What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2016-03-29 compared with 2015-03-25 · 230 added, 174 removed, 778 unchanged (34% of the section changed)

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

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 Campofrío Food Group (CFG).

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

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.

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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.

We believe 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.

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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.

On January 16, 2014, the Company elected to change its fiscal year 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.

Unless otherwise noted, all references to "2015" and "2014" in this report are to the 53 week period ended January 3, 2016 and the 52 week period ended December 28, 2014 , respectively.

Net income was $452.3 million in 2015 , compared to net income of $556.1 million in 2014 .

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

Fresh Pork operating profit increased $80.6 million primarily as the impact of lower meat values was more than offset by lower hog prices.

Packaged Meats operating profit increased $213.5 million to a record $673.3 million primarily as a result of lower raw material costs and higher sales volume, partially offset by lower average selling prices.

Hog Production operating profit decreased $324.5 million primarily as a result of lower live hog market prices driven by higher hog supplies, partially offset by favorable hedging results and lower feed costs.

International operating profit decreased $89.7 million due to lower pork market prices in Europe and Mexico and the impact of foreign currency translation due to a stronger U.S.

Corporate expenses increased by $17.7 million primarily due to higher stock-based compensation expense and charitable contributions.

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.

Twelve Months Ended

January 3, 2016

December 28, 2014

(in millions)

Interest expense

Income tax expense

Depreciation and amortization expense

Non-operating (gain) loss

Adjusted EBITDA

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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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.

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

however, there were very few cases compared to the outbreak that occurred 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 were also 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 was 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.

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 recovered and the supply increase yielded lower market prices.

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.

On November 30, 2015, the EPA finalized RFS standards for 2014, 2015 and 2016 at higher levels than the proposed volumes, but below statutory targets.

The 2016 standard is set at 18.11 billion gallons of renewable fuels, or 10.10% of the motor fuel pool.

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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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 .

country- of-origin labeling (COOL) requirements violated the United States’ WTO obligations, the 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).

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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.

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

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.

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

was rejected.

Canada and Mexico are seeking a combined $3.2 billion in retaliatory tariffs against a range of U.S.

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

In December 2015, a WTO Arbitration Panel report set retaliatory tariffs against the United States at just over $1 billion.

In December 2015, Congress passed and the President signed into law the Fiscal Year 2016 omnibus spending legislation which included legislative language to repeal the WTO-noncompliant components of the COOL statute.

Although Canada and Mexico still have the right to initiate retaliatory tariffs against the U.S.

under WTO rules, there is no indication that they intend to do so and the revocation of mandatory COOL for meat has essentially settled the dispute.

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.

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:

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;

Maximizing our manufacturing platform and distribution system;

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;

Aligning our operations to provide better customer service;

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.

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 into 2016.

RESULTS OF OPERATIONS

Significant Events Affecting Results of Operations

Sale of Label Printing Plant

In 2015, we sold our product label printing business in Kansas City for $1.65 million cash plus contingent consideration, which we valued at $11.9 million , and recognized a gain of $12.0 million in SG&A, reflected in the Packaged Meats segment.

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.

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).

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.

WH Group Merger

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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 (income) loss of affiliates within the International segment in the third quarter of fiscal 2012.

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 twelve months ended April 29, 2012 .

Consolidated Results of Operations

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 tables presented below compare our results of operations for the periods indicated.

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

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

Twelve Months Ended January 3, 2016 and December 28, 2014

Twelve Months Ended

January 3, 2016

December 28, 2014

(in millions)

Cost of sales

Selling, general and administrative expenses

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 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 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

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 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 .

Income Tax Expense

For 2015, the effective tax rate was impacted by income relative to permanent items, the lower mix of earnings from foreign operations, which are taxed at lower rates, and foreign restructuring.

For 2014, taxable income relative to permanent items, the mix of income between jurisdictions and foreign restructuring impacted the effective rate.

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

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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)

Selling, General and Administrative Expenses

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

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

Twelve Months Ended January 3, 2016 and December 28, 2014

Twelve Months Ended

January 3, 2016

December 28, 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 12% due to a 21% decrease in average selling prices, partially offset by a 12% increase in volume.

Operating profit per head increased to $6 from $4 due to lower raw material costs, which more than offset the impact of lower fresh pork market prices.

We processed 30.5 million hogs during 2015 , an increase of 13% from the prior year.

Packaged Meats

Current year sales decreased 1% due to an 8% decrease in average selling prices, partially offset by a 7% increase in volume.

Current year sales volume totaled 3.0 billion pounds.

Current year operating profit increased to $0.22 per pound from $0.16 per pound due primarily to lower raw material costs.

Current year results included a gain of $12.0 million on the sale of our product label printing business in Kansas City.

Hog Production

Sales decreased 9% due to lower domestic live hog market prices which were partially offset by favorable hedging results.

Head sold during the year amounted to 15.9 million hogs, an increase of 8% from the prior year.

These changes in sales volumes and market prices are 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 $1 per head from $23 per head due to lower selling 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 $260.5 million , or 16% .

On a constant currency basis, sales increased 2% due to a 9% increase in volume to 1.5 billion pounds driven largely by a 9% increase in hogs processed and an 11% increase in poultry processed in Europe, partially offset by a 7% decrease in average selling prices.

We processed 4.6 million hogs during 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 $12.6 million due to a stronger U.S.

The decrease in operating results is primarily attributable to higher stock-based compensation expense and charitable contributions.

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

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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.

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.

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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 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.

As of January 3, 2016 , our liquidity position was $2.3 billion , comprised of $1.4 billion in availability under our credit facilities, $704.9 million in cash and cash equivalents and $160.0 million in unutilized loans.

Our liquidity position was enhanced by cash held for payments deferred by livestock suppliers to 2016 as well as cash held for the $125.0 million voluntary contribution to fund our qualified pension plans made in the first quarter of 2016.

Sources of Liquidity

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Credit Facilities

December 28, 2014

January 3, 2016

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 the Inventory Revolver which would have matured in June 2016.

Financial Statements and Supplementary Data-Note 7 —" Debt " for additional information regarding our working capital facilities and Rabobank Term Loan.

Rabobank Term Loan

In May 2015, we refinanced our $200.0 million Rabobank Term Loan and extended its maturity date from May 1, 2018 to May 1, 2020.

Financial Statements and Supplementary Data-Note 7 —" Debt " for additional information regarding our working capital facilities and Rabobank Term Loan.

Operating Activities

Twelve Months Ended

January 3, 2016

December 28, 2014

(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 January 3, 2016 vs.

Twelve Months Ended December 28, 2014

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

In the current year, we received $152.5 million for the settlement of derivative contracts and for margin requirements compared to $179.6 million paid in the prior year.

Net tax payments decreased approximately $25.4 million

Cash interest payments decreased approximately $24.5 million .

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

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.

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

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Twelve Months Ended

January 3, 2016

December 28, 2014

(in millions)

Capital expenditures

Proceeds from sale of equity interest in CFG

Business acquisition, net of cash acquired

Net (expenditures) proceeds from breeding stock transactions

Construction of distribution center pending sale-leaseback

Proceeds from sale-leaseback of distribution center

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:

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

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

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

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Business acquisition, net of cash acquired

Net (expenditures) proceeds from breeding stock transactions

Net expenditures from breeding stock transactions

Proceeds from sale of property, plant and equipment

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Twelve Months Ended

January 3, 2016

December 28, 2014

(in millions)

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

Payment of dividends

Net repayments on revolving credit facilities and notes payables

Net cash flows from financing activities

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

In the current year, we repurchased $258.1 million of our 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.

Financing Activities

Twelve Months Ended

December 28, 2014

December 29, 2013

(in millions)

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We repurchased 19,068,079 shares of our common stock for $386.4 million as part of the 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.

We incurred $18.0 million in transaction fees in connection with the issuance of the 2022 Notes, which were being amortized over their ten-year life and subsequently written off in connection with the Merger.

Twelve Months Ended April 29, 2012

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7.75% senior unsecured notes, due July 2017, including unamortized premiums of $20.6 million and $38.1 million

5.25% senior unsecured notes, due August 2018

5.875% senior unsecured notes, due August 2021

5.25% senior unsecured notes, due August 2018, net of debt issuance costs of $5.4 million and $8.3 million

5.875% senior unsecured notes, due August 2021, net of debt issuance costs of $5.7 million and $7.6 million

Floating rate senior unsecured term loan, due May 2020

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

Various, interest rates from 2.45% to 2.76%, due February 2016 through March 2019

Current portion

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Total shareholder's equity

Interest Rate Spread

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.

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

As of January 3, 2016 , we continued to guarantee $6.7 million of leases that were transferred to JBS S.A.

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

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Capital Projects

We anticipate annual capital expenditures in the range of $325 million to $380 million over the next several years to upgrade facilities with new machinery and equipment in order to improve our competitive cost structure and achieve least cost/best in class operations.

We anticipate capital expenditures of approximately $350.0 million for 2016 to upgrade facilities with new machinery and equipment in order to improve our competitive cost structure and achieve least cost/best in class operations.

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

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

As of the end of 2015, we had completed conversions to group housing for 82% 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.

Worldwide, we have pledged to convert all company sow farms by 2022.

Our hog production operations in Poland and Romania completed their conversions to group housing facilities a number of years ago, and our joint ventures in Mexico are currently working toward the 2022 goal.

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.

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

During 2015 , margin deposits posted by us ranged from $(15.4) million to $80.7 million (negative amounts representing margin deposits we have received from our brokers).

The average daily amount we held on deposit with our brokers during 2015 was $40.7 million .

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

As of January 3, 2016 , the net amount on deposit with our brokers was $47.9 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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We contributed $200.0 million to our qualified pension plans in 2015 .

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.

In January 2016, we contributed an additional $125.0 million to our qualified pension plans.

Contractual Obligations and Commercial Commitments

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

The following table provides information about our contractual obligations and commercial commitments as of January 3, 2016 :

Payments Due By Period

(in millions)

Long-term debt, excluding premiums

Long-term debt, excluding premiums and debt issuance costs

Capital lease obligations, including interest

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Includes fixed price forward grain purchase contracts totaling $11.9 million .

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

Also includes unpriced forward grain purchase contracts which, if valued as of January 3, 2016 market prices, would be $198.6 million .

These forward grain contracts are accounted for as normal purchases.

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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.

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

OFF-BALANCE SHEET ARRANGEMENTS

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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 December 28, 2014 and December 29, 2013 :

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 January 3, 2016 and December 28, 2014 :

(in millions)

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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 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 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)

Commodity contracts:

Grain contracts

Lean hog contracts

Interest rate contracts

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

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)

Commodity contracts

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)

Commodity contracts

Foreign exchange contracts

Financial Statements and Supplementary Data-Note 4 — Derivative Financial Instruments " for the effects of pre-tax gains and losses on derivative instruments on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Judgments and Uncertainties

Effect if Actual Results Differ

From Assumptions

Impairment Considerations of Equity Method Investments

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If we consider any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the affiliate’s industry), then a write-down of the investment to its estimated fair value would be recorded.

In assessing the fair value of an investment, we consider a variety of information, including, when available, independent third party valuation reports, which incorporate generally accepted valuation techniques, and quoted market prices for our investment adjusted for any influence premium that should be applied to the market price based on our ability to exert significant influence over the operational and strategic decisions of the company.

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

In assessing the fair value of an investment, we consider a variety of information, including 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 periods presented in this Form 10-K.

Judgments and Uncertainties

Effect if Actual Results Differ

From Assumptions

Accrued self insurance

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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 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

Effect if Actual Results Differ

From Assumptions

A 10% increase in the estimates as of January 3, 2016, would result in an increase in the amount we recorded for our insurance liabilities of approximately $10.6 million.

Impairment of long-lived assets

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

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.

We had no significant impairments of long-lived assets during the periods presented in this Form 10-K.

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.

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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.

As of January 3, 2016, we had $1.6 billion of goodwill and $1.3 billion of indefinite-lived intangible assets, consisting mainly of trademarks.

Our goodwill is included in the following segments:

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Therefore, the second step was not necessary.

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.

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

Our 2015 indefinite-lived 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 an impairment.

Judgments and Uncertainties

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

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.

We funded $200.0 million, $167.1 million, $18.8 million, and $17.7 million to our qualified pension plans during the twelve months ended January 3, 2016, the twelve months ended December 28, 2014, the eight months ended December 29, 2013 and the twelve months ended April 28, 2013, respectively.

We expect to fund $125.0 million in 2016 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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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.

During 2014, we used a new mortality table that has 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.

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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.

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.

An additional 0.50% decrease in the discount rate used to measure our projected benefit obligation would have further reduced the funded status by $123.5 million as of January 3, 2016, and would have resulted in an additional $15.3 million in net pension cost for the twelve months ended January 3, 2016.

A 0.50% decrease in expected return on plan assets would have resulted in an additional $7.0 million in net pension cost for the twelve months ended January 3, 2016.

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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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