicated that the rules impose additional costs on the industry including costs associated with segregation of livestock, record-keeping and new packaging and labeling along with potential retaliatory trade measures under WTO rules.

We cannot presently assess the full economic impact of COOL on the meat processing industry or on our operations.

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.

Looking ahead to fiscal 2014, we will continue to execute our 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.

Near-term, fresh pork margins continue to be weak, but we expect operating profit on a per head basis to average in the mid-single digits in fiscal 2014.

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

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

In our International segment, we anticipate some weakness in the first quarter of fiscal 2014 before results strengthen later in the year.

With the launch of our recently announced organizational realignment, we are taking steps to build on our positive results in 2014 as we continue to solidify Smithfield’s position as a global leader in branded packaged meats.

Our organizational realignment is about growth and harmonization and we currently expect to further evolve the company without closing any locations or reducing our workforce.

There are a plethora of benefits to moving to a centralized structure and unifying all our resources and brands together as ‘One Smithfield,’ which should position us to take advantage of growth opportunities with the following goals:

Leveraging Smithfield’s size and scope in pork industry;

Approaching the market more efficiently and effectively;

Best utilizing management talent across company;

Aligning with the way in which our customers operate;

Maximizing our manufacturing platform and plant efficiency;

Optimizing operations in areas like brand management, manufacturing, sales, and marketing;

Strengthening marketing, brand building and innovation across all brands.

PEDv has not been a major issue for us this past fall, but the virus does remain a potential uncertainty going forward.

We expect U.S.

market hog supplies to rebound in 2015, although lower prices and reduced energy costs should generate additional demand in the export markets, as well as domestically.

Lower pork prices should also allow us to leverage additional synergistic opportunities with WH Group.

We are sharply focused on growth and believe that Smithfield is in an ideal position to continue to achieve strong results in 2015.

RESULTS OF OPERATIONS

Significant Events Affecting Results of Operations

WH Group Merger

In connection with the Merger, we incurred $23.9 million and $18.0 million of professional fees during the three months ended December 29, 2013 and five months ended September 26, 2013 , respectively.

These fees are recognized in merger related costs on the consolidated statements of income and reflected in the results of our Corporate segment.

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

We recognized these deferred costs in interest expense during the three months ended December 29, 2013 upon termination of the financing arrangement following the Merger.

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

The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed by WH Group in the Merger reflects fair value estimates based on management analysis, including work performed by third-party valuation specialists.

This work was finalized during the third quarter of 2014 with no material adjustments.

Our pre-tax earnings for the twelve months ended December 29, 2013 were negatively impacted by $37.7 million as a result of the fair value adjustments to our assets and liabilities, including a $45.4 million increase in cost of sales as a result of the fair value step-up of our inventories.

Acquisition of Kansas City Sausage, LLC

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

KCS operates in Des Moines, Iowa and Kansas City, Missouri.

In Des Moines, KCS produces premium raw materials for sausage, as well as value-added products, including boneless hams and hides.

The Kansas City plant is a modern sausage processing facility and is designed for optimum efficiency to provide retail and foodservice customers with high quality products.

With our strong ongoing focus on building our packaged meats business, and with 15% of the U.S.

sow population, this joint venture is a logical fit for the Company.

It is expected to provide a growth platform in two key packaged meats categories — breakfast sausage and dinner sausage — and to allow us to expand our product offerings to our customers.

These categories represent over $4.0 billion in industry retail and foodservice sales annually.

KCS is managed by its Board of Directors, which makes decisions that most significantly impact the economic performance of KCS.

We have the right to nominate and elect the majority of the members of the Board of Directors of KCS, and based on the associated voting rights, we have determined that we have a controlling financial interest in KCS.

As a result, the acquisition of our interest in KCS was accounted for in the Fresh Pork and Packaged Meats segments using the acquisition method of accounting.

In 2014, KCS generated over $300 million in sales.

Missouri Litigation

During fiscal 2011, we reached a settlement with one of our insurance carriers regarding the reimbursement of certain past and future defense costs associated with the Missouri Litigation.

Related to this matter, we recognized a net benefit of $19.1 million in selling, general and administrative expenses in the Hog Production segment in fiscal 2011.

During fiscal 2012, we engaged in global settlement negotiations and recognized $22.2 million in net charges associated with the expected settlement.

During the twelve months ended April 29, 2012 , we engaged in global settlement negotiations and recognized $22.2 million in net charges associated with the expected settlement of the Missouri Litigation.

The charges were recognized in selling, general and administrative expenses in the Hog Production segment.

During fiscal 2013, the parties to the litigation reached an agreement and consummated the global settlement.

During the twelve months ended April 28, 2013 , the parties to the litigation reached an agreement and consummated the global settlement.

CFG Consolidation Plan

In December 2011 (fiscal 2012), the board of CFG approved a multi-year plan to consolidate and streamline its manufacturing operations to improve operating efficiencies and increase utilization (the CFG Consolidation Plan ).

In December 2011, the board of Campofrío Food Group (CFG) approved a multi-year plan to consolidate and streamline its manufacturing operations to improve operating efficiencies and increase utilization (the CFG Consolidation Plan ).

The CFG Consolidation Plan included the disposal of certain assets, employee redundancy costs and the contribution of CFG's French cooked ham business into a newly formed joint venture.

As a result, we recorded our share of CFG's charges totaling $38.7 million in equity in loss (income) of affiliates within the International segment in the third quarter of fiscal 2012.

Fire Insurance Settlement

In July 2009 (fiscal 2010), a fire occurred at the primary manufacturing facility of our subsidiary, Patrick Cudahy, Inc.

(Patrick Cudahy), in Cudahy, Wisconsin.

The fire damaged a portion of the facility’s production space and required the temporary cessation of operations, but did not consume the entire facility.

Shortly after the fire, we resumed production activities in undamaged portions of the plant, including the distribution center, and took steps to address the supply needs for Patrick Cudahy products by shifting production to other Company and third-party facilities.

We maintain comprehensive general liability and property insurance, including business interruption insurance.

In December 2010 (fiscal 2011), we reached an agreement with our insurance carriers to settle the claim for a total of $208.0 million , of which $70.0 million had been advanced to us in fiscal 2010.

We allocated these proceeds to first recover the book value of the property lost, out-of-pocket expenses incurred and business interruption losses that resulted from the fire.

The remaining proceeds were recognized as an involuntary conversion gain of $120.6 million in the Corporate segment in the third quarter of fiscal 2011.

The involuntary conversion gain was classified in a separate line item on the consolidated statement of income.

We also recognized $15.8 million of the insurance proceeds in fiscal 2011 in cost of sales in our Pork segment to offset business interruption losses incurred.

Hog Production Cost Savings Initiative

In fiscal 2010, we announced the Cost Savings Initiative.

The plan included a number of undertakings designed to improve operating efficiencies and productivity.

These consisted of farm reconfigurations and conversions, termination of certain high cost, third party hog grower contracts and breeding stock sourcing contracts, as well as a number of other cost reduction activities.

The Cost Savings Initiative was completed in fiscal 2013.

We incurred charges related to these activities totaling $3.1 million and $28.0 million in fiscal 2012 and fiscal 2011, respectively.

No significant charges were incurred during fiscal 2013.

All charges have been recorded in cost of sales in the Hog Production segment.

Impairment and Disposal of Long-lived Assets

Portsmouth, Virginia Plant

In November 2011 (fiscal 2012), we announced that we would shift the production of hot dogs and lunchmeat from Smithfield Packing's Portsmouth, Virginia plant to our Kinston, North Carolina plant and permanently close the Portsmouth facility.

The Kinston facility will be expanded to handle the additional production and will incorporate state of the art technology and equipment, which is expected to produce significant production efficiencies and cost reductions.

The Kinston expansion will require an estimated $85 million in capital expenditures, substantially all of which had been incurred by the end of fiscal 2013.

The expansion of the Kinston facility and the closure of the Portsmouth facility are expected to be completed in the first half of fiscal 2014.

As a result of this decision, we performed an impairment analysis of the related assets at the Portsmouth facility in the second quarter of fiscal 2012 and determined that the net cash flows expected to be generated over the anticipated remaining useful life of the plant were sufficient to recover its book value.

As such, no impairment existed.

However, we revised depreciation estimates to reflect the use of the related assets at the Portsmouth facility over their shortened useful lives.

As a result, we recognized accelerated depreciation charges of $4.4 million and $3.3 million in cost of sales during fiscal 2013 and fiscal 2012, respectively.

Also, in connection with this decision, we wrote-down inventory by $0.8 million in cost of sales and accrued $0.6 million for employee severance in selling, general and administrative expenses in the second quarter of fiscal 2012.

All of these charges are reflected in the Pork segment.

In January 2011 (fiscal 2011), we sold a portion of our Dalhart, Texas hog production assets to a crop farmer for net proceeds of $9.1 million and recognized a loss on the sale of $1.8 million in selling, general and administrative expenses in our Hog Production segment in the third quarter of fiscal 2011.

In April 2011 (fiscal 2011), we completed the sale of the remaining assets of our Dalhart, Texas operation and received net proceeds of $32.5 million .

As a result of the sale, we recognized a gain of $13.6 million , after allocating $8.5 million in goodwill to the asset group, in selling, general and administrative expenses in our Hog Production segment in the fourth quarter of fiscal 2011.

Oklahoma and Iowa

In January 2011 (fiscal 2011), we completed the sale of certain hog production assets located in Oklahoma and Iowa.

As a result of these sales, we received total net proceeds of $70.4 million and recognized gains totaling $6.9 million , after allocating $17.0 million of goodwill to these asset groups.

The gains were recorded in selling, general and administrative expenses in our Hog Production segment in the third quarter of fiscal 2011.

In the first half of fiscal 2011, we began reducing the hog population on certain hog farms in Missouri in order to comply with an amended consent decree.

The amended consent decree allows us to return the farms to full capacity upon the installation of an approved "next generation" technology that would reduce the level of odor produced by the farms.

The reduced hog raising capacity at these farms was replaced with third party contract farmers in Iowa.

In the first quarter of fiscal 2011, in connection with the anticipated reduction in finishing capacity, we performed an impairment analysis of these hog farms and determined that the book value of the assets was recoverable and thus, no impairment existed.

Based on the favorable hog raising performance experienced with these third party contract farmers and the amount of capital required to install "next generation" technology at our Missouri farms, we made the decision in the first quarter of fiscal 2012 to permanently idle certain of the assets on these farms.

Depreciation estimates were revised to reflect the shortened useful lives of the assets.

As a result, we recognized accelerated depreciation charges of $8.2 million in fiscal 2012.

These charges are reflected in the Hog Production segment.

Butterball, LLC (Butterball)

In June 2010 (fiscal 2011), we announced that we had made an offer to purchase our joint venture partner’s 51% ownership interest in Butterball and our partner’s related turkey production assets.

In accordance with Butterball’s operating agreement, our partner had to either accept the offer to sell or be required to purchase our 49% interest and our related turkey production assets.

In September 2010 (fiscal 2011), we were notified of our joint venture partner’s decision to purchase our 49% interest in Butterball and our related turkey production assets.

In December 2010 (fiscal 2011), we completed the sale of these assets for $167.0 million and recognized a gain of $0.2 million .

As a result, we recorded our share of CFG's charges totaling $38.7 million in equity in (income) loss of affiliates within the International segment in the third quarter of fiscal 2012.

Consolidated Results of Operations

The tables presented below compare our results of operations for fiscal years 2013 , 2012 and 2011 .

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

Sales and Cost of Sales

(in millions)

The tables presented below compare our results of operations for the twelve months ended December 28, 2014 , December 29, 2013 , April 28, 2013 and April 29, 2012 .

The twelve months ended December 29, 2013 reflects the combined results of predecessor and successor periods.

This combined information does not purport to represent what our consolidated results of operations would have been if the Merger had taken place on December 31, 2012, nor have we made any attempt to either include or exclude expenses or income that would have resulted had the Merger actually occurred on December 31, 2012.

The Transition Period reflects the combined results of predecessor and successor periods.

This combined information does not purport to represent what our consolidated results of operations would have been if the Merger had taken place on April 29, 2013, nor have we made any attempt to either include or exclude expenses or income that would have resulted had the Merger actually occurred on April 29, 2013.

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

Twelve Months Ended December 28, 2014 and December 29, 2013

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

Cost of sales

Gross profit margin

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

Sales in the current year were slightly higher than the prior year as higher volumes across all segments were largely offset by lower domestic fresh meat and hog market prices and the effects of foreign currency translation.

The decline in gross profit margin was primarily caused by higher hog feed costs and lower pork prices in the U.S.

The increase in consolidated sales was primarily driven by higher sales prices and volumes in the Pork segment.

These increases were attributable to higher market prices for fresh pork, supported by export demand, and an improved sales mix in packaged meats to higher margin core brands.

Gross margin declined from fiscal 2011 levels as a result of significantly higher raw material costs in all segments.

Domestic live hog market prices increased approximately 15% to $65 per hundredweight from $57 per hundredweight, and domestic raising costs increased 18% to $64 per hundredweight from $54 per hundredweight as a result of higher feed prices.

Cost of sales in fiscal 2011 included $28.0 million of charges associated with the Cost Savings Initiative compared to $3.1 million in fiscal 2012.

Also, cost of sales in fiscal 2012 included $8.2 million and $4.7 million of accelerated depreciation and other charges related to the idling of certain of our Missouri hog farm assets and the planned closure of our Portsmouth, Virginia meat processing plant, respectively.

Selling, general and administrative expenses

Merger related costs

Income from equity method investments

Operating profit

Interest expense

Non-operating (gain) loss

Income before income taxes

Income tax expense

Sales and Gross Profit

Sales increased primarily as a result of higher domestic pork market prices.

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

As noted in "Significant Events Affecting Results of Operations--WH Group Merger," the twelve months ended December 29, 2013 included an additional $45.4 million in cost of sales as a result of the fair value step-up of our inventory.

Selling, General and Administrative Expenses (SG&A)

The increase in SG&A is primarily attributable to higher variable compensation expenses stemming from higher year-over-year operating results, partially offset by lower pension expense.

Merger Related Costs

We incurred an aggregate of $41.9 million of professional fees in the twelve months ended December 29, 2013 as a result of the Merger.

Income from Equity Method Investments

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

Additionally, favorable changes to income tax rates positively impacted equity income from CFG.

Interest Expense

Interest expense for the twelve months ended December 29, 2013 included $17.3 million of debt issuance costs originally deferred by Merger Sub.

Income Tax Expense

For the twelve months ended December 28, 2014 , taxable income relative to permanent items, the mix of income between jurisdictions and foreign restructurings impacted the effective tax rate.

The effective tax rate for the twelve months ended December 29, 2013 was also impacted by income relative to permanent items for the period, the mix of income between jurisdictions and state income tax credits.

Eight Months Ended December 29, 2013 and December 30, 2012

The Transition Period

Eight Months Ended

September 27 - December 29, 2013

April 29 - September 26, 2013

December 29, 2013

December 30, 2012

(in millions)

Cost of sales

Selling, general and administrative expenses

Merger related costs

Loss (income) from equity method investments

Operating profit

Interest expense

Loss on debt extinguishment

Income before income taxes

Income tax expense

Sales and Gross Profit

Sales increased primarily as a result of higher average selling prices in the Fresh Pork, Packaged Meats and Hog Production segments and an 18% increase in volume in the International segment.

Gross profit decreased primarily as the result of an 8% increase in domestic live hog prices.

As noted in "Significant Events Affecting Results of Operations--WH Group Merger," the eight months ended December 29, 2013 included an additional $45.4 million in cost of sales as a result of the fair value step-up of our inventory.

Selling, General and Administrative Expenses

Advertising costs during the eight months ended December 29, 2013 were approximately $20.0 million higher than during the eight months ended December 30, 2012 as we continued our investment in marketing and advertising programs focused on building brand equity and growing sales.

Merger Related Costs

As noted in "Significant Events Affecting Results of Operations," we incurred an aggregate of $41.9 million of professional fees during the eight months ended December 29, 2013 as a result of the Merger.

Loss (Income) from Equity Method Investments

The decline in profitability was primarily driven by lower selling prices in the meat processing operations of our Mexican joint ventures.

Also, tax law changes in Mexico negatively impacted our joint ventures.

during the eight months ended December 29, 2013 .

Interest Expense and Loss on Debt Extinguishment

As noted in "Significant Events Affecting Results of Operations," interest expense for the eight months ended December 29, 2013 includes $17.3 million of debt issuance costs originally deferred by Merger Sub.

In the eight months ended December 30, 2012, we recognized losses of $120.7 million on the repurchase of $694.4 million of our outstanding senior notes due in May 2013 and July 2014.

Income Tax Expense

The effective tax rate was impacted in all periods presented by income relative to permanent items, the mix of income between jurisdictions and state income tax credits.

Twelve Months Ended April 28, 2013 and April 29, 2012

Twelve Months Ended

April 28, 2013

April 29, 2012

(in millions)

Cost of sales

Selling, general and administrative expenses

The following items explain the significant changes in SG&A:

Fiscal 2012 included $22.2 million in net charges associated with the Missouri litigation.

Fiscal 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG.

In June 2011 (fiscal 2012), we terminated negotiations to purchase the additional interest.

Pension and other post-retirement benefit expenses increased $26.4 million .

Fiscal 2012 included $22.2 million in net charges associated with the Missouri litigation compared to a $19.1 million net benefit in fiscal 2011.

Fiscal 2011 included a net gain of $18.7 million on the sale of hog farms in Texas, Oklahoma and Iowa.

Losses on foreign currency denominated transactions increased $7.0 million .

Fiscal 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG.

In June 2011 (fiscal 2012), we terminated negotiations to purchase the additional interest.

Variable compensation expense was $29.9 million lower due primarily to lower profitability levels in fiscal 2012.

Expense for pension and other postretirement benefits decreased $19.6 million .

(Income) loss from equity method investments

(in millions)

Mexican joint ventures

All other equity method investments

Operating profit

Interest expense

Loss on debt extinguishment

Income before income taxes

Income tax expense

Sales and Gross Profit

Sales increased slightly as higher volumes across all segments were largely offset by lower domestic fresh meat and hog market prices and the effects of foreign currency translation.

The decline in gross profit margin was primarily caused by higher hog feed costs and lower pork prices in the U.S.

Selling, General and Administrative Expenses (SG&A)

The twelve months ended April 29, 2012 included $22.2 million in net charges associated with the Missouri litigation.

The twelve months ended April 29, 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG.

In June 2011, we terminated negotiations to purchase the additional interest.

Pension and other post-retirement benefit expenses increased $26.4 million .

(Income) Loss from Equity Method Investments

The following items explain the significant changes in loss (income) from equity method investments:

CFG's results for fiscal 2012 included $38.7 million of charges related to the CFG Consolidation Plan.

CFG's results for twelve months ended April 29, 2012 included $38.7 million of charges related to the CFG Consolidation Plan.

Results from our Mexican joint ventures declined due to higher feed costs, lower hog prices and lower meat sales volumes.

CFG's results for fiscal 2012 included $38.7 million of charges related to the CFG Consolidation Plan.

Results from our Mexican joint ventures were negatively impacted by higher feed costs and unfavorable changes in foreign exchange rates.

Interest Expense

(in millions)

Interest expense

The following items explain the significant changes in loss (income) from equity method investments:

Interest expense decreased due to lower average interest rates resulting from the refinancing of our 10% senior secured notes due July 2014 (2014 Notes) and our 7.75% senior unsecured notes due May 2013 (2013 Notes) as described under "Liquidity and Capital Resources" below.

Interest expense decreased in fiscal 2012 as a result of our Project 100 initiative, under which we redeemed more than $1 billion of debt since the first quarter of fiscal 2011, including $600 million of our 7% senior unsecured notes due August 2011, $260.6 million of our 2014 Notes and $190 million of our 2013 Notes.

Loss on Debt Extinguishment

(in millions)

Loss on debt extinguishment

The following items explain the losses on debt extinguishment for the fiscal years presented:

We recognized losses of $120.7 million during fiscal 2013 on the repurchase of $589.4 million of our 2014 Notes and $105.0 million of our 2013 Notes.

We recognized losses of $11.0 million during fiscal 2012 on the repurchase of $59.7 million of our 2014 Notes.

We recognized a loss on debt extinguishment of $1.2 million in the first quarter of fiscal 2012 associated with the refinancing of our working capital facilities in June 2011 (fiscal 2012).

We recognized losses of $92.5 million during fiscal 2011 on the repurchase of $522.2 million of our 7% senior unsecured notes due August 2011, $200.9 million of our 2014 Notes and $190.0 million of our 2013 Notes.

Twelve Months Ended April 28, 2013

We recognized losses of $120.7 million on the repurchase of $694.4 million of our outstanding senior notes due in May 2013 and July 2014.

Twelve Months Ended April 29, 2012

We recognized losses of $11.0 million on the repurchase of $59.7 million of our 2014 Notes.

We recognized a loss on debt extinguishment of $1.2 million in the first quarter associated with the refinancing of our working capital facilities in June 2011.

Income Tax Expense

Income tax expense (in millions)

Effective tax rate

The following items explain the significant changes in the effective tax rate from fiscal 2012 to fiscal 2013:

The following items explain the significant changes in the effective tax rate from the twelve months ended April 29, 2012 to twelve months ended April 28, 2013 :

Tax credits increased due in part to the passage of the American Taxpayer Relief Act of 2012 that retroactively reinstated the Research and Development, Work Opportunity and Welfare to Work tax credits.

We released $11.1 million in deferred tax asset valuation allowances in the current year, primarily related to the utilization of tax losses in foreign jurisdictions.

The mix of earnings from foreign operations, which are taxed at lower rates, was higher in the current year.

We released $11.1 million in deferred tax asset valuation allowances in the twelve months ended April 28, 2013 , primarily related to the utilization of tax losses in foreign jurisdictions.

The mix of earnings from foreign operations, which are taxed at lower rates, was higher in the twelve months ended April 28, 2013 .

Segment Results

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

(in millions)

The following information reflects the comparative results from each respective segment:

Twelve Months Ended December 28, 2014 and December 29, 2013

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

Fresh pork (1)

Packaged Meats

Operating profit:

Fresh pork (1)

Packaged meats

Sales volume:

Hog Production

International

Total segment sales

Intersegment sales

Consolidated sales

Operating profit (loss):

Packaged Meats

Average unit selling price :

Hog Production

International

Consolidated operating profit

Current year sales increased 12% due to a 15% increase in average selling prices partially offset by a 3% decrease in volume.

Current year operating profit increased 27% .

Operating profit per head increased from $2.61 to $3.47 due to higher fresh pork market prices, which more than offset higher raw material costs.

We processed 27.9 million hogs during 2014 , a decrease of 4% , largely attributable to PEDv.

However, average hog weights were up 2% , which helped to offset the overall decline in volume.

Packaged Meats

Hogs processed

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

——————————————

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

Pork segment sales declined slightly as high pork supplies contributed to lower average fresh pork sales prices.

Fresh pork sales volumes increased as a result of higher slaughter levels and hog weights.

Packaged meats sales volumes increased across all trade channels.

Lower average unit selling prices of private label products were largely offset by higher sales prices in our core brands.

Fresh pork operating profit decreased to $6 per head from $8 per head due primarily to lower sales prices.

Packaged meats operating profit increased to $.17 per pound from $.15 per pound, benefitting from lower raw material costs.

Sales and operating profit were positively impacted by higher average unit selling prices for both fresh pork and packaged meats driven by strong export demand, an improved mix in packaged meats to more core brand product sales, and strong pricing discipline.

Fresh pork volumes increased primarily as a result of stronger export demand.

Fresh pork operating profit decreased to $8 per head from a record $15 per head as live hog prices increased significantly more than fresh meat prices.

Packaged meats operating profit increased to $.15 per pound from $.13 per pound as a result of strong pricing discipline, an improved product mix to more high margin core brands and lower variable compensation and pension related expenses, which more than offset the impact of higher raw material costs.

Operating profit for packaged meats in fiscal 2012 included $4.7 million in charges associated with the anticipated closure of our Portsmouth plant.

Hog Production Segment

(in millions)

Operating (loss) profit

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

Raising costs (per hundredweight) (2)

——————————————

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.

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 increased due to higher volumes, which more than offset the impact of lower market hog prices.

Fiscal 2013 operating profit was negatively impacted by higher hog supplies, resulting in a 6% decrease in live hog prices, and increased raising costs, primarily as a result of higher priced feed.

Fiscal 2013 operating profit included gains of $91.2 million compared to $58.6 million in fiscal 2012 on derivative contracts that are not reflected in the average live hog prices and raising costs presented in the table above;

these are primarily lean hog derivative contracts, and grain derivative contracts that are not designated in hedging relationships for accounting purposes.

Fiscal 2012 operating profit included $22.2 million in net charges associated with the Missouri litigation.

Fiscal 2012 operating profit included accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri.

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

Volume declined due to temporary disruptions from the Cost Savings Initiative and the sale of our Oklahoma hog farms at the end of the third quarter of fiscal 2011.

Raising costs increased primarily as a result of higher feed costs.

Fiscal 2012 operating profit included $22.2 million in net charges associated with the Missouri litigation compared to a $19.1 million net benefit in fiscal 2011.

Operating profit in fiscal 2011 included a net gain of $18.7 million on the sale of hog farms in Oklahoma, Iowa and Texas.

Fiscal 2012 operating profit included accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri.

Fiscal 2012 operating profit included $3.1 million in charges associated with the Cost Savings Initiative compared to $28.0 million in fiscal 2011.

Fiscal 2012 operating profit included gains of $58.6 million compared to $22.2 million in fiscal 2011 on derivative contracts that are not reflected in the average live hog prices and raising costs presented in the table above;

these are primarily lean hog derivative contracts, and grain derivative contracts that are not designated in hedging relationships for accounting purposes.

International Segment

Current year sales increased 10% due to a 10% increase in average selling prices.

Current year sales volume totaled 2.8 billion pounds, which remained relatively unchanged from the twelve months ended December 29, 2013.

Current year operating profit increased to $0.16 per pound from $0.13 per pound due to higher average selling prices.

Additionally, the prior year included $38.7 million, or $0.01 per pound, of non-cash costs related to the fair value step-up of inventories due to the Merger.

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

Hog Production

Current year sales decreased due to lower sales volume, partially offset by higher domestic live hog market prices.

Head sold during the year amounted to 14.7 million hogs, a decrease of 10% from the twelve months ended December 29, 2013.

PEDv was a significant factor in the volume decline and favorably impacted market prices.

Current year operating profit benefited from a 20% increase in domestic live hog market prices and lower feed costs.

International

Current year sales were positively impacted by an 18% increase in volume of 1.5 billion pounds, driven largely by a 13% increase in hogs processed in Europe, and partially offset by an 11% decrease in average selling prices.

We processed 4.3 million hogs during 2014.

The effects of foreign currency translation also positively impacted sales by approximately $18 million .

Current year operating profit was positively impacted by higher sales and lower feed costs in Europe along with higher equity income from our Mexican joint ventures.

Additionally, favorable changes to income tax rates positively impacted equity income from CFG.

Operating results in the Corporate segment were improved from last year due to the impact of $41.9 million of merger related costs in the prior year, partially offset by higher variable compensation expense in the current year driven by improved operating results.

Eight Months Ended December 29, 2013 and December 30, 2012

The Transition Period

Eight Months Ended

September 27 - December 29, 2013

April 29 - September 26, 2013

December 29, 2013

December 30, 2012

(in millions)

Packaged Meats

Hog Production

International

Total segment sales

Intersegment sales

Consolidated sales

Operating profit (loss):

Packaged Meats

Hog Production

International

Consolidated operating profit

Sales increased during the Transition Period as a result of a 6% increase in average selling prices and a 1% increase in volume.

Operating profit decreased despite the increase in average selling prices primarily as a result of an 8% increase in domestic live hog prices.

Packaged Meats

Sales increased during the Transition Period as a result of a 9% increase in average selling prices.

Operating profit in the current year decreased as the increase in selling prices was more than offset by higher raw material costs.

Additionally, operating profit in the Transition Period included $38.7 million of additional non-

cash costs related to the fair value step-up of our inventories.

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

Hog Production

Transition Period sales benefited from an 8% increase in domestic live hog prices and a 3% increase in head sold.

Hog Production operating profit improved by $97.2 million mainly due to higher live hog market prices.

International

As a result of fluctuations in foreign exchange rates, International segment sales and operating profit in the Transition Period were both positively impacted by approximately 3%.

Sales and operating profit in the transition period were positively impacted by an 18% increase in volume which was partially offset by a 10% decrease in average selling prices.

Transition Period operating profit was also negatively impacted by 8% and 6% increases in raising costs in both Poland and Romania, respectively, along with significantly lower equity income from our Mexican joint ventures.

The Transition Period includes fees related to the Merger.

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

Twelve Months Ended April 28, 2013 and April 29, 2012

Twelve Months Ended

April 28, 2013

April 29, 2012

(in millions)

United Kingdom

Packaged Meats

Hog Production

International

Total segment sales

Intersegment sales

Consolidated sales

Operating profit (loss):

Sales volume (pounds)

Average unit selling price (3)

Hogs processed

Raising costs (per hundredweight)

Sales volume (pounds)

Average unit selling price (3)

Hogs processed

Raising costs (per hundredweight)

——————————————

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:

Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased sales by $116.1 million , or 7.9% .

Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased operating profit by $11.5 million .

Sales and operating profit benefited from significantly higher volumes in our Polish operations due to a 19% increase in the number of hogs processed.

Packaged Meats

Hog Production

International

Consolidated operating profit

Sales declined 3% due to a 6% decrease in average selling prices, partially offset by a 3% increase in volume as a result of higher slaughter levels and hog weights.

Operating profit decreased to $6 per head from $8 per head due to lower fresh pork market prices.

We processed 28.5 million hogs, an increase of 3% from the twelve months ended April 29, 2012 .

Packaged Meats

Sales increased 2% due to a 4% increase in volume partially offset by a 1% decrease in average selling prices.

Sales volume totaled 2.8 billion pounds and 2.7 billion pounds for the twelve months ended April 28, 2013 and April 29, 2012 , respectively.

Operating profit increased to $0.17 per pound from $0.15 per pound due to lower raw material costs.

Hog Production

Sales increased due to higher volumes, which more than offset the impact of lower market hog prices.

Head sold during the twelve months ended April 28, 2013 amounted to 16.0 million hogs, an increase of 1% from the twelve months ended April 29, 2012 .

Operating profit was negatively impacted by higher hog supplies, resulting in a 6% decrease in live hog prices, and increased domestic raising costs, including the effects of grain derivative contracts designated in hedging relationships for accounting purposes, primarily as a result of higher priced feed.

Operating profit for the twelve months ended April 28, 2013 included gains of $91.2 million compared to $58.6 million for the twelve months ended April 29, 2012 on lean hog derivative contracts and grain derivative contracts that are not designated in hedging relationships for accounting purposes.

Operating profit for the twelve months ended April 29, 2012 included $22.2 million in net charges associated with the Missouri litigation as well as accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri.

International

Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased sales by 8% and decreased operating profit by $11.5 million .

Sales and operating profit for the twelve months ended April 28, 2013 benefited from significantly higher volumes in our Polish operations due to a 19% increase in the number of hogs processed.

Unit sales prices in our Polish operations increased in several key product categories;

however, higher volumes of lower value by-products that resulted from more processed hogs effectively diminished the overall average unit selling price compared to the prior year.

Sales and operating profit in our Romanian operations improved on significantly higher average unit selling prices and sales volumes, which benefitted from the approval to export pork products to European Union member countries beginning in the fourth quarter of fiscal 2012.

Sales and hog slaughter volumes benefited from an expansion in our hog production operations in the second quarter of fiscal 2012.

Operating profit also improved as a result of a $5.4 million reduction in foreign exchange transaction losses and a $3.9 million increase in government farm subsidies received.

Fiscal 2012 operating profit included $38.7 million of charges related to the CFG Consolidation Plan.

however, higher volumes of lower value by-products that resulted from more processed hogs effectively diminished the overall average unit selling price compared to twelve months ended April 29, 2012 .

Sales and operating profit in our Romanian operations improved on significantly higher average unit selling prices and sales volumes, which benefited from the approval to export pork products to European Union member countries beginning in the fourth quarter of the twelve months ended April 29, 2012 .

Sales and hog slaughter volumes benefited from an expansion in our hog production operations in the second quarter of the twelve months ended April 29, 2012 .

Operating profit for the twelve months ended April 29, 2012 included $38.7 million of charges related to the CFG Consolidation Plan.

Equity income from our Mexican joint ventures decreased by $4.1 million due to higher feed costs and unfavorable changes in foreign exchange rates.

Sales and operating profit in Poland were positively impacted by higher average unit selling prices primarily due to a shift in product mix to more packaged meats and our ability to pass along higher raw material costs, particularly in the second half of fiscal 2012.

Operating profit in Poland declined primarily as a result of higher raw material costs in our meat processing operations.

Improvements in Polish hog production fundamentals partially offset the decline in profit.

Sales and operating profit in our Romania fresh pork operation were positively impacted by our approval to export pork products out of Romania to European Union member countries beginning in the fourth quarter of fiscal 2012.

As a result, average unit selling prices increased 7% .

Our Romanian fresh pork and hog production operations both saw improvements in operating results.

However, these improvements were more than offset by increased losses in our distribution operations and an unfavorable $8.4 million impact from foreign currency exposure.

Fiscal 2012 operating profit included $38.7 million of charges related to the CFG Consolidation Plan.

Equity income from our Mexican joint ventures decreased $16.2 million , primarily due to higher feed costs and unfavorable changes in foreign exchange rates.

Other Segment

(in millions)

Operating loss

The change in sales and operating loss reflects the sale of our turkey operations, including our investment in Butterball, in December 2010 (fiscal 2011).

Corporate Segment

(in millions)

Operating (loss) profit

The following items explain the significant changes in Corporate segment operating profit (loss):

Fiscal 2012 included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG.

In June 2011, we terminated negotiations to purchase the additional interest.

Fiscal 2011 included a gain of $120.6 million on the final settlement with our insurance carriers of our claim related to the fire that occurred at our Cudahy, Wisconsin facility in fiscal 2010.

Fiscal 2012 included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG.

The twelve months ended April 29, 2012 included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG.

In June 2011, we terminated negotiations to purchase the additional interest.

Variable compensation cost declined $9.0 million due to lower consolidated profit levels in fiscal 2012.

Expense for pension and other post-retirement benefits decreased $4.1 million .

LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

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 April 28, 2013 , our liquidity position was $1.6 billion , comprised of $1.3 billion in availability under our credit facilities and $310.6 million in cash and cash equivalents.

In August 2012 (fiscal 2013), we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes at a price equal to 99.5% of their face value.

We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $589.4 million of our 2014 Notes and $105.0 million of our 2013 Notes.

As a result of these repurchases, we recognized losses on debt extinguishment of $120.7 million in the second quarter of fiscal 2013, including the write-off of related unamortized discounts, premiums, and debt issuance costs.

We also extended the maturity date of our $200.0 million Rabobank Term Loan from June 2016 (fiscal 2017) to May 2018 (fiscal 2019).

These activities significantly improved our debt maturity profile, removed the early maturity trigger on the Inventory Revolver, and released the encumbrances on our real estate and fixed assets.

In the fourth quarter of fiscal 2013, we partially exercised the accordion feature of our Second Amended and Restated Credit Agreement and increased the borrowing capacity of the Inventory Revolver from a total of $925.0 million to a total of $1.025 billion .

All other terms and conditions of the Inventory Revolver remain unchanged, including the limitation on the actual amount of credit that is available from time to time under the Inventory Revolver as a result of borrowing base valuations of our inventory, accounts receivable and certain cash balances.

We also executed a new $200.0 million term loan with a scheduled maturity date of February 4, 2014 (the Bank of America Term Loan).

The Bank of America Term Loan bears interest at a rate of LIBOR plus 3.25% per annum or, at our election, a base rate plus 2.25% per annum.

These two financing activities increased our liquidity and provided capital funding at a lower interest rate, which will assist us in retiring upcoming debt maturities in the first quarter of fiscal 2014.

As of December 28, 2014 , our liquidity position was $1.8 billion , comprised of $1.3 billion in availability under our credit facilities and $433.5 million in cash and cash equivalents.

Sources of Liquidity

8 unchanged sentences

Credit Facilities

April 28, 2013

December 28, 2014

Borrowing Base Adjustment

8 unchanged sentences

Operating Activities

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

Net cash flows from operating activities

The following items explain the significant changes in cash flows from operating activities over the past three fiscal years:

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

Twelve Months Ended December 28, 2014 vs.

Twelve Months Ended December 28, 2013

Cash received from customers increased due to higher average meat selling prices.

Cash paid for grain and other ingredients purchased by the Hog Production segment decreased approximately $656.6 million from the prior year.

Cash paid to outside hog suppliers increased due to a 20% increase in average domestic live hog prices.

Cash paid to outside meat suppliers increased due to higher fresh meat market prices, particularly pork and beef.

The current year included net tax payments of $ 178.8 million for income taxes as compared to net

refunds of $ 16.5 million in the prior year.

In the current year, we paid $179.6 million for the settlement of derivative contracts and for margin requirements compared to $37.1 million in the prior year.

Cash interest payments increased approximately $23.2 million .

The Transition Period

Eight Months Ended

September 27 - December 29, 2013

April 29 - September 26, 2013

December 29, 2013

December 30, 2012

(in millions)

Net cash flows from operating activities

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

Eight Months Ended December 29, 2013 vs.

Eight Months Ended December 30, 2012

Cash received from customers increased due to a 6% and 9% increase in average selling prices in the Fresh Pork and Packaged Meats segments, respectively, and an 18% increase in sales volume in the International segment.

Cash paid for grain and other feed ingredients purchased by the Hog Production segment decreased approximately $65.4 million despite a significant increase in total pounds purchased.

In the prior year eight month period, we paid cash to settle the Missouri litigation.

In the eight months ended December 29, 2013 , we paid $53.8 million for the settlement of derivative contracts and for margin requirements compared to $91.0 million received in prior year.

Cash paid to outside hog suppliers increased due to an 8% increase in domestic live hog market prices.

Twelve Months Ended

April 28, 2013

April 29, 2012

(in millions)

Net cash flows from operating activities

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

Twelve Months Ended April 28, 2013 vs.

Twelve Months Ended April 29, 2012

Cash paid for grain and other feed ingredients purchased by the Hog Production segment increased approximately $372 million .

1 unchanged sentence

Cash received from customers decreased primarily as a result of lower domestic selling prices.

We paid cash to settle the Missouri litigation in fiscal 2013.

We paid cash to settle the Missouri litigation in the twelve months ended April 28, 2013 .

Expenditures for advertising increased as part of our strategy to build brand equity and grow sales.

Cash paid to outside hog suppliers was lower due to a 6% decrease in average domestic live hog market prices.

Income tax payments decreased $222.0 million as a result of significant tax refunds during the first quarter of fiscal 2013 and lower domestic taxable income.

We contributed $17.7 million to our qualified and non-qualified pension plans in fiscal 2013 compared to $142.8 million in fiscal 2012.

Cash paid to outside hog suppliers was higher due to a 15% increase in average live hog market prices.

Fiscal 2012 included net tax payments of $225.7 million compared to net refunds of $34.8 million in the prior year.

Cash paid for grain and other feed ingredients purchased by the Hog Production segment increased approximately $262 million .

Variable compensation paid in fiscal 2012 related to the prior year's performance was higher than the corresponding amount paid in fiscal 2011.

We contributed $142.8 million to our qualified and non-qualified pension plans in fiscal 2012 compared to $128.5 million in fiscal 2011.

Cash received from customers increased primarily as a result of higher selling prices.

Cash received for the settlement of commodity derivative contracts and for margin requirements increased $82.0 million .

Income tax payments decreased $222.0 million as a result of significant tax refunds during the twelve months ended April 28, 2013 and lower domestic taxable income.

We contributed $17.7 million to our qualified and non-qualified pension plans in the twelve months ended April 28, 2013 compared to $142.8 million in the twelve months ended April 29, 2012 .

Investing Activities

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

Acquisition of Smithfield Foods, Inc.

Capital expenditures

Business acquisition, net of cash acquired

Insurance proceeds

Net (expenditures) proceeds from breeding stock transactions

Proceeds from sale of property, plant and equipment

Advance note and other

Net cash flows from investing activities

The following items explain the significant investing activities for each of the past three fiscal years:

The following items explain the significant investing activities for the periods presented:

Twelve Months Ended December 28, 2014

Capital expenditures primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.

In April 2014, Kansas City Sausage Company, LLC (KCS) bought a meat processing business for $11.0 million.

Twelve Months Ended December 28, 2013

WH Group paid $4.9 billion in connection with the Merger to acquire all of our common stock and settle all vested and unvested stock-based compensation awards.

We paid $33.7 million, net of cash acquired, for a 50% interest in KCS.

Also, we advanced $10.0 million to the seller of KCS in exchange for a promissory note, which is secured by the remaining membership interests in KCS held by the seller.

The Transition Period

Eight Months Ended

September 27 - December 29, 2013

April 29 - September 26, 2013

December 29, 2013

December 30, 2012

(in millions)

Acquisition of Smithfield Foods, Inc.

Capital expenditures

Business acquisition, net of cash acquired

Net (expenditures) proceeds from breeding stock transactions

Proceeds from sale of property, plant and equipment

Advance note and other

Net cash flows from investing activities

The following items explain the significant investing activities for the periods presented:

Eight Months Ended December 29, 2013

WH Group paid $4.9 billion in connection with the Merger to acquire all of our common stock and settle all vested and unvested stock-based compensation awards.

In May 2013, we paid $32.8 million, net of cash acquired, for a 50% interest in KCS.

Also, we advanced $10.0 million to the seller of KCS in exchange for a promissory note, which is secured by the remaining membership interest in KCS held by the seller.

Eight Months Ended December 30, 2012

Capital expenditures during the prior year primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.

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

Twelve Months Ended

April 28, 2013

April 29, 2012

(in millions)

Capital expenditures

Business acquisition, net of cash acquired

Net (expenditures) proceeds from breeding stock transactions

Proceeds from sale of property, plant and equipment

Net cash flows from investing activities

The following items explain the significant investing activities for the periods presented:

Twelve Months Ended April 28, 2013

Capital expenditures included $45.9 million related to our Kinston, North Carolina plant expansion project.

1 unchanged sentence

We paid $24.0 million , net of cash acquired, for a 70% interest in American Skin Food Group, LLC.

Twelve Months Ended April 29, 2012

Capital expenditures included $32.8 million related to our Kinston, North Carolina plant expansion project and $30.9 million related to the Cost Savings Initiative.

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

Capital expenditures primarily related to plant and hog farm improvement projects, including approximately $44.0 million related to the Cost Savings Initiative.

Dispositions included proceeds from the sale of our investment in Butterball, LLC and our related turkey production assets and proceeds from the sale of hog operations in Texas, Oklahoma and Iowa.

The insurance proceeds represent the gain on involuntary conversion of property, plant and equipment due to the Patrick Cudahy fire upon the final settlement of claims with our insurance carriers in the third quarter of fiscal 2011.

Proceeds from the sale of property, plant and equipment includes $9.1 million from the sale of farm land in Texas.

Financing Activities

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

Net proceeds from equity contributions

Proceeds from the issuance of long-term debt and capital leases

Principal payments on long-term debt and capital lease obligations

Proceeds from Securitization Facility

Payments on Securitization Facility

Net borrowings (repayments) on revolving credit facilities and notes payables

Debt issuance costs and other

Net cash flows from financing activities

The following items explain the significant investing activities for the periods presented:

Twelve Months Ended December 28, 2013

As part of the Merger, WH Group purchased all of our common stock as of the Merger Date.

The amount paid by WH Group, net of certain transaction costs is deemed to be an equity contribution by WH Group to the Company.

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

Also, Merger Sub incurred $20.4 million in transaction fees in connection with the issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes.

As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Sub, including Merger Sub's obligations under the Merger Sub Notes.

We made an early repayment of our $200.0 million floating rate unsecured term loan due in February 2014 and we repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million , and we repaid the outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million .

We drew $145.0 million, net of repayments, on our Inventory Revolver and $105.0 million, net of repayments, on our Securitization Facility, to repay other long-term debt, as noted above.

The Transition Period

Eight Months Ended

September 27 - December 29, 2013

April 29 - September 26, 2013

December 29, 2013

December 30, 2012

(in millions)

Net proceeds from equity contributions

Proceeds from the issuance of long-term debt and capital leases

Principal payments on long-term debt and capital lease obligations

Proceeds from Securitization Facility

Payments on Securitization Facility

Net borrowings (repayments) on revolving credit facilities and notes payables

Repurchase of common stock

Debt issuance costs and other

Net cash flows from financing activities

The following items explain the significant investing activities for the periods presented:

Eight Months Ended December 29, 2013

As part of the Merger, WH Group purchased all of our common stock as of the Merger Date.

The amount paid by WH Group, net of certain transaction costs is deemed to be an equity contribution by WH Group to the Company.

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

Also, Merger Sub incurred $20.4 million in transaction fees in connection with the issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes.

We made an early repayment of our $200.0 million floating rate unsecured term loan due in February 2014, repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million, and repaid the outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million.

We drew $145.0 million on our Inventory Revolver and $105.0 million on our Securitization Facility, net of repayments, to repay other long-term debt, as noted above.

Eight Months Ended December 30, 2012

In August 2012, we issued $1.0 billion of our 2022 Notes at a price equal to 99.5% of their face value.

We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $694.4 million of our outstanding senior notes due in May 2013 and July 2014.

We repurchased 19,068,079 shares of our common stock for $386.4 million as part of a previously approved share repurchase program.

We incurred $18.0 million in transaction fees in connection with the issuance of the 2022 Notes, which are being amortized over their ten-year life.

Twelve Months Ended

April 28, 2013

April 29, 2012

(in millions)

Proceeds from the issuance of long-term debt

2 unchanged sentences

Repurchase of common stock

Net proceeds from the issuance of common stock and stock option exercises

Change in cash collateral

1 unchanged sentence

Net cash flows from financing activities

The following items explain the significant financing activities for each of the past three fiscal years:

The following items explain the significant financing activities for the periods presented:

Twelve Months Ended April 28, 2013

In August 2012, we issued $1.0 billion of our 2022 Notes at a price equal to 99.5% of their face value.

2 unchanged sentences

We incurred $18.0 million in transaction fees in connection with the issuance of the 2022 Notes, which are being amortized over their ten -year life.

Twelve Months Ended April 29, 2012

We redeemed the remaining $77.8 million of our 7% senior unsecured notes due August 2011 and repurchased $59.7 million of our 2014 Notes.

2 unchanged sentences

We paid $11.0 million of debt issuance costs in connection with the refinancing of the ABL Credit Facility.

We repurchased $522.2 million of our 7% senior unsecured notes due August 2011 through open market purchases as well as a tender offer.

Also, we repurchased $190.0 million and $200.9 million of our 2013 Notes and our 2014 Notes, respectively, as a result of a tender offer that expired on February 9, 2011.

We repaid $16.2 million in outstanding notes payable and received $40.4 million from draws on credit facilities in the International segment.

We repaid $30.1 million on outstanding loans in the International segment.

We transferred $20.0 million of cash into a deposit account to serve as collateral for overdrafts on certain of our bank accounts in place of letters of credit previously used under our banking agreement and $3.9 million of cash to the counterparty of our interest rate swap contract to serve as collateral and replace letters of credit previously provided under the contract.

Capitalization

(in millions)

6.625% senior unsecured notes, due August 2022, including unamortized discounts of $4.7 million

10% senior secured notes, due July 2014, including unamortized discounts of $7.0 million

10% senior secured notes, due July 2014, including unamortized premiums of $4.4 million

7.75% senior unsecured notes, due July 2017

4% senior unsecured Convertible Notes, due June 2013, including unamortized discounts of $4.1 million and $26.8 million

7.75% senior unsecured notes, due May 2013

6.625% senior unsecured notes, due August 2022, including unamortized premiums of $19.7 million and $21.7 million

7.75% senior unsecured notes, due July 2017, including unamortized premiums of $38.1 million and $54.0 million

5.25% senior unsecured notes, due August 2018

5.875% senior unsecured notes, due August 2021

Floating rate senior unsecured term loan, due May 2018

Floating rate senior unsecured term loan, due February 2014

Various, interest rates from 0.0% to 7.22%, due May 2013 through June 2017

Inventory Revolver, LIBOR plus 2.75%

Securitization Facility, the lender's cost of funds of 0.30% plus 1.05%

Various, interest rates from 0.0% to 3.13%, due January 2015 through March 2019

Current portion

Total long-term debt

Total shareholders’ equity

Total shareholder's equity

Interest Rate Spread

Although we had no borrowings on the Inventory Revolver or the Securitization Facility as of April 28, 2013 , the applicable interest rates would have been LIBOR plus 3% and 0.2% plus 1.75% , respectively.

Interest rates for both the Inventory Revolver and the Securitization Facility are based on pricing-level grids in the respective agreements and determined by our Funded Debt to EBITDA ratio (as defined in the Second Amended and Restated Credit Agreement).

As of December 28, 2014 , the interest rates on borrowings under the Inventory Revolver and the Securitization Facility were LIBOR plus 2.75% and 0.30% plus 1.05% , respectively.

The interest rate spread for the Inventory Revolver is based on a pricing-level grid in the agreement and is determined by our Funded Debt to EBITDA ratio (as defined in the Second Amended and Restated Credit Agreement, dated as of June 9, 2011, among the Company, specified subsidiaries of the Company, Rabobank Nederland, New York Branch, as Administrative Agent, specified lenders, and other specified agents and arrangers, as amended).

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

2 unchanged sentences

If we consider it probable that we will become responsible for an obligation, we will record the liability in our consolidated balance sheet.

As of April 28, 2013 , we continue to guarantee $10.2 million of leases that were transferred to JBS S.A.

in connection with the sale of Smithfield Beef, Inc.

Some of these lease guarantees may be released in the near future and others may remain in place until the leases expire through February 2022.

As of December 28, 2014 , we continued to guarantee $7.7 million of leases that were transferred to JBS S.A.

in connection with the sale of Smithfield Beef, Inc which closed in October 2008.

This guaranty may remain in place until the leases expire through February 2022.

Additional Matters Affecting Liquidity

2 unchanged sentences

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

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.

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 2012, we had completed conversions to group housing for over 38% 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.

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 million.

Under specified circumstances, if the Company enters into a definitive agreement with a Qualified Pre-Existing Bidder with respect to an alternative acquisition proposal on or before June 27, 2013, the amount of the termination fee will instead be reduced to $75 million.

The Merger Agreement also provides that Shuanghui will be required to pay the Company a reverse termination fee of $275 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 CFIUS), or termination as a result of the failure by Shuanghui to receive the proceeds of its committed debt financing and consummate the Merger.

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, 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 the completion of the Merger

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

As of the end of 2014, we had completed conversions to group housing for over 71% of our sows on company-owned farms.

We remain on track to finish conversion to group housing for all sows on company-owned farms by the end of 2017.

Our hog production operations in Poland and Romania completed their conversions to group housing facilities a number of years ago.

In January 2014, we announced the recommendation that all of our contract sow growers join with us in converting their facilities to group housing systems for pregnant sows.

We asked contract sow growers to convert by 2022 and offered a sliding scale of incentives to accelerate that timetable through the receipt of contract extensions upon completion of the conversion.

Risk Management Activities

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

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

The average daily amount we held on deposit from our brokers during fiscal 2013 was $3.1 million .

As of April 28, 2013 , the net amount on deposit with our brokers was $71.4 million .

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

The average daily amount we held on deposit with our brokers during 2014 was $170.2 million .

As of December 28, 2014 , the net amount on deposit with our brokers was $20.0 million .

The effects, positive or negative, on liquidity resulting from our risk management activities tend to be mitigated by offsetting changes in cash prices in our core business.

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The values of our pension obligation and related assets may fluctuate significantly, which may in turn lead to a larger underfunded status in our pension plans and a higher funding requirement.

We contributed $17.7 million to our qualified pension plans in fiscal 2013 .

Our expected minimum funding requirement in fiscal 2014 is $51.6 million .

Missouri Litigation

During the second quarter of fiscal 2013, the parties to certain nuisance litigation in Missouri reached an agreement and consummated a global settlement that resolved substantially all of the litigation.

The global settlement was not materially different than the accrual we maintained for the settled litigation and, therefore, did not materially affect our profits or losses in the second quarter of fiscal 2013.

Payments made by us under the global settlement and payments we received from the insurance carriers are included in our cash flows from operations for fiscal 2013 .

We contributed $167.1 million to our qualified pension plans in 2014 .

We do not expect to have a funding requirement in 2015 .

2015 Tender Offer

In January 2015, we commenced a cash tender offer for our 2017, 2018, 2021 and 2022 Notes, subject to a maximum aggregate purchase price of up to $275 million (2015 Tender Offer).

The 2015 Tender Offer expired in February 2015.

As a result of the 2015 Tender Offer, we paid $275 million to repurchase $258 million of principal.

As a result of these repurchases, we will recognize losses on debt extinguishment of approximately $12.1 million in the first quarter of 2015, including the write-off of related unamortized premiums and debt issuance costs.

Contractual Obligations and Commercial Commitments

The following table provides information about our contractual obligations and commercial commitments as of April 28, 2013 .

The following table provides information about our contractual obligations and commercial commitments as of December 28, 2014 :

Payments Due By Period

(in millions)

Long-term debt

Long-term debt, excluding premiums

Capital lease obligations, including interest

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——————————————

Through the Pork and International segments, we have purchase agreements with certain hog producers.

Through the Fresh Pork and International segments, we have purchase agreements with certain hog producers.

Some of these arrangements obligate us to purchase all of the hogs produced by these producers.

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Includes fixed price forward grain purchase contracts totaling $15.4 million .

Also includes unpriced forward grain purchase contracts which, if valued as of April 28, 2013 market prices, would be $287.4 million .

Also includes unpriced forward grain purchase contracts which, if valued as of December 28, 2014 market prices, would be $254.2 million .

These forward grain contracts are accounted for as normal purchases.

1 unchanged sentence

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

(Nathan's) over an 18 year contractual term commencing in March 2014 (fiscal 2014).

In December 2012 (fiscal 2013), 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.

(Nathan's) over an 18 year contractual term commencing in March 2014.

In December 2012, John Morrell signed an agreement with Nathan's to become Nathan's exclusive licensee to manufacture and sell branded hot dog, sausage and corn beef products in the retail market.

Under the terms of the agreement, guaranteed minimum royalty payments are $10.0 million for the first year and increase at a compounded average annual rate of 3.2% over the contract term.

16 unchanged sentences

(in millions)

Interest rate contracts

Foreign currency

2 unchanged sentences

Sensitivity Analysis

The following table presents the sensitivity of the fair value of our open derivative contracts to a hypothetical 10% change in market prices or foreign exchange rates, as of April 28, 2013 and April 29, 2012 .

The following table presents the sensitivity of the fair value of our open derivative contracts to a hypothetical 10% change in market prices or foreign exchange rates, as of December 28, 2014 and December 29, 2013 :

(in millions)

1 unchanged sentence

Commodities Risk

Our meat processing and hog production operations use various raw materials, mainly corn, lean hogs, live cattle, pork bellies, soybeans and wheat, which are actively traded on commodity exchanges.

Our meat processing and hog production operations use various raw materials, primarily live hogs, corn, soybean meal and wheat, which are actively traded on commodity exchanges.

We hedge these commodities when we determine conditions are appropriate to mitigate the inherent price risks.

9 unchanged sentences

We also periodically enter into foreign exchange forward contracts to hedge exposure to changes in foreign currency rates on foreign denominated assets and liabilities as well as forecasted transactions denominated in foreign currencies.

The following tables present the effects on our consolidated financial statements from our derivative instruments and related hedged items:

The following tables present the effects on our consolidated financial statements of pre-tax gains and losses on derivative instruments designated in cash flow hedging relationships:

Cash Flow Hedges

Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion)

Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)

Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Earnings (Effective Portion)

Gain (Loss) Recognized in Earnings on Derivative (Ineffective Portion)

Twelve Months Ended

December 28, 2014

September 27 - December 29, 2013

December 28, 2014

September 27 - December 29, 2013

December 28, 2014

September 27 - December 29, 2013

(in millions)

6 unchanged sentences

Foreign exchange contracts

Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion)

Gain (Loss) Reclassified from Accumulated Other Comprehensive (Income) Loss into Earnings (Effective Portion)

Gain (Loss) Recognized in Earnings on Derivative (Ineffective Portion)

Twelve Months Ended

April 29 - September 26, 2013

April 28, 2013

April 29, 2012

April 29 - September 26, 2013

April 28, 2013

April 29, 2012

April 29 - September 26, 2013

April 28, 2013

April 29, 2012

(in millions)

Commodity contracts:

Grain contracts

Lean hog contracts

Interest rate contracts

Foreign exchange contracts

Fair Value Hedges

Gain (Loss) Recognized in Earnings on Derivative

Gain (Loss) Recognized in Earnings on Related Hedged Item

Twelve Months Ended

December 28, 2014

September 27 - December 29, 2013

April 29 - September 26, 2013

April 28, 2013

April 29, 2012

(in millions)

Commodity contracts

Gain (Loss) Recognized in Earnings on Related Hedged Item

Twelve Months Ended

December 28, 2014

September 27 - December 29, 2013

April 29 - September 26, 2013

April 28, 2013

April 29, 2012

(in millions)

1 unchanged sentence

Mark-to-Market Method

Gain (Loss) Recognized in Earnings on Related Hedged Item

Twelve Months Ended

December 28, 2014

September 27 - December 29, 2013

April 29 - September 26, 2013

April 28, 2013

April 29, 2012

(in millions)

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Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages or fees, and the effectiveness of strategies or other factors beyond our control.

We have not made any material changes in the accounting methodology used to establish our contingent liabilities during the past three fiscal years.

We have not made any material changes in the accounting methodology used to establish our contingent liabilities during the periods presented in this Form 10-K.

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our contingent liabilities.

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Recognition of the costs related to these programs contains uncertainties due to judgment required in estimating the potential performance and redemption of each program.These estimates are based on many factors, including experience of similar promotional programs.

We have not made any material changes in the accounting methodology used to establish our marketing accruals during the past three fiscal years.

We have not made any material changes in the accounting methodology used to establish our marketing accruals during the periods presented in this Form 10-K.

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our marketing accruals.

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We also consider the history of our investment's cash flows, expectations about future cash flows and market multiples for comparable businesses.

We have not made any material changes in the accounting methodology used to evaluate impairment of equity method investments during the last three years.

As of April 28, 2013, the carrying value of our investment in CFG exceeded the quoted market price on the Bolsa de Madrid Exchange (Madrid Exchange), indicating a possible impairment of our investment.

However, CFG's share price is just one of several factors we consider in evaluating the fair value of our investment in CFG.

Based on our evaluation, we concluded the fair value of our investment in CFG as of April 28, 2013, exceeded its carrying amount.

However, our estimate of fair value has declined over the last 24 months, significantly eroding the gap between fair value and carrying value.

The fair value decline is primarily attributable to persistent recessionary conditions in Western Europe, which have dampened CFG's current operating performance.

In addition, rising interest rates associated with European sovereign debt crises have forced discount rates higher, diminishing the values calculated using our discounted cash flow techniques.

Finally, CFG's share price on the Madrid Exchange has declined and, notwithstanding our reservations about the Madrid Exchange price, we nonetheless utilize it as a component of our valuation work and believe such declines must be considered as part of our fair value estimate.

Judgments and Uncertainties

Effect if Actual Results Differ

From Assumptions

While we do not believe our investment is impaired as of April 28, 2013, the confluence of these and other factors has decreased our estimate of CFG's fair value and increased the risk of impairment.

If the trends contributing to our lower estimate of CFG's fair value continue, the investment would become impaired.

Specifically, if the most sensitive factors affecting our fair value calculations (i.e., estimates of future cash flows, interest rates and share price) continue to deteriorate, it is reasonably possible that our estimate of fair value could fall below carrying value.

If that occurs, and we determine that the decline is other than temporary, we would record a charge to income for the difference between the estimate of fair value and the carrying amount of our investment.

We have not made any material changes in the accounting methodology used to evaluate impairment of equity method investments during the periods presented in this Form 10-K.

Accrued self insurance

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Incident rates, including frequency and severity, could increase or decrease causing estimates in our self-insurance liabilities to change.

We have not made any material changes in the accounting methodology used to establish our self-insurance liabilities during the past three fiscal years.

We have not made any material changes in the accounting methodology used to establish our self-insurance liabilities during the periods presented in this Form 10-K.

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our self-insurance liabilities.

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

A 10% increase in the estimates as of April 28, 2013, would result in an increase in the amount we recorded for our insurance liabilities of approximately $9.9 million.

A 10% increase in the estimates as of December 28, 2014, would result in an increase in the amount we recorded for our insurance liabilities of approximately $10.2 million.

Judgments and Uncertainties

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The impairment is the excess of the carrying value over the fair value of the long-lived asset.

We recorded impairment charges related to long-lived assets of $4.2 million, $2.9 and $9.2 million in fiscal 2013, 2012 and 2011, respectively.

During 2014, the three months ended December 29, 2013, the five months ended September 26, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 29, 2012, we had no significant impairments of long-lived assets.

Our impairment analysis contains uncertainties due to judgment in assumptions and estimates surrounding undiscounted future cash flows of the long-lived asset, including forecasting useful lives of assets and selecting the discount rate that reflects the risk inherent in future cash flows.

We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the last three years.

We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the periods presented in this Form 10-K.

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments of long- lived assets.

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Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.

We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill and other intangible assets during the last three years.

As of April 28, 2013, we had $782.4 million of goodwill and $345.7 million of other non-amortized intangible assets.

We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill and other intangible assets during the periods presented in this Form 10-K.

As of December 28, 2014, we had $1.6 billion of goodwill and $1.3 billion of other non-amortizable intangible assets, consisting mainly of trademarks.

Our goodwill is included in the following segments:

• $231.8 million – Pork

• $130.6 million – International

• $420.0 million – Hog Production

Fresh Pork - $32.2 million

Packaged Meats - $1,518.3 million

International - $71.8 million

Hog Production - $3.9 million

As a result of the first step of our 2014 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value.

Therefore, the second step was not necessary.

A hypothetical 10% decrease in the estimated fair value of our reporting units would not result in an impairment.

Our fiscal 2013 other non-amortized intangible asset impairment analysis did not result in an impairment charge.

A hypothetical 10% decrease in the estimated fair value of our reporting units would not result in a material impairment.

Our 2014 other non-amortizable intangible asset impairment analysis did not result in an impairment charge.

A hypothetical 10% decrease in the estimated fair value of our intangible assets would not result in a material impairment.

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The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit).

For our other non-amortized intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

For our other non-amortizable intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other intangible assets.

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We generally contribute the minimum amount required under government regulations to our qualified pension plans.

We funded $17.7 million, $142.8 million and $95.1 million to our qualified pension plans during fiscal 2013, 2012 and 2011, respectively.

We expect to fund at least $51.6 million in fiscal 2014.

We funded $167.1 million, $18.8 million, $17.7 million, and $142.8 million to our qualified pension plans during the twelve months ended December 28, 2014, the eight months ended December 29, 2013, the twelve months ended April 28, 2013 and the twelve months ended April 28, 2012, respectively.

We do not expect to have a funding requirement in 2015 for our qualified pension plans.

The measurement of our pension obligation and costs is dependent on a variety of assumptions regarding future events.

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Retirement rates are based primarily on actual plan experience.

Mortality rates are based on mandated mortality tables, which have flexibility to consider industry specific groups, such as blue collar or white collar.

Mortality rates were previously based on mandated mortality tables.

During 2014, we used a new mortality table based on the Mercer Industry Longevity Experience Study (MILES).

Both tables have flexibility to consider industry specific groups, such as blue collar or white collar.

The expected return on plan assets reflects asset allocations, investment strategy and historical returns of the asset categories.

The effects of actual results differing from these assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.

The following weighted average assumptions were used to determine our benefit obligation and net benefit cost for fiscal 2013:

The following weighted average assumptions were used to determine our benefit obligation and net benefit cost for 2014:

• 5.25% – Discount rate to determine net benefit cost

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If actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

For example, the discount rate used to measure our projected benefit obligation decreased from 4.75% as of April 29, 2012 to 4.45% as of April 28, 2013, which is the primary cause for a $115.5 million decline in funded status and an expected increase in net pension cost of $11.9 million in fiscal 2014.

An additional 0.50% decrease in the discount rate used to measure our projected benefit obligation would have further reduced the funded status by $136.8 million as of April 28, 2013, and would have resulted in an additional $16.8 million in net pension cost for fiscal 2013.

A 0.50% decrease in expected return on plan assets would have resulted in an additional $5.5 million in net pension cost for fiscal 2013.

An additional 0.50% decrease in the discount rate used to measure our projected benefit obligation would have further reduced the funded status by $112.5 million as of December 28, 2014, and would have resulted in an additional $2.2 million in net pension cost for the twelve months ended December 28, 2014.

A 0.50% decrease in expected return on plan assets would have resulted in an additional $5.6 million in net pension cost for the twelve months ended December 28, 2014.

In addition to higher net pension cost, a significant decrease in the funded status of our pension plans caused by either a devaluation of plan assets or a decline in the discount rate would result in higher pension funding requirements.

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The forward-looking statements include statements concerning our outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts.

Our forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements.

These risks and uncertainties include 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, the required approvals by the Company's shareholders or 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 costs, fees, expenses and charges related to the Merger Agreement or the 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 consummation of the proposed 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 “Item 1A.

Our forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements.

These risks and uncertainties include, but are not limited to, the availability and prices of live hogs, feed ingredients (including corn), raw materials, fuel and supplies, food safety, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, risks associated with our indebtedness, including cost increases due to rising interest rates or changes in debt ratings or outlook, hedging risk, adverse weather conditions, operating efficiencies, changes in foreign currency exchange rates, access to capital, the cost of compliance with and changes to regulations and laws, including changes in accounting standards, tax laws, environmental laws, agricultural laws and occupational, health and safety laws, adverse results from litigation, actions of domestic and foreign governments, labor relations issues, credit exposure to large customers, the ability to realize the anticipated strategic benefits of the acquisition of Smithfield Foods, Inc.

by WH Group, the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations and other risks and uncertainties described under “Item 1A.

Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking statements because actual results may differ materially from those expressed in, or implied by, the statements.

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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 7. Management’s Discussion and Analysis