NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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NOTE
1
:
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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 four reportable segments: Pork, Hog Production, International and Corporate, each of which is comprised of a number of subsidiaries, joint ventures and other investments.
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 hereinafter referred to as WH Group, the Company merged with Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of WH Group (the 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.
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 in conjunction with the audited consolidated financial statements and the related notes included in our Transition Report on Form 10-K for the eight months ended
December 29, 2013
. 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.
The Merger was accounted for as a business combination using the acquisition method of accounting. WH Group's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. Unless the context otherwise requires, all references to
"Successor"
refer to Smithfield Foods, Inc. and all its subsidiaries for the period subsequent to the Merger. All references to
“Predecessor”
refer to Smithfield Foods, Inc. and all its subsidiaries for all periods prior to the Merger. Purchase price allocations resulting from the Merger affect the comparability of results of operations for the Successor and Predecessor periods.
The consolidated condensed balance sheets, as of
March 30, 2014
and
December 29, 2013
, reflect various preliminary fair value estimates and analyses resulting from applying the acquisition method of accounting as of the Merger Date, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the Merger Date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the Merger Date.
Change in Fiscal Year End
On January 16, 2014, the Company elected to change its fiscal year end from the 52 or 53 week period which previously ended on the Sunday nearest April 30 to the 52 or 53 week period which ends on the Sunday nearest December 31. The change in fiscal year was made effective as of December 29, 2013. Therefore, the three months ended March 30, 2014 correspond to the first quarter of 2014 and the three months ended March 31, 2013 represents the comparable period for 2013.
Recently Issued Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update 2013-11,
Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists
(ASU 2013-11). This update does not have a significant impact on our consolidated condensed balance sheet.
Inventories consist of the following:
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March 30,
2014
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December 29,
2013
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(in millions)
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Fresh and packaged meats
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$
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1,157.4
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$
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956.7
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Livestock
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951.3
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1,054.8
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Grains
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116.2
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134.5
|
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Manufacturing supplies
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67.8
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69.3
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Other
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60.5
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59.4
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Total inventories
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$
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2,353.2
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$
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2,274.7
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NOTE 3:
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DERIVATIVE FINANCIAL INSTRUMENTS
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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 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 30, 2014
, 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 30, 2014
, we had credit exposure of
$10.1 million
on non-exchange traded derivative contracts, excluding the effects of netting arrangements. As a result of netting arrangements, we had no significant credit exposure as of
March 30, 2014
. No significant concentrations of credit risk existed as of
March 30, 2014
.
The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. All derivative contracts are recorded in prepaid expenses and other current assets or accrued expenses and other current liabilities within the consolidated condensed balance sheets, as appropriate.
The following table presents the fair values of our open derivative financial instruments on a gross basis.
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Assets
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Liabilities
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March 30,
2014
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December 29,
2013
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March 30,
2014
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December 29,
2013
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(in millions)
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(in millions)
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Derivatives using the "hedge accounting" method:
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Grain contracts
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$
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47.7
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$
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5.5
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$
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1.3
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$
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16.2
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Livestock contracts
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—
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0.7
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276.0
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1.1
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Foreign exchange contracts
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0.4
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0.6
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—
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—
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Total
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48.1
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6.8
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277.3
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17.3
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Derivatives using the "mark-to-market" method:
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Grain contracts
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2.5
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0.6
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4.2
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1.1
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Livestock contracts
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3.2
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2.8
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30.4
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9.5
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Energy contracts
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3.7
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2.9
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—
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—
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Foreign exchange contracts
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0.2
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0.6
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—
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0.2
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Total
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9.6
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6.9
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34.6
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10.8
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Total fair value of derivative instruments
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$
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57.7
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$
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13.7
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$
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311.9
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$
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28.1
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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 (OTC) 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 that are executed with the same counterparty under a master netting arrangement in the consolidated balance sheet. We do not offset the related cash collateral held with or received from the same counterparty with the fair value of the net derivative position. As of
March 30, 2014
, prepaid expenses and other current assets included
$334.2 million
representing cash on deposit with brokers to cover losses on our open derivative instruments and for initial margin requirements.
The following tables reconcile the gross amounts of derivative assets and liabilities to the net amounts presented in our consolidated condensed balance sheets, and the related effects of cash collateral under netting arrangements that provide a legal right of offset of assets and liabilities.
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March 30, 2014
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Gross Amount of Derivative Assets/ Liabilities
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Netting of Derivative Assets/ Liabilities
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Net Amount Presented in the Condensed Consolidated Balance Sheet
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Cash Collateral Pledged
(1)
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Net Amount
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(in millions)
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Assets:
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Commodities
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$
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57.0
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$
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(55.0
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)
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$
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2.0
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$
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—
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$
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2.0
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Foreign exchange contracts
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0.6
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—
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0.6
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—
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0.6
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Total
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$
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57.6
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$
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(55.0
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)
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$
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2.6
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$
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—
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$
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2.6
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Liabilities:
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Commodities
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$
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311.8
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$
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(55.0
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)
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$
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256.8
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$
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(244.4
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)
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$
|
12.4
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Foreign exchange contracts
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—
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—
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—
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—
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—
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Total
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$
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311.8
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$
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(55.0
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)
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$
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256.8
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$
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(244.4
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)
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$
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12.4
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December 29, 2013
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Gross Amount of Derivative Assets/ Liabilities
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Netting of Derivative Assets/ Liabilities
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Net Amount Presented in the Condensed Consolidated Balance Sheet
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Cash Collateral Pledged
(1)
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Net Amount
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(in millions)
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Assets:
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|
|
|
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Commodities
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$
|
12.5
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|
$
|
(7.4
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)
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$
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5.1
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$
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—
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$
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5.1
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Foreign exchange contracts
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|
1.2
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—
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|
1.2
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—
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1.2
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Total
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$
|
13.7
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$
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(7.4
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)
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$
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6.3
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$
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—
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|
|
$
|
6.3
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Liabilities:
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|
|
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|
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Commodities
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$
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27.9
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$
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(7.4
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)
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$
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20.5
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|
|
$
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(15.6
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)
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$
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4.9
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Foreign exchange contracts
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|
0.2
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—
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|
|
0.2
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|
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—
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|
|
0.2
|
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Total
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$
|
28.1
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$
|
(7.4
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)
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$
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20.7
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|
|
$
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(15.6
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)
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|
$
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5.1
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——————————————
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(1)
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Cash collateral pledged represents the cash on deposit with brokers and is included in prepaid expenses and other current assets on the consolidated balance sheets. Cash on deposit is the initial margin deposited with the broker plus the cash margin to cover gains and losses on our open positions. The cash collateral presented in the table is limited to amounts available to offset our open net derivative positions under master netting arrangements, and therefore does not reflect the Company's total amount received or pledged. For example, initial margin deposited with our brokers would not be included in the table to the extent it exceeds the net loss position on our open derivative instruments.
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See Note 10—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 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 30, 2014
, we had no cash flow hedges for forecasted transactions beyond
December 2015
.
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 30, 2014
, the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:
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Minimum
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Maximum
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Metric
|
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Commodities:
|
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Corn
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42,575,000
|
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|
87,375,000
|
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Bushels
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Soybean meal
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346,500
|
|
|
775,500
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Tons
|
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Lean hogs
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103,280,000
|
|
|
1,847,680,000
|
|
|
Pounds
|
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Foreign currency
(1)
|
|
16,757,550
|
|
|
28,774,861
|
|
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U.S. Dollars
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——————————————
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(1)
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Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
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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:
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Gains (Losses) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion)
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Gains (Losses) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
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Gains (Losses) Recognized in Earnings on Derivative (Ineffective Portion)
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Successor
|
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Predecessor
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
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Three Months Ended
|
|
|
|
March 30, 2014
|
|
March 31, 2013
|
|
March 30, 2014
|
|
March 31, 2013
|
|
March 30, 2014
|
|
March 31, 2013
|
|
|
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(in millions)
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(in millions)
|
|
(in millions)
|
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Commodity contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain contracts
|
|
$
|
58.3
|
|
|
$
|
(40.0
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
46.2
|
|
|
$
|
2.4
|
|
|
$
|
(2.2
|
)
|
|
Lean hog contracts
|
|
(297.6
|
)
|
|
39.2
|
|
|
(25.7
|
)
|
|
5.1
|
|
|
(15.5
|
)
|
|
0.2
|
|
|
Foreign exchange contracts
|
|
0.3
|
|
|
0.6
|
|
|
3.0
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
(239.0
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(24.1
|
)
|
|
$
|
52.7
|
|
|
$
|
(13.1
|
)
|
|
$
|
(2.0
|
)
|
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 30, 2014
, there were deferred net losses of
$134.1 million
, net of tax of
$85.4 million
, in accumulated other comprehensive income (loss). We expect to reclassify
$6.2 million
(
$3.8 million
net of tax) of the deferred net gains 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 30, 2014
, the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:
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|
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|
|
|
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|
|
Minimum
|
|
Maximum
|
|
Metric
|
|
Commodities:
|
|
|
|
|
|
|
|
Corn
|
|
450,000
|
|
|
5,910,000
|
|
|
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:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Gains (Losses) Recognized in Earnings on Derivative
|
|
Gains (Losses) Recognized in Earnings on Related Hedged Item
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
March 30, 2014
|
|
March 31, 2013
|
|
March 30, 2014
|
|
March 31, 2013
|
|
|
|
(in millions)
|
|
(in millions)
|
|
Commodity contracts
|
|
$
|
(0.9
|
)
|
|
$
|
2.0
|
|
|
$
|
1.0
|
|
|
$
|
(2.1
|
)
|
We recognized
gains
of
$0.1 million
during the
three
months ended
March 30, 2014
and
losses
of
$(2.4) million
during the
three
months ended
March 31, 2013
on closed commodity derivative contracts as the underlying cash transactions affected earnings.
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 either sales or cost of sales for commodity contracts, and SG&A for foreign exchange contracts.
During the
three
months ended
March 30, 2014
, the range of notional volumes associated with open derivative instruments using the “mark-to-market” method was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
|
Metric
|
|
Commodities:
|
|
|
|
|
|
|
|
Lean hogs
|
|
5,440,000
|
|
|
414,600,000
|
|
|
Pounds
|
|
Corn
|
|
490,000
|
|
|
5,190,000
|
|
|
Bushels
|
|
Soybean meal
|
|
—
|
|
|
3,800
|
|
|
Tons
|
|
Soybeans
|
|
75,000
|
|
|
1,125,000
|
|
|
Bushels
|
|
Natural gas
|
|
9,400,000
|
|
|
11,040,000
|
|
|
Million BTU
|
|
Diesel
|
|
504,000
|
|
|
1,008,000
|
|
|
Gallons
|
|
Foreign currency
(1)
|
|
8,096,567
|
|
|
33,694,441
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
March 30, 2014
|
|
March 31, 2013
|
|
|
|
(in millions)
|
|
Commodity contracts (cost of sales)
|
|
$
|
1.8
|
|
|
$
|
3.1
|
|
|
Commodity contracts (sales)
|
|
5.4
|
|
|
0.2
|
|
|
Foreign exchange contracts
|
|
0.1
|
|
|
0.3
|
|
|
Total
|
|
$
|
7.3
|
|
|
$
|
3.6
|
|
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.
Investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investment
|
|
% Owned
|
|
March 30,
2014
|
|
December 29,
2013
|
|
|
|
|
|
(in millions)
|
|
Campofrío Food Group (CFG)
|
|
37%
|
|
$
|
358.8
|
|
|
$
|
351.4
|
|
|
Mexican joint ventures
|
|
50%
|
|
127.6
|
|
|
118.0
|
|
|
Other
|
|
Various
|
|
27.1
|
|
|
27.1
|
|
|
Total investments
|
|
|
|
$
|
513.5
|
|
|
$
|
496.5
|
|
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.
As of
March 30, 2014
, we held
37.8 million
shares of CFG common stock. Shares of CFG are publicly traded on the Bolsa de Madrid Exchange (Madrid Exchange). Our investment in CFG contractually entitles us to two seats on CFG's board of directors, giving us the ability to exert significant influence over the strategic and operational decisions of our investee. The stock is very thinly traded on the Madrid Exchange. CFG is a closely held company, with the three largest shareholders owning approximately 74% of the outstanding shares. We are CFG's largest shareholder, with approximately a
37%
interest.
In November 2013, Mexican processed meats producer Sigma Alimentos (Sigma) announced its intention to tender for all of CFG’s outstanding shares at a bid price of
€6.80
per share (the Bid Price). As part of the announcement, Sigma publicly acknowledged that it has obtained commitments to purchase approximately
44.5%
of CFG's outstanding shares at the Bid Price. The Bid Price offered by Sigma was also considered in our fair value assessment discussed above. In December 2013, we announced our intention to join Sigma in its tender offer by retaining our 37% interest in CFG. As a result of our agreement with Sigma, the Bid Price was increased to
€6.90
per share.
Income from equity method investments consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
|
|
|
|
Three Months Ended
|
|
Equity Investment
|
|
Segment
|
|
March 30, 2014
|
|
March 31, 2013
|
|
|
|
|
|
(in millions)
|
|
CFG
(1)
|
|
International
|
|
$
|
(3.1
|
)
|
|
$
|
(3.6
|
)
|
|
Mexican joint ventures
|
|
International
|
|
(11.8
|
)
|
|
(4.0
|
)
|
|
All other equity method investments
|
|
Various
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Income from equity method investments
|
|
|
|
$
|
(15.1
|
)
|
|
$
|
(7.8
|
)
|
——————————————
|
|
|
|
(1)
|
CFG prepares its financial statements in accordance with International Financial Reporting Standards. Our share of CFG’s results reflects U.S. GAAP adjustments and thus, there may be differences between the amounts we report for CFG and the amounts reported by CFG.
|
Working Capital Facilities
As of
March 30, 2014
, we had aggregate credit facilities and credit lines totaling
$1.4 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
$141.3 million
. As of
March 30, 2014
, our unused capacity under these credit facilities and credit lines was
$735.5 million
.
As part of the Securitization Facility agreement, all accounts receivable of our major Pork segment 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 30, 2014
, the SPV hel
d
$572.8 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
March 30, 2014
, we continued to guarantee
$9.2 million
of leases that were transferred to JBS S.A. in connection with the sale of Smithfield Beef, Inc. Some of these lease guarantees may be released in the near future and others may remain in place until the leases expire through February 2022.
Our effective tax rate was
33%
and
(14)%
for the
three
months ended
March 30, 2014
and
March 31, 2013
, respectively. For the period ended March 30, 2014, taxable income relative to permanent items, the mix of income between jurisdictions, and the expiration of certain federal tax credits as of December 31, 2013 impacted the effective tax rate. The period ended March 31, 2013 was impacted by income relative to permanent items, the mix of income between jurisdictions, state income tax credits and federal legislation during that period that reinstated certain federal tax credits retroactively to January 1, 2012.
Beginning with the Successor period, the Company, with its respective subsidiaries, is included in its U.S. parent company’s consolidated federal income tax group and consolidated income tax return. The members of the consolidated group have elected to allocate income taxes among the members of the group by the separate return method, under which the parent company credits the subsidiary for income tax reductions resulting from the subsidiary’s inclusion in the consolidated return, or the parent company charges the subsidiary for its allocated share of the consolidated income tax liability.
The components of net periodic pension cost consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
March 30, 2014
|
|
March 31, 2013
|
|
|
|
(in millions)
|
|
Service cost
|
|
$
|
11.8
|
|
|
$
|
11.8
|
|
|
Interest cost
|
|
21.1
|
|
|
18.7
|
|
|
Expected return on plan assets
|
|
(20.8
|
)
|
|
(19.7
|
)
|
|
Net amortization
|
|
—
|
|
|
13.2
|
|
|
Net periodic pension cost
|
|
$
|
12.1
|
|
|
$
|
24.0
|
|
Other Comprehensive Loss
The following table presents 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
March 30, 2014
|
|
March 31, 2013
|
|
|
|
Before Tax
|
|
Tax
|
|
After Tax
|
|
Before Tax
|
|
Tax
|
|
After Tax
|
|
|
|
(in millions)
|
|
Foreign currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment arising during the period
|
|
$
|
1.1
|
|
|
$
|
(1.8
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(24.7
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(27.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service credits reclassified to cost of sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.9
|
|
|
(1.5
|
)
|
|
2.4
|
|
|
Amortization of actuarial losses and prior service credits reclassified to SG&A
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9.2
|
|
|
(3.6
|
)
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses arising during the period
|
|
(239.0
|
)
|
|
93.1
|
|
|
(145.9
|
)
|
|
(0.2
|
)
|
|
0.1
|
|
|
(0.1
|
)
|
|
(Gains) losses reclassified to sales
|
|
25.7
|
|
|
(9.9
|
)
|
|
15.8
|
|
|
(5.1
|
)
|
|
1.9
|
|
|
(3.2
|
)
|
|
(Gains) losses reclassified to cost of sales
|
|
1.4
|
|
|
(0.4
|
)
|
|
1.0
|
|
|
(46.2
|
)
|
|
18.0
|
|
|
(28.2
|
)
|
|
Gains reclassified to SG&A
|
|
(3.0
|
)
|
|
0.8
|
|
|
(2.2
|
)
|
|
(1.4
|
)
|
|
0.3
|
|
|
(1.1
|
)
|
|
Total other comprehensive loss
|
|
$
|
(213.8
|
)
|
|
$
|
81.8
|
|
|
$
|
(132.0
|
)
|
|
$
|
(64.5
|
)
|
|
$
|
12.1
|
|
|
$
|
(52.4
|
)
|
|
|
|
|
NOTE 10:
|
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.
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 non-pension financial assets and liabilities that were measured at fair value on a recurring basis as of
March 30, 2014
and
December 29, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2014
|
|
December 29, 2013
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in millions)
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
0.2
|
|
|
$
|
4.9
|
|
|
$
|
—
|
|
|
$
|
5.1
|
|
|
Foreign exchange contracts
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
|
Bond securities
|
|
19.7
|
|
|
—
|
|
|
—
|
|
|
19.7
|
|
|
19.8
|
|
|
—
|
|
|
—
|
|
|
19.8
|
|
|
Insurance contracts
|
|
—
|
|
|
67.2
|
|
|
—
|
|
|
67.2
|
|
|
—
|
|
|
65.8
|
|
|
—
|
|
|
65.8
|
|
|
Total
|
|
$
|
19.7
|
|
|
$
|
69.8
|
|
|
$
|
—
|
|
|
$
|
89.5
|
|
|
$
|
20.0
|
|
|
$
|
71.9
|
|
|
$
|
—
|
|
|
$
|
91.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
174.3
|
|
|
$
|
82.5
|
|
|
$
|
—
|
|
|
$
|
256.8
|
|
|
$
|
15.1
|
|
|
$
|
5.4
|
|
|
$
|
—
|
|
|
$
|
20.5
|
|
|
Foreign exchange contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
Total
|
|
$
|
174.3
|
|
|
$
|
82.5
|
|
|
$
|
—
|
|
|
$
|
256.8
|
|
|
$
|
15.1
|
|
|
$
|
5.6
|
|
|
$
|
—
|
|
|
$
|
20.7
|
|
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.
|
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 30, 2014
, 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 30, 2014
and
December 29, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2014
|
|
December 29, 2013
|
|
|
|
Fair
Value
|
|
Carrying Value
|
|
Fair
Value
|
|
Carrying Value
|
|
|
|
(in millions)
|
|
Long-term debt, including current portion
|
|
$
|
3,443.0
|
|
|
$
|
3,316.1
|
|
|
$
|
3,120.2
|
|
|
$
|
3,020.1
|
|
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.
Like other participants in the 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 Transition Report on Form 10-K for the eight months ended December 29, 2013, in July, August and September 2013, 25 complaints were filed in the Superior Court of Wake County, North Carolina by 479 individual plaintiffs against Smithfield and our wholly owned subsidiary, Murphy-Brown, alleging causes of action for nuisance and related claims. All 25 complaints stem from previously disclosed requests for pre-litigation mediation of farm nuisance disputes filed in Wake County, North Carolina in early July 2013.
On April 15, 2014, an additional request for pre-litigation mediation of farm nuisance dispute was filed against the Company and Murphy-Brown in Duplin County, North Carolina on behalf of 35 claimants, at least some of whom appear to be claimants in the Wake County proceedings. 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 Transition Report on Form 10-K for the eight months ended December 29, 2013. We established a reserve estimating our expenses to defend against these and similar potential claims on the opening balance sheet. Consequently, expenses and other liabilities associated with these claims for subsequent periods 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 this matter is in its 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.
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NOTE 12:
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REPORTABLE SEGMENTS
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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: Pork, Hog Production, International, and Corporate, each of which is comprised of a number of subsidiaries, joint ventures and other investments.
The Pork segment consists mainly of our three wholly owned U.S. fresh pork and packaged meats subsidiaries
:
The S
mithfield Packing Company, Inc., Farmland Foods, Inc. and John Morrell Food Group. The Hog Production segment consists of our hog production operations located in the U.S. The International segment is comprised mainly of our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico. The 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:
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Successor
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Predecessor
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Three Months Ended
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March 30, 2014
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March 31, 2013
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(in millions)
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Sales:
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Segment sales—
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Pork
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$
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2,935.6
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$
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2,781.7
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Hog Production
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849.5
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834.0
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International
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374.7
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350.3
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Total segment sales
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4,159.8
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3,966.0
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Intersegment sales—
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Pork
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(14.4
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)
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(10.8
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Hog Production
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(713.4
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)
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(618.2
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)
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International
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(9.9
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)
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(10.1
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)
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Total intersegment sales
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(737.7
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)
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(639.1
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)
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Consolidated sales
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$
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3,422.1
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$
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3,326.9
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Operating profit:
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Pork
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$
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180.2
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$
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128.8
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Hog Production
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9.5
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(60.4
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)
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International
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36.9
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14.3
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Corporate
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(30.2
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)
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(23.9
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)
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Consolidated operating profit
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$
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196.4
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$
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58.8
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