Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in millions and unaudited)
Three Months Ended
March 29,
2015
March 30,
2014
Sales
$
3,616.5
$
3,422.1
Cost of sales
3,210.4
3,025.4
Gross profit
406.1
396.7
Selling, general and administrative expenses
221.9
215.4
Income from equity method investments
(4.0
)
(15.1
)
Operating profit
188.2
196.4
Interest expense
34.7
40.8
Non-operating (gain) loss
12.8
(1.1
)
Income before income taxes
140.7
156.7
Income tax expense
43.7
51.4
Net income
$
97.0
$
105.3
See Notes to Consolidated Condensed Financial Statements
3
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions and unaudited)
Three Months Ended
March 29,
2015
March 30,
2014
Net income
$
97.0
$
105.3
Other comprehensive income (loss), net of tax:
Foreign currency translation
(84.3
)
(0.7
)
Pension accounting
0.7
—
Hedge accounting
24.5
(131.3
)
Total other comprehensive loss
(59.1
)
(132.0
)
Comprehensive income (loss)
$
37.9
$
(26.7
)
See Notes to Consolidated Condensed Financial Statements
4
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except share data)
(unaudited)
March 29,
2015
December 28,
2014
ASSETS
Current assets:
Cash and cash equivalents
$
66.9
$
433.5
Accounts receivable, net
882.4
864.0
Inventories
2,114.6
2,206.8
Prepaid expenses and other current assets
155.8
244.3
Total current assets
3,219.7
3,748.6
Property, plant and equipment, net
2,737.1
2,753.4
Goodwill
1,622.4
1,626.2
Intangible assets, net
1,374.8
1,380.9
Investments
446.7
498.0
Other assets
122.0
124.4
Total assets
$
9,522.7
$
10,131.5
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations
33.6
48.1
Accounts payable
398.8
675.1
Accrued expenses and other current liabilities
662.7
745.0
Total current liabilities
1,095.1
1,468.2
Long-term debt and capital lease obligations
2,405.0
2,678.5
Other liabilities
1,388.0
1,394.6
Redeemable noncontrolling interests
51.2
49.8
Commitments and contingencies
Equity:
Shareholder's equity:
Common stock, no par value, 1,000 shares authorized; 1,000 issued and outstanding
—
—
Additional paid-in capital
4,173.0
4,167.3
Retained earnings
687.8
590.8
Accumulated other comprehensive loss
(277.7
)
(218.6
)
Total shareholder's equity
4,583.1
4,539.5
Noncontrolling interests
0.3
0.9
Total equity
4,583.4
4,540.4
Total liabilities and equity
$
9,522.7
$
10,131.5
See Notes to Consolidated Condensed Financial Statements
5
SMITHFIELD FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions and unaudited)
Three Months Ended
March 29,
2015
March 30,
2014
Cash flows from operating activities:
Net income
$
97.0
$
105.3
Adjustments to reconcile net cash flows from operating activities:
Depreciation and amortization
58.0
56.7
Income from equity method investments
(4.0
)
(15.1
)
Changes in operating assets and liabilities and other, net
(155.5
)
(526.3
)
Net cash flows from operating activities
(4.5
)
(379.4
)
Cash flows from investing activities:
Capital expenditures
(67.7
)
(30.8
)
Net proceeds (expenditures) from breeding stock transactions
(13.2
)
3.4
Proceeds from the sale of property, plant and equipment
1.1
0.5
Advance note and other
—
(0.1
)
Net cash flows from investing activities
(79.8
)
(27.0
)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt
—
13.0
Principal payments on long-term debt and capital lease obligations
(408.6
)
(10.0
)
Proceeds from Securitization Facility
230.0
100.0
Payments on Securitization Facility
(85.0
)
(60.0
)
Net proceeds (payments) on revolving credit facilities
(14.6
)
258.9
Net cash flows from financing activities
(278.2
)
301.9
Effect of foreign exchange rate changes on cash
(4.1
)
0.7
Net change in cash and cash equivalents
(366.6
)
(103.8
)
Cash and cash equivalents at beginning of period
433.5
193.4
Cash and cash equivalents at end of period
$
66.9
$
89.6
See Notes to Consolidated Condensed Financial Statements
6
SMITHFIELD FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 :
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Organization
Smithfield Foods, Inc., together with its subsidiaries ("Smithfield," "the Company," "we," "us" or "our"), is the largest hog producer and pork processor in the world. We produce and market a wide variety of fresh meat and packaged meats products both domestically and internationally. We conduct our operations through five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate.
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. 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 December 28, 2014 . 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 March 29, 2015 correspond to the first quarter of 2015 and the three months ended March 30, 2014 correspond to the first quarter of 2014 .
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, Revenues from Contracts with Customers (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. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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. The new guidance is effective for fiscal year and interim periods within those years beginning after December 15, 2016 and early adoption is not 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 potential impact of future adoption but at this time do not anticipate it will have a material impact on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost (ASU 2015-03). The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015 with early adoption permitted. We elected to early adopt this new guidance effective for the first quarter of 2015 and have applied the changes retrospectively to all periods presented. Debt issuance costs, which we previously presented in Other assets in our Consolidated Condensed Balance Sheets, were approximately $13.8 million and $16.1 million as of March 29, 2015 and December 28, 2014, respectively.
7
NOTE 2 :
INVENTORIES
Inventories consist of the following:
March 29,
2015
December 28,
2014
(in millions)
Fresh and packaged meats
$
936.0
$
961.9
Livestock
919.2
928.1
Grains
138.0
191.6
Manufacturing supplies
76.2
79.8
Other
45.2
45.4
Total inventories
$
2,114.6
$
2,206.8
NOTE 3 :
DERIVATIVE FINANCIAL INSTRUMENTS
Our meat processing and hog production operations use various raw materials, primarily live hogs, corn and soybean meal, which are actively traded on commodity exchanges. We hedge these commodities when we determine conditions are appropriate to mitigate price risk. 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. We attempt to closely match the commodity contract terms with the hedged item. We also periodically enter into interest rate swaps to hedge exposure to changes in interest rates on certain financial instruments and foreign exchange forward contracts to hedge certain exposures to fluctuating foreign currency rates.
We record all derivatives in the balance sheet as either assets or liabilities at fair value. Accounting for changes in the fair value of a derivative depends on whether it qualifies and has been designated as part of a hedging relationship. For derivatives that qualify and have been designated as 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). 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.
Changes in commodity prices could have a significant impact on cash deposit requirements under our broker and counter-party agreements. 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 March 29, 2015 , 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. 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 March 29, 2015 , we had no significant credit exposure on non-exchange traded derivative contracts. No significant concentrations of credit risk existed as of March 29, 2015 .
The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. All derivative contracts are recorded in prepaid expenses and other current assets or accrued expenses and other current liabilities within the consolidated condensed balance sheets, as appropriate.
8
The following table presents the fair values of our open derivative financial instruments on a gross basis.
Assets
Liabilities
March 29,
2015
December 28,
2014
March 29,
2015
December 28,
2014
(in millions)
(in millions)
Derivatives using the "hedge accounting" method:
Grain contracts
$
3.8
$
4.8
$
35.5
$
24.8
Livestock contracts
4.8
60.7
—
—
Interest rate contracts
—
—
0.2
0.1
Foreign exchange contracts
0.1
—
1.4
0.2
Total
8.7
65.5
37.1
25.1
Derivatives using the "mark-to-market" method:
Grain contracts
1.6
1.1
1.4
8.5
Livestock contracts
8.4
5.9
26.4
8.6
Energy contracts
—
—
13.5
10.1
Foreign exchange contracts
0.2
0.7
0.4
0.1
Total
10.2
7.7
41.7
27.3
Total fair value of derivative instruments
$
18.9
$
73.2
$
78.8
$
52.4
The majority of our derivatives are exchange traded futures contracts held with brokers, subject to netting arrangements that are enforceable during the ordinary course of business. Additionally, we have a smaller portfolio of over-the-counter derivatives that are held by counterparties under netting arrangements found in typical master netting agreements. 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.
March 29, 2015
Gross Amount of Derivative Assets/ Liabilities
Netting of Derivative Assets/ Liabilities
Net Derivative Assets/Liabilities
Cash Collateral
Net Amount Presented in the Condensed Consolidated Balance Sheet
(in millions)
Assets:
Commodities
$
18.6
$
(13.8
)
$
4.8
$
14.3
$
19.1
Foreign exchange contracts
0.3
(0.3
)
—
—
—
Total
$
18.9
$
(14.1
)
$
4.8
$
14.3
$
19.1
Liabilities:
Commodities
76.8
(13.8
)
63.0
(55.7
)
7.3
Interest rate contracts
0.2
—
0.2
—
0.2
Foreign exchange contracts
1.8
(0.3
)
1.5
—
1.5
Total
$
78.8
$
(14.1
)
$
64.7
$
(55.7
)
$
9.0
9
December 28, 2014
Gross Amount of Derivative Assets/ Liabilities
Netting of Derivative Assets/ Liabilities
Net Derivative Assets/Liabilities
Cash Collateral
Net Amount Presented in the Condensed Consolidated Balance Sheet
(in millions)
Assets:
Commodities
$
72.5
$
(14.6
)
$
57.9
$
(12.3
)
$
45.6
Foreign exchange contracts
0.7
(0.3
)
0.4
—
0.4
Total
$
73.2
$
(14.9
)
$
58.3
$
(12.3
)
$
46.0
Liabilities:
Commodities
52.0
(14.6
)
37.4
(32.3
)
5.1
Interest rate contracts
0.1
—
0.1
—
0.1
Foreign exchange contracts
0.3
(0.3
)
—
—
—
Total
$
52.4
$
(14.9
)
$
37.5
$
(32.3
)
$
5.2
See Note 9—Fair Value Measurements for additional information about the fair value of our derivatives.
Hedge Accounting Method
Cash Flow Hedges
We enter into derivative instruments, such as futures, swaps and options contracts, to manage our exposure to the variability in expected future cash flows attributable to commodity price risk associated with the forecasted sale of live hogs and fresh pork, and the forecasted purchase of corn, wheat and soybean meal. 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 March 29, 2015 , we had no cash flow hedges for forecasted transactions beyond June 2016 .
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 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 March 29, 2015 , the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:
Minimum
Maximum
Metric
Commodities:
Corn
56,855,000
71,130,000
Bushels
Soybean meal
553,300
689,000
Tons
Lean hogs
43,240,000
1,006,440,000
Pounds
Interest rate
18,594,273
19,117,326
U.S. Dollars
Foreign currency (1)
25,071,064
40,400,421
U.S. Dollars
——————————————
(1)
Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
10
The following table presents the effects on our consolidated condensed financial statements of pre-tax gains and losses on derivative instruments designated in cash flow hedging relationships for the periods indicated:
Gains (Losses) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion)
Gains (Losses) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Gains (Losses) Recognized in Earnings on Derivative (Ineffective Portion)
Three Months Ended
Three Months Ended
Three Months Ended
March 29,
2015
March 30,
2014
March 29,
2015
March 30,
2014
March 29,
2015
March 30,
2014
(in millions)
(in millions)
(in millions)
Commodity contracts:
Grain contracts
$
(31.0
)
$
58.3
$
(23.8
)
$
(1.4
)
$
(3.4
)
$
2.4
Lean hog contracts
132.3
(297.6
)
83.0
(25.7
)
1.5
(15.5
)
Interest rate contracts
(0.1
)
—
—
—
—
—
Foreign exchange contracts
(1.7
)
0.3
(0.6
)
3.0
—
—
Total
$
99.5
$
(239.0
)
$
58.6
$
(24.1
)
$
(1.9
)
$
(13.1
)
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 March 29, 2015 , there were deferred net losses of $51.0 million , net of tax of $32.9 million , in accumulated other comprehensive income (loss). We expect to reclassify $106.5 million ( $65.1 million net of tax) of deferred net losses on closed commodity contracts into earnings within the next twelve months. We are unable to estimate the amount of unrealized gains or losses to be reclassified into earnings within the next twelve months related to open contracts as their values are subject to change.
Fair Value Hedges
We enter into derivative instruments (primarily futures contracts) that are designed to hedge changes in the fair value of live hog inventories and firm commitments to buy grains. When fair value hedge accounting is applied, derivative gains and losses are recognized in earnings currently along with the change in fair value of the hedged item attributable to the risk being hedged. 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 March 29, 2015 , the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:
Minimum
Maximum
Metric
Commodities:
Corn
3,605,000
7,480,000
Bushels
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:
Gains (Losses) Recognized in Earnings on Derivative
Gains (Losses) Recognized in Earnings on Related Hedged Item
Three Months Ended
Three Months Ended
March 29,
2015
March 30,
2014
March 29,
2015
March 30,
2014
(in millions)
(in millions)
Commodity contracts
$
2.0
$
(0.9
)
$
(1.9
)
$
1.0
We recognized gains of $1.0 million and $0.1 million for the three months ended March 29, 2015 and March 30, 2014 , respectively, on closed commodity derivative contracts as the underlying cash transactions affected earnings.
11
Mark-to-Market Method
Derivative instruments that are not designated as a hedge, have been de-designated from a hedging relationship, or do not meet the criteria for hedge accounting are marked-to-market with the unrealized gains and losses together with actual realized gains and losses from closed contracts being recognized in current period earnings. 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 March 29, 2015 , the range of notional volumes associated with open derivative instruments using the "mark-to-market" method was as follows:
Minimum
Maximum
Metric
Commodities:
Lean hogs
142,520,000
181,680,000
Pounds
Corn
3,960,000
15,560,000
Bushels
Soybean meal
8,400
12,400
Tons
Soybeans
640,000
2,400,000
Bushels
Wheat
60,000
105,000
Bushels
Natural gas
9,560,000
11,000,000
Million BTU
Heating oil
2,016,000
3,024,000
Gallons
Live cattle
—
4,200,000
Pounds
Diesel
6,314,000
7,112,000
Gallons
Crude oil
48,000
72,000
Barrels
Foreign currency (1)
12,884,295
41,199,245
U.S. Dollars
——————————————
(1)
Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
The following table presents the amount of gains (losses) recognized in the consolidated condensed statements of income on derivative instruments using the "mark-to-market" method by type of derivative contract for the periods indicated:
Three Months Ended
March 29,
2015
March 30,
2014
(in millions)
Commodity contracts
$
(28.3
)
$
7.2
Foreign exchange contracts
(1.2
)
0.1
Total
$
(29.5
)
$
7.3
The table above reflects gains and losses from both open and closed contracts including, among other things, gains and losses related to contracts designed to hedge price movements that occur entirely within a quarter. The table includes amounts for both realized and unrealized gains and losses. The table is not, therefore, a simple representation of unrealized gains and losses recognized in the income statement during any period presented.
NOTE 4 :
INVESTMENTS
Investments consist of the following:
Equity Investment
% Owned
March 29,
2015
December 28,
2014
(in millions)
Campofrío Food Group (CFG)
37%
$
300.6
$
330.0
Mexican joint ventures
50%
121.5
142.8
Other
Various
24.6
25.2
Total investments
$
446.7
$
498.0
12
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
Segment
March 29,
2015
March 30,
2014
(in millions)
CFG
International
$
3.1
$
(3.1
)
Mexican joint ventures
International
(7.2
)
(11.8
)
All other equity method investments
Various
0.1
(0.2
)
Income from equity method investments
$
(4.0
)
$
(15.1
)
NOTE 5 :
DEBT
Working Capital Facilities
As of March 29, 2015 , 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 $173.8 million . As of March 29, 2015 , our unused capacity under these credit facilities was $1.2 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. 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 March 29, 2015 , the SPV held $529.6 million of accounts receivable.
See Note 12—Subsequent Events for additional information related to our working capital facilities subsequent to March 29, 2015 .
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). The 2015 Tender Offer expired in February 2015. 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 , including the write-off of related unamortized premiums and debt issuance costs.
NOTE 6 :
GUARANTEES
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 March 29, 2015 , we continued to guarantee $7.4 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.
13
NOTE 7 :
PENSION PLANS
The components of net periodic pension cost consist of:
Three Months Ended
March 29,
2015
March 30,
2014
(in millions)
Service cost
$
15.1
$
11.8
Interest cost
19.0
21.1
Expected return on plan assets
(22.1
)
(20.8
)
Net amortization
1.2
—
Net periodic pension cost
$
13.2
$
12.1
NOTE 8 :
EQUITY
Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss) and the related effects on net income of amounts reclassified out of other comprehensive income (loss).
Three Months Ended
March 29, 2015
March 30, 2014
Before Tax
Tax
After Tax
Before Tax
Tax
After Tax
(in millions)
Foreign currency translation:
Translation adjustment arising during the period
$
(95.0
)
$
10.7
$
(84.3
)
$
1.1
$
(1.8
)
$
(0.7
)
Pension accounting:
Amortization of actuarial losses and prior service credits reclassified to cost of sales
1.0
(0.4
)
0.6
—
—
—
Amortization of actuarial losses and prior service credits reclassified to SG&A
0.2
(0.1
)
0.1
—
—
—
Hedge accounting:
Gains (losses) arising during the period
99.5
(39.1
)
60.4
(239.0
)
93.1
(145.9
)
(Gains) losses reclassified to sales
(83.0
)
32.2
(50.8
)
25.7
(9.9
)
15.8
Losses reclassified to cost of sales
23.8
(9.4
)
14.4
1.4
(0.4
)
1.0
(Gains) losses reclassified to SG&A
0.6
(0.1
)
0.5
(3.0
)
0.8
(2.2
)
Total other comprehensive loss
$
(52.9
)
$
(6.2
)
$
(59.1
)
$
(213.8
)
$
81.8
$
(132.0
)
NOTE 9 :
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to consider and reflect the assumptions of market participants in fair value calculations. These factors include nonperformance risk (the risk that an obligation will not be fulfilled) and credit risk, both of the reporting entity (for liabilities) and of the counterparty (for assets).
We use, as appropriate, a market approach (generally, data from market transactions), an income approach (generally, present value techniques), and/or a cost approach (generally, replacement cost) to measure the fair value of an asset or liability. These valuation approaches incorporate inputs, such as observable, independent market data, that we believe are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.
14
The FASB has established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:
▪
Level 1—quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.
▪
Level 2—observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
▪
Level 3—unobservable for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.
We have classified assets and liabilities measured at fair value based on the lowest level of input that is significant to the fair value measurement. For the periods presented, we had no transfers of assets or liabilities between levels within the fair value hierarchy. The timing of any such transfers would be determined at the end of each reporting period.
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 March 29, 2015 and December 28, 2014 :
March 29, 2015
December 28, 2014
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(in millions)
(in millions)
Assets
Derivatives:
Commodity contracts
$
4.8
$
—
$
—
$
4.8
$
57.8
$
0.1
$
—
$
57.9
Foreign exchange contracts
—
—
—
—
—
0.4
—
0.4
Bond securities
—
—
—
—
15.9
—
—
15.9
Insurance contracts
—
72.4
—
72.4
—
70.0
—
70.0
Total
$
4.8
$
72.4
$
—
$
77.2
$
73.7
$
70.5
$
—
$
144.2
Liabilities
Derivatives:
Commodity contracts
35.3
27.7
—
63.0
18.0
19.4
—
37.4
Interest rate swaps
—
0.2
—
0.2
—
0.1
—
0.1
Foreign exchange contracts
—
1.5
—
1.5
—
—
—
—
Total
$
35.3
$
29.4
$
—
$
64.7
$
18.0
$
19.5
$
—
$
37.5
The following are descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value on a recurring basis:
▪
Derivatives— Derivatives classified within Level 1 are valued using quoted market prices. In some cases where quoted market prices are not available, we value the derivatives using market based pricing models that utilize the net present value of estimated future cash flows to calculate fair value, in which case the measurements are classified within Level 2. These valuation models make use of market-based observable inputs, including exchange traded prices and rates, yield curves, credit curves, and measures of volatility.
▪
Bond securities —Bond securities are valued at quoted market prices and are classified within Level 1.
▪
Insurance contracts— Insurance contracts are valued at their cash surrender value using the daily asset unit value (AUV) which is based on the quoted market price of the underlying securities and classified within Level 2.
15
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition; 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 March 29, 2015 , we had no significant assets or liabilities that were measured and recorded at fair value on a nonrecurring basis.
Other Financial Instruments
We determine the fair value of public debt using Level 2 inputs based on quoted market prices. 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 March 29, 2015 and December 28, 2014 .
March 29, 2015
December 28, 2014
Fair
Value
Carrying Value
Fair
Value
Carrying Value
(in millions)
Long-term debt, including current portion
$
2,521.4
$
2,413.8
$
2,782.0
$
2,701.7
The carrying amounts of cash and cash equivalents, accounts receivable, notes payable and accounts payable approximate their fair values because of the relatively short-term maturity of these instruments.
NOTE 10 :
CONTINGENCIES
Like other participants in our industry, we are subject to various laws and regulations administered by federal, state and other government entities, including the United States Environmental Protection Agency (EPA) and corresponding state agencies, as well as the United States Department of Agriculture, the Grain Inspection, Packers and Stockyard Administration, the United States Food and Drug Administration, the United States Occupational Safety and Health Administration, the Commodities and Futures Trading Commission and similar agencies in foreign countries.
We from time to time receive notices and inquiries from regulatory authorities and others asserting that we are not in compliance with such laws and regulations. In some instances, litigation ensues. In addition, individuals may initiate litigation against us.
North Carolina Nuisance Litigation
As previously disclosed in our Report on Form 10-K for the twelve months ended December 28, 2014, in August, September and October 2014, 25 complaints were filed in the Eastern District of North Carolina by 515 individual plaintiffs against our wholly owned subsidiary, Murphy-Brown, alleging causes of action for nuisance and related claims. The complaints stemmed from the nuisance cases previously filed in the Superior Court of Wake County. On February 23, 2015, all 25 complaints were amended and one complaint was severed into two separate actions. The 26 currently pending complaints were filed on behalf of 541 plaintiffs and relate to approximately 14 company-owned and 75 contract farms. All 26 complaints include causes of action for temporary nuisance and negligence and seek recovery of an unspecified amount of compensatory, special and punitive damages. Murphy-Brown is in the process of responding to the complaints in all 26 cases. The Company believes that the claims are unfounded and intends to defend the suits vigorously.
Our policy for establishing accruals and disclosures for contingent liabilities is contained in Note 1—Summary of Significant Accounting Policies in our report on Form 10-K for the twelve months ended December 28, 2014. We established a reserve for our estimated expenses to defend against these and similar potential claims in 2013. Consequently, future expenses associated with these claims will not affect our profits or losses unless our reserve proves to be insufficient or excessive. 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. 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.
16
NOTE 11 : REPORTABLE SEGMENTS
Our operating segments are determined on the basis of how we internally report and evaluate financial information used to make operating decisions and assess performance. For external reporting purposes, we aggregate operating segments which have similar economic characteristics, products, production processes, types or classes of customers and distribution methods into reportable segments based on a combination of factors, including products produced and geographic areas of operations. Our reportable segments are 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 U.S. 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, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico. The Corporate segment provides management and administrative services to support our other segments.
The following table presents sales and operating profit (loss) by segment for the periods indicated:
Three Months Ended
March 29,
2015
March 30,
2014
(in millions)
Sales:
Segment sales—
Fresh Pork
$
1,334.1
$
1,387.1
Packaged Meats
1,709.6
1,548.5
Hog Production
806.4
849.5
International
330.2
374.7
Total segment sales
4,180.3
4,159.8
Intersegment sales—
Fresh Pork
(14.7
)
(14.4
)
Hog Production
(538.8
)
(713.4
)
International
(10.3
)
(9.9
)
Total intersegment sales
(563.8
)
(737.7
)
Consolidated sales
$
3,616.5
$
3,422.1
Operating profit (loss):
Fresh Pork
33.2
58.9
Packaged Meats
172.5
121.3
Hog Production
(6.4
)
9.5
International
15.9
36.9
Corporate
(27.0
)
(30.2
)
Consolidated operating profit
$
188.2
$
196.4
17
NOTE 12 : SUBESEQUENT EVENTS
Debt Refinancing
In April 2015, we entered into a new $1.025 billion asset-based revolving credit facility agreement (the Inventory Revolver Credit Agreement) which replaced our previous $1.025 billion U.S. senior secured revolving credit facility which would have matured in June 2016. The Inventory Revolver Credit Agreement provides for an option, subject to obtaining additional loan commitments and certain other conditions, to increase the available U.S. Dollar commitments by up to $375 million in the future. It also provides for a foreign currency subfacility for Canadian Dollars, Japanese Yen, Euros and British Pounds Sterling of up to the foreign currency equivalent of $100 million, a subfacility of up to $50 million for swingline borrowings and a subfacility of up to $150 million for issuances of letters of credit.
Availability under the Inventory Revolver Credit Agreement will be based upon borrowing base valuations of the Company's domestic inventory, live sows and certain accounts receivable. The Inventory Revolver Credit Agreement is scheduled to mature on May 1, 2020.
Loans under the Inventory Revolver Credit Agreement bear interest at LIBOR plus a margin ranging from 1.75% to 2.75% per annum, or, at the election of the Company, at a base rate plus a margin ranging from 0.75% to 1.75% per annum, with either such margin varying according to the ratio of the Company's consolidated funded debt to consolidated EBITDA. Letters of credit issued under the Inventory Revolver Credit Agreement accrue fees at a rate equal to the applicable margin for LIBOR loans. In addition, the Company is required to pay a commitment fee for the average daily unused commitments under the Inventory Revolver Credit Agreement, at rates ranging from 0.30% to 0.50% per annum depending on the ratio of the Company's consolidated funded debt to consolidated EBITDA.
The obligations under the Inventory Revolver Credit Agreement are guaranteed by substantially all domestic subsidiaries of the Company and are secured by a first-priority lien, subject to permitted liens and exceptions for excluded assets, on substantially all of the Company's and the subsidiary guarantors' accounts receivable (other than those sold and financed pursuant to the Securitization Facility), inventory, other personal property relating to such inventory and accounts receivable and all proceeds therefrom, cash and cash equivalents, deposit accounts, intercompany notes, intellectual property and certain capital stock and interests pledged by the Company and the subsidiary guarantors.
The Inventory Revolver Credit Agreement contains affirmative and negative covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to create liens and encumbrances; incur debt; make capital expenditures, make acquisitions and investments; dispose of or transfer assets; and pay dividends or make other payments in respect of the Company's capital stock; in each case, subject to certain qualifications and exceptions.
In addition, the Inventory Revolver Credit Agreement contains financial covenants requiring the Company to maintain a total consolidated leverage ratio (ratio of consolidated funded debt to consolidated capitalization) of, subject to certain exceptions, not more than 0.50 to 1.0, a minimum interest coverage ratio (ratio of consolidated EBITDA to consolidated interest expense) of not less than 2.50 to 1.0 and limitations on capital expenditures.
The Inventory Revolver Credit Agreement also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the facility may be accelerated, the lenders’ commitments may be terminated and the lenders may foreclose upon the collateral. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the facility will automatically become due and payable and the lenders’ commitments will automatically terminate.
18
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.