What changed in this filing

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Item 1. Financial Statements

2016-08-16 compared with 2016-04-28 · 86 added, 60 removed, 354 unchanged (29% of the section changed)

4 unchanged sentences

Three Months Ended

Six Months Ended

Cost of sales

3 unchanged sentences

Interest expense

Non-operating loss

Non-operating (gain) loss

Income before income taxes

5 unchanged sentences

Three Months Ended

Six Months Ended

Other comprehensive income (loss), net of tax:

38 unchanged sentences

(in millions and unaudited)

Three Months Ended

Six Months Ended

Cash flows from operating activities:

1 unchanged sentence

Depreciation and amortization

Stock-based compensation expense

Income from equity method investments

2 unchanged sentences

Cash flows from investing activities:

Proceeds from sale of equity interest in Campofrio Food Group

Capital expenditures

Net expenditures from breeding stock transactions

Proceeds from the sale of property, plant and equipment

Net cash flows from investing activities

21 unchanged sentences

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

You should read these statements and notes in conjunction with the audited consolidated financial statements and the related notes included in our report on Form 10-K for the twelve months ended January 3, 2016 .

The information reflects all normal recurring adjustments which we believe are necessary to present fairly the financial position and results of operations for all periods included.

Certain prior year amounts have been reclassified to conform to current year presentation.

The three months ended April 3, 2016 correspond to the first quarter of 2016 and the three months ended March 29, 2015 correspond to the first quarter of 2015 .

The three and six months ended July 3, 2016 correspond to the second quarter and first half of 2016 , respectively, and the three and six months ended June 28, 2015 correspond to the second quarter and first half of 2015 , respectively.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).

The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance.

1 unchanged sentence

The ASU applies to all contracts with customers, except those that are within the scope of other topics in the FASB Accounting Standards Codification.

Compared with current U.S.

GAAP, the ASU also requires significantly expanded disclosures about revenue recognition.

Compared with current GAAP, the ASU also requires significantly expanded disclosures about revenue recognition.

In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606):

6 unchanged sentences

The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018 with early adoption permitted.

The guidance is not currently effective for us and has not been applied in this Form 10-Q.

We are currently in the process of evaluating the impact of adoption on our consolidated financial statements.

3 unchanged sentences

The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016 with early adoption permitted.

The guidance is not currently effective for us and has not been applied in this Form 10-Q.

We are currently in the process of evaluating the impact of adoption on our consolidated financial statements.

In June 2016, the FASB issued Accounting Standards update 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASU 2016-13).

ASU 2016-13 will impact how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

The ASU replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and

requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 with early adoption permitted beginning in Q1 of 2019.

The guidance is not currently effective for us and has not been applied in this Form 10-Q.

We are currently in the process of evaluating the potential impact of adoption but at this time do not anticipate it will have a material impact on our consolidated financial statements.

Inventories consist of the following:

18 unchanged sentences

Additionally, certain of our derivative contracts contain credit risk-related contingent features, which would require us to post additional cash collateral to cover net losses on open derivative instruments if our credit rating was downgraded.

As of April 3, 2016 , the net liability position of our open derivative instruments that are subject to credit risk related contingent features was not material.

As of July 3, 2016 , the net liability position of our open derivative instruments that are subject to credit risk-related contingent features was not material.

We are exposed to losses in the event of nonperformance or nonpayment by counter parties under financial instruments.

Although our counter parties primarily consist of financial institutions that are investment grade, there is still a possibility that one or more of these companies could default.

However, a majority of our financial instruments are exchange traded futures contracts held with brokers and counter parties with whom we maintain margin accounts that are settled on a daily basis, thereby limiting our credit exposure to non-exchange traded derivatives.

However, a majority of our financial instruments are exchange traded futures

contracts held with brokers and counter parties with whom we maintain margin accounts that are settled on a daily basis, thereby limiting our credit exposure to non-exchange traded derivatives.

Determination of the credit quality of our counter parties is based upon a number of factors, including credit ratings and our evaluation of their financial condition.

As of April 3, 2016 , we had no significant credit exposure on non-exchange traded derivative contracts.

No significant concentrations of credit risk existed as of April 3, 2016 .

As of July 3, 2016 , we had gross credit exposure of $15.7 million and $8.6 million after netting agreements on non-exchange traded derivative contracts.

The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions.

17 unchanged sentences

These agreements legally allow for net settlement in the event of bankruptcy.

We offset the fair values of derivative assets and liabilities, along with the related cash collateral, that are executed with the same counterparty under these arrangements in the consolidated balance sheet.

The following tables reconcile the gross amounts of derivative assets and liabilities to the net amounts presented in our consolidated condensed balance sheets and the related effects of cash collateral under netting arrangements that provide a legal right of offset of assets and liabilities.

April 3, 2016

Gross Amount of Derivative Assets/ Liabilities

22 unchanged sentences

In addition, we enter into interest rate swaps to manage our exposure to changes in interest rates associated with our variable interest rate debt, and we enter into foreign exchange contracts to manage our exposure to the variability in expected future cash flows attributable to changes in foreign exchange rates associated with the forecasted purchase or sale of assets denominated in foreign currencies.

As of April 3, 2016 , we had no cash flow hedges for forecasted transactions beyond December 2016 .

As of July 3, 2016 , we had no commodity-related cash flow hedges for forecasted transactions beyond April 2017 .

When cash flow hedge accounting is applied, derivative gains or losses are recognized as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.

The ineffective portion of derivative gains and losses is recognized as part of current period earnings.

Derivative gains and losses, when reclassified into earnings, are recorded in cost of sales for grain contracts, sales for lean hog contracts, interest expense for interest rate contracts, and sales and selling, general and administrative expenses (SG&A) for foreign exchange contracts.

Gains and losses on derivatives designed to hedge price risk associated with fresh pork sales are recorded in the Hog Production segment.

During the three months ended April 3, 2016 , the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:

During the six months ended July 3, 2016 , the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:

1,500,960,000

Interest rate

18 unchanged sentences

Foreign exchange contracts

Six Months Ended

(in millions)

Commodity contracts:

Grain contracts

Lean hog contracts

Interest rate swaps

Foreign exchange contracts

For the periods presented, foreign exchange contracts were determined to be highly effective.

We have excluded from the assessment of effectiveness differences between spot and forward rates, which we have determined to be immaterial.

As of April 3, 2016 , there were deferred net losses of $7.4 million , net of tax of $4.9 million , in accumulated other comprehensive income (loss).

As of July 3, 2016 , there were deferred net losses of $4.8 million , net of tax of $2.9 million , in accumulated other comprehensive income (loss).

We expect to reclassify $5.5 million ( $3.4 million net of tax) of deferred net losses on closed commodity contracts into earnings within the next twelve months.

4 unchanged sentences

The gains or losses on the derivative instruments and the offsetting losses or gains on the related hedged items are recorded in cost of sales for commodity contracts.

During the three months ended April 3, 2016 , the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:

During the six months ended July 3, 2016 , the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:

The following table presents the effects on our consolidated condensed statements of income of gains and losses on derivative instruments designated in fair value hedging relationships and the related hedged items for the periods indicated:

6 unchanged sentences

Commodity contracts

We recognized gains of $1.5 million and $1.0 million for the three months ended April 3, 2016 and March 29, 2015 , respectively, on closed commodity derivative contracts as the underlying cash transactions affected earnings.

Six Months Ended

(in millions)

Commodity contracts

We recognized gains of $0.9 million for the three months ended July 3, 2016 and gains of $2.4 million and $0.9 million for the six months ended July 3, 2016 and June 28, 2015 , respectively, on closed commodity derivative contracts as the underlying cash transactions affected earnings.

Mark-to-Market Method

1 unchanged sentence

Under the mark-to-market method, gains and losses are recorded in cost of sales for commodity contracts and SG&A for foreign exchange contracts.

During the three months ended April 3, 2016 , the range of notional volumes associated with open derivative instruments using the "mark-to-market" method was as follows:

During the six months ended July 3, 2016 , the range of notional volumes associated with open derivative instruments using the "mark-to-market" method was as follows:

Foreign currency (1)

4 unchanged sentences

Three Months Ended

Six Months Ended

(in millions)

Commodity contracts

3 unchanged sentences

The table is not, therefore, a simple representation of unrealized gains and losses recognized in the income statement during any period presented.

Investments consist of the following:

Equity Investment

(in millions)

Mexican joint ventures

Total investments

We record our share of earnings and losses from our equity method investments in income from equity method investments.

Some of these results are reported on a one-month lag which, in our opinion, does not materially impact our consolidated condensed financial statements.

(Income) loss from equity method investments consists of the following:

Three Months Ended

Equity Investment

(in millions)

Mexican joint ventures

International

Campofrío Food Group (CFG)

International

All other equity method investments

Income from equity method investments

Working Capital Facilities

As of April 3, 2016 , we had aggregate credit facilities totaling $1.5 billion , including an inventory-based revolving credit facility totaling $1.025 billion (the Inventory Revolver), an accounts receivable securitization facility totaling $325.0 million (the Securitization Facility) and international credit facilities totaling $176.1 million .

As of April 3, 2016 , our unused capacity under these credit facilities was $1.3 billion .

As of July 3, 2016 , we had aggregate credit facilities totaling approximately $1.5 billion , including an inventory-based revolving credit facility totaling $1.025 billion (the Inventory Revolver), an accounts receivable securitization facility totaling $275.0 million (the Securitization Facility) and international credit facilities totaling $164.5 million .

As of July 3, 2016 , our unused capacity under these credit facilities was $1.3 billion .

As part of the Securitization Facility agreement, all accounts receivable of our major Fresh Pork and Packaged Meats subsidiaries are sold to a wholly owned "bankruptcy remote" special purpose vehicle (SPV).

The SPV pledges the receivables as security for loans and letters of credit.

The SPV is included in our consolidated financial statements and therefore, the accounts receivable owned by it are included in our consolidated balance sheet.

The SPV is included in our consolidated financial statements and therefore, the accounts receivable owned by it are included in our consolidated balance sheets.

However, the accounts receivable owned by the SPV are separate and distinct from our other assets and are not available to our other creditors should we become insolvent.

As of April 3, 2016 , the SPV held $495.1 million of accounts receivable.

As part of our business, we are a 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 condensed balance sheets.

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

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

As of April 3, 2016 , we continued to guarantee $6.4 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.

As of July 3, 2016 , the SPV held $533.2 million of accounts receivable.

PENSION PLANS

1 unchanged sentence

Three Months Ended

Six Months Ended

(in millions)

Interest cost

6 unchanged sentences

Three Months Ended

April 3, 2016

March 29, 2015

June 28, 2015

(in millions)

1 unchanged sentence

Translation adjustment arising during the period

Translation losses reclassified to non-operating (gain) loss

Pension accounting:

Actuarial gain

Amortization of actuarial losses and prior service credits reclassified to cost of sales

4 unchanged sentences

Losses reclassified to cost of sales

Losses reclassified to SG&A

Total other comprehensive income (loss)

We paid a $73.6 million dividend during the current quarter to our parent company, recorded as a reduction to retained earnings.

Six Months Ended

June 28, 2015

(in millions)

Foreign currency translation:

Translation adjustment arising during the period

Translation losses reclassified to non-operating (gain) loss

Pension accounting:

Actuarial gain

Amortization of actuarial losses and prior service credits reclassified to cost of sales

Amortization of actuarial losses and prior service credits reclassified to SG&A

Hedge accounting:

Gains arising during the period

Gains reclassified to sales

Losses reclassified to cost of sales

Losses reclassified to SG&A

Total other comprehensive income (loss)

We paid dividends totaling $336.1 million for the six months ended July 3, 2016 to our parent company, recorded as a reduction to retained earnings.

FAIR VALUE MEASUREMENTS

18 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities, including assets held in a rabbi trust used to fund our non-qualified defined benefit plan, that were measured at fair value on a recurring basis as of April 3, 2016 and January 3, 2016 :

April 3, 2016

January 3, 2016

14 unchanged sentences

that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.

During the three months ended April 3, 2016 , we had no significant assets or liabilities that were measured and recorded at fair value on a nonrecurring basis.

During the six months ended July 3, 2016 , we had no significant assets or liabilities that were measured and recorded at fair value on a nonrecurring basis.

Other Financial Instruments

1 unchanged sentence

The carrying amount of all other debt approximates fair value as those instruments are based on variable interest rates.

The following table presents the fair value and carrying value of long-term debt, including the current portion of long-term debt as of April 3, 2016 and January 3, 2016 .

April 3, 2016

The following table presents the fair value and carrying value of long-term debt, including the current portion of long-term debt as of July 3, 2016 and January 3, 2016 .

January 3, 2016

26 unchanged sentences

However, legal expenses incurred in our and our subsidiaries’ defense of these claims and any payments made to plaintiffs through unfavorable verdicts or otherwise will negatively impact our cash flows and our liquidity position.

Given that these matters are in the very preliminary stages and given the inherent uncertainty of the outcome for these and similar potential claims, we cannot estimate the reasonably possible loss or range of loss for these loss contingencies outside the expenses we will incur to defend against these claims.

Given that these matters are in the preliminary stages and given the inherent uncertainty of the outcome for these and similar potential claims, we cannot estimate the reasonably possible loss or range of loss for these loss contingencies outside the expenses we will incur to defend against these claims.

We will continue to review whether an additional accrual is necessary and whether we have the ability to estimate the reasonably possible loss or range of loss for these matters.

9 unchanged sentences

hog production operations.

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

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

1 unchanged sentence

Three Months Ended

Six Months Ended

(in millions)

Segment sales—

4 unchanged sentences

Intersegment sales—

Packaged Meats

Hog Production

8 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements