SMITHFIELD FOODS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following information in conjunction with the audited consolidated financial statements and the related notes in “Item 8. Financial Statements and Supplementary Data.” EXECUTIVE OVERVIEW We are the largest hog producer and pork processor in the world. In the United States, we are also the leader in numerous packaged meats categories with popular brands including Smithfield®, Eckrich®, Farmland®, Armour® and John Morrell®. We are committed to providing good food in a responsible way and maintaining robust animal care, community involvement, employee safety, environmental, and food safety and quality programs. We produce and market a wide variety of fresh meat and packaged meats products both domestically and internationally. We operate in a cyclical industry and our results are significantly affected by fluctuations in commodity prices for livestock (primarily hogs) and grains. Some of the factors that we believe are critical to the success of our business are our ability to: ▪ maintain and expand market share, particularly in packaged meats, ▪ develop and maintain strong customer relationships, ▪ continually innovate and differentiate our products, ▪ manage risk in volatile commodities markets, and ▪ maintain our position as a low cost producer of live hogs, fresh pork and packaged meats. We conduct our operations through five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. The Fresh Pork segment consists of our U.S. fresh pork operations. The Packaged Meats segment consists of our U.S. packaged meats operations. The Hog Production segment consists of our hog production operations located in the U.S. 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. In February 2015, we announced an organizational realignment and key senior management appointments that unify all of our independent operating companies, brands, marketing and employees under one corporate umbrella. Moving to a more centralized structure allows for a more efficient and effective approach to customers, best utilizes management talent, maximizes the manufacturing platform and plant efficiency and optimizes marketing, innovation and brand management. WH Group Merger On September 26, 2013 (the Merger Date), pursuant to the Agreement and Plan of Merger dated May 28, 2013 (the Merger Agreement) with WH Group Limited, formerly Shuanghui International Holdings Limited, a corporation formed under the laws of the Cayman Islands and hereinafter referred to as WH Group, the Company merged with Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of WH Group (Merger Sub), in a transaction hereinafter referred to as the Merger. As a result of the Merger, the Company survived as a wholly owned subsidiary of WH Group. WH Group is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's largest meat processing enterprise and China's largest publicly traded meat products company as measured by market capitalization. WH Group is a pioneer in the Chinese meat processing industry with over 30 years of history. WH Group's businesses include hog production, meat processing, fresh meat and packaged meats production and distribution. The merging of WH Group's distribution network with our strong management team, leading brands and vertically integrated model is allowing us to provide high-quality, competitively-priced and safe U.S. meat products to consumers in markets around the world. As part of WH Group's international platform, we expect our best practices in large-scale farming, food safety standards, environmental stewardship and animal welfare to set the global industry standard. 29 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 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. With our shared expertise and leadership, we continue to work on accelerating a global expansion strategy as part of WH Group. The Merger was accounted for as a business combination using the acquisition method of accounting. WH Groups's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. The difference in the cost basis of the Company before and after the Merger impacts the comparability of results. Change in Fiscal Year On January 16, 2014, the Company elected to change its fiscal year 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 "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. 2015 Summary 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. dollar. ▪ 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) Net income $ 452.3 $ 556.1 Interest expense 133.8 159.4 Income tax expense 195.6 217.0 Depreciation and amortization expense 234.1 230.8 EBITDA $ 1,015.8 $ 1,163.3 Non-operating (gain) loss 12.1 (0.9 ) Adjusted EBITDA $ 1,027.9 $ 1,162.4 30 Animal Health The U.S. 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. pork market was significantly impacted by the spreading of PEDv, a disease that only infects pigs, not humans or other livestock, which has been an industry-wide issue and continues to have a presence in U.S. swine. Our herds in several regions in which we operate were affected in 2014 as PEDv spread throughout the U.S. There were confirmed cases of PEDv in the U.S. in 2015; however, there were very few cases compared to the outbreak that occurred in 2014. The USDA and the industry continue to monitor the situation. 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 The federal Renewable Fuel Standard (RFS) program requires that bio-fuels be blended into transportation fuels at ever-increasing volumes up to 36 billion gallons in 2030. In October 2010, the Environmental Protection Agency (EPA) granted a “partial waiver” to a statutory bar under the Clean Air Act prohibiting fuel manufacturers from introducing fuel additives that are not “substantially similar” to those already approved and in use for vehicles of model year (MY) 1975 or later. Prior to 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. In January 2011, the EPA granted another partial waiver authorizing E15 use in MY 2001-2006 light-duty motor vehicles. Judicial challenges to these rulemakings by a coalition of industry groups were dismissed. In 2013, the EPA issued a proposed rule that would have reduced the volume of renewable fuels mandated by statute and reflected the EPA’s estimate of what would actually be produced in 2014. 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. We cannot presently assess the full economic impact of the RFS program on the meat processing industry or on our operations. Country of Origin Labeling Following a World Trade Organization (WTO) panel ruling on a complaint by Canada and Mexico that existing U.S. country- of-origin labeling (COOL) requirements violated the United States’ WTO obligations, 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 . 78 Fed. Reg. 31367 (May 24, 2013) (the 2013 Rule). The 2013 Rule requires, in part, that labels on covered meat products must list separately, in sequence, the specific country where the animal was "born," the country where it was "raised," and the country where it was "slaughtered." The rule also prohibits combining or commingling of meats with different "Born, Raised, and Slaughtered" combinations in the same package at retail. 31 On March 28, 2014 and on July 29, 2014, the U.S. Court of Appeals for the District of Columbia Circuit rejected a judicial challenge to these rulemakings by a coalition of industry groups. As of February 9, 2015, industry opponents dropped their lawsuit against the 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. 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. Outlook The commodity markets affecting our business fluctuate on a daily basis. In this operating environment, it is difficult to forecast industry trends and conditions. The outlook statements that follow must be viewed in this context. 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 our operations to provide better customer service; • Optimizing operations in areas like brand management, manufacturing, sales, and marketing; and • 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, 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. 32 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. Sale of CFG 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. Tender Offer 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 In connection with the Merger, we incurred $23.9 million and $18.0 million of professional fees during the three months ended December 29, 2013 and five months ended September 26, 2013 , respectively. These fees are recognized in merger related costs on the consolidated statements of income and reflected in the results of our Corporate segment. In addition, Merger Sub deferred $17.3 million of debt issuance costs for a financing arrangement. We recognized these deferred costs in interest expense during the three months ended December 29, 2013 upon termination of the financing arrangement following the Merger. WH Group's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed by WH Group in the Merger reflects fair value estimates based on management analysis, including work performed by third-party valuation specialists. This work was finalized during the third quarter of 2014 with no material adjustments. Our pre-tax earnings for the twelve months ended December 29, 2013 were negatively impacted by $37.7 million as a result of the fair value adjustments to our assets and liabilities, including a $45.4 million increase in cost of sales as a result of the fair value step-up of our inventories. Acquisition of Kansas City Sausage, LLC In May 2013, we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $36.0 million in cash. KCS operates in Des Moines, Iowa and Kansas City, Missouri. In Des Moines, KCS produces premium raw materials for sausage, as well as value-added products, including boneless hams and hides. The Kansas City plant is a modern sausage processing facility and is designed for optimum efficiency to provide retail and foodservice customers with high quality products. With our strong ongoing focus on building our packaged meats business, and with 15% of the U.S. sow population, this joint venture is a logical fit for the Company. It is expected to provide a growth platform in two key packaged meats categories — breakfast sausage and dinner sausage — and to allow us to expand our product offerings to our customers. These categories represent over $4.0 billion in industry retail and foodservice sales annually. KCS is managed by its Board of Directors, which makes decisions that most significantly impact the economic performance of KCS. We have the right to nominate and elect the majority of the members of the Board of Directors of KCS, and based on the associated voting rights, we have determined that we have a controlling financial interest in KCS. As a result, the acquisition of our interest in KCS was accounted for in the Fresh Pork and Packaged Meats segments using the acquisition method of accounting. In 2015, KCS generated over $275 million in sales. 33 Missouri Litigation During the twelve months ended April 29, 2012 , we engaged in global settlement negotiations and recognized $22.2 million in net charges associated with the expected settlement of the Missouri Litigation. The charges were recognized in selling, general and administrative expenses in the Hog Production segment. During the twelve months ended April 28, 2013 , the parties to the litigation reached an agreement and consummated the global settlement. CFG Consolidation Plan In December 2011, the board of Campofrío Food Group (CFG) approved a multi-year plan to consolidate and streamline its manufacturing operations to improve operating efficiencies and increase utilization (the CFG Consolidation Plan). The CFG Consolidation Plan included the disposal of certain assets, employee redundancy costs and the contribution of CFG's French cooked ham business into a newly formed joint venture. As a result, we recorded our share of CFG's charges totaling $38.7 million in equity in (income) loss of affiliates within the International segment in the twelve months ended April 29, 2012 . 34 Consolidated Results of Operations 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. This combined information does not purport to represent what our consolidated results of operations would have been if the Merger had taken place on April 29, 2013, nor have we made any attempt to either include or exclude expenses or income that would have resulted had the Merger actually occurred on April 29, 2013. As used in the tables below, "NM" means "not meaningful." Twelve Months Ended January 3, 2016 and December 28, 2014 Twelve Months Ended January 3, 2016 December 28, 2014 % Change (unaudited) (in millions) Sales $ 14,438.4 $ 15,031.3 (4 )% Cost of sales 12,683.0 13,255.7 (4 ) Gross profit 1,755.4 1,775.6 (1 ) Selling, general and administrative expenses 973.3 902.2 8 Income from equity method investments (11.7 ) (58.2 ) (80 ) Operating profit 793.8 931.6 (15 ) Interest expense 133.8 159.4 (16 ) Non-operating (gain) loss 12.1 (0.9 ) NM Income before income taxes 647.9 773.1 (16 ) Income tax expense 195.6 217.0 (10 ) Net income $ 452.3 $ 556.1 (19 )% 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. dollar. • 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 . 35 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 Twelve Months Ended December 28, 2014 December 29, 2013 % Change (unaudited) (in millions) Sales $ 15,031.3 $ 13,896.1 8 % Cost of sales 13,255.7 12,691.1 4 Gross profit 1,775.6 1,205.0 47 Selling, general and administrative expenses 902.2 830.1 9 Merger related costs — 41.9 (100 ) Income from equity method investments (58.2 ) (5.5 ) 958 Operating profit 931.6 338.5 175 Interest expense 159.4 180.5 (12 ) Non-operating (gain) loss (0.9 ) 1.7 (153 ) Income before income taxes 773.1 156.3 395 Income tax expense 217.0 35.6 510 Net income $ 556.1 $ 120.7 361 % Sales and Gross Profit • Sales increased primarily as a result of higher domestic pork market prices. • Gross profit increased primarily as a result of higher average selling prices and lower hog raising costs, which more than offset the increase in pork processing raw material costs. As noted in "Significant Events Affecting Results of Operations--WH Group Merger," the twelve months ended December 29, 2013 included an additional $45.4 million in cost of sales as a result of the fair value step-up of our inventory. Selling, General and Administrative Expenses (SG&A) • The increase in SG&A is primarily attributable to higher variable compensation expenses stemming from higher year-over-year operating results, partially offset by lower pension expense. Merger Related Costs • We incurred an aggregate of $41.9 million of professional fees in the twelve months ended December 29, 2013 as a result of the Merger. Income from Equity Method Investments • The increase in profitability in the current year is primarily driven by higher hog prices in Mexico. Additionally, favorable changes to income tax rates positively impacted equity income from CFG. Interest Expense • Interest expense for the twelve months ended December 29, 2013 included $17.3 million of debt issuance costs originally deferred by Merger Sub. 36 Income Tax Expense • For the twelve months ended December 28, 2014, taxable income relative to permanent items, the mix of income between jurisdictions and foreign restructurings impacted the effective tax rate. The effective tax rate for the twelve months ended December 29, 2013 was also impacted by income relative to permanent items for the period, the mix of income between jurisdictions and state income tax credits. Eight Months Ended December 29, 2013 and December 30, 2012 Successor Predecessor The Transition Period Predecessor Eight Months Ended (unaudited) September 27 - December 29, 2013 April 29 - September 26, 2013 December 29, 2013 December 30, 2012 % Change (in millions) Sales $ 3,894.2 $ 5,679.5 $ 9,573.7 $ 8,898.7 8 % Cost of sales 3,543.1 5,190.1 8,733.2 7,943.5 10 Gross profit 351.1 489.4 840.5 955.2 (12 ) Selling, general and administrative expenses 213.4 341.7 555.1 540.5 3 Merger related costs 23.9 18.0 41.9 — NM Loss (income) from equity method investments 2.6 0.5 3.1 (6.5 ) (148 ) Operating profit 111.2 129.2 240.4 421.2 (43 ) Interest expense 59.0 64.6 123.6 111.8 11 Loss on debt extinguishment 1.7 — 1.7 120.7 (99 ) Income before income taxes 50.5 64.6 115.1 188.7 (39 ) Income tax expense 15.8 12.7 28.5 58.7 (51 ) Net income $ 34.7 $ 51.9 $ 86.6 $ 130.0 (33 )% Sales and Gross Profit • Sales increased primarily as a result of higher average selling prices in the Fresh Pork, Packaged Meats and Hog Production segments and an 18% increase in volume in the International segment. • Gross profit decreased primarily as the result of an 8% increase in domestic live hog prices. As noted in "Significant Events Affecting Results of Operations--WH Group Merger," the eight months ended December 29, 2013 included an additional $45.4 million in cost of sales as a result of the fair value step-up of our inventory. Selling, General and Administrative Expenses • Advertising costs during the eight months ended December 29, 2013 were approximately $20.0 million higher than during the eight months ended December 30, 2012 as we continued our investment in marketing and advertising programs focused on building brand equity and growing sales. Merger Related Costs • As noted in "Significant Events Affecting Results of Operations," we incurred an aggregate of $41.9 million of professional fees during the eight months ended December 29, 2013 as a result of the Merger. Loss (Income) from Equity Method Investments • The decline in profitability was primarily driven by lower selling prices in the meat processing operations of our Mexican joint ventures. Also, tax law changes in Mexico negatively impacted our joint ventures. during the eight months ended December 29, 2013 . Interest Expense and Loss on Debt Extinguishment • As noted in "Significant Events Affecting Results of Operations," interest expense for the eight months ended December 29, 2013 includes $17.3 million of debt issuance costs originally deferred by Merger Sub. 37 • In the eight months ended December 30, 2012, we recognized losses of $120.7 million on the repurchase of $694.4 million of our outstanding senior notes due in May 2013 and July 2014. Income Tax Expense • The effective tax rate was impacted in all periods presented by income relative to permanent items, the mix of income between jurisdictions and state income tax credits. Twelve Months Ended April 28, 2013 and April 29, 2012 Predecessor Twelve Months Ended April 28, 2013 April 29, 2012 % Change (in millions) Sales $ 13,221.1 $ 13,094.3 1 % Cost of sales 11,901.4 11,544.9 3 Gross profit 1,319.7 1,549.4 (15 ) Selling, general and administrative expenses 815.4 816.9 — (Income) loss from equity method investments (15.0 ) 9.9 (252 ) Operating profit 519.3 722.6 (28 ) Interest expense 168.7 176.7 (5 ) Loss on debt extinguishment 120.7 12.2 889 Income before income taxes 229.9 533.7 (57 ) Income tax expense 46.1 172.4 (73 ) Net income $ 183.8 $ 361.3 (49 )% Sales and Gross Profit • Sales increased slightly as higher volumes across all segments were largely offset by lower domestic fresh meat and hog market prices and the effects of foreign currency translation. • The decline in gross profit margin was primarily caused by higher hog feed costs and lower pork prices in the U.S. Selling, General and Administrative Expenses • The twelve months ended April 29, 2012 included $22.2 million in net charges associated with the Missouri litigation. • The twelve months ended April 29, 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011, we terminated negotiations to purchase the additional interest. • Pension and other post-retirement benefit expenses increased $26.4 million. (Income) Loss from Equity Method Investments • CFG's results for twelve months ended April 29, 2012 included $38.7 million of charges related to the CFG Consolidation Plan. • Results from our Mexican joint ventures declined due to higher feed costs, lower hog prices and lower meat sales volumes. Interest Expense • Interest expense decreased due to lower average interest rates resulting from the refinancing of our 10% senior secured notes due July 2014 (2014 Notes) and our 7.75% senior unsecured notes due May 2013 (2013 Notes) as described under "Liquidity and Capital Resources" below. 38 Loss on Debt Extinguishment Twelve Months Ended April 28, 2013 • We recognized losses of $120.7 million on the repurchase of $694.4 million of our outstanding senior notes due in May 2013 and July 2014. Twelve Months Ended April 29, 2012 • We recognized losses of $11.0 million on the repurchase of $59.7 million of our 2014 Notes. • We recognized a loss on debt extinguishment of $1.2 million in the first quarter associated with the refinancing of our working capital facilities in June 2011. Income Tax Expense The following items explain the significant changes in the effective tax rate from the twelve months ended April 29, 2012 to twelve months ended April 28, 2013 : • Tax credits increased due in part to the passage of the American Taxpayer Relief Act of 2012 that retroactively reinstated the Research and Development, Work Opportunity and Welfare to Work tax credits. • We released $11.1 million in deferred tax asset valuation allowances in the twelve months ended April 28, 2013 , primarily related to the utilization of tax losses in foreign jurisdictions. • The mix of earnings from foreign operations, which are taxed at lower rates, was higher in the twelve months ended April 28, 2013 . 39 Segment Results 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 % Change (in millions) Sales: Fresh Pork $ 5,089.9 $ 5,780.0 (12 )% Packaged Meats 7,089.1 7,173.0 (1 )% Hog Production 3,069.7 3,384.6 (9 )% International 1,422.8 1,654 (14 )% Total segment sales 16,671.5 17,991.6 (7 )% Intersegment sales (2,233.1 ) (2,960.3 ) (25 )% Consolidated sales $ 14,438.4 $ 15,031.3 (4 )% Operating profit (loss): Fresh Pork $ 177.3 $ 96.7 83 % Packaged Meats 673.3 459.8 46 % Hog Production 19.7 344.2 (94 )% International 66.1 155.8 (58 )% Corporate (142.6 ) (124.9 ) (14 )% Consolidated operating profit $ 793.8 $ 931.6 (15 )% Fresh Pork • 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. 40 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. Dollar. Corporate • 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 Twelve Months Ended December 28, 2014 December 29, 2013 % Change (unaudited) (in millions) Sales: Fresh Pork $ 5,780.0 $ 5,155.6 12 % Packaged Meats 7,173.0 6,522.6 10 % Hog Production 3,384.6 3,420.6 (1 )% International 1,654.0 1,556.7 6 % Total segment sales 17,991.6 16,655.5 8 % Intersegment sales (2,960.3 ) (2,759.4 ) 7 % Consolidated sales $ 15,031.3 $ 13,896.1 8 % Operating profit (loss): Fresh Pork $ 96.7 $ 76.0 27 % Packaged Meats 459.8 378.0 22 % Hog Production 344.2 (21.9 ) 1,672 % International 155.8 60.5 158 % Corporate (124.9 ) (154.1 ) 19 % Consolidated operating profit $ 931.6 $ 338.5 175 % Fresh Pork • Current year sales increased 12% due to a 15% increase in average selling prices partially offset by a 3% decrease in volume. • Current year operating profit increased 27%. Operating profit per head increased from $2.61 to $3.47 due to higher fresh pork market prices, which more than offset higher raw material costs. • We processed 27.9 million hogs during 2014, a decrease of 4%, largely attributable to PEDv. However, average hog weights were up 2%, which helped to offset the overall decline in volume. Packaged Meats • Current year sales increased 10% due to a 10% increase in average selling prices. Current year sales volume totaled 2.8 billion pounds, which remained relatively unchanged from the twelve months ended December 29, 2013. 41 • Current year operating profit increased to $0.16 per pound from $0.13 per pound due to higher average selling prices. Additionally, the prior year included $38.7 million, or $0.01 per pound, of non-cash costs related to the fair value step-up of inventories due to the Merger. See "Significant Events Affecting Results of Operations" for further discussion. Hog Production • Current year sales decreased due to lower sales volume, partially offset by higher domestic live hog market prices. Head sold during the year amounted to 14.7 million hogs, a decrease of 10% from the twelve months ended December 29, 2013. PEDv was a significant factor in the volume decline and favorably impacted market prices. • Current year operating profit benefited from a 20% increase in domestic live hog market prices and lower feed costs. International • Current year sales were positively impacted by an 18% increase in volume of 1.5 billion pounds, driven largely by a 13% increase in hogs processed in Europe, and partially offset by an 11% decrease in average selling prices. We processed 4.3 million hogs during 2014. The effects of foreign currency translation also positively impacted sales by approximately $18 million. • Current year operating profit was positively impacted by higher sales and lower feed costs in Europe along with higher equity income from our Mexican joint ventures. Additionally, favorable changes to income tax rates positively impacted equity income from CFG. Corporate • Operating results in the Corporate segment were improved from last year due to the impact of $41.9 million of merger related costs in the prior year, partially offset by higher variable compensation expense in the current year driven by improved operating results. Eight Months Ended December 29, 2013 and December 30, 2012 Successor Predecessor The Transition Period Predecessor Eight Months Ended (unaudited) September 27 - December 29, 2013 April 29 - September 26, 2013 December 29, 2013 December 30, 2012 % Change (in millions) Sales: Fresh Pork $ 1,347.3 $ 2,240.3 $ 3,587.6 $ 3,356.1 7 % Packaged Meats 1,968.9 2,541.7 4,510.6 4,140.0 9 Hog Production 889.2 1,439.1 2,328.3 2,042.8 14 International 428.2 643.6 1,071.8 983.6 9 Total segment sales 4,633.6 6,864.7 11,498.3 10,522.5 9 Intersegment sales (739.4 ) (1,185.2 ) (1,924.6 ) (1,623.8 ) (19 ) Consolidated sales $ 3,894.2 $ 5,679.5 $ 9,573.7 $ 8,898.7 8 % Operating profit (loss): Fresh Pork $ 96.0 $ (50.7 ) $ 45.3 $ 131.0 (65 )% Packaged Meats 81.7 149.2 230.9 322.7 (28 ) Hog Production (40.6 ) 81.4 40.8 (56.4 ) 172 International 25.4 15.9 41.3 89.0 (54 ) Corporate (51.3 ) (66.6 ) (117.9 ) (65.1 ) (81 ) Consolidated operating profit $ 111.2 $ 129.2 $ 240.4 $ 421.2 (43 )% 42 Fresh Pork • Sales increased during the Transition Period as a result of a 6% increase in average selling prices and a 1% increase in volume. • Operating profit decreased despite the increase in average selling prices primarily as a result of an 8% increase in domestic live hog prices. Packaged Meats • Sales increased during the Transition Period as a result of a 9% increase in average selling prices. • Operating profit in the current year decreased as the increase in selling prices was more than offset by higher raw material costs. Additionally, operating profit in the Transition Period included $38.7 million of additional non-cash costs related to the fair value step-up of our inventories. See "Significant Events Affecting Results of Operations" for further discussion. Hog Production • Transition Period sales benefited from an 8% increase in domestic live hog prices and a 3% increase in head sold. • Hog Production operating profit improved by $97.2 million mainly due to higher live hog market prices. International • As a result of fluctuations in foreign exchange rates, International segment sales and operating profit in the Transition Period were both positively impacted by approximately 3%. • Sales and operating profit in the transition period were positively impacted by an 18% increase in volume which was partially offset by a 10% decrease in average selling prices. • Transition Period operating profit was also negatively impacted by 8% and 6% increases in raising costs in both Poland and Romania, respectively, along with significantly lower equity income from our Mexican joint ventures. Corporate • The Transition Period includes fees related to the Merger. See "Significant Events Affecting Results of Operations" for further discussion. 43 Twelve Months Ended April 28, 2013 and April 29, 2012 Predecessor Twelve Months Ended April 28, 2013 April 29, 2012 % Change (in millions) Sales: Fresh Pork $ 4,924.1 $ 5,089.4 (3 )% Packaged Meats 6,152.0 6,003.6 2 Hog Production 3,135.1 3,052.6 3 International 1,468.5 1,466.7 — Total segment sales 15,679.7 15,612.3 — Intersegment sales (2,458.6 ) (2,518.0 ) 2 Consolidated sales $ 13,221.1 $ 13,094.3 1 Operating profit (loss): Fresh Pork $ 161.6 $ 222.0 (27 )% Packaged Meats 470.0 401.7 17 Hog Production (119.1 ) 166.1 (172 ) International 108.2 42.8 153 Corporate (101.4 ) (110.0 ) 8 Consolidated operating profit $ 519.3 $ 722.6 (28 )% Fresh Pork • Sales declined 3% due to a 6% decrease in average selling prices, partially offset by a 3% increase in volume as a result of higher slaughter levels and hog weights. • Operating profit decreased to $6 per head from $8 per head due to lower fresh pork market prices. • We processed 28.5 million hogs, an increase of 3% from the twelve months ended April 29, 2012. Packaged Meats • Sales increased 2% due to a 4% increase in volume partially offset by a 1% decrease in average selling prices. Sales volume totaled 2.8 billion pounds and 2.7 billion pounds for the twelve months ended April 28, 2013 and April 29, 2012, respectively. • Operating profit increased to $0.17 per pound from $0.15 per pound due to lower raw material costs. Hog Production • Sales increased due to higher volumes, which more than offset the impact of lower market hog prices. Head sold during the twelve months ended April 28, 2013 amounted to 16.0 million hogs, an increase of 1% from the twelve months ended April 29, 2012 . • Operating profit was negatively impacted by higher hog supplies, resulting in a 6% decrease in live hog prices, and increased domestic raising costs, including the effects of grain derivative contracts designated in hedging relationships for accounting purposes, primarily as a result of higher priced feed. • Operating profit for the twelve months ended April 28, 2013 included gains of $91.2 million compared to $58.6 million for the twelve months ended April 29, 2012 on lean hog derivative contracts and grain derivative contracts that are not designated in hedging relationships for accounting purposes. • Operating profit for the twelve months ended April 29, 2012 included $22.2 million in net charges associated with the Missouri litigation as well as accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri. 44 International • Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased sales by 8% and decreased operating profit by $11.5 million. • Sales and operating profit for the twelve months ended April 28, 2013 benefited from significantly higher volumes in our Polish operations due to a 19% increase in the number of hogs processed. Unit sales prices in our Polish operations increased in several key product categories; however, higher volumes of lower value by-products that resulted from more processed hogs effectively diminished the overall average unit selling price compared to twelve months ended April 29, 2012 . • Sales and operating profit in our Romanian operations improved on significantly higher average unit selling prices and sales volumes, which benefited from the approval to export pork products to European Union member countries beginning in the fourth quarter of the twelve months ended April 29, 2012 . Sales and hog slaughter volumes benefited from an expansion in our hog production operations in the second quarter of the twelve months ended April 29, 2012 . • Operating profit for the twelve months ended April 29, 2012 included $38.7 million of charges related to the CFG Consolidation Plan. • Equity income from our Mexican joint ventures decreased by $4.1 million due to higher feed costs and unfavorable changes in foreign exchange rates. Corporate • The twelve months ended April 29, 2012 included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011, we terminated negotiations to purchase the additional interest. 45 LIQUIDITY AND CAPITAL RESOURCES Summary Our cash requirements consist primarily of the purchase of raw materials used in our hog production and pork processing operations, long-term debt obligations and related interest, lease payments for real estate, machinery, vehicles and other equipment, and expenditures for capital assets, other investments and other general business purposes. Our primary sources of liquidity are cash we receive as payment for the products we produce and sell, as well as our credit facilities. 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 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 We have available a variety of sources of liquidity and capital resources, both internal and external. These sources provide funds required for current operations, acquisitions, integration costs, debt retirement and other capital requirements. Accounts Receivable and Inventories The meat processing industry is characterized by high sales volume and rapid turnover of inventories and accounts receivable. Because of the rapid turnover rate, we consider our meat inventories and accounts receivable highly liquid and readily convertible into cash. The Hog Production segment also has rapid turnover of accounts receivable. Although inventory turnover in the Hog Production segment is slower, mature hogs are readily convertible into cash. Borrowings under our credit facilities are used, in part, to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs. Credit Facilities January 3, 2016 Facility Capacity Borrowing Base Adjustment Outstanding Letters of Credit Outstanding Borrowings Amount Available (in millions) Inventory Revolver $ 1,025.0 $ (1.3 ) $ — $ — $ 1,023.7 Securitization Facility 325.0 — (87.9 ) — 237.1 International facilities 167.2 (2.7 ) (0.1 ) (38.8 ) 125.6 Total credit facilities $ 1,517.2 $ (4.0 ) $ (88.0 ) $ (38.8 ) $ 1,386.4 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. See "Item 8. 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. See "Item 8. Financial Statements and Supplementary Data-Note 7 —" Debt " for additional information regarding our working capital facilities and Rabobank Term Loan. 46 Cash Flows Operating Activities Twelve Months Ended January 3, 2016 December 28, 2014 (in millions) Net cash flows from operating activities $ 797.8 $ 813.1 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 (unaudited) December 28, 2014 December 29, 2013 (in millions) Net cash flows from operating activities $ 813.1 $ 358.2 The following items explain the significant changes in cash flows from operating activities for the periods presented: Twelve Months Ended December 28, 2014 vs. Twelve Months Ended December 28, 2013 ▪ Cash received from customers increased due to higher average meat selling prices. ▪ Cash paid for grain and other ingredients purchased by the Hog Production segment decreased approximately $656.6 million from the prior year. ▪ Cash paid to outside hog suppliers increased due to a 20% increase in average domestic live hog prices. ▪ Cash paid to outside meat suppliers increased due to higher fresh meat market prices, particularly pork and beef. ▪ The current year included net tax payments of $178.8 million for income taxes as compared to net refunds of $16.5 million in the prior year. ▪ In the current year, we paid $179.6 million for the settlement of derivative contracts and for margin requirements compared to $37.1 million in the prior year. ▪ Cash interest payments increased approximately $23.2 million. 47 Successor Predecessor The Transition Period Predecessor Eight Months Ended (unaudited) September 27 - December 29, 2013 April 29 - September 26, 2013 December 29, 2013 December 30, 2012 (in millions) Net cash flows from operating activities $ 459.3 $ (25.8 ) $ 433.5 $ 248.0 The following items explain the significant changes in cash flows from operating activities for the periods presented: Eight Months Ended December 29, 2013 vs. Eight Months Ended December 30, 2012 ▪ Cash received from customers increased due to a 6% and 9% increase in average selling prices in the Fresh Pork and Packaged Meats segments, respectively, and an 18% increase in sales volume in the International segment. ▪ Cash paid for grain and other feed ingredients purchased by the Hog Production segment decreased approximately $65.4 million despite a significant increase in total pounds purchased. ▪ In the prior year eight month period, we paid cash to settle the Missouri litigation. ▪ In the eight months ended December 29, 2013 , we paid $53.8 million for the settlement of derivative contracts and for margin requirements compared to $91.0 million received in prior year. ▪ Cash paid to outside hog suppliers increased due to an 8% increase in domestic live hog market prices. Predecessor Twelve Months Ended April 28, 2013 April 29, 2012 (in millions) Net cash flows from operating activities $ 172.7 $ 570.1 The following items explain the significant changes in cash flows from operating activities for the periods presented: Twelve Months Ended April 28, 2013 vs. Twelve Months Ended April 29, 2012 • Cash paid for grain and other feed ingredients purchased by the Hog Production segment increased approximately $372 million. • Cash received for the settlement of commodity derivative contracts and for margin requirements decreased $103.4 million in fiscal 2013. • Cash received from customers decreased primarily as a result of lower domestic selling prices. • We paid cash to settle the Missouri litigation in the twelve months ended April 28, 2013. • Expenditures for advertising increased as part of our strategy to build brand equity and grow sales. • Cash paid to outside hog suppliers was lower due to a 6% decrease in average domestic live hog market prices. • Income tax payments decreased $222.0 million as a result of significant tax refunds during the twelve months ended April 28, 2013 and lower domestic taxable income. • We contributed $17.7 million to our qualified and non-qualified pension plans in the twelve months ended April 28, 2013 compared to $142.8 million in the twelve months ended April 29, 2012. 48 Investing Activities Twelve Months Ended January 3, 2016 December 28, 2014 (in millions) Capital expenditures $ (375.2 ) $ (301.4 ) Proceeds from sale of equity interest in CFG 354.0 — Business acquisition, net of cash acquired — (11.0 ) Net (expenditures) proceeds from breeding stock transactions (53.2 ) 13.3 Construction of distribution center pending sale-leaseback (43.5 ) — Proceeds from sale-leaseback of distribution center 42.5 — Proceeds from sale of property, plant and equipment 6.4 3.8 Other (6.0 ) 3.6 Net cash flows from investing activities $ (75.0 ) $ (291.7 ) 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 (unaudited) December 28, 2014 December 29, 2013 (in millions) Acquisition of Smithfield Foods, Inc. $ — $ (4,896.6 ) Capital expenditures (301.4 ) (311.0 ) Business acquisition, net of cash acquired (11.0 ) (33.7 ) Net (expenditures) proceeds from breeding stock transactions 13.3 (6.2 ) Proceeds from sale of property, plant and equipment 3.8 6.1 Advance note and other 3.6 (10.4 ) Net cash flows from investing activities $ (291.7 ) $ (5,251.8 ) The following items explain the significant investing activities for the periods presented: Twelve Months Ended December 28, 2014 ▪ Capital expenditures primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below. ▪ In April 2014, Kansas City Sausage Company, LLC (KCS) bought a meat processing business for $11.0 million. Twelve Months Ended December 28, 2013 ▪ WH Group paid $4.9 billion in connection with the Merger to acquire all of our common stock and settle all vested and unvested stock-based compensation awards. ▪ 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. 49 ▪ We paid $33.7 million, net of cash acquired, for a 50% interest in KCS. Also, we advanced $10.0 million to the seller of KCS in exchange for a promissory note, which is secured by the remaining membership interests in KCS held by the seller. Successor Predecessor The Transition Period Predecessor Eight Months Ended (unaudited) September 27 - December 29, 2013 April 29 - September 26, 2013 December 29, 2013 December 30, 2012 (in millions) Acquisition of Smithfield Foods, Inc. $ (4,896.6 ) $ — $ (4,896.6 ) $ — Capital expenditures (69.9 ) (139.8 ) (209.7 ) (176.7 ) Business acquisition, net of cash acquired — (32.8 ) (32.8 ) (23.1 ) Net (expenditures) proceeds from breeding stock transactions 5.1 (5.3 ) (0.2 ) (12.4 ) Proceeds from sale of property, plant and equipment 2.3 1.7 4.0 14.8 Advance note and other — (10.0 ) (10.0 ) 0.1 Net cash flows from investing activities $ (4,959.1 ) $ (186.2 ) $ (5,145.3 ) $ (197.3 ) The following items explain the significant investing activities for the periods presented: Eight Months Ended December 29, 2013 • WH Group paid $4.9 billion in connection with the Merger to acquire all of our common stock and settle all vested and unvested stock-based compensation awards. • In May 2013, we paid $32.8 million, net of cash acquired, for a 50% interest in KCS. Also, we advanced $10.0 million to the seller of KCS in exchange for a promissory note, which is secured by the remaining membership interest in KCS held by the seller. • 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. Eight Months Ended December 30, 2012 • Capital expenditures during the prior year primarily related to plant and hog farm improvement projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below. • In October 2012, we paid $23.1 million, net of cash acquired, for a 70% interest in American Skin Food Group, LLC. Predecessor Twelve Months Ended April 28, 2013 April 29, 2012 (in millions) Capital expenditures $ (278.0 ) $ (290.7 ) Business acquisition, net of cash acquired (24.0 ) — Net expenditures from breeding stock transactions (18.4 ) (2.3 ) Proceeds from sale of property, plant and equipment 16.9 6.4 Other (0.2 ) — Net cash flows from investing activities $ (303.7 ) $ (286.6 ) 50 The following items explain the significant investing activities for the periods presented: Twelve Months Ended April 28, 2013 • Capital expenditures included $45.9 million related to our Kinston, North Carolina plant expansion project. The remaining 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. • We paid $24.0 million, net of cash acquired, for a 70% interest in American Skin Food Group, LLC. Twelve Months Ended April 29, 2012 • Capital expenditures included $32.8 million related to our Kinston, North Carolina plant expansion project and $30.9 million related to the Cost Savings Initiative. The remaining capital expenditures primarily related to plant and hog farm improvement projects. Financing Activities Twelve Months Ended January 3, 2016 December 28, 2014 (in millions) Proceeds from the issuance of long-term debt and capital leases $ — $ 13.0 Principal payments on long-term debt and capital lease obligations (410.1 ) (34.5 ) Proceeds from Securitization Facility 290.0 255.0 Payments on Securitization Facility (290.0 ) (360.0 ) Payment of dividends (30.0 ) — Net repayments on revolving credit facilities and notes payables (6.4 ) (159.6 ) Other — (0.2 ) Net cash flows from financing activities $ (446.5 ) $ (286.3 ) 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 (unaudited) December 28, 2014 December 29, 2013 (in millions) Net proceeds from equity contributions $ — $ 4,162.1 Proceeds from the issuance of long-term debt and capital leases 13.0 1,100.3 Principal payments on long-term debt and capital lease obligations (34.5 ) (680.5 ) Proceeds from Securitization Facility 255.0 440.0 Payments on Securitization Facility (360.0 ) (335.0 ) Net borrowings (repayments) on revolving credit facilities and notes payables (159.6 ) 93.5 Debt issuance costs and other (0.2 ) (18.2 ) Net cash flows from financing activities $ (286.3 ) $ 4,762.2 51 The following items explain the significant investing activities for the periods presented: Twelve Months Ended December 28, 2013 ▪ As part of the Merger, WH Group purchased all of our common stock as of the Merger Date. The amount paid by WH Group, net of certain transaction costs is deemed to be an equity contribution by WH Group to the Company. ▪ Merger Sub issued the Merger Sub Notes as part of the financing for the Merger. Also, Merger Sub incurred $20.4 million in transaction fees in connection with the issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Sub, including Merger Sub's obligations under the Merger Sub Notes. • We made an early repayment of our $200.0 million floating rate unsecured term loan due in February 2014 and we repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million, and we repaid the outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million. ▪ We drew $145.0 million, net of repayments, on our Inventory Revolver and $105.0 million, net of repayments, on our Securitization Facility, to repay other long-term debt, as noted above. Successor Predecessor The Transition Period Predecessor Eight Months Ended (unaudited) September 27 - December 29, 2013 April 29 - September 26, 2013 December 29, 2013 December 30, 2012 (in millions) Net proceeds from equity contributions $ 4,162.1 $ — $ 4,162.1 $ — Proceeds from the issuance of long-term debt and capital leases 900.3 — 900.3 1,019.2 Principal payments on long-term debt and capital lease obligations (218.7 ) (458.7 ) (677.4 ) (713.4 ) Proceeds from Securitization Facility 240.0 170.0 410.0 — Payments on Securitization Facility (255.0 ) (50.0 ) (305.0 ) — Net borrowings (repayments) on revolving credit facilities and notes payables (367.9 ) 490.3 122.4 42.8 Repurchase of common stock — — — (386.4 ) Debt issuance costs and other (20.4 ) 0.1 (20.3 ) (16.5 ) Net cash flows from financing activities $ 4,440.4 $ 151.7 $ 4,592.1 $ (54.3 ) The following items explain the significant investing activities for the periods presented: Eight Months Ended December 29, 2013 • As part of the Merger, WH Group purchased all of our common stock as of the Merger Date. The amount paid by WH Group, net of certain transaction costs is deemed to be an equity contribution by WH Group to the Company. • Merger Sub issued the Merger Sub Notes as part of the financing for the Merger. Also, Merger Sub incurred $20.4 million in transaction fees in connection with the issuance of the Merger Sub Notes, which are being amortized over the life of the Merger Sub Notes. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Sub, including Merger Sub's obligations under the Merger Sub Notes. • We made an early repayment of our $200.0 million floating rate unsecured term loan due in February 2014, repaid the outstanding principal balance on our 4% senior unsecured convertible notes totaling $400.0 million, and repaid the outstanding principal amount on our 7.75% senior unsecured notes totaling $55.0 million. • We drew $145.0 million on our Inventory Revolver and $105.0 million on our Securitization Facility, net of repayments, to repay other long-term debt, as noted above. 52 Eight Months Ended December 30, 2012 • In August 2012, we issued $1.0 billion of our 2022 Notes at a price equal to 99.5% of their face value. We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $694.4 million of our outstanding senior notes due in May 2013 and July 2014. • We repurchased 19,068,079 shares of our common stock for $386.4 million as part of a previously approved share repurchase program. • We incurred $18.0 million in transaction fees in connection with the issuance of the 2022 Notes, which are being amortized over their ten-year life. Predecessor Twelve Months Ended April 28, 2013 April 29, 2012 (in millions) Proceeds from the issuance of long-term debt $ 1,219.2 $ — Principal payments on long-term debt and capital lease obligations (716.5 ) (152.7 ) Net borrowings (repayments) on revolving credit facilities and notes payables 13.9 (0.3 ) Repurchase of common stock (386.4 ) (189.5 ) Change in cash collateral — 23.9 Debt issuance costs and other (14.5 ) (9.8 ) Net cash flows from financing activities $ 115.7 $ (328.4 ) The following items explain the significant financing activities for the periods presented: Twelve Months Ended April 28, 2013 • In August 2012, we issued $1.0 billion of our 2022 Notes at a price equal to 99.5% of their face value. We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $589.4 million of our 2014 Notes and $105.0 million of our 2013 Notes. • 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 were being amortized over their ten-year life and subsequently written off in connection with the Merger. Twelve Months Ended April 29, 2012 • We redeemed the remaining $77.8 million of our 7% senior unsecured notes due August 2011 and repurchased $59.7 million of our 2014 Notes. • We repurchased 9,176,704 shares of our common stock for $189.5 million as part of the Share Repurchase Program. • We received $20.0 million of cash previously held in a deposit account to serve as collateral for overdrafts on certain of our bank accounts and $3.9 million of cash from the counterparty of our interest rate swap contract which expired in August 2011. • We paid $11.0 million of debt issuance costs in connection with the refinancing of the ABL Credit Facility. 53 Capitalization January 3, 2016 December 28, 2014 (in millions) 6.625% senior unsecured notes, due August 2022, including unamortized premiums of $15.6 million and $19.7 million $ 900.2 $ 1,014.3 7.75% senior unsecured notes, due July 2017, including unamortized premiums of $20.6 million and $38.1 million 446.8 519.3 5.25% senior unsecured notes, due August 2018, net of debt issuance costs of $5.4 million and $8.3 million 446.4 491.7 5.875% senior unsecured notes, due August 2021, net of debt issuance costs of $5.7 million and $7.6 million 349.3 392.4 Floating rate senior unsecured term loan, due May 2020 50.0 200.0 Various, interest rates from 2.45% to 2.76%, due February 2016 through March 2019 71.0 84.0 Total debt 2,263.7 2,701.7 Current portion (29.1 ) (46.9 ) Total long-term debt $ 2,234.6 $ 2,654.8 Total shareholder's equity $ 4,820.5 $ 4,539.5 Guarantees As part of our business, we are party to various financial guarantees and other commitments as described below. These arrangements involve elements of performance and credit risk that are not included in the consolidated balance sheet. 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. 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 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. This guaranty may remain in place until the leases expire through February 2022. Additional Matters Affecting Liquidity Capital Projects 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. Group Pens In January 2007, we announced a voluntary, ten-year program to phase out individual gestation stalls at our company-owned sow farms and replace the gestation stalls with group pens. We currently estimate the total cost of our transition to group pens to be approximately $360.0 million, including associated maintenance and repairs. This program represents a significant financial commitment and reflects our desire to be more animal friendly, as well as to address the concerns and needs of our customers. As of the end of 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. 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. We asked contract sow growers to convert by 2022 and offered a sliding scale of incentives to accelerate that timetable through the receipt of contract extensions upon completion of the conversion. 54 Risk Management Activities We are exposed to market risks primarily from changes in commodity prices, and to a lesser degree, interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative instruments to hedge our exposure to changing prices and rates, as more fully described under “Derivative Financial Instruments” below. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative portfolio. When the value of our open derivative contracts decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease. 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 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 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. For example, in a period of rising grain prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in spot markets. These offsetting changes do not always occur, however, in the same amounts or in the same period, with lag times of as much as twelve months. Pension Plan Funding Funding requirements for our pension plans are determined based on the funded status measured at the end of each year. The values of our pension obligation and related assets may fluctuate significantly, which may in turn lead to a larger underfunded status in our pension plans and a higher funding requirement. We contributed $200.0 million to our qualified pension plans in 2015 . In January 2016, we contributed an additional $125.0 million to our qualified pension plans. 55 Contractual Obligations and Commercial Commitments The following table provides information about our contractual obligations and commercial commitments as of January 3, 2016 : Payments Due By Period Total < 1 Year 1-3 Years 3-5 Years > 5 Years (in millions) Long-term debt, excluding premiums and debt issuance costs $ 2,238.7 $ 29.1 $ 911.6 $ 58.3 $ 1,239.7 Interest 686.2 139.8 245.4 162.8 138.2 Capital lease obligations, including interest 25.0 1.4 2.1 1.9 19.6 Operating leases 260.0 49.0 79.1 53.1 78.8 Capital expenditure commitments 57.9 57.9 — — — Purchase obligations: Hog procurement (1) 5,970.7 1,628.6 2,422.1 1,365.7 554.3 Contract hog growers (2) 1,142.5 377.7 316.7 210.4 237.7 Grain procurement (3) 210.5 210.5 — — — Other (4) 406.2 167.5 27.8 30.0 180.9 Total $ 10,997.7 $ 2,661.5 $ 4,004.8 $ 1,882.2 $ 2,449.2 —————————————— (1) Through the Fresh Pork and International segments, we have purchase agreements with certain hog producers. Some of these arrangements obligate us to purchase all of the hogs produced by these producers. Other arrangements obligate us to purchase a fixed amount of hogs. Due to the uncertainty of the number of hogs that we are obligated to purchase and the uncertainty of market prices at the time of hog purchases, we have estimated our obligations under these arrangements. Future payments were estimated using current live hog market prices, available futures contract prices and internal projections adjusted for historical quality premiums. (2) Through the Hog Production segment, we use independent farmers and their facilities to raise hogs produced from our breeding stock. Under multi-year contracts, the farmers provide the initial facility investment, labor and front line management in exchange for a performance-based service fee payable upon delivery. We are obligated to pay this service fee for all hogs delivered. We have estimated our obligation based on expected hogs delivered from these farmers. (3) Includes fixed price forward grain purchase contracts totaling $11.9 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. As a result, they are not recorded in the balance sheet. (4) Includes guaranteed royalty payments totaling $229.5 million to Nathan's Famous Inc. (Nathan's) over an 18 year contractual term commencing in March 2014. In December 2012, John Morrell signed an agreement with Nathan's to become Nathan's exclusive licensee to manufacture and sell branded hot dog, sausage and corn beef products in the retail market. Under the terms of the agreement, guaranteed minimum royalty payments 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 We do not have any off-balance sheet arrangements that have a material current effect, or that are reasonably likely to have a material future effect, on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. DERIVATIVE FINANCIAL INSTRUMENTS We are exposed to market risks primarily from changes in commodity prices, as well as interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative instruments to hedge our exposure to changing prices and rates. 56 Derivative instruments are recorded in the balance sheet as either assets or liabilities at fair value. For derivatives that qualify and have been designated as cash flow or fair value hedges for accounting purposes, changes in fair value have no net impact on earnings, to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings (commonly referred to as the “hedge accounting” method). For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in current period earnings (commonly referred to as the “mark-to-market” method). Under this guidance, we may elect either method of accounting for our derivative portfolio, assuming all the necessary requirements are met. We have in the past availed ourselves of either acceptable method and expect to do so in the future. We believe all of our derivative instruments represent economic hedges against changes in prices and rates, regardless of their designation for accounting purposes. When available, we use quoted market prices to determine the fair value of our derivative instruments. This may include exchange prices, quotes obtained from brokers, or independent valuations from external sources, such as banks. In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value. The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. The following table presents the fair values of our open derivative financial instruments in the consolidated balance sheets (1) : January 3, 2016 December 28, 2014 (in millions) Grains $ (28.0 ) $ (27.4 ) Livestock 18.8 58.0 Energy (15.7 ) (10.1 ) Interest rate contracts (0.2 ) (0.1 ) Foreign currency (1.1 ) 0.4 —————————————— (1) Negative amounts represent net liabilities 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 January 3, 2016 and December 28, 2014 : January 3, 2016 December 28, 2014 (in millions) Grains $ 18.9 $ 24.2 Livestock 1.4 76.3 Energy 3.3 5.9 Foreign currency 7.4 4.3 Commodities Risk Our meat processing and hog production operations use various raw materials, primarily live hogs, corn, soybean meal and wheat, which are actively traded on commodity exchanges. We hedge these commodities when we determine conditions are appropriate to mitigate the inherent price risks. While this hedging may limit our ability to participate in gains from favorable commodity fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material prices. Commodities underlying our derivative instruments are subject to significant price fluctuations. Any requirement to mark-to-market the positions that have not been designated or do not qualify for hedge accounting could result in volatility in our results of operations. We attempt to closely match the hedging instrument terms with the hedged item’s terms. Gains and losses resulting from our commodity derivative contracts are recorded in cost of sales except for lean hog contracts that are designated in cash flow hedging relationships, which are recorded in sales, and are offset by increases and decreases in cash prices in our core business (with such increases and decreases reflected in the same income statement line items). For example, in a period of rising grain prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in spot markets. However, under the “mark-to-market” method described above, these offsetting changes do not always occur in the same period, with lag times of as much as twelve months. 57 Interest Rate and Foreign Currency Exchange Risk We periodically enter into interest rate swaps to hedge our exposure to changes in interest rates on certain financial instruments and to manage the overall mix of fixed rate and floating rate debt instruments. 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. See "Item 8. 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. 58 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our experience and our understanding of the current facts and circumstances. Actual results could differ from those estimates. The following is a summary of certain accounting policies and estimates we consider critical. Our accounting policies are more fully discussed in Note 1 in “Item 8. Financial Statements and Supplementary Data.” Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Contingent liabilities We are subject to lawsuits, investigations and other claims related to the operation of our farms, labor, livestock procurement, securities, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fees. A determination of the amount of reserves and disclosures required, if any, for these contingencies are made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of loss is reasonably possible or probable. Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages or fees, and the effectiveness of strategies or other factors beyond our control. We have not made any material changes in the accounting methodology used to establish our contingent liabilities during the periods presented in this Form 10-K. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our contingent liabilities. 59 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Marketing and advertising costs We incur advertising, customer incentive and consumer incentive costs to promote products through marketing programs. These programs include cooperative advertising, volume discounts, in-store display incentives, coupons and other programs. Advertising costs are charged in the period incurred except for certain production costs, which are expensed upon the first airing of the advertisement. We accrue customer and consumer incentive costs based on the estimated performance, historical utilization and redemption of each program. Except for certain amounts related to cooperative advertising arrangements, cash consideration given to customers is considered a reduction in the price of our products, thus recorded as a reduction to sales. The remainder of marketing and advertising costs is recorded as a selling, general and administrative expense. Recognition of the costs related to these programs contains uncertainties due to judgment required in estimating the potential performance and redemption of each program.These estimates are based on many factors, including experience of similar promotional programs. We have not made any material changes in the accounting methodology used to establish our marketing accruals during the periods presented in this Form 10-K. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our marketing accruals. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material. Impairment Considerations of Equity Method Investments Each quarter, we review the carrying value of our investments and consider whether indicators of impairment exist. Examples of impairment indicators include a history or expectation of future operating losses and declines in a quoted share price, among other factors. If an impairment indicator exists, we must evaluate the fair value of our investment to determine if a loss in value, which is other than temporary, has occurred. 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 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. 60 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Accrued self insurance We are self insured for certain losses related to health and welfare, workers’ compensation, auto liability and general liability claims. We use an independent third-party actuary to assist in the determination of certain of our self-insurance liabilities. We and the actuary consider a number of factors when estimating our self-insurance liability, including claims experience, demographic factors, severity factors and other actuarial assumptions. We periodically review our estimates and assumptions with our third-party actuary to assist us in determining the adequacy of our self-insurance liability. Our self-insurance liabilities contain uncertainties due to assumptions required and judgment used. Costs to settle our obligations, including legal and healthcare costs, could increase or decrease causing estimates of our self-insurance liabilities to change. Incident rates, including frequency and severity, could increase or decrease causing estimates in our self-insurance liabilities to change. We have not made any material changes in the accounting methodology used to establish our self-insurance liabilities during the periods presented in this Form 10-K. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our self-insurance liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material. A 10% increase in the estimates as of 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 Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Examples include a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition. When evaluating long-lived assets for impairment, we compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. Impairment is recorded if the estimated future cash flows are less than the carrying value of the asset. The impairment is the excess of the carrying value over the fair value of the long-lived asset. 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. We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the periods presented in this Form 10-K. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments of long- lived assets. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to future impairment losses that could be material. 61 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Impairment of goodwill and other non-amortized intangible assets Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a prescribed two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any. The first step in the two-step impairment test is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. We estimate the fair value of our reporting units by applying valuation multiples and/or estimating future discounted cash flows. The selection of multiples and cash flows is dependent upon assumptions regarding future levels of operating performance as well as business trends and prospects, and industry, market and economic conditions. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. When estimating future discounted cash flows, we consider the assumptions that hypothetical marketplace participants would use in estimating future cash flows. In addition, where applicable, an appropriate discount rate is used, based on our cost of capital or location-specific economic factors. The fair values of trademarks have been calculated using a royalty rate method. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace. Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions. We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill and other intangible assets during the periods presented in this Form 10-K. 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: Fresh Pork - $32.2 million Packaged Meats - $1,518.3 million International - $65.1 million Hog Production - $3.9 million As a result of the first step of our 2015 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value. Therefore, the second step was not necessary. A hypothetical 10% decrease in the estimated fair value of our reporting units would not result in an impairment. Our 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. 62 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit). For our other non-amortizable intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other intangible assets. However, we could be required to evaluate the recoverability of goodwill and other intangible assets prior to the required annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a decline in market capitalization. 63 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Income taxes We estimate total income tax expense based on statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we earn income. Federal income taxes include an estimate for taxes on earnings of foreign subsidiaries expected to be remitted to the United States and be taxable, but not for earnings considered indefinitely invested in the foreign subsidiary. Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded when it is likely a tax benefit will not be realized for a deferred tax asset. We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due. This analysis is performed in accordance with the applicable accounting guidance. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Changes in projected future earnings could affect the recorded valuation allowances in the future. Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate. Our analysis of unrecognized tax benefits contain uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds. We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our recorded liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement may require use of our cash and result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement could be recognized as a reduction in our effective tax rate in the period of resolution. 64 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Pension Accounting We provide the majority of our U.S. employees with pension benefits. We account for our pension plans in accordance with the applicable accounting guidance, which requires us to recognize the funded status of our pension plans in our consolidated balance sheets and to recognize, as a component of other comprehensive income (loss), the gains or losses and prior service costs or credits that arise during the period, but are not recognized in net periodic benefit cost. We use an independent third-party actuary to assist in the determination of our pension obligation and related costs. We generally contribute the minimum amount required under government regulations to 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. The key assumptions we use include discount rates, salary growth, retirement ages/mortality rates and the expected return on plan assets. These assumptions may have an effect on the amount and timing of future contributions. The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match our expected benefit payment stream. The salary growth assumption reflects our long-term actual experience, the near-term outlook and assumed inflation. Retirement rates are based primarily on actual plan experience. Mortality rates were previously based on mandated mortality tables. 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. The effects of actual results differing from these assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods. The following weighted average assumptions were used to determine our benefit obligation and net benefit cost for 2015: • 4.55% – Discount rate to determine net benefit cost • 4.70% – Discount rate to determine pension benefit obligation • 7.50% – Expected return on plan assets • 4.00% – Salary growth 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 $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. Derivatives Accounting See “Derivative Financial Instruments” above for a discussion of our derivative accounting policy. 65 Recent Accounting Pronouncements See Note 1 in “Item 8. Financial Statements and Supplementary Data” for information about recently issued accounting standards not yet adopted by us, including their potential effects on our financial statements. FORWARD-LOOKING INFORMATION This report contains “forward-looking” statements within the meaning of the federal securities laws. The forward-looking statements include statements concerning our outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Our forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These risks and uncertainties include, but are not limited to, the availability and prices of live hogs, feed ingredients (including corn), raw materials, fuel and supplies, food safety, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, risks associated with our indebtedness, including cost increases due to rising interest rates or changes in debt ratings or outlook, hedging risk, adverse weather conditions, operating efficiencies, changes in foreign currency exchange rates, access to capital, the cost of compliance with and changes to regulations and laws, including changes in accounting standards, tax laws, environmental laws, agricultural laws and occupational, health and safety laws, adverse results from litigation, actions of domestic and foreign governments, labor relations issues, credit exposure to large customers, the ability to realize the anticipated strategic benefits of the acquisition of Smithfield Foods, Inc. by WH Group, the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations and other risks and uncertainties described under “Item 1A. Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking statements because actual results may differ materially from those expressed in, or implied by, the statements. Any forward-looking statement that we make speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.