What changed in this filing

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Item 2. Management’s Discussion and Analysis

2015-10-28 compared with 2015-08-12 · 86 added, 69 removed, 321 unchanged (33% of the section changed)

25 unchanged sentences

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.

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.

Third Quarter Summary of Results

Net income for the third quarter of 2015 was $83.3 million compared to net income of $155.3 million for the third quarter of 2014 .

The following summarizes the operating results of each of our reportable segments for the third quarter of 2015 compared to the third quarter of 2014 :

Fresh Pork operating results increased by $26.6 million primarily as the impact of lower meat values was more than offset by lower hog prices.

Packaged Meats operating profit remained relatively unchanged as lower raw material costs and higher sales volume were largely offset by lower average selling prices.

Hog Production operating profit decreased by $92.5 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.

We believe EBITDA is a useful measure to our investors because it excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs.

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 all periods presented:

International operating profit decreased by $25.0 million primarily due to lower pork market prices in Europe and Mexico and the impact of foreign currency translation due to a stronger U.S.

The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA for all periods presented.

EBITDA and adjusted EBITDA are non-GAAP measures.

We believe EBITDA is a useful measure to our investors because it excludes the effects of financing and investing activities by eliminating interest and depreciation costs.

We also believe adjusted EBITDA is a useful measure as it excludes the effect of non-operating activities.

EBITDA and adjusted EBITDA are not intended to be substitutes 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 they exclude a number of important cash and non-cash charges.

Three Months Ended

Six Months Ended

June 28, 2015

June 29, 2014

June 28, 2015

June 29, 2014

Nine Months Ended

September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014

(in millions)

2 unchanged sentences

Depreciation and amortization expense

Non-operating (gain) loss

Adjusted EBITDA

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

1 unchanged sentence

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).

6 unchanged sentences

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

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

however, there are very few cases compared to the outbreak that occurred in 2014.

The USDA and the industry continue to monitor the situation.

3 unchanged sentences

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

In 2014, the spread of PEDv in the U.S.

reduced hog supplies and lead to higher hog and meat prices.

In 2015, the hog herds have recovered and the supply increase has yielded lower market prices.

Renewable Fuel Standard

29 unchanged sentences

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.

On September 16, 2015, the WTO Arbitrator hosted a public hearing in Geneva where Canada, Mexico and the U.S.

defended their respective retaliatory tariff proposals.

An Arbitration Panel report setting the final number of retaliatory tariffs is expected to be released in December.

At that time, 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.

21 unchanged sentences

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.

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 as well as 2016.

RESULTS OF OPERATIONS

Consolidated Results of Operations

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

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

Three Months Ended

June 28, 2015

June 29, 2014

September 27, 2015

September 28, 2014

(in millions)

4 unchanged sentences

Interest expense

Non-operating gain

Income before income taxes

2 unchanged sentences

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.

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

Selling, general and administrative expenses (SG&A)

The increase in SG&A is primarily attributable to higher marketing and advertising costs as we focus on growing our brands through consumer-focused marketing programs.

Income from equity method investments

2 unchanged sentences

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.

The effective tax rate was 31% and 26% for the third 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.

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

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

Six Months Ended

June 28, 2015

June 29, 2014

Nine Months Ended

September 27, 2015

September 28, 2014

(in millions)

9 unchanged sentences

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.

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

Selling, general and administrative expenses (SG&A)

The increase in SG&A is primarily attributable to higher marketing and advertising costs as we focus on growing our brands through consumer-focused marketing programs as well as higher stock-based compensation expense.

Income from equity method investments

4 unchanged sentences

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, partially offset by a $0.7 million pre-tax gain from the sale of our equity interest in CFG.

Income tax expense

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

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

Segment Results

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

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

Three Months Ended

June 28, 2015

June 29, 2014

September 27, 2015

September 28, 2014

(in millions)

10 unchanged sentences

Consolidated operating profit

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.

Sales decreased 16% due to a 27% decrease in average selling prices, partially offset by an 15% increase in volume.

Operating results increased to a $2 profit per head from a $2 loss per head due to lower hog prices, which more than offset the impact of lower meat values.

We processed 7.2 million hogs in 2015, an increase of 15% from the prior year.

Packaged Meats

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

Sales decreased 6% due to an 11% decrease in average selling prices, partially offset by a 5% increase in volume.

Current year sales volume totaled 662.8 million pounds.

Operating profit increased to $0.26 per pound from $0.15 per pound due to lower raw material costs.

Operating profit decreased to $0.17 per pound from $0.18 per pound as advertising expenditures increased by $0.01 per pound.

Lower raw material costs were largely offset by lower average selling prices.

Hog Production

Sales decreased 5% due to lower domestic live hog market prices which were partially offset by favorable hedging results.

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.

Head sold during the quarter amounted to 3.7 million , an increase of 12% from the prior year.

These changes in sales volumes and market prices were driven largely by the effects of PEDv in the prior year.

See "Executive Overview--Animal Health" for additional discussion about PEDv.

Operating profit decreased to $13 per head from $42 per head due to lower live hog market prices, 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 $76.5 million , or 17% .

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.

On a constant currency basis, sales increased 1% due to a 9% increase in volume to 394.6 million pounds, driven largely by an 11% increase in hogs processed and an 8% increase in poultry processed in Europe, partially offset by an 8% decrease in average selling prices.

We processed 1.2 million hogs in 2015.

1 unchanged sentence

Foreign currency translation also negatively impacted operating profit by approximately $2.3 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

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

Nine Months Ended

September 27, 2015

September 28, 2014

(in millions)

14 unchanged sentences

Packaged Meats

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

Sales decreased 2% due to an 8% decrease in average selling prices, partially offset by a 6% increase in volume.

Current year sales volume totaled 2.1 billion pounds.

3 unchanged sentences

Head sold during the year amounted to 11.5 million , an increase of 6% from the prior year.

These changes in sales volumes and market prices were driven largely by the effects of PEDv in the prior year.

See "Executive Overview--Animal Health" for additional discussion about PEDv.

Operating profit decreased to $7 per head from $26 per head due to lower sales, partially offset by favorable hedging results and lower feed costs.

1 unchanged sentence

Sales decreased 16% due primarily to changes in foreign exchange rates, which negatively impacted sales by $205.4 million , or 17% .

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.

On a constant currency basis, sales increased 1% due to a 9% increase in volume to 1.1 billion pounds, driven largely by an 8% increase in hogs processed and a 13% increase in poultry processed in Europe, partially offset by a 7% decrease in average selling prices.

We processed 3.4 million hogs in 2015.

5 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 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.

As of September 27, 2015 , our liquidity position was approximately $1.6 billion , comprised of approximately $1.4 billion in availability under our credit facilities, $115.2 million in cash and cash equivalents and $100.0 million in unutilized loans.

Sources of Liquidity

8 unchanged sentences

Credit Facilities

June 28, 2015

September 27, 2015

Borrowing Base Adjustment

9 unchanged sentences

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.

It also includes 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.

23 unchanged sentences

Operating Activities

Six Months Ended

Nine Months Ended

September 27,

September 28,

(in millions)

3 unchanged sentences

In the current year, we received $ 132.3 million for the settlement of derivative contracts and for margin requirements compared to $ 309.3 million paid in the prior year.

Cash interest payments decreased approximately $47.0 million .

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.

Net tax payments decreased approximately $12.8 million .

Cash received from customers decreased due to lower average meat selling prices.

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

Investing Activities

Six Months Ended

Nine Months Ended

September 27,

September 28,

(in millions)

9 unchanged sentences

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

Other investing activities include construction expenditures pending sale leaseback treatment.

Financing Activities

Six Months Ended

Nine Months Ended

September 27,

September 28,

(in millions)

3 unchanged sentences

Payments on Securitization Facility

Net proceeds (payments) on revolving credit facilities

Net payments on revolving credit facilities

Payment of dividends

4 unchanged sentences

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.

In the prior year, we drew $65.0 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 June 28, 2015 , as compared to December 28, 2014 , was impacted by the following significant changes:

Our balance sheet as of September 27, 2015 , as compared to December 28, 2014 , was impacted by the following significant changes:

Investments decreased $358.2 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.

6 unchanged sentences

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

As of September 27, 2015 , we continued to guarantee $6.9 million of leases that were transferred to JBS S.A.

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

19 unchanged sentences

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

During the six months ended 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 .

During the nine months ended September 27, 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 nine months ended September 27, 2015 was $42.9 million .

As of September 27, 2015 , the net amount on deposit with our brokers was $40.3 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