What changed in this filing

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Item 2. Management’s Discussion and Analysis

2016-10-26 compared with 2016-08-16 · 74 added, 71 removed, 231 unchanged (39% of the section changed)

23 unchanged sentences

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.

We believe moving to a more centralized structure allows for a more efficient and effective approach to customers, best utilizes management talent, maximizes the manufacturing platform and plant efficiency and optimizes marketing, innovation and brand management.

Second Quarter Summary of Results

Net income for the second quarter of 2016 was $ 137.8 million compared to net income of $104.2 million for the second quarter of 2015 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the second quarter of 2016 compared to the second quarter of 2015:

Fresh Pork operating profit increased by $73.0 million primarily as a result of higher fresh pork market values relative to hog prices.

Packaged Meats operating profit decreased by $ 3.4 million primarily as a result of lower sales volume.

Hog Production operating results decreased by $23.9 million primarily as a result of favorable hedging results in the prior year.

International operating profit increased by $4.4 million primarily due to improved results in our Mexican joint ventures.

We believe the impact of One Smithfield has resulted in pre-tax profit margin improvements of approximately 100 basis points and is expected to further improve pre-tax profit margins by another 100 basis points over the next eighteen to twenty-four months.

Third Quarter Summary of Results

Net income for the third quarter of 2016 was $ 143.8 million compared to net income of $83.3 million for the third quarter of 2015 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the third quarter of 2016 compared to the third quarter of 2015:

Fresh Pork operating profit increased by $62.6 million primarily due to lower live hog market prices resulting from higher hog supplies in the U.S.

Packaged Meats operating profit increased by $ 24.5 million primarily as a result of higher selling prices and volumes.

Hog Production operating results decreased by $12.6 million primarily as a result of lower live hog market prices, partially offset by lower feed costs.

International operating profit increased by $12.8 million primarily due to higher sales volume and prices, and lower feed costs in our European operations.

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

4 unchanged sentences

Three Months Ended

Six Months Ended

June 28, 2015

Nine Months Ended

September 27,

(in millions)

3 unchanged sentences

Depreciation and amortization

Non-operating (gain) loss

Non-operating loss

Adjusted EBITDA

22 unchanged sentences

On July 14, 2016, Congress passed legislation creating a national standard of disclosure for food products containing genetically modified organisms (GMO) or bioengineered ingredients.

The legislation, which is expected to be signed into law, will preempt any state laws on GMO labeling and disclosure, such as those that went into effect in Vermont on July 1, 2016.

The legislation, which was signed into law, will preempt any state laws on GMO labeling and disclosure, such as those that went into effect in Vermont on July 1, 2016.

The bill requires mandatory disclosure of GMO ingredients in food, giving food manufacturers the option of disclosing that information online or via on-package labels.

23 unchanged sentences

Consolidated Results of Operations

The table presented below compares our results of operations for the second quarters of 2016 and 2015 .

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

The table presented below compares our results of operations for the third quarters of 2016 and 2015 .

Three Months Ended

September 27,

(in millions)

4 unchanged sentences

Interest expense

Non-operating gain

Income before income taxes

Income tax expense

Sales and gross profit

Sales remained relatively flat compared to the prior year.

Gross profit increased primarily as a result of higher domestic meat prices and lower hog raising costs, which were partially offset by the effect of more favorable hedging results in the prior year.

Selling, general and administrative expenses

The decrease in SG&A is primarily attributed to lower marketing and advertising costs.

Income from equity method investments

Equity income increased primarily due to improved results in our Mexican joint ventures, which were attributable to lower feed costs.

Six Months Ended

The following items explain the significant changes in our consolidated results of operations for the three months ended October 2, 2016 as compared to the three months ended September 27, 2015:

Sales increased 4% primarily due to higher domestic and international meat volumes and selling prices.

Gross profit increased 23% primarily as a result of higher sales, lower domestic pork processing raw material costs and lower hog feed costs in the U.S.

Nine Months Ended

September 27,

(in millions)

5 unchanged sentences

Non-operating loss

Income before income taxes

Income tax expense

Sales and gross profit

Sales decreased primarily as a result of lower average selling prices of domestic fresh pork, more favorable hedging results in the prior year and lower domestic meat volume, which was partially offset by higher average selling prices of domestic packaged meats products.

Gross profit increased primarily as a result of lower pork processing raw material costs and lower hog raising costs.

Selling, general and administrative expenses

The decrease in SG&A is primarily attributed to lower marketing and advertising costs.

Income from equity method investments

The following items explain the significant changes in our consolidated results of operations for the nine months ended October 2, 2016 as compared to the nine months ended September 27, 2015:

Sales decreased 2% primarily as a result of more favorable hedging results in the prior year, lower average selling prices of domestic fresh pork and the impact of foreign currency translation.

These declines were partially offset by higher average selling prices of domestic packaged meats products and higher sales volume in Europe.

Gross profit increased 11% primarily as a result of lower domestic pork processing raw material costs and lower hog feed costs in the U.S.

Selling, general and administrative expenses decreased 3% primarily due to an increase in the cash surrender value of company-owned life insurance policies, the reimbursement of expenses associated with a legal settlement and a reduction in advertising expenses.

Equity income in the prior year was negatively impacted by our former investment in CFG.

Equity income also increased due to improved results in our Mexican joint ventures, which were attributable to lower feed costs.

Non-operating loss

Equity income also increased due to improved results in our Mexican joint ventures.

The non-operating loss in the prior year is primarily related to a loss on debt extinguishment of $12.8 million as a result of the Tender Offer.

Segment Results

The following information reflects the results from each respective segment for the second quarters of 2016 and 2015 .

The following information reflects the results from each respective segment for the third quarters of 2016 and 2015 .

Three Months Ended

September 27,

(in millions)

10 unchanged sentences

Consolidated operating profit

Sales decreased 1% primarily due to lower volume.

Operating profit increased primarily due to higher fresh pork market values relative to hog prices.

Hogs processed in the current quarter remained relatively unchanged from the prior year quarter.

Sales increased 6% due to a 5% increase in volume and a 1% increase in average selling prices.

Operating profit increased primarily due to lower live hog market prices relative to fresh pork market prices.

The number of hogs processed increased 9%.

Packaged Meats

Sales increased 7% due to a 10% increase in average selling prices, partially offset by a 3% decline in volume.

Operating profit remained relatively unchanged, but declined as a percentage of sales as we were not able to fully pass on a significant increase in raw material costs.

Sales increased 3% due to a 2% increase in average selling prices and a 1% increase in volume.

Operating profit increased primarily due to higher sales while raw material costs were relatively unchanged.

Hog Production

Sales decreased 14% due primarily to more favorable hedging results in the prior year quarter and a 2% decrease in head sold.

Operating profit decreased due to lower sales, partially offset by lower feed costs.

Sales decreased 6% due to lower live hog market prices, partially offset by a higher volume.

The number of market hogs sold increased 4% while average hog weights were down 2%.

Operating profit decreased due to lower live hog market prices, partially offset by lower feed costs.

Operating results benefited from favorable hedging activities in both years.

International

Sales increased 5% primarily due to an 11% increase in volume, partially offset by the impact of foreign currency translation and lower average selling prices.

The volume increase was driven largely by a 12% increase in hogs processed and a 16% increase in poultry processed.

Foreign currency translation lowered sales 3% , primarily due to a stronger U.S.

Operating profit increased due to higher equity income from our Mexican joint ventures, primarily due to lower feed costs, which was slightly offset by lower operating profit in Europe, primarily due to higher raw material costs.

Six Months Ended

Sales increased 6% primarily due to a 5% increase in volume and a 5% increase in average selling prices in our European operations, partially offset by the impact of foreign currency translation.

Operating profit increased due to higher sales and lower feed costs in our European operations.

Nine Months Ended

September 27,

(in millions)

10 unchanged sentences

Consolidated operating profit

Sales decreased 8% primarily due to a 7% decrease in average selling prices and a 2% decrease in volume.

Operating profit increased primarily due to higher fresh pork market values relative to hog prices.

Hogs processed so far in 2016 remain relatively unchanged from the prior year.

Sales decreased 4% primarily due to lower average selling prices.

Operating profit increased primarily due to lower live hog market prices and slightly higher fresh pork market prices.

The number of hogs processed increased 3%.

Packaged Meats

Sales increased 5% primarily due to an increase in average selling prices from the prior year.

Current year sales volume was relatively unchanged from the prior year.

Operating profit improved as a result of higher sales and lower advertising expenses.

Operating profit margin was relatively unchanged from the prior year.

Sales increased 4% primarily due to an increase in average selling prices.

Operating profit improved as a result of higher sales prices, which more than offset higher raw material costs.

Hog Production

Sales decreased 18% primarily due to more favorable hedging results in the prior year, lower domestic live hog market prices and a 2% decrease in head sold.

Sales decreased 15% primarily due to significantly lower live hog market prices and more favorable hedging activities in the prior year.

Operating results decreased primarily due to lower sales, partially offset by lower feed costs.

International

Sales increased 1% despite a 6% negative foreign currency impact due to a stronger U.S.

On a constant currency basis, sales increased 7% due to an 11% increase in volume, driven largely by a 13% increase in hogs processed and a 15% increase in poultry processed, partially offset by a 3% decrease in average selling prices.

Operating profit increased primarily due to higher equity income.

Equity income in the prior year was negatively impacted by $4.9 million in losses from our former investment in CFG while results from our Mexican joint ventures improved year over year, primarily due to lower feed costs.

Sales increased 3% due to an 8% increase in volume in our European operations, partially offset by the impact of foreign currency translation.

Operating profit increased primarily due to higher sales and lower feed costs in our European operations and improved results from our Mexican joint ventures.

Equity income in the prior year was negatively impacted by $4.9 million in losses from our former investment in CFG.

LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

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

As of July 3, 2016 , our liquidity position was approximately $1.4 billion , comprised of approximately $1.3 billion in availability under our credit facilities and $119.3 million in cash and cash equivalents.

As of October 2, 2016 , our liquidity position was approximately $1.6 billion , comprised of approximately $1.3 billion in availability under our credit facilities and $277.6 million in cash and cash equivalents.

Sources of Liquidity

8 unchanged sentences

Credit Facilities

October 2, 2016

Borrowing Base Adjustment

8 unchanged sentences

Operating Activities

Six Months Ended

Nine Months Ended

September 27,

(in millions)

1 unchanged sentence

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

Cash received from customers decreased due to lower sales.

Cash paid for grain and other ingredients purchased by the Hog Production segment increased approximately $22.1 million from the prior year.

In the current year, we contributed $125.0 million to our qualified pension plans compared to $200.0 million in the prior year.

Cash paid to outside hog suppliers decreased due to a 5% decline in live hog market prices.

The current year included net tax receipts of $16.5 million for domestic income taxes compared to $91.3 million paid in the prior year.

In the current year, we received $ 187.1 million for the settlement of derivative contracts and for margin requirements compared to $ 132.3 million in the prior year.

Cash paid for grain and other ingredients purchased by the Hog Production segment increased approximately $37.0 million from the prior year.

In the current year, we contributed $225.0 million to our qualified pension plans compared to $200.0 million in the prior year.

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

Investing Activities

Six Months Ended

Nine Months Ended

September 27,

(in millions)

5 unchanged sentences

Capital expenditures during both years primarily related to plant and hog farm improvement and expansion projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.

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

Current year expenditures include costs related to a new domestic enterprise resource planning system.

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

In the prior year, we incurred costs for the construction of a distribution center that was a pending sale-leaseback, as shown in other investing activities above.

Financing Activities

Six Months Ended

Nine Months Ended

September 27,

(in millions)

10 unchanged sentences

Financial Position

Our balance sheet as of July 3, 2016 , as compared to January 3, 2016 , was impacted by the following significant changes:

Our balance sheet as of October 2, 2016 , as compared to January 3, 2016 , was impacted by the following significant changes:

Accounts payable decreased by $166.5 million mainly due to the timing of payments.

1 unchanged sentence

The Company has $426.2 million of senior unsecured public notes maturing on July 1, 2017.

Accordingly, this debt was classified as a current liability as of October 2, 2016.

While we may choose to use other sources of capital to fund this upcoming maturity, adequate liquidity resources are available to address this maturity in its entirety.

In September 2016, the Company issued a notice to bondholders to call $250.0 million principal of our bonds maturing August 1, 2018, at 101%.

Accordingly, this debt was classified as a current liability as of October 2, 2016.

The bonds were redeemed on October 21, 2016.

We expect to recognize a loss on debt extinguishment of $4.6 million in the fourth quarter of 2016 as a result of the redemption.

Additional Matters Affecting Liquidity

18 unchanged sentences

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

During the six months ended July 3, 2016 , margin deposits ranged from $14.3 million to $87.1 million .

The average daily amount on deposit with our brokers during the six months ended July 3, 2016 was $46.3 million .

As of July 3, 2016 , the net amount on deposit with our brokers was $42.0 million .

During the nine months ended October 2, 2016 , margin deposits posted by us ranged from $(49.4) million (negative amounts representing margin deposits we have received from our brokers) to $87.1 million .

The average daily amount on deposit with our brokers during the nine months ended October 2, 2016 was $26.9 million .

As of October 2, 2016 , the net amount on deposit from our brokers was $(33.0) million .

The effects, positive or negative, on liquidity resulting from our risk management activities tend to be mitigated by offsetting changes in cash prices in our core business.

19 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis