What changed in this filing

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Item 2. Management’s Discussion and Analysis

2015-08-12 compared with 2015-04-29 · 182 added, 99 removed, 208 unchanged (57% of the section changed)

21 unchanged sentences

hog production operations.

The International segment is comprised mainly of our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico.

The International segment is comprised mainly of our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations in Mexico, our hog production operations located in Poland and Romania, our interests in hog production operations in Mexico, and our former investment in CFG.

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

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We believe 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.

First Quarter Summary of Results

Net income for the first quarter of 2015 was $97.0 million compared to net income of $105.3 million for the first quarter of 2014 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the first quarter of 2015 compared to the first quarter of 2014 :

Fresh Pork operating profit decreased by $25.7 million primarily as a result of lower fresh pork market prices.

Packaged Meats operating profit increased by $ 51.2 million as a result of higher sales volume due primarily to the timing of Easter.

Hog Production operating results decreased by $15.9 million primarily as a result of lower live hog market prices.

International operating profit decreased by $21.0 million due to lower average selling prices in Europe as well as a decrease in results from Campofrío Food Group (CFG) and our joint ventures in Mexico.

EBITDA for the first quarter of 2015 was $233.4 million compared to $254.2 million in the first quarter of 2014.

Second Quarter Summary of Results

Net income for the second quarter of 2015 was $104.2 million compared to net income of $142.9 million for the second quarter of 2014 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the second quarter of 2015 compared to the second quarter of 2014 :

Fresh Pork operating results decreased by $44.8 million primarily as a result of lower fresh pork market prices.

Packaged Meats operating profit increased by $ 78.8 million as a result of lower raw material costs and higher sales volume.

Hog Production operating profit decreased by $89.9 million primarily as a result of lower live hog market prices driven by higher hog supplies.

International operating profit decreased by $19.1 million primarily due to lower pork market prices in Europe, a decrease in results from our joint ventures in Mexico and the impact of foreign currency translation due to a stronger U.S.

EBITDA for the second quarter of 2015 was $245.2 million compared to $317.3 million in the second quarter of 2014.

EBITDA for the first half of 2015 was $478.6 million compared to $571.5 million for the first half of 2014.

EBITDA is a non-GAAP measure.

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EBITDA is not intended to be a substitute for our comparable GAAP measures and should not be used by investors or other users of our financial statements as the sole basis for formulating decisions as it excludes a number of important cash and non-cash charges.

The following table provides a reconciliation of net income to EBITDA for both periods:

The following table provides a reconciliation of net income to EBITDA for all periods presented:

Three Months Ended

March 29, 2015

March 30, 2014

Six Months Ended

June 28, 2015

June 29, 2014

June 28, 2015

June 29, 2014

(in millions)

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Income tax expense

Depreciation expense

Amortization expense

Depreciation and amortization expense

In June 2015, we completed the sale of our entire equity interest in CFG to Alfa for $354.0 million in cash.

As of the date of the sale, the book value of our investment in CFG was $298.7 million .

Additionally, we had $54.6 million of unrealized currency translation losses on our balance sheet related to our investment in CFG.

As a result of the sale, we recognized a pre-tax gain of $0.7 million in non-operating (gain) loss in our consolidated condensed statements of income.

In January 2015, we commenced a cash tender offer for our 7.75% senior unsecured notes due July 2017, 5.25% senior unsecured notes due August 2018, 5.875% senior unsecured notes due August 2021 and 6.625% senior unsecured notes due August 2022, subject to a maximum aggregate purchase price up to $275.0 million (2015 Tender Offer).

The 2015 Tender Offer expired in February 2015.

As a result of the 2015 Tender Offer, we paid $275.0 million to repurchase $258.1 million of principal and recognized losses on debt extinguishment of $12.8 million, including the write-off of related unamortized premiums and debt issuance costs.

Porcine Epidemic Diarrhea Virus (PEDv)

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

As a result of the 2015 Tender Offer, we paid $275.0 million to repurchase $258.1 million of principal and recognized losses on debt extinguishment of $12.8 million in non-operating (gain) loss in the consolidated condensed income statement, including the write-off of related unamortized premiums and debt issuance costs.

Animal Health

Department of Agriculture (USDA) identified Porcine Epidemic Diarrhea Virus (PEDv) in the United States for the first time in 2013.

During 2014, the U.S.

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

however, the outbreak currently is less severe than in 2014.

however, the outbreak currently is much 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.

During 2015, herds in several of our geographic regions have also been impacted by outbreaks of Porcine Reproductive and Respiratory Syndrome Virus (PRRSv).

While PRRSv is not new to the swine industry, the impact of these outbreaks has been more severe than observed in recent years.

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

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

Renewable Fuel Standard

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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.

Prior to the 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.

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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.

In April 2015, the EPA entered into a proposed consent decree which would have them propose the 2015 RFS by June 1, 2015 and to finalize the 2014 and 2015 RFS targets by November 30, 2015.

On May 29, 2015, the EPA proposed to establish the annual percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel and total renewable fuels that apply to all gasoline and diesel produced or imported in years 2014, 2015 and 2016 as well as the volume of biomass-based diesel for 2017.

The proposed volumes are below statutory levels, but above historical output of renewable fuels.

The EPA plans to finalize those standards by November 30, 2015.

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

Additionally, Sens.

Dianne Feinstein (D-CA) and Pat Toomey (R-PA) have introduced similar legislation which would eliminate the conventional ethanol mandate.

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.

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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 the 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.

An appeal of the DSB's ruling brought by the U.S.

was rejected.

Canada and Mexico are seeking a combined $3.3 billion in retaliatory tariffs against a range of U.S.

agricultural and manufactured product exports, including frozen and chilled pork products.

The WTO DSB has referred the case to arbitration which is expected to conclude in late summer or early fall 2015.

At the conclusion of arbitration, Canada and Mexico will be permitted to impose retaliatory tariffs equal to a sum determined by the arbitrator.

House of Representatives passed legislation, H.R.

2393 the "Country of Origin Labeling Amendments Act of 2015," on June 10, 2015.

If enacted, this legislation would repeal the WTO non-compliant sections of the COOL statute, thus settling the dispute and eliminating the threat of retaliatory tariffs from Canada and Mexico.

Senate is considering this legislation, as well as other proposals to amend the COOL statute.

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.

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

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

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 in the following ways:

Our most exciting growth prospect is the ongoing development of our packaged meats business.

Although we have experienced meaningful and consistent improvement in packaged meats margins, we believe significant growth potential remains.

We will continue to strengthen our consumer-focused marketing programs and promote innovation to improve our product mix toward branded, value-added products.

We expect these actions to result in continued broad-based gains in packaged meats sales, volume, market share, distribution and margins.

With our organizational realignment, we are taking steps to build on our record results in 2014 as we continue to solidify Smithfield's position as a global leader in branded packaged meats.

There is 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 in the following ways:

Leveraging Smithfield's size and scope in pork industry;

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Strengthening marketing, brand building and innovation across all brands.

We will continue to sharpen our strategic focus and drive operational improvements across our entire platform.

Our most exciting growth prospect is the ongoing development of our packaged meats business.

We will continue to strengthen our consumer-focused marketing programs and promote innovation to improve our product mix toward branded, value-added products.

Consequently, we expect to deliver modest volume growth and very solid packaged meats margins.

PEDv has not been a major issue, but the virus does remain a potential wildcard 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 and Shuanghui, our sister company in China.

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

We will continue to sharpen our strategic focus and drive operational improvements across our entire platform, including our fresh pork, hog production and international divisions.

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

RESULTS OF OPERATIONS

Consolidated Results of Operations

The tables presented below compare our results of operations for the first quarters of 2015 and 2014.

The table presented below compares our results of operations for the second quarters of 2015 and 2014.

Three Months Ended

March 29, 2015

March 30, 2014

June 28, 2015

June 29, 2014

(in millions)

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Interest expense

Non-operating gain

Income before income taxes

Income tax expense

Sales and gross profit

Sales decreased primarily as a result of lower market prices across all of our segments and the impact of foreign currency translation as a result of a stronger U.S.

Gross profit decreased primarily as a result of lower sales, partially offset by lower pork processing raw material costs.

Income from equity method investments

Equity income decreased primarily as a result of lower hog prices in Mexico.

Interest expense

The decrease in interest expense is primarily due to lower debt balances in the current year as a result of various debt repayment activities.

Non-operating gain

During 2015, we recognized a pre-tax gain of $0.7 million on the sale of our equity interest in CFG.

Income tax expense

The effective tax rate was 33% and 35% for the second quarters of 2015 and 2014, respectively.

For both the current year and prior year, taxable income relative to permanent items, the mix of income between jurisdictions, and the expiration of certain federal tax credits impacted the effective tax rate.

The table presented below compares our results of operations for the first half of 2015 and 2014.

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

Six Months Ended

June 28, 2015

June 29, 2014

(in millions)

Cost of sales

Selling, general and administrative expenses

Income from equity method investments

Operating profit

Interest expense

Non-operating (gain) loss

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Sales and gross profit

Sales increased primarily as a result of higher sales volume of domestic packaged meats products due primarily to the timing of Easter.

Gross profit increased primarily as a result of higher sales volume of domestic packaged meats products, lower pork processing raw material costs and lower hog raising costs.

Sales decreased primarily as a result of lower market prices across all of our segments and the impact of foreign currency translation as a result of a stronger U.S.

Gross profit decreased primarily as a result of lower sales, partially offset by lower pork processing raw material costs.

Income from equity method investments

The decrease in equity income is a result of a significant tax benefit recognized by CFG in the prior year which positively impacted equity income from CFG in 2014.

Additionally, current year equity income was negatively impacted by lower hog prices in Mexico.

Equity income decreased primarily as a result of lower hog prices in Mexico.

Additionally, equity income decreased due to a significant tax benefit recognized through our former investment in CFG in 2014.

Interest expense

The decrease in interest expense in the current year is primarily due to our 2015 Tender Offer.

The decrease in interest expense is primarily due to lower debt balances in the current year as a result of various debt repayment activities.

Non-operating (gain) loss

During 2015, we recognized a loss on debt extinguishment of $12.8 million as a result of the 2015 Tender Offer.

During 2015, we recognized a loss on debt extinguishment of $12.8 million as a result of the 2015 Tender Offer, partially offset by a $0.7 million pre-tax gain from the sale of our equity interest in CFG.

Income tax expense

Our effective tax rate was 31% and 33% for the first quarters of 2015 and 2014, respectively.

The effective tax rate was 32% and 34% for the first half of 2015 and 2014, respectively.

Segment Results

The following information reflects the results from each respective segment for the first quarters of 2015 and 2014.

The following information reflects the results from each respective segment for the second quarters of 2015 and 2014.

Three Months Ended

March 29, 2015

March 30, 2014

June 28, 2015

June 29, 2014

(in millions)

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Consolidated operating profit

Sales decreased 4% due to an 8% decrease in average selling prices partially offset by a 4% increase in volume.

Operating profit decreased to $4 per head from $8 per head due to lower fresh pork market prices.

Sales decreased 15% due to a 24% decrease in average selling prices, partially offset by a 12% increase in volume.

Operating results decreased to a $2 loss per head from a $5 profit per head due to lower fresh pork market prices.

We processed 7.4 million hogs in 2015, an increase of 15% from the prior year.

Packaged Meats

Sales increased 10% due to a 12% increase in volume, driven primarily by the timing of Easter, partially offset by a 2% decrease in average selling prices.

Sales decreased 11% due to a 12% decrease in average selling prices, partially offset by a 2% increase in volume.

Current year sales volume totaled 677.0 million pounds.

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Sales decreased 8% due to lower domestic live hog market prices which were partially offset by favorable hedging results.

Head sold during the year amounted to 4.0 million , relatively unchanged from the prior year.

However, average hog weights were up 2% .

Operating results decreased due to a 25% decrease in domestic live hog market prices, partially offset by favorable hedging results and lower feed costs.

Head sold during the year amounted to 3.8 million , an increase of 9% from the prior year.

Operating profit decreased to $10 per head from $37 per head due to lower sales, partially offset by favorable hedging results and lower feed costs.

International

Sales decreased due primarily to changes in foreign exchange rates, which negatively impacted sales by $79.5 million , or 19% .

On a constant currency basis, sales increased 2% due to a 4% increase in volume of 360.2 million pounds, driven largely by a 7% increase in hogs processed and a 20% increase in poultry processed in Europe.

On a constant currency basis, sales increased 1% due to an 8% increase in volume to 374 million pounds, driven largely by a 7% increase in hogs processed and a 12% increase in poultry processed in Europe, partially offset by a 6% decrease in average selling prices.

We processed 1.1 million hogs in 2015.

Additionally, average selling prices decreased 2% .

Operating profit was negatively impacted by lower average selling prices in Europe along with lower equity income from CFG and our Mexican joint ventures.

CFG's results in the prior year were positively impacted by a significant tax benefit recognized in the first quarter of 2014.

Operating profit was negatively impacted by lower pork market prices in Europe along with lower equity income from our Mexican joint ventures.

Foreign currency translation also negatively impacted operating profit by approximately $4.1 million due to a stronger U.S.

The following information reflects the results from each respective segment for the first half of 2015 and 2014.

Six Months Ended

June 28, 2015

June 29, 2014

(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 decreased 10% due to a 16% decrease in average selling prices, partially offset by an 8% increase in volume.

Operating profit decreased to $1 per head from $6 per head due to lower fresh pork market prices.

We processed 15.1 million hogs in 2015, an increase of 10% from the prior year.

Packaged Meats

Sales decreased 1% due to a 7% decrease in average selling prices, partially offset by a 7% increase in volume.

Current year sales volume totaled 1.4 billion pounds.

Operating profit increased to $0.25 per pound from $0.17 per pound due to lower raw material costs.

Hog Production

Sales decreased 7% due to lower domestic live hog market prices which were partially offset by favorable hedging results.

Head sold during the year amounted to 7.8 million , an increase of 4% from the prior year.

Operating profit decreased to $4 per head from $18 per head due to lower sales, partially offset by favorable hedging results and lower feed costs.

International

Sales decreased 15% due primarily to changes in foreign exchange rates, which negatively impacted sales by $131.4 million , or 16% .

On a constant currency basis, sales increased 2% due to an 8% increase in volume to 720 million pounds, driven largely by a 7% increase in hogs processed and a 16% increase in poultry processed in Europe.

We processed 2.2 million hogs in 2015.

Operating profit was negatively impacted by lower pork market prices in Europe along with lower equity income from our Mexican joint ventures.

Foreign currency translation also negatively impacted operating profit by approximately $6.6 million due to a stronger U.S.

LIQUIDITY AND CAPITAL RESOURCES

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We believe that our current liquidity position is strong and that our cash flows from operations and availability under our credit facilities will be sufficient to meet our working capital needs and financial obligations for at least the next twelve months.

As of March 29, 2015 , our liquidity position was approximately $1.3 billion , comprised of approximately $1.2 billion in availability under our credit facilities and $66.9 million in cash and cash equivalents.

As of June 28, 2015 , our liquidity position was approximately $1.7 billion , comprised of approximately $1.4 billion in availability under our credit facilities, $195.0 million in cash and cash equivalents and $100.0 million in unutilized loans.

Sources of Liquidity

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Credit Facilities

March 29, 2015

June 28, 2015

Borrowing Base Adjustment

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Total credit facilities

In April 2015, we entered into a new $1.025 billion asset-based revolving credit facility agreement (the Inventory Revolver Credit Agreement) which replaced our previous $1.025 billion U.S.

senior secured revolving credit facility which would have matured in June 2016.

The Inventory Revolver Credit Agreement provides for an option, subject to obtaining additional loan commitments and certain other conditions, to increase the available U.S.

Dollar commitments by up to $375 million in the future.

It also provides for a foreign currency subfacility for Canadian Dollars, Japanese Yen, Euros and British Pounds Sterling of up to the foreign currency equivalent of $100 million, a subfacility of up to $50 million for swingline borrowings and a subfacility of up to $150 million for issuances of letters of credit.

Availability under the Inventory Revolver Credit Agreement will be based upon borrowing base valuations of the Company's domestic inventory, live sows and certain accounts receivable.

In April 2015, we entered into a new $1.025 billion asset-based revolving credit facility agreement (the Inventory Revolver Credit Agreement) which replaced our previous $1.025 billion senior secured revolving credit facility which would have matured in June 2016.

The Inventory Revolver Credit Agreement provides for an option, subject to obtaining additional loan commitments and certain other conditions, to increase the available commitments by up to $375 million in the future.

It also provides for a multicurrency subfacility for Canadian Dollars, Japanese Yen, Euros, British Pounds Sterling and U.S.

Dollars of up to the foreign currency equivalent of $100 million, a subfacility of up to $50 million for swingline borrowings and a subfacility of up to $150 million for issuances of letters of credit.

Availability under the Inventory Revolver Credit Agreement is based upon borrowing base valuations of our U.S.

inventory, live sows and certain accounts receivable.

The Inventory Revolver Credit Agreement is scheduled to mature on May 1, 2020.

Loans under the Inventory Revolver Credit Agreement bear interest at LIBOR plus a margin ranging from 1.75% to 2.75% per annum, or, at the election of the Company, at a base rate plus a margin ranging from 0.75% to 1.75% per annum, with either such margin varying according to the ratio of the Company's consolidated funded debt to consolidated EBITDA.

Loans under the Inventory Revolver Credit Agreement bear interest at LIBOR plus a margin ranging from 1.75% to 2.75% per annum, or, at our election, at a base rate plus a margin ranging from 0.75% to 1.75% per annum, with either such margin varying according to the ratio of our consolidated funded debt to consolidated EBITDA.

Letters of credit issued under the Inventory Revolver Credit Agreement accrue fees at a rate equal to the applicable margin for LIBOR loans.

In addition, the Company is required to pay a commitment fee for the average daily unused commitments under the Inventory Revolver Credit Agreement, at rates ranging from 0.30% to 0.50% per annum depending on the ratio of the Company's consolidated funded debt to consolidated EBITDA.

The obligations under the Inventory Revolver Credit Agreement are guaranteed by substantially all domestic subsidiaries of the Company and are secured by a first-priority lien, subject to permitted liens and exceptions for excluded assets, on substantially all of the Company's and the subsidiary guarantors' accounts receivable (other than those sold and financed pursuant to the Securitization Facility), inventory, other personal property relating to such inventory and accounts receivable and all proceeds therefrom, cash and cash equivalents, deposit accounts, intercompany notes, intellectual property and certain capital stock and interests pledged by the Company and the subsidiary guarantors.

The Inventory Revolver Credit Agreement contains affirmative and negative covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to create liens and encumbrances;

make capital expenditures, make acquisitions and investments;

In addition, we are required to pay a commitment fee for the average daily unused commitments under the Inventory Revolver Credit Agreement, at rates ranging from 0.30% to 0.50% per annum depending on the ratio of our consolidated funded debt to consolidated EBITDA.

The obligations under the Inventory Revolver Credit Agreement are guaranteed by substantially all of our U.S.

subsidiaries and are secured by a first-priority lien, subject to permitted liens and exceptions for excluded assets, on substantially all of our and our subsidiary guarantors' personal property, including accounts receivable (other than those sold and financed pursuant to the Securitization Facility), inventory, cash and cash equivalents, deposit accounts, intercompany notes, intellectual property and certain capital stock and interests pledged by us and our subsidiary guarantors, and all proceeds thereof.

The Inventory Revolver Credit Agreement contains affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of our subsidiaries to create liens and encumbrances;

make capital expenditures;

make acquisitions and investments;

dispose of or transfer assets;

and pay dividends or make other payments in respect of the Company's capital stock;

and pay dividends or make other payments in respect of our capital stock;

in each case, subject to certain qualifications and exceptions.

In addition, the Inventory Revolver Credit Agreement contains financial covenants requiring the Company to maintain a total consolidated leverage ratio (ratio of consolidated funded debt to consolidated capitalization) of, subject to certain exceptions, not more than 0.50 to 1.0, a minimum interest coverage ratio (ratio of consolidated EBITDA to consolidated interest expense) of not less than 2.50 to 1.0 and limitations on capital expenditures.

In addition, the Inventory Revolver Credit Agreement contains financial covenants requiring us to maintain a total consolidated leverage ratio (ratio of consolidated funded debt to consolidated capitalization) of, subject to certain exceptions, not more than 0.50 to 1.0, a minimum interest coverage ratio (ratio of consolidated EBITDA to consolidated interest expense) of not less than 2.50 to 1.0 and limitations on capital expenditures.

The Inventory Revolver Credit Agreement also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the facility may be accelerated, the lenders’ commitments may be terminated and the lenders may foreclose upon the collateral.

In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the facility will automatically become due and payable and the lenders’ commitments will automatically terminate.

Rabobank Term Loan

In May 2015, we refinanced the Rabobank Term Loan and extended its maturity date from May 1, 2018 to May 1, 2020.

After the refinancing, the total capacity of the Rabobank term loan was $150.0 million, with $50.0 million outstanding.

We may draw the additional $100.0 million until April 15, 2016.

We may elect to prepay the loan at any time, subject to the payment of certain prepayment fees in respect of any voluntary prepayment prior to April 15, 2017 and other customary breakage costs.

Interest accrues, at our option, at LIBOR plus 3.25%.

Operating Activities

Three Months Ended

Six Months Ended

(in millions)

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

Cash paid to outside hog suppliers decreased due to lower domestic live hog prices.

In the current year, we received $ 127.0 million for the settlement of derivative contracts and for margin requirements compared to $ 298.8 million paid in the prior year.

The current year included net tax refunds of $ 32.7 million for domestic income taxes as compared to net

payments of $ 0.4 million in the prior year.

Cash paid to outside hog suppliers decreased due to a 25% decrease in average domestic live hog prices.

In the current year, we received a cash dividend of $14.3 million from one of our Mexican joint ventures.

Cash paid for grain and other ingredients purchased by the Hog Production segment increased approximately $21.4 million from the prior year.

In the current year, we contributed $200.0 million to our qualified pension plans.

Investing Activities

Three Months Ended

Six Months Ended

(in millions)

Proceeds from sale of equity interest in CFG

Capital expenditures

Net proceeds (expenditures) from breeding stock transactions

Business acquisitions

Proceeds from the sale of property, plant and equipment

Advance note and other

Net cash flows from investing activities

The following items explain the significant investing activities:

In June 2015, we sold our entire equity interest in CFG for $354.0 million in cash.

Capital expenditures during both years primarily related to plant and hog farm improvement and expansion 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 (KCS) bought a meat processing business for $11.0 million .

Financing Activities

Three Months Ended

Six Months Ended

(in millions)

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Net proceeds (payments) on revolving credit facilities

Payment of dividends

Net cash flows from financing activities

The following items explain the significant financing activities:

In the current year, we paid $258.1 million of principal payments as a result of the 2015 Tender Offer as well as $150.0 million on our Rabobank term loan.

In the current year, we drew $145.0 million, net of repayments, on our Securitization Facility, primarily to repay other long-term debt, as noted above.

In the prior year, we drew $280.0 million, net of repayments, on our Inventory Revolver and $40.0 million, net of repayments, on our Securitization Facility, primarily to cover margin requirements on our commodity derivative contracts.

In the current year, we repurchased $258.1 million of senior unsecured notes in connection with the 2015 Tender Offer.

Additionally, we repaid $150.0 million on our Rabobank term loan.

In the current year, we paid a $30.0 million dividend to our parent company.

In the prior year, we drew $55.0 million on our Inventory Revolver and $50.0 million, net of repayments, on our Securitization Facility, primarily to cover margin requirements on our commodity derivative contracts.

Financial Position

Our balance sheet as of March 29, 2015 , as compared to December 28, 2014 , was impacted by the following significant changes:

Investments decreased $51.3 million mainly due to currency translation adjustments, a result of a stronger U.S.

Dollar, as well as a $14.3 million cash dividend received from one of our Mexican joint ventures.

Accounts payable decreased by $276.3 million mainly due to the timing of payments.

Interest Rate Spread

As of March 29, 2015 , the interest rates on borrowings under the Inventory Revolver and the Securitization Facility were LIBOR plus 3.0% and the lender's cost of funds of 0.12% plus 1.15% , respectively.

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

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

Our balance sheet as of June 28, 2015 , as compared to December 28, 2014 , was impacted by the following significant changes:

Investments decreased $351.6 million mainly due to the sale of CFG, a $14.3 million cash dividend received from one of our Mexican joint ventures and currency translation adjustments, a result of a stronger U.S.

Accounts payable decreased $258.0 million mainly due to the timing of payments.

Net long-term pension liability decreased $275.4 million mainly due to a $200.0 million voluntary contribution to fund our qualified pension plans.

We also elected to perform an interim remeasurement of our plan obligations and assets as of June 26, 2015 which resulted in a $76.1 million decrease to the pension obligation.

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

These arrangements involve elements of performance and credit risk that are not included in the consolidated condensed balance sheets.

We could become liable in connection with these obligations depending on the performance of the guaranteed party or the occurrence of future events that we are unable to predict.

We could become liable in connection with these obligations depending on the performance of the primary obligor or the occurrence of future events that we are unable to predict.

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

As of March 29, 2015 , we continued to guarantee $7.4 million of leases that were transferred to JBS S.A.

As of June 28, 2015 , we continued to guarantee $7.2 million of leases that were transferred to JBS S.A.

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

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

During the three months ended March 29, 2015 , margin deposits ranged from $(15.4) million to $73.3 million (negative amounts representing margin deposits we have received from our brokers).

The average daily amount on deposit with our brokers during the three months ended March 29, 2015 was $29.3 million .

As of March 29, 2015 , the net amount on deposit with our brokers was $70.0 million .

During the six months ended June 28, 2015 , margin deposits ranged from $(15.4) million to $80.7 million (negative amounts representing margin deposits we have received from our brokers).

The average daily amount on deposit with our brokers during the six months ended June 28, 2015 was $49.3 million .

As of June 28, 2015 , the net amount on deposit with our brokers was $40.5 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.

19 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis