Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the fiscal year ended May 2,
2010
Commission
file number: 1-15321
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SMITHFIELD
FOODS, INC.
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(Exact
name of registrant as specified in its charter)
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Virginia
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52-0845861
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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200
Commerce Street
Smithfield,
Virginia
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23430
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(Address
of principal executive offices)
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(Zip
Code)
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(757)
365-3000
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $.50 par value per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes þ No ¨
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes þ No ¨
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer þ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ¨ No þ
The
aggregate market value of the shares of registrant’s Common Stock held by
non-affiliates as of November 1, 2009 was approximately $1.5
billion. This figure was calculated by multiplying
(i) the $13.34 last sales price of registrant’s Common Stock as reported on
the New York Stock Exchange on the last business day of the registrant’s most
recently completed second fiscal quarter by (ii) the number of shares of
registrant’s Common Stock not held by any executive officer or director of the
registrant or any person known to the registrant to own more than five percent
of the outstanding Common Stock of the registrant. Such calculation does not
constitute
an admission or determination that any such executive officer, director or
holder of more than five percent of the outstanding shares of Common Stock of
the registrant is in fact an affiliate of the registrant.
At
June 8, 2010, 166,013,232
shares of the registrant’s Common Stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III incorporates certain information by reference from the registrant’s
definitive proxy statement to be filed with respect to its Annual Meeting of
Shareholders to be held on September 1, 2010.
TABLE
OF CONTENTS
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Page
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PART
I
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ITEM 1.
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3
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ITEM 1A.
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14
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ITEM 1B.
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21
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ITEM 2.
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22
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ITEM 3.
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24
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ITEM 4.
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26
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26
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PART
II
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ITEM 5.
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27
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ITEM 6.
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28
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ITEM 7.
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30
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ITEM 7A.
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59
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ITEM 8.
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60
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ITEM 9.
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108
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ITEM 9A.
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108
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ITEM 9B.
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108
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PART
III
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ITEM 10.
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109
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ITEM 11.
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109
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ITEM 12.
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109
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ITEM 13.
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109
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ITEM 14.
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109
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PART IV
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ITEM 15.
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110
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115
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2
PART
I
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BUSINESS
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GENERAL
DEVELOPMENT OF BUSINESS
Smithfield
Foods, Inc., together with its subsidiaries (the “Company,” “we,” “us” or “our”)
began as a pork processing operation called The Smithfield Packing Company,
founded in 1936 by Joseph W. Luter and his son, Joseph W. Luter, Jr. Through a
series of acquisitions starting in 1981, we have become the largest pork
processor and hog producer in the world.
We
produce and market a wide variety of fresh meat and packaged meats products both
domestically and internationally. We operate in a cyclical industry
and our results are significantly affected by fluctuations in commodity prices
for live hogs and grains. Additionally, some of the key factors
influencing our business are customer preferences and demand for our products;
our ability to maintain and grow relationships with customers; the introduction
of new and innovative products to the marketplace; accessibility to
international markets for our products including the effects of any trade
barriers; and operating efficiencies of our facilities.
We
conduct our operations through five reporting segments: Pork, International, Hog
Production, Other 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 International segment is comprised mainly of our meat
processing and distribution operations in Poland, Romania and the United
Kingdom, as well as our interests in meat processing operations, mainly in
Western Europe and Mexico. The Hog Production segment consists of our hog
production operations located in the U.S., Poland and Romania as well as our
interests in hog production operations in Mexico. The Other segment is comprised
of our turkey production operations and our interest in Butterball, LLC
(Butterball). Through the first quarter of fiscal 2010, this segment also
included our live cattle operations. The Corporate segment provides management
and administrative services to support our other segments.
Over
the past few decades, we have completed numerous acquisitions. Recently, our
overall focus has shifted from acquisitions to integration, driving operating
efficiencies and growing our packaged meats business to fully leverage the
benefits of our prior acquisitions. Additionally, we are currently focused on
reducing our debt and eliminating non-core or under-performing
businesses.
Fiscal
2010 Business Developments
The
following business developments have occurred since the beginning of fiscal
2010:
Hog
Production Cost Savings Initiative
In
the fourth quarter of fiscal 2010, we announced a plan to improve the cost
structure and profitability of our domestic hog production operations (the Cost
Savings Initiative). The plan includes a number of undertakings designed to
improve operating efficiencies and productivity. These consist of farm
reconfigurations and conversions, termination of certain high cost, third-party
hog grower contracts and breeding stock sourcing contracts, as well as a number
of other cost reduction activities.
As
a result of the Cost Savings Initiative, we recorded pre-tax charges totaling
$9.1 million in the fourth quarter of fiscal 2010, including impairment and
accelerated depreciation charges of $2.5 million and $3.8 million, respectively,
as well as contract termination costs of $2.8 million. These charges were
recorded in cost of sales in the Hog Production segment.
Certain
of the activities associated with the Cost Savings Initiative are expected to
occur over a two to three-year period in order to allow for the successful
transformation of farms while minimizing disruption of supply. We anticipate
recording additional charges over this period in the range of $30 million to $35
million primarily associated with future contract terminations. We also
anticipate capital expenditures totaling approximately $86 million will be
required in connection with the farm reconfigurations and other cost savings
activities.
We
do not believe the benefits of the Cost Savings Initiative will have any
significant impact on our results of operations in fiscal 2011. Beginning in
fiscal 2012, we expect a gradual improvement in profitability of our Hog
Production segment. We expect that by fiscal 2014, the benefits of this
initiative will be fully realized and we currently estimate profitability
improvement of approximately $2 per hundredweight.
3
Hog
Farm Impairments
In
fiscal 2008 and fiscal 2009, we announced that we would reduce the size of
our U.S. sow herd by 10% in order to reduce the overall supply of hogs in the
U.S. market.
In
June 2009 (fiscal 2010), we decided to further reduce our domestic sow herd by
3%, or approximately 30,000 sows, which was accomplished by ceasing
certain hog production operations and closing certain of our hog farms. In
addition, in the first quarter of fiscal 2010, we began marketing certain other
hog farms. As a result of these decisions, we recorded total
impairment charges of $34.1 million, including an allocation of
goodwill, in the first quarter of fiscal 2010 to write-down the hog farm
assets to their estimated fair values. The impairment charges were recorded in
cost of sales in the Hog Production segment.
RMH
Foods, LLC (RMH)
In October
2009 (fiscal 2010), we entered into an agreement to sell substantially all of
the assets of RMH, a subsidiary within the Pork segment, for $9.5 million, plus
the assumption by the buyer of certain liabilities, subject to customary
post-closing adjustments, including adjustments for differences in working
capital at closing from agreed-upon targets. We recorded pre-tax charges
totaling $3.5 million, including $0.5 million of goodwill impairment, in
the Pork segment in the second quarter of fiscal 2010 to write-down the assets
of RMH to their fair values. These charges were recorded in cost of sales. In
December 2009 (fiscal 2010), we completed the sale of RMH for $9.1 million, plus
$1.4 million of liabilities assumed by the buyer.
Farasia
Corporation (Farasia)
In
November 2009 (fiscal 2010), we completed the sale of our investment in Farasia,
a 50/50 Chinese joint venture formed in 2001, for RMB 97.0 million ($14.2
million at the time of the transaction). Farasia's wholly-owned subsidiary,
Maverick Food Company Limited, focuses mainly on hot dogs and other sausages,
whole and sliced ham, bacon, Chinese-style processed meat, and frozen and
convenience food. We recorded, in selling, general and administrative expenses,
a $4.5 million pre-tax gain in the third quarter of fiscal 2010 on the sale of
our investment in Farasia.
Premium
Pet Health, LLC (PPH)
Prior
to fiscal 2010, we held a 51% ownership interest in Premium Pet Health, LLC
(PPH), a leading protein by-product processor that supplies many of the leading
pet food processors in the United States. The partnership agreement afforded the
noncontrolling interest holders an option to require us to redeem their
ownership interests beginning in November 2009 (fiscal 2010). The redemption
value was determinable from a specified formula based on the earnings of
PPH.
In
fiscal 2010, as a result of discussions with the noncontrolling
interest holders, we determined that the noncontrolling interests were
probable of becoming redeemable. As such, in fiscal 2010, we recorded an
adjustment to increase the carrying amount of the redeemable noncontrolling
interests by $32.2 million with an offsetting decrease of $19.4 million
to additional paid-in capital and $12.8 million to deferred tax
assets.
In
November 2009 (fiscal 2010), the noncontrolling interest holders exercised their
put option. In December 2009 (fiscal 2010), we acquired the remaining 49%
interest in PPH for $38.9 million. Because PPH was previously consolidated into
our financial statements, the acquisition of the remaining 49% interest in PPH
was accounted for as an equity transaction.
Sioux
City Plant Closure
In
January 2010 (fiscal 2010), we announced that we would close our fresh pork
processing plant located in Sioux City, Iowa. The Sioux City plant was one of
our oldest and least efficient plants. The plant design severely limited our
ability to produce value-added packaged meats products and maximize production
throughput. A portion of the plant’s production has been transferred to other
nearby Smithfield plants. We closed the Sioux City plant in April 2010 (fiscal
2010).
As
a result of the planned closure, we recorded charges of $13.1 million in the
third quarter of fiscal 2010. These charges consisted of $3.6 million for the
write-down of long-lived assets, $2.5 million of unusable inventories and $7.0
million for estimated severance benefits pursuant to contractual and ongoing
benefit arrangements, of which $5.5 million were paid-out during the fourth
quarter of fiscal 2010. Substantially all of these charges were recorded in cost
of sales in the Pork segment. We do not expect any significant future charges
associated with the plant closure.
Pork
Segment Restructuring
In
February 2009 (fiscal 2009), we announced a plan to consolidate and streamline
the corporate structure and manufacturing operations of our Pork segment (the
Restructuring Plan). The plan included the closure of six plants, the
last of which was closed in February 2010 (fiscal 2010). This restructuring is
intended to make us more competitive by improving operating efficiencies and
increasing plant utilization. For fiscal 2010, we achieved our
targeted cost savings and improved pre-tax earnings, after applicable
restructuring charges, of $55 million in fiscal 2010. We expect the benefits of
the Restructuring Plan will be fully reflected in our fiscal 2011
results.
4
DESCRIPTION
OF SEGMENTS
Pork
Segment
The
Pork segment consists mainly of three wholly-owned U.S. fresh pork and
packaged meats subsidiaries. The Pork segment produces a wide variety of fresh
pork and packaged meats products in the U.S. and markets them nationwide and to
numerous foreign markets, including China, Japan, Mexico, Russia and Canada. The
Pork segment currently operates over 40 processing plants. We process hogs at
eight plants (five in the Midwest and three in the Southeast), with an aggregate
slaughter capacity of approximately 110,000 hogs per day.
The
Pork segment sold approximately 4.0 billion pounds of fresh pork in fiscal
2010. A substantial portion of our fresh pork is sold to retail customers as
unprocessed, trimmed cuts such as butts, loins (including roasts and chops),
picnics and ribs.
The
Pork segment also sold approximately 2.9 billion pounds of packaged meats
products in fiscal 2010. We produce a wide variety of packaged meats, including
smoked and boiled hams, bacon, sausage, hot dogs (pork, beef and chicken), deli
and luncheon meats, specialty products such as pepperoni, dry meat products, and
ready-to-eat, prepared foods such as pre-cooked entrees and pre-cooked bacon and
sausage. We market our domestic packaged meats products under labels that
include Smithfield, Farmland, John Morrell, Gwaltney, Great, Cumberland Gap,
Armour, Eckrich, Margherita, LunchMakers, Dinner Bell, Carando, Kretschmar, Lean
Generation, Lykes, Cook’s, Esskay, Valleydale, Ember Farms, Rath, Roegelein,
Ohse, Stefano’s, Williamsburg, Tom & Ted’s and Jamestown. We also sell
a substantial quantity of packaged meats as private-label products.
Our
product lines include leaner fresh pork products as well as lower-fat and
lower-salt packaged meats. We also market a line of lower-fat value-priced
luncheon meats, smoked sausage and hot dogs, as well as fat-free deli hams and
40% lower-fat bacon.
During
the preceding three fiscal years, our main acquisition in the Pork segment was a
vertically integrated hog producer and pork processor of mostly fresh pork
products, Premium Standard Farms, Inc. (PSF), in fiscal 2008.
The
following table shows the percentages of Pork segment revenues derived from
packaged meats products and fresh pork for the fiscal years
indicated.
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Fiscal
Years
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2010
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2009
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2008
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Packaged
meats
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55 | % | 53 | % | 58 | % | ||||||
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Fresh
pork
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45 | 47 | 42 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
In
fiscal 2010, export sales (including by-products
and rendering) comprised approximately 15% of the Pork segment’s
volumes and approximately 12% of the segment’s revenues.
Sources
and availability of raw materials
Live
hogs are the primary raw materials of the Pork segment. Historically, hog prices
have been subject to substantial fluctuations. Hog supplies, and consequently
prices, are affected by factors such as corn and soybean meal prices, weather
and farmers’ access to capital. Hog prices tend to rise seasonally as hog
supplies decrease during the hot summer months and tend to decline as supplies
increase during the fall. This tendency is due to lower farrowing performance
during the winter months and slower animal growth rates during the hot summer
months.
The
Pork segment purchased 46% of its U.S. live hog requirements from the Hog
Production segment in fiscal 2010. In addition, we have established multi-year
agreements with Maxwell Foods, Inc. and Prestage Farms, Inc., which provide us
with a stable supply of high-quality hogs at market-indexed prices. These
producers supplied approximately 10% of hogs processed by the Pork segment in
fiscal 2010. We also purchase hogs on a daily basis at our Southeastern and
Midwestern processing plants and our company-owned buying stations in three
Southeastern and five Midwestern states.
We
also purchase fresh pork from other meat processors to supplement our processing
requirements. Additional purchases include raw beef, poultry and other meat
products that are added to sausages, hot dogs and luncheon meats. Those meat
products and other materials and supplies, including seasonings, smoking and
curing agents, sausage casings and packaging materials, are readily available
from numerous sources at competitive prices.
5
International
Segment
The
International segment includes our international meat processing operations that
produce a wide variety of fresh pork, beef, poultry and packaged meats products,
including cooked hams, sausages, hot dogs, bacon and canned meats. We have
controlling interests in international meat processing and distribution
operations located mainly in Poland, Romania and the United Kingdom. In
addition, we have noncontrolling interests in international meat processing
operations, mainly in Western Europe and Mexico, including a 37% interest in the
common stock of Campofrío Food Group, S.A. (CFG), a leading European packaged
meats company headquartered in Madrid, Spain, and one of the largest worldwide
with annual sales of approximately €1.8
billion (approximately $2.4
billion as of May 2, 2010).
The
following table shows the percentages of International segment revenues derived
from packaged meats, fresh pork and other products for the fiscal years
indicated.
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Fiscal
Years
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2010
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2009
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2008
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Packaged
meats
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35 | % | 34 | % | 41 | % | ||||||
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Fresh
pork
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24 | 31 | 19 | |||||||||
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Other
products(1)
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41 | 35 | 40 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
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(1)
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Includes poultry, beef,
by-products and rendering
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The
International segment has sales denominated in foreign currencies and, as a
result, is subject to certain currency exchange risk. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Derivative Financial Instruments” for a discussion of our foreign
currency hedging activities.
Sources
and availability of raw materials
Like the Pork segment,
live hogs are the primary raw materials of the International segment with the
primary source of hogs being the Hog Production segment. The International
segment purchased 87%
of its live hog requirements from the Hog Production segment in fiscal 2010.
Hog
Production Segment
As
a complement to our Pork and International segments, we have vertically
integrated into hog production and are the world’s largest hog producer. The Hog
Production segment consists of our hog production operations located in the
U.S., Poland and Romania, as well as our interests in hog production operations
in Mexico. The Hog Production segment operates numerous hog production
facilities with approximately 1.0 million sows producing about 19.3 million
market hogs annually. In addition, through our Mexican joint ventures, we have
approximately 90,000 sows producing about 1.7 million market hogs
annually.
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The
profitability of hog production is directly related to the market price of live
hogs and the cost of feed grains such as corn and soybean meal. The Hog
Production segment generates higher profits when hog prices are high and feed
grain prices are low, and lower profits (or losses) when hog prices are low and
feed grain prices are high. We believe that the Hog Production segment furthers
our strategic initiative of vertical integration and reduces our exposure to
fluctuations in profitability historically experienced by the pork processing
industry. In addition, with the importance of food safety to the consumer, our
vertically integrated system provides increased traceability from conception of
livestock to consumption of the pork product.
As
disclosed above under “Pork Segment,” during fiscal 2008, we acquired PSF, a
vertically integrated hog producer and pork processor. PSF’s hog production
operations are reported in our Hog Production segment. The acquisition of PSF
added hog production facilities in Missouri, North Carolina and Texas with
approximately 225,000 sows producing about 4.0 million market hogs
annually.
The
following table shows the percentages of Hog Production segment revenues derived
from hogs sold internally and externally, and other products for the fiscal
years indicated.
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Fiscal
Years
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2010
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2009
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2008
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Internal
hog sales
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80 | % | 82 | % | 81 | % | ||||||
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External
hog sales
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18 | 15 | 17 | |||||||||
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Other
products(1)
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2 | 3 | 2 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
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(1)
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Consists primarily of feed sold to
external parties.
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Genetics
We
own certain genetic lines of specialized breeding stock which are marketed using
the name Smithfield Premium Genetics (SPG). The Hog Production segment makes
extensive use of these genetic lines, with approximately 790,000 SPG breeding
sows. In addition, we have sublicensed some of these rights to some of our
strategic hog production partners. In addition, through our joint ventures, we
have approximately 60,000 SPG breeding sows. All hogs produced under these
sublicenses are processed internally. We believe that the hogs produced by these
genetic lines are the leanest hogs commercially available and enable us to
market highly differentiated pork products. We believe that the leanness and
increased meat yields of these hogs enhance our profitability with respect to
both fresh pork and packaged meats. In fiscal 2010, we produced approximately
15.5 million SPG hogs domestically. We also produced approximately 1.1 million
SPG hogs through our joint ventures.
Hog
production operations
We
use advanced management techniques to produce premium quality hogs on a large
scale at a low cost. We develop breeding stock, optimize diets for our hogs at
each stage of the growth process, process feed for our hogs and design hog
containment facilities. We believe our economies of scale and production
methods, together with our use of the advanced SPG genetics, make us a low cost
producer of premium quality hogs. We also utilize independent farmers and their
facilities to raise hogs produced from our breeding stock. Under multi-year
contracts, a farmer provides the initial facility investment, labor and front
line management in exchange for a service fee. Currently, approximately 65% of
our market hogs are finished on contract farms.
Nutrient
management and other environmental issues
Our
hog production facilities have been designed to meet or exceed all applicable
zoning and other government regulations. These regulations require, among other
things, maintenance of separation distances between farms and nearby residences,
schools, churches, public use areas, businesses, rivers, streams and wells and
adherence to required construction standards.
Hog
production facilities generate significant quantities of manure, which must be
managed properly to protect public health and the environment. We believe that
we use the best technologies currently available and economically feasible for
the management of swine
7
manure,
which require permits under state, and in some instances, federal law. The
permits impose standards and conditions on the design and operation of the
systems to protect public health and the environment, and can also impose
nutrient management planning requirements depending on the type of system
utilized. The most common system of swine manure management employed by our hog
production facilities is the lagoon and spray field system, in which lined
earthen lagoons are utilized to treat the manure before it is applied to
agricultural fields by spray application. The nitrogen and phosphorus in the
treated manure serve as a crop fertilizer.
We
follow a number of other policies and protocols to reduce the impact of our hog
production operations on the environment, including: the employment of
environmental management systems; ongoing employee training regarding
environmental controls; walk-around inspections at all sites by trained
personnel; formal emergency response plans that are regularly updated; and
collaboration with manufacturers regarding testing and developing new equipment.
For further information see “Regulation” below.
Sources
and availability of raw materials
Feed
grains, including corn, soybean meal and wheat, are the primary raw materials of
the Hog Production segment. These grains are readily available from numerous
sources at competitive prices. We generally purchase corn and soybean meal
through forward purchase contracts. Historically, grain prices have been subject
to substantial fluctuations and have escalated in recent years due to increased
worldwide demand.
Other
Segment
The
Other segment is comprised of our turkey production operations, our 49% interest
in Butterball and through the first quarter of fiscal 2010, our live cattle
operations.
Our
turkey production operations produce and sell exclusively to Butterball.
Butterball is the largest U.S. turkey producer. Its products include
whole turkeys and parts, cooked turkey breasts, turkey sausages, ground turkey,
lunchmeat and fresh tray pack, bone-in and boneless turkey. These products are
sold in thirty-one countries, including the U.S., Mexico, China and Russia, and
are available through retail, deli and foodservice channels.
Our
live cattle operations consisted of the live cattle inventories that were
excluded from the sale of Smithfield Beef, Inc. (Smithfield Beef) in October
2008 (fiscal 2009).
SEGMENTS
IN GENERAL
Customers
and Marketing
Our
fundamental marketing strategy is to provide quality and value to the ultimate
consumers of our fresh pork, packaged meats and other meat products. We have a
variety of consumer advertising and trade promotion programs designed to build
awareness and increase sales distribution and penetration. We also provide sales
incentives for our customers through rebates based on achievement of specified
volume and/or growth in volume levels.
We
have significant market presence, both domestically and internationally, where
we sell our fresh pork, packaged meats and other meat products to national and
regional supermarket chains, wholesale distributors, the foodservice industry
(fast food, restaurant and hotel chains, hospitals and other institutional
customers), export markets and other further processors. We use both in-house
salespersons as well as independent commission brokers to sell our products. In
fiscal 2010, we sold our products to more than 5,000
customers, none of whom accounted for as much as 10% of consolidated revenues.
We have no significant or seasonally variable backlog because most customers
prefer to order products shortly before shipment and, therefore, do not enter
into formal long-term contracts.
Methods
of Distribution
We
use a combination of private fleets of leased tractors and trailers and
independent common carriers and owner operators to distribute live hogs, fresh
pork, packaged meats and other meat products to our customers, as well as to
move raw materials between plants for further processing. We coordinate
deliveries and use backhauling to reduce overall transportation costs. In the
U.S., we distribute products directly from some of our plants and from leased
distribution centers primarily in Missouri, Pennsylvania, North Carolina,
Virginia, Kansas, Wisconsin, Indiana, Illinois, California, Iowa, Nebraska and
Texas. We also operate distribution centers adjacent to our plants in Bladen
County, North Carolina, Sioux Falls, South Dakota and Crete, Nebraska.
Internationally, we distribute our products through a combination of leased and
owned warehouse facilities.
8
Trademarks
We
own and use numerous marks, which are registered trademarks or are otherwise
subject to protection under applicable intellectual property laws. We consider
these marks and the accompanying goodwill and customer recognition valuable and
material to our business. We believe that registered trademarks have been
important to the success of our branded fresh pork and packaged meats products.
In a number of markets, our brands are among the leaders in select product
categories.
Seasonality
The
meat processing business is somewhat seasonal in that, traditionally, the
periods of higher sales for hams are the holiday seasons such as Christmas,
Easter and Thanksgiving, and the periods of higher sales for smoked sausages,
hot dogs and luncheon meats are the summer months. The Pork segment typically
builds substantial inventories of hams in anticipation of its seasonal holiday
business. In addition, the Hog Production segment experiences lower farrowing
performance during the winter months and slower animal growth rates during the
hot summer months resulting in a decrease in hog supplies in the summer and an
increase in hog supplies in the fall.
Competition
The
protein industry is highly competitive. Our products compete with a large number
of other protein sources, including chicken, beef and seafood, but our principal
competition comes from other pork processors.
We
believe that the principal competitive factors in the pork processing industry
are price, product quality and innovation, product distribution and brand
loyalty. Some of our competitors are more diversified than us, especially now
that we have sold Smithfield Beef. To the extent that their other operations
generate profits, these more diversified competitors may be able to support
their meat processing operations during periods of low or negative
profitability.
Research
and Development
We conduct continuous
research and development activities to develop new products and to improve
existing products and processes. We incurred expenses on
company-sponsored research and development activities of $38.8
million, $52.6 million and $90.9 million in fiscal 2010, 2009 and
2008, respectively. The reduction in research and development activities over
the previous two fiscal years was due to our focus on driving efficiencies and
reducing debt. The reduction is expected to be temporary.
FINANCIAL
INFORMATION ABOUT SEGMENTS
Financial
information for each reportable segment, including revenues, operating profit
and total assets, is disclosed in Note 18 in “Item 8. Financial Statements and
Supplementary Data.”
RISK
MANAGEMENT AND HEDGING
We
are exposed to market risks primarily from changes in commodity prices, as well
as interest rates and foreign exchange rates. To mitigate these risks, we
utilize derivative instruments to hedge our exposure to changing prices and
rates. For further information see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Derivative
Financial Instruments.”
REGULATION
Regulation
in General
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.
From
time to time, we receive notices and inquiries from regulatory authorities and
others asserting that we are not in compliance with particular laws and
regulations. In some instances, litigation ensues. In addition, individuals may
initiate litigation against us.
Many
of our facilities are subject to environmental permits and other regulatory
requirements, violations of which are subject to civil and criminal sanction. In
some cases, third parties may also have the right to sue to enforce
compliance.
9
We
use the International Organization for Standardization (ISO) 14001 standard to
manage and optimize environmental performance, and we were the first in the
industry to achieve ISO 14001 certification for our hog production and
processing facilities. ISO guidelines require a long-term management plan
integrating regular third-party audits, goal setting, corrective action,
documentation, and executive review. Our Environmental Management System (EMS),
which conforms to the ISO 14001 standard, addresses the significant
environmental aspects of our operations, provides employee training programs and
facilitates engagement with local communities and regulators. Most importantly,
the EMS allows the collection, analysis and reporting of relevant environmental
data to facilitate our compliance with applicable environmental laws and
regulations.
Water
In
November 2008, EPA revised regulations under the Clean Water Act governing
confined animal feeding operations (CAFOs) in response to a 2005 federal court
decision. The new regulations delete the requirement that almost all CAFOs apply
for Clean Water Act permit coverage and instead require that all CAFOs that
“discharge or propose to discharge” apply for coverage. In 2010, EPA
issued new guidance relative to when EPA believes CAFOs “propose to
discharge.” Although compliance with EPA’s regulations required some
changes to our hog production operations resulting in additional costs, such
compliance has not had a material adverse effect on our hog production
operations.
In the fall of 2007, an
activist group and others filed a rulemaking petition with the North Carolina
Environmental Management Commission (the Commission) requesting that the
Commission initiate a rulemaking to require monitoring by swine operations
covered by federal and state general permits in North Carolina. In May 2008, the
Commission accepted the petition and directed staff to form a stakeholder group
to assist staff in developing a proposed rule before proceeding to public
comment and before further Commission consideration. Rules were proposed in May
2009, and the matter continues to proceed under the state administrative process
including a second-round of public comment. Although compliance with a new
monitoring rule in North Carolina could impose additional costs on our hog
production operations, such costs are not expected to have a material adverse
effect on our hog production operations. However, there can be no assurance that
the rulemaking will not result in changes to the existing monitoring rules which
may have a material adverse effect on our financial position or results of
operations.
Air
During
calendar year 2002, the National Academy of Sciences (the Academy) undertook a
study at EPA’s request to assist EPA in considering possible future regulation
of air emissions from animal feeding operations. The Academy’s study identified
a need for more research and better information, but also recommended
implementing without delay technically and economically feasible management
practices to decrease emissions. Further, our hog production subsidiaries have
accepted EPA’s offer to enter into an administrative consent agreement and order
with owners and operators of hog farms and other animal production operations.
Under the terms of the consent agreement and order, participating owners and
operators agreed to pay a penalty, contribute towards the cost of an air
emissions monitoring study and make their farms available for monitoring. In
return, participating farms have been given immunity from federal civil
enforcement actions alleging violations of air emissions requirements under
certain federal statutes, including the Clean Air Act. Pursuant to our consent
agreement and order, we have paid a $100,000 penalty to EPA. PSF’s Texas farms
and company-owned farms in North Carolina also agreed to participate in this
program. The National Pork Board, of which we are a member and financial
contributor, will be paying the costs of the air emissions monitoring study on
behalf of all hog producers, including us, out of funds collected from its
members in previous years. The cost of the study for all hog producers is
approximately $6.0 million. Monitoring under the study began in the spring 2007
and ended in the winter 2010, and the Academy is now examining the data.
New regulations governing air emissions from animal agriculture operations are
likely to emerge from the monitoring program undertaken pursuant to the consent
agreement and order. There can be no assurance that any new regulations that may
be proposed to address air emissions from animal feeding operations will not
have a material adverse effect on our financial position or results of
operations.
Greenhouse
Gases
The
U.S. Congress is actively considering legislation to reduce greenhouse gas (GHG)
emissions as a result of concerns over climate change. The EPA
finalized regulations in calendar year 2010 under the Clean Air Act, which may
trigger new source review and permitting requirements for certain sources of GHG
emissions. These rulemakings are all subject to judicial
appeals. There may also be changes in applicable state law pertaining
to the regulation of GHGs.. Several states have taken steps to
require the reduction of GHGs by certain companies and public utilities,
primarily through the planned development of GHG inventories and/or regional GHG
cap and trade programs.
10
As
in virtually every industry, GHG emissions occur at several points across our
operations, including production, transportation and processing. Compliance with
future legislation, if any, and compliance with currently evolving regulation of
GHGs by EPA and the states may result in increased compliance costs, capital
expenditures, and operating costs. In the event that any future
compliance requirements at any of our facilities requires more than the
sustainability measures that we are currently undertaking to monitor emissions
and improve our energy efficiency, we may experience significant increases in
our costs of operation. Such costs may include the cost to purchase
offsets or allowances and costs to reduce GHG emissions if such reductions are
required. These regulatory changes may also lead to higher cost of
goods and services which may be passed on to us by
suppliers.
As
an agriculture-based company, changes to the climate could also affect key
inputs to our business as the result of shifts in temperatures, water
availability, precipitation, and other factors. Both the cost
and availability of corn and other feed crops, for example, could be
affected. The regulation or taxation of carbon emissions could also
affect the prices of commodities, energy, and other inputs to our
business. We believe there could also be opportunities for us as a
result of heightened interest in alternative energy sources—including those
derived from manure—and participation in carbon markets. However, it
is not possible at this time to predict the complete structure or outcome of any
future legislative efforts to address GHG emissions and climate change, whether
EPA’s regulatory efforts will survive court challenge, or the eventual cost to
us of compliance. There can be no assurance that GHG regulation will not have a
material adverse effect on our financial position or results of
operations.
Regulatory
and Other Proceedings
From
time to time we receive notices from regulatory authorities and others asserting
that we are not in compliance with certain environmental laws and regulations.
In some instances, litigation ensues.
In
March 2006 (fiscal 2006), we settled two citizen citation lawsuits alleging
among other things violations of certain environmental laws. The settlement
provides, among other things, that our subsidiary, Murphy-Brown LLC, will
undertake a series of measures designed to enhance the performance of the swine
waste management systems on approximately 244 company-owned farms in North
Carolina and thereby reduce the potential for surface water or ground water
contamination from these farms. The effect of the settlement will not have a
material adverse effect on our financial position or results of operations. The
settlement resolves all claims in the actions and also contains a broad release
and covenant not to sue for any other claims or actions that the plaintiffs
might be able to bring against us and our subsidiaries related to swine waste
management at the farms covered by the settlement. There are certain exceptions
to the release and covenant not to sue related to future violations and the
swine waste management technology development initiative pursuant to the
Agreement described below under “Environmental Stewardship.” We may move to
terminate the settlement on or after March 2013 provided all of the consent
decree obligations have been satisfied.
Prior
to our acquisition of PSF, it had entered into a consent judgment with the State
of Missouri and a consent decree with the federal government and a citizens
group. The judgment and decree generally required that PSF pay penalties to
settle past alleged regulatory violations, utilize new technologies to reduce
nitrogen in the material that it applies to farm fields and research, and
develop and implement “Next Generation Technology” for environmental controls at
certain of its Missouri operations.
Prior
to our acquisition of PSF, it estimated in 2004 that it would invest
approximately $33.0 million in total capital to implement the new technologies
by calendar 2010 to comply with the judgment and decree. As of May 2, 2010,
PSF estimated costs to comply with the judgment and decree to be approximately
$41.0 million, of which $28.4 million had been spent. Included in these
expenditures is a fertilizer plant in northern Missouri that converts waste into
commercial grade fertilizer. We also anticipate spending an estimated $2.3
million to replace aging lagoon covers, which PSF installed in the past to
comply with consent judgment obligations. However, decisions made by the panel
of university experts responsible for approving new technologies pursuant to the
judgment and decree in fiscal 2009 and 2010 suggest that our obligations under
the judgment and decree could significantly exceed our current estimate. As of
May 2, 2010, the State Attorney General is considering new technology proposals
approved by the expert panel in 2010; however, discussions are ongoing and it is
not possible at this time to predict with certainty the outcome or the eventual
cost to us of complying with the judgment and
decree.
For further information regarding regulatory matters resulting in
litigation, see “Item 3. Legal Proceedings.”
11
Environmental
Stewardship
In
July 2000, in furtherance of our continued commitment to responsible
environmental stewardship, we and our North Carolina-based hog production
subsidiaries voluntarily entered into an agreement with the Attorney General of
North Carolina (the Agreement) designed to enhance water quality in the State of
North Carolina through a series of initiatives to be undertaken by us and our
subsidiaries while protecting access to swine operations in North Carolina.
These initiatives focused on operations of our hog production subsidiaries in
the State of North Carolina, particularly areas devastated by hurricanes in the
fall of 1999.
Under
the Agreement, we assumed a leadership role in the development of
environmentally superior and economically feasible waste management system
technologies. Pursuant to the Agreement, we committed to implement
environmentally superior and economically feasible technologies for the
management of swine waste at our farms in North Carolina following a
determination made by an expert from North Carolina State University, with
advice from peer review panels appointed by him, that such technologies are both
environmentally superior and economically feasible to construct and operate at
such farms. We provided $15.0 million to fund the technology research and
development activities under the Agreement.
We
also agreed to provide certain financial and technical assistance to those farms
under contract to our subsidiaries as necessary to facilitate their
implementation of such technologies determined to be environmentally superior
and economically feasible. These technology research activities have now been
completed and the technology development, environmental enhancement and
conversion agreement portions of the Agreement remain in place. Although none of
the technologies evaluated under the Agreement were found to be economically
feasible for existing farms, a specific solids
separation/nitrification/denitrification/soluble phosphorous removal system in
combination with any one of four specified solids treatment systems was found to
meet the environmental performance standards established under the Agreement.
These combinations of technologies were found to be both economically feasible
and environmentally superior for new farms. We are committed to building on the
technology research and development work completed under the Agreement, and are
in the process of evaluating options for continued technology development work
in North Carolina.
The
Agreement also reflects our commitment to preserving and enhancing the
environment of eastern North Carolina by providing a total of $50.0 million to
assist in the preservation of wetlands and other natural areas in eastern North
Carolina and to promote similar environmental enhancement activities. This
commitment is being fulfilled with annual contributions of $2.0 million over a
25 year period beginning in 2000.
Animal
Welfare Program
We
have a formalized animal welfare program which we believe is one of the most
comprehensive programs in our industry.
Our
animal welfare program includes processes and procedures relating to the safety,
comfort and health of our animals. We retained the services of two
internationally recognized experts on animal behavior and animal handling, who
verified that our animal welfare program is credible, science-based and
auditable. This program includes procedures designed to monitor animal
well-being at all stages of the animal’s life through a series of checklists,
inspections and audits. Through this program, our production personnel receive
specific training in the proper methods and practices for the promotion of
animal well-being. Adherence to proper animal welfare management is also a
condition of our agreements with contract farmers. Going forward, we are also
utilizing the National Pork Board’s Pork Quality Assurance Plus Program, which
is better known as PQA Plus. While the concepts and methods of the two systems
are essentially the same, the PQA Plus program offers a unified, industry
approach for animal welfare and food safety issues. We assisted the National
Pork Board in the development of PQA Plus. Pork producers become certified only
after attending a training session on good production practices, which include
such topics as disease prevention, biosecurity, responsible antibiotic use, and
appropriate feeding, and after undergoing regular on-farm assessments and random
third-party audits. PQA Plus certification is valid for three years. We obtained
certification of all company-owned and contract farms under the PQA Plus program
by the end of calendar year 2009. The audit component of our animal welfare
program will be rolled into the PQA Plus program.
12
In January 2007 (fiscal 2007), we announced a ten-year program to
phase out individual gestation stalls at our sow farms and replace the gestation
stalls with group pens. We have begun preliminary work necessary to determine
the best approach at each farm. Some of our farms will require extensive
retrofits and reconfiguration and many may require new permits from state
agencies in order to make any significant changes. We completed group housing
conversions at two existing farms in North Carolina and Colorado and a newly
built facility in Utah. The Utah facility includes two new 5,000-hog housing
sites where sows have access to individual stalls to eat, drink, and rest, but
can also move into a more open pen area. We currently estimate the total cost of
our transition to group pens to be approximately $300 million. This program
represents a significant financial commitment and reflects our desire to be more
animal friendly, as well as to address the concerns and needs of our customers.
We do not expect that the switch to penning systems at sow farms will have a
material adverse effect on our operations. Due to recent significant operating
losses incurred by our Hog Production segment, we have delayed capital
expenditures for the program such that we no longer expect to complete the
phase-out within ten years of the original announcement. However, we remain
committed to implementing the program as soon as economic conditions
improve.
EMPLOYEES
The
following table shows the approximate number of our employees and the
approximate number of employees covered by collective bargaining agreements or
that are members of labor unions in each segment, as of May 2,
2010:
|
Segment
|
Employees
|
Employees
Covered by Collective Bargaining Agreements
|
||||||
|
Pork
|
32,100 | 21,000 | ||||||
|
International
|
8,800 | 6,500 | ||||||
|
HP
|
6,800 | - | ||||||
|
Other
|
100 | - | ||||||
|
Corporate
|
200 | - | ||||||
|
Totals
|
48,000 | 27,500 | ||||||
Of
the approximately 27,500 employees covered by collective bargaining agreements
or that are members of labor unions, none are covered by collective bargaining
agreements that expire in fiscal 2011. These agreements expire over periods
throughout the next several years. We believe that our relationship with our
employees is satisfactory.
FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS
See
Note 18 in “Item 8. Financial Statements and Supplementary Data” for financial
information about geographic areas. See “Item 1A. Risk Factors” for a discussion
of the risks associated with our international sales and
operations.
AVAILABLE
INFORMATION
Our
website address is www.smithfieldfoods.com. The
information on our website is not part of this annual report. Our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
any amendments to those reports are available free of charge through our website
as soon as reasonably practicable after filing or furnishing the material to the
SEC. You may read and copy documents we file at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains a
website that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including us) file electronically with the
SEC. The SEC’s website is www.sec.gov.
13
|
RISK
FACTORS
|
The
following risk factors should be read carefully in connection with evaluating
our business and the forward-looking information contained in this Annual Report
on Form 10-K. The risk factors below represent what we believe are the known
material risk factors with respect to us and our business. Any of the following
risks could materially adversely affect our business, operations, industry,
financial position or future financial results.
Our
results of operations are cyclical and could be adversely affected by
fluctuations in the commodity prices for hogs and grains.
We
are largely dependent on the cost and supply of hogs and feed ingredients and
the selling price of our products and competing protein products, all of which
are determined by constantly changing and volatile market forces of supply and
demand as well as other factors over which we have little or no control. These
other factors include:
|
|
§
|
competing
demand for corn for use in the manufacture of ethanol or other alternative
fuels,
|
|
|
§
|
environmental
and conservation regulations,
|
|
|
§
|
import
and export restrictions such as trade barriers resulting from, among other
things, health concerns,
|
|
|
§
|
economic
conditions,
|
|
|
§
|
weather,
including weather impacts on our water supply and the impact on the
availability and pricing of grains,
|
|
|
§
|
energy
prices, including the effect of changes in energy prices on our
transportation costs and the cost of feed,
and
|
|
|
§
|
crop
and livestock diseases.
|
We
cannot assure you that all or part of any increased costs experienced by us from
time to time can be passed along to consumers of our products, in a timely
manner or at all.
Hog
prices demonstrate a cyclical nature over periods of years, reflecting the
supply of hogs on the market. Further, hog raising costs are largely dependent
on the fluctuations of commodity prices for corn and other feed ingredients. For
example, our fiscal 2009 results of operations were negatively impacted by
higher feed and feed ingredient costs which increased hog raising costs to $62
per hundredweight in fiscal 2009 from $50 per hundred weight in the prior year,
or 24%, at a time of continued weak lean hog prices due to excess supply. When
hog prices are lower than our hog production costs, our non-vertically
integrated competitors may have a cost advantage.
Additionally,
commodity pork prices demonstrate a cyclical nature over periods of years,
reflecting changes in the supply of fresh pork and competing proteins on the
market, especially beef and chicken. For example, our fiscal 2006 fourth quarter
and fiscal 2007 first half financial results were impacted negatively by an
over-supply of protein that decreased selling prices of our fresh and packaged
meats.
We
attempt to manage certain of these risks through the use of our risk management
and hedging programs. However, these programs may also limit our ability to
participate in gains from favorable commodity fluctuations. For example, we
ensured availability of grain supplies in the summer of 2008 through the end of
fiscal 2009 by locking in corn at approximately $6 per bushel through this
period. As a result, our feed costs remained at these high levels through the
end of fiscal 2009 despite the decrease in the price of corn on the commodities
markets during such period. The high cost of feed, in particular corn, and the
impact of these hedges were principal factors in making the Hog Production
segment unprofitable during fiscal 2009 and fiscal 2010. Additionally, a portion
of our commodity derivative contracts are marked-to-market such that the related
unrealized gains and losses are reported in earnings on a quarterly basis. This
accounting treatment may cause significant volatility in our quarterly earnings.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Derivative Financial Instruments” for further
information.
Outbreaks
of disease among or attributed to livestock can significantly affect production,
the supply of raw materials, demand for our products and our
business.
We
take precautions to ensure that our livestock are healthy and that our
processing plants and other facilities operate in a sanitary manner.
Nevertheless, we are subject to risks relating to our ability to maintain animal
health and control diseases. Livestock health problems could adversely impact
production, the supply of raw materials and consumer confidence in all of our
operating segments.
From time to time, we have experienced outbreaks of certain
livestock diseases, such as the outbreaks of classical swine fever at three of
our hog farms in Romania in August 2007 and the outbreak of circovirus at our
U.S. facilities that began in late fiscal 2006. We may experience additional
occurrences of disease in the future. Disease can reduce the number of offspring
produced, hamper the growth of livestock to finished size, result in expensive
vaccination programs and require in some cases the destruction of infected
livestock, all of which could adversely affect our production or ability to sell
or export our products. Adverse publicity concerning any disease or health
concern could also cause customers to lose confidence in the safety and quality
of our food products, particularly as we expand our branded pork
products.
14
In
addition to risks associated with maintaining the health of our livestock, any
outbreak of disease elsewhere in the U.S. or in other countries could reduce
consumer confidence in the meat products affected by the particular disease,
generate adverse publicity, depress market conditions for our hogs
internationally and/or domestically and result in the imposition of import or
export restrictions. For example, the initial and widespread media
reports regarding the A(H1N1) influenza outbreak labeled the influenza the
“swine flu” or a variation thereof. We experienced a temporary
decline in sales due to the perceived risk of A(H1N1) and pork prices dropped
sharply during a period in which prices normally move higher.
Outbreaks
of disease among or attributed to livestock also may have indirect consequences
that adversely affect our business. For example, past outbreaks of avian
influenza in various parts of the world reduced the global demand for poultry
and thus created a temporary surplus of poultry both domestically and
internationally. This poultry surplus placed downward pressure on poultry prices
which in turn reduced meat prices including pork both in the U.S. and
internationally.
Any
perceived or real health risks related to our products or the food industry
generally or increased regulation could adversely affect our ability to sell our
products.
We
are subject to risks affecting the food industry generally, including risks
posed by the following:
|
|
§
|
food
spoilage or food contamination,
|
|
|
§
|
evolving
consumer preferences and nutritional and health-related
concerns,
|
|
|
§
|
consumer
product liability claims,
|
|
|
§
|
product
tampering,
|
|
|
§
|
the
possible unavailability and expense of product liability insurance,
and
|
|
|
§
|
the
potential cost and disruption of a product
recall.
|
Adverse
publicity concerning any perceived or real health risk associated with our
products could also cause customers to lose confidence in the safety and quality
of our food products, which could adversely affect our ability to sell our
products, particularly as we expand our branded products business. We could also
be adversely affected by perceived or real health risks associated with similar
products produced by others to the extent such risks cause customers to lose
confidence in the safety and quality of such products generally and, therefore,
lead customers to opt for other meat options that are perceived as safe. The
A(H1N1) influenza outbreak that began in late fiscal 2009 illustrates the
adverse impact that can result from perceived health risks associated with the
products we sell. Although the CDC and other regulatory and scientific bodies
indicated that people cannot get A(H1N1) influenza from eating cooked pork or
pork products, the perception of some consumers that the disease could be
transmitted in that manner was the apparent cause of the temporary decline in
pork consumption in late fiscal 2009 and early fiscal 2010.
Our
products are susceptible to contamination by disease producing organisms, or
pathogens, such as Listeria monocytogenes, Salmonella, Campylobacter and generic
E. coli. Because these pathogens are generally found in the environment, there
is a risk that they, as a result of food processing, could be present in our
products. We have systems in place designed to monitor food safety risks
throughout all stages of our vertically integrated process. However, we cannot
assure you that such systems, even when working effectively, will eliminate the
risks related to food safety. These pathogens can also be introduced to our
products as a result of improper handling at the further processing, foodservice
or consumer level. In addition to the risks caused by our processing operations
and the subsequent handling of the products, we may encounter the same risks if
any third party tampers with our products. We could be required to recall
certain of our products in the event of contamination or adverse test results.
Any product contamination also could subject us to product liability claims,
adverse publicity and government scrutiny, investigation or intervention,
resulting in increased costs and decreased sales as customers lose confidence in
the safety and quality of our food products. Any of these events could have an
adverse impact on our operations and financial results.
Our manufacturing facilities and products, including the
processing, packaging, storage, distribution, advertising and labeling of our
products, are subject to extensive federal, state and foreign laws and
regulations in the food safety area, including constant government inspections
and governmental food processing controls. Loss of or failure to obtain
necessary permits and registrations could delay or prevent us from meeting
current product demand, introducing new products, building new facilities or
acquiring new businesses and could adversely affect operating results. If we are
found to be out of compliance with applicable laws and regulations, particularly
if it relates to or compromises food safety, we could be subject to civil
remedies, including fines, injunctions, recalls or asset seizures, as well as
potential criminal sanctions, any of which could have an adverse effect on our
financial results. In addition, future material changes in food safety
regulations could result in increased operating costs or could be required to be
implemented on schedules that cannot be met without interruptions in our
operations.
15
Environmental regulation and related
litigation and commitments could have a material adverse effect on
us.
Our
past and present business operations and properties are subject to extensive and
increasingly stringent laws and regulations pertaining to protection of the
environment, including among others:
|
|
§
|
the
treatment and discharge of materials into the
environment,
|
|
|
§
|
the
handling and disposition of manure and solid wastes
and
|
|
|
§
|
the
emission of greenhouse gases.
|
Failure
to comply with these laws and regulations or any future changes to them may
result in significant consequences to us, including civil and criminal
penalties, liability for damages and negative publicity. Some requirements
applicable to us may also be enforced by citizen groups or other third parties.
Natural disasters, such as flooding and hurricanes, can cause the discharge of
effluents or other waste into the environment, potentially resulting in our
being subject to further liability claims and governmental regulation as has
occurred in the past. See “Item 1. Business—Regulation” for further discussion
of regulatory compliance as it relates to environmental risk. We have incurred,
and will continue to incur, significant capital and operating expenditures to
comply with these laws and regulations. We also face the risk of nuisance
lawsuits even if we are operating in compliance with applicable regulations.
Before we acquired PSF, other nuisance suits in Missouri resulted in jury
verdicts against PSF and Continental Grain Company (CGC). In the fourth
quarter of fiscal 2010, a jury awarded compensatory damages totaling $11,050,000
to 15 plaintiffs in another nuisance suit. Currently, we are defending a
number of additional nuisance suits with respect to farms in
Missouri. See “Item 3. Legal Proceedings—Missouri
litigation.”
In
addition, pursuant to a voluntary agreement with the State of North Carolina, we
committed to implement environmentally superior and economically feasible
technologies for the management of swine waste at our farms in North Carolina
provided a determination is made by an expert from North Carolina State
University that such technologies are both environmentally superior and
economically feasible to construct and operate at such farms. We also acquired
PSF in fiscal 2008, which entered into environmental consent decrees in the
State of Missouri requiring PSF to research, develop and implement new
technologies to control wastewater, air and odor emissions from its Missouri
farms. See “Item 1. Business—Environmental Stewardship” and “Item 1.
Business—Regulation” for further information regarding these obligations. We
cannot assure you that the costs of carrying out these obligations will not
exceed previous estimates or that requirements applicable to us will not be
altered in ways that will require us to incur significant additional costs and
adversely affect our financial results. In addition, new environmental issues
could arise that would cause currently unanticipated investigations, assessments
or expenditures.
Governmental
authorities may take further action restricting our ability to own livestock or
to engage in farming or restricting such operations generally, which could
adversely affect our business.
A
number of states, including Iowa and Missouri, have adopted legislation that
prohibits or restricts the ability of meat packers, or in some cases
corporations generally, from owning livestock or engaging in farming. In the
second quarter of fiscal 2006, we entered into a settlement agreement with the
State of Iowa whereby the state agreed not to enforce its restrictive
legislation on us for a period of ten years. As a part of our settlement, we
committed to pay $200,000 per year for 10 years to support various programs
benefiting the swine industry in Iowa. We also agreed to purchase a specified
minimum number of hogs to be processed by us in Iowa and South Dakota on the
open market for two years.
Other
states have similar legislation restricting the ability of corporations or
others from owning livestock farms or engaging in farming. In addition, Congress
has recently considered federal legislation that would ban meat packers from
owning livestock. We cannot assure you that such or similar legislation
affecting our operations will not be adopted at the federal or state levels in
the future. Such legislation, if adopted and applicable to our current
operations and not successfully challenged or settled, could have a material
adverse impact on our operations and our financial statements.
In fiscal 2008, the State of North Carolina enacted a permanent moratorium
on the construction of new hog farms using the lagoon and sprayfield system. The
moratorium limits us from expanding our North Carolina production operations.
This permanent moratorium replaced a 10-year moratorium on the construction of
hog farms with more than 250 hogs or the expansion of existing large farms. This
moratorium may over time lead to increased competition for contract
growers.
16
Our
level of indebtedness and the terms of our indebtedness could adversely affect
our business and liquidity position.
As
of May 2, 2010, we had:
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§
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approximately
$3,008.1 million of indebtedness;
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§
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guarantees
of up to $80.3 million for the financial obligations of certain
unconsolidated joint ventures and hog
farmers;
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§
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guarantees
of $13.5 million for leases that were transferred to JBS in connection
with the sale of Smithfield Beef;
and
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§
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aggregate
borrowing capacity available under our ABL Credit Facility totaling $707.2
million, taking into account a borrowing base adjustment of $74.9 million,
no outstanding borrowings and outstanding letters of credit of $217.9
million.
|
Our
indebtedness may increase from time to time in the future for various reasons,
including fluctuations in operating results, working capital needs, capital
expenditures and potential acquisitions or joint ventures. In addition, due to
the volatile nature of the commodities markets, we may have to borrow
significant amounts to cover any margin calls under our risk management and
hedging programs. During fiscal 2010, margin deposits posted by us ranged from
$(22.6) million to $233.4 million (negative amounts representing margin deposits
we have received from our brokers). Our consolidated indebtedness level could
significantly affect our business because:
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§
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it
may, together with the financial and other restrictive covenants in the
agreements governing our indebtedness, significantly limit or impair our
ability in the future to obtain financing, refinance any of our
indebtedness, sell assets or raise equity on commercially reasonable terms
or at all, which could cause us to default on our obligations and
materially impair our liquidity,
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§
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a
downgrade in our credit rating could restrict or impede our ability to
access capital markets at attractive rates and increase the cost of future
borrowings. For example, in fiscal 2009, both Standard & Poor’s Rating
Services (S&P) and Moody’s Investors Services twice downgraded our
credit ratings, which resulted in increased interest expense, and our
credit rating is currently on negative watch by
S&P,
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§
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it
may reduce our flexibility to respond to changing business and economic
conditions or to take advantage of business opportunities that may
arise,
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§
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a
portion of our cash flow from operations must be dedicated to interest
payments on our indebtedness and is not available for other purposes,
which amount would increase if prevailing interest rates
rise,
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§
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substantially
all of our assets in the United States secure our ABL Credit Facility, our
Rabobank Term Loan and our Senior Secured Notes, which could limit our
ability to dispose of such assets or utilize the proceeds of such
dispositions and, upon an event of default under any such secured
indebtedness, the lenders thereunder could foreclose upon our pledged
assets, and
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§
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it
could make us more vulnerable to downturns in general economic or industry
conditions or in our business.
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Further,
our debt agreements restrict the payment of dividends to shareholders and, under
certain circumstances, may limit additional borrowings, investments, the
acquisition or disposition of assets, mergers and consolidations, transactions
with affiliates, the creation of liens and the repayment of certain debt. For
example, we anticipate that, if availability under the ABL Credit Facility does
not meet certain thresholds, we will be subject to financial condition
maintenance tests under the ABL Credit Facility and the Rabobank Term Loan. In
addition, as more fully described in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Debt Covenants and
the Incurrence Test,” the indentures relating to our senior unsecured notes
preclude us from incurring certain additional indebtedness and restrict us from
engaging in certain other activities, including paying cash dividends,
repurchasing our common stock and making certain investments when our interest
coverage ratio is less than 2.0 to 1.0 (the “Incurrence Test”). As of
May 2, 2010, we did not meet the Incurrence Test, and we do not expect to
meet the Incurrence Test again until the second quarter of fiscal 2011 at the
earliest. Failure to meet the Incurrence Test limits our flexibility in
accessing the credit markets and, should this failure continue, could adversely
affect our business and financial condition by, among other things, limiting our
ability to obtain financing, refinance existing indebtedness when it becomes due
and take advantage of corporate opportunities.
17
Should
market conditions deteriorate, or our operating results be depressed in the
future, we may have to request amendments to our covenants and restrictions.
There can be no assurance that we will be able to obtain such relief should it
be needed in the future. A breach of any of these covenants or restrictions
could result in a default that would permit our senior lenders, including
lenders under the ABL Credit Facility or the Rabobank Term Loan, the holders of
our Senior Secured Notes or the holders of our senior unsecured notes, as the
case may be, to declare all amounts outstanding under the ABL Credit Facility,
the Rabobank Term Loan, the Senior Secured Notes or the senior unsecured notes
to be due and payable, together with accrued and unpaid interest, and the
commitments of the relevant senior lenders to make further extensions of credit
under the ABL Credit Facility could be terminated. If we were unable to repay
our indebtedness to our lenders under our secured debt, these lenders could
proceed, where applicable, against the collateral securing that indebtedness,
which could include substantially all of our assets. Our future ability to
comply with financial covenants and other conditions, make scheduled payments of
principal and interest, or refinance existing borrowings depends on future
business performance that is subject to economic, financial, competitive and
other factors, including the other risks set forth in this Item 1A.
We
may not be successful in implementing and executing on our hog production cost
savings initiative and we can provide no assurance in the expected profitability
improvements from the cost savings initiative or the pork restructuring
plan.
In the
fourth quarter of fiscal 2010, we announced a plan to improve the cost structure
and profitability of our domestic hog production operations. The Cost
Savings Initiative includes a number of undertakings designed to improve
operating efficiencies and productivity. These consist of farm
reconfigurations and conversions, and termination of certain high cost, third
party hog grower contracts and breeding stock sourcing contracts, as well as a
number of other cost reduction activities. We can provide no
assurance, however, that the Cost Savings Initiative will result in the expected
profitability improvement in our Hog Production segment.
Further,
in February 2009, we announced a plan to consolidate and streamline the
corporate structure and manufacturing operations in our Pork segment to improve
operating efficiencies and increase plant utilization. The Restructuring Plan
resulted in the consolidation of several of our Pork segment business units into
three large operating companies. We can provide no assurance, however, that the
Restructuring Plan will result in the expected level of annual cost savings and
improved pre-tax earnings.
Our
operations are subject to the risks associated with acquisitions and investments
in joint ventures.
Although
our overall focus has shifted from acquisitions to integration of existing
operations, we may continue to review opportunities for strategic growth through
acquisitions in the future. We have also pursued and may in the future pursue
strategic growth through investment in joint ventures. These acquisitions and
investments may involve large transactions or realignment of existing
investments such as the recent merger of Groupe Smithfield and Campofrío. These
transactions present financial, managerial and operational challenges,
including:
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§
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diversion
of management attention from other business
concerns,
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§
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difficulty
with integrating businesses, operations, personnel and financial and other
systems,
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§
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lack
of experience in operating in the geographical market of the acquired
business,
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§
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increased
levels of debt potentially leading to associated reduction in ratings of
our debt securities and adverse impact on our various financial
ratios,
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§
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the
requirement that we periodically review the value at which we carry our
investments in joint ventures, and, in the event we determine that the
value at which we carry a joint venture investment has been impaired, the
requirement to record a non-cash impairment charge, which charge could
substantially affect our reported earnings in the period of such charge,
would negatively impact our financial ratios and could limit our ability
to obtain financing in the future,
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§
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potential
loss of key employees and customers of the acquired
business,
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§
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assumption
of and exposure to unknown or contingent liabilities of acquired
businesses,
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§
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potential
disputes with the sellers, and
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§
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for
our investments, potential lack of common business goals and strategies
with, and cooperation of, our joint venture
partners
|
In
addition, acquisitions outside the U.S. may present unique difficulties and
increase our exposure to those risks associated with international
operations.
We
could experience financial or other setbacks if any of the businesses that we
have acquired or may acquire in the future have problems of which we are not
aware or liabilities that exceed expectations. See “Item 3. Legal
Proceedings—Missouri Litigation” regarding lawsuits filed in Missouri against
PSF and CGC by neighboring individuals largely based on the laws of nuisance,
including a jury verdict for compensatory damages totaling $11,050,000 to 15
plaintiffs in fiscal 2010. Although we are continuing PSF’s vigorous defense of
these claims, we cannot assure you that we will be successful, that additional
nuisance claims will not arise in the future or that the reserves for this
litigation will not have to be substantially increased.
18
Our
numerous equity investments in joint ventures, partnerships and other entities,
both within and outside the U.S., are periodically involved in modifying and
amending their credit facilities and loan agreements. The ability of these
entities to refinance or amend their facilities on a successful and satisfactory
basis, and to comply with the covenants in their financing facilities, affects
our assessment of the carrying value of any individual investment. As of
May 2, 2010, none of our equity investments represented more than 6% of our
total consolidated assets. If we determine in the future that an investment is
impaired, we would be required to record a non-cash impairment charge, which
could substantially affect our reported earnings in the period of such charge.
In addition, any such impairment charge would negatively impact our financial
ratios. See “Item 8. Notes to Consolidated Financial
Statements—Note 1: Investments” for a discussion of the accounting treatment of
our equity investments.
We
are subject to risks associated with our international sales and
operations.
Sales
to international customers accounted for approximately 22% of our net sales in
fiscal 2010. We conduct foreign operations in Poland, Romania and the United
Kingdom and export our products to more than 40 countries. In addition, we are
engaged in joint ventures mainly in Mexico and China and have significant
investments in Western Europe. As of May 2, 2010, approximately 27% of our
long-lived assets were associated with our foreign operations. Because of the
growing market share of U.S. pork products in the international markets, U.S.
exporters are increasingly being affected by measures taken by importing
countries to protect local producers.
As
a result, our international sales, operations and investments are subject to
various risks related to economic or political uncertainties including among
others:
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general
economic and political conditions,
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§
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imposition
of tariffs, quotas, trade barriers and other trade protection measures
imposed by foreign countries,
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§
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the
closing of borders by foreign countries to the import of our products due
to animal disease or other perceived health or safety
issues,
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§
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difficulties
and costs associated with complying with, and enforcing remedies under, a
wide variety of complex domestic and international laws, treaties and
regulations,
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§
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different
regulatory structures and unexpected changes in regulatory
environments,
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§
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tax
rates that may exceed those in the United States and earnings that may be
subject to withholding requirements and incremental taxes upon
repatriation,
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§
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potentially
negative consequences from changes in tax laws,
and
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§
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distribution
costs, disruptions in shipping or reduced availability of freight
transportation.
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Furthermore,
our foreign operations are subject to the risks described above as well as
additional risks and uncertainties including among others:
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§
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fluctuations
in currency values, which have affected, among other things, the costs of
our investments in foreign
operations,
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§
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translation
of foreign currencies into U.S. dollars,
and
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§
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foreign
currency exchange controls.
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Negative
consequences relating to these risks and uncertainties could jeopardize or limit
our ability to transact business in one or more of those markets where we
operate or in other developing markets and could adversely affect our financial
results.
Our
operations are subject to the general risks of litigation.
We
are involved on an ongoing basis in litigation arising in the ordinary course of
business or otherwise. Trends in litigation may include class actions involving
consumers, shareholders, employees or injured persons, and claims related to
commercial, labor, employment, antitrust, securities or environmental matters.
Moreover, the process of litigating cases, even if we are successful, may be
costly, and may approximate the cost of damages sought. These actions could also
expose us to adverse publicity, which might adversely affect our brands,
reputation and/or customer preference for our products. Litigation trends and
expenses and the outcome of litigation cannot be predicted with certainty and
adverse litigation trends, expenses and outcomes could adversely affect our
financial results.
19
We
depend on availability of, and satisfactory relations with, our
employees.
As
of May 2, 2010, we had approximately 48,000 employees, 27,500 of whom are
covered by collective bargaining agreements or are members of labor unions. Our
operations depend on the availability, retention and relative costs of labor and
maintaining satisfactory relations with employees and the labor unions. Further,
employee shortages can and do occur, particularly in rural areas where some of
our operations are located. Labor relations issues arise from time to time,
including issues in connection with union efforts to represent employees at our
plants and with the negotiation of new collective bargaining agreements. If we
fail to maintain satisfactory relations with our employees or with the unions,
we may experience labor strikes, work stoppages or other labor disputes.
Negotiation of collective bargaining agreements also could result in higher
ongoing labor costs. In addition, the discovery by us or governmental
authorities of undocumented workers, as has occurred in the past, could result
in our having to attempt to replace those workers, which could be disruptive to
our operations or may be difficult to do.
Immigration
reform continues to attract significant attention in the public arena and the
U.S. Congress. If new immigration legislation is enacted, such laws may contain
provisions that could increase our costs in recruiting, training and retaining
employees. Also, although our hiring practices comply with the requirements of
federal law in reviewing employees’ citizenship or authority to work in the
U.S., increased enforcement efforts with respect to existing immigration laws by
governmental authorities may disrupt a portion of our workforce or our
operations at one or more of our facilities, thereby negatively impacting our
business.
We
cannot assure you that these activities or consequences will not adversely
affect our financial results in the future.
The
continued consolidation of customers could negatively impact our
business.
Our
ten largest customers represented approximately 29% of net sales for fiscal year
2010. We do not have long-term sales agreements (other than to certain
third-party hog customers) or other contractual assurances as to future sales to
these major customers. In addition, continued consolidation within the retail
industry, including among supermarkets, warehouse clubs and food distributors,
has resulted in an increasingly concentrated retail base and increased our
credit exposure to certain customers. Our business could be materially adversely
affected and suffer significant set backs in sales and operating income if our
larger customers’ plans, markets, and/or financial condition should change
significantly.
An impairment in the carrying value
of goodwill could negatively impact our consolidated results of operations and
net worth.
Goodwill
is recorded at fair value and is not amortized, but is reviewed for impairment
at least annually or more frequently if impairment indicators arise. In
evaluating the potential for impairment of goodwill, we make assumptions
regarding future operating performance, business trends, and market and economic
conditions. Such analyses further require us to make judgmental assumptions
about sales, operating margins, growth rates, and discount rates. There are
inherent uncertainties related to these factors and to management’s judgment in
applying these factors to the assessment of goodwill recoverability. Goodwill
reviews are prepared using estimates of the fair value of reporting units based
on market multiples of EBITDA (earnings before interest, taxes, depreciation and
amortization) or on the estimated present value of future discounted cash flows.
We could be required to evaluate the recoverability of goodwill prior to the
annual assessment if we experience disruptions to the business, unexpected
significant declines in operating results, divestiture of a significant
component of our business and market capitalization declines. For example, at
the end of the third quarter of fiscal 2009, we performed an interim test of the
carrying amount of goodwill related to our U.S. hog production operations. We
undertook this test due to the significant losses recently incurred in our hog
production operations and decline in the market price of our common stock. We
determined that the fair value of our U.S. hog production reporting unit
exceeded its carrying value by more than 20 percent. Therefore goodwill was not
impaired. However, these types of events and the resulting analyses could result
in non-cash goodwill impairment charges in the future.
Beginning
in the first quarter of fiscal 2009, our market capitalization was below our
book value, which is a potential indicator of impairment. By the fourth quarter
of fiscal 2010, our market capitalization once again exceeded our book
value.
Impairment
charges could substantially affect our reported earnings in the periods of such
charges. In addition, impairment charges would negatively impact our financial
ratios and could limit our ability to obtain financing in the future. As of May
2, 2010, we had $822.9 million of goodwill, which represented approximately 11%
of total assets.
20
Deterioration
of economic conditions could negatively impact our business.
Our
business may be adversely affected by changes in national or global economic
conditions, including inflation, interest rates, availability of capital
markets, consumer spending rates, energy availability and costs (including fuel
surcharges) and the effects of governmental initiatives to manage economic
conditions. Any such changes could adversely affect the demand for our products
or the cost and availability of our needed raw materials, cooking ingredients
and packaging materials, thereby negatively affecting our financial
results.
The
downturn in the U.S. economy may result in reduced demand for certain of our
products, downward pressure on prices and shifts to less profitable private
label products. Moreover, any material reduction in demand for our products in
our key export markets (China, Japan, Mexico, Russia and Canada) could have an
adverse effect on our results of operations.
The
recent disruptions and instability in credit and other financial markets and
deterioration of national and global economic conditions, could, among other
things:
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§
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make
it more difficult or costly for us to obtain financing for our operations
or investments or to refinance our debt in the
future;
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§
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cause
our lenders to depart from prior credit industry practice and make more
difficult or expensive the granting of any technical or other waivers
under our credit agreements to the extent we may seek them in the
future;
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§
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impair
the financial condition of some of our customers, suppliers or
counterparties to our derivative instruments, thereby increasing customer
bad debts, non-performance by suppliers or counterparty failures
negatively impacting our treasury
operations;
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§
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negatively
impact global demand for protein products, which could result in a
reduction of sales, operating income and cash
flows;
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§
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decrease
the value of our investments in equity and debt securities, including our
company-owned life insurance and pension plan assets, which could result
in higher pension cost and statutorily mandated funding requirements;
and
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§
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impair
the financial viability of our
insurers.
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UNRESOLVED
STAFF COMMENTS
|
Not
applicable.
21
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PROPERTIES
|
The following table lists our material
plants and other physical properties. Based on a five day week, our weekly
domestic pork slaughter capacity was 550,000 head, and our domestic packaged
meats capacity was 63.4 million pounds, as of May 2, 2010. During fiscal 2010,
the average weekly capacity utilization for pork slaughter and packaged meats
was 95% and 84%, respectively. We believe these properties are adequate and
suitable for our needs.
|
Location(1)
|
Segment
|
Operation
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Smithfield Packing Plant
Bladen County, North Carolina
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Pork
|
Slaughtering
and cutting hogs; production of boneless hams and loins
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Smithfield
Packing Plant
Smithfield,
Virginia
|
Pork
|
Slaughtering
and cutting hogs; production of boneless loins, bacon, sausage, bone-in
and boneless cooked and smoked hams and picnics
|
|
|
Smithfield
Packing Plant
Kinston,
North Carolina
|
Pork
|
Production
of boneless cooked hams, deli hams and sliced deli
products
|
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|
Smithfield
Packing Plant
Clinton,
North Carolina
|
Pork
|
Slaughtering
and cutting hogs; fresh pork
|
|
|
Smithfield
Packing Plant(2)
Landover,
Maryland
|
Pork
|
Production
of smoked ham products
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|
Smithfield
Packing Plant
Wilson,
North Carolina
|
Pork
|
Production
of bacon
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Smithfield
Packing Plant
Portsmouth,
Virginia
|
Pork
|
Production
of hot dogs and luncheon meats
|
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|
John
Morrell Plant
Sioux
Falls, South Dakota
|
Pork
|
Slaughtering
and cutting hogs; production of boneless loins, bacon, hot dogs, luncheon
meats, smoked and canned hams and packaged lard
|
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John
Morrell Plant
Springdale,
OH
|
Pork
|
Production
of hot dogs and luncheon meats
|
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|
Curly’s Foods, Inc. Plant
(operated
by John Morrell)
Sioux
City, Iowa
|
Pork
|
Production
of raw and cooked ribs and other BBQ items
|
|
|
Armour-Eckrich
Meats
(operated
by John Morrell)
St.
Charles, Illinois
|
Pork
|
Production
of bulk and sliced dry sausages
|
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|
Armour-Eckrich
Meats
(operated by John Morrell)
Omaha,
Nebraska
|
Pork
|
Production
of bulk and sliced dry sausages and prosciutto ham
|
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Armour-Eckrich
Meats
(operated by John Morrell)
Peru,
Indiana
|
Pork
|
Production
of pre-cooked bacon
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Armour-Eckrich
Meats
(operated by John Morrell)
Junction
City, Kansas
|
Pork
|
Production
of smoked sausage
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Armour-Eckrich
Meats
(operated by John Morrell)
Mason
City, Iowa
|
Pork
|
Production
of boneless bulk and sliced ham products and cooked
ribs
|
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Armour-Eckrich
Meats
(operated by John Morrell)
St.
James, Minnesota
|
Pork
|
Production
of sliced luncheon meats
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22
|
Location(1)
|
Segment
|
Operation
|
|
|
Farmland
Plant
Crete,
Nebraska
|
Pork
|
Slaughtering
and cutting hogs; fresh and packaged pork products
|
|
|
Farmland
Plant
Monmouth,
Illinois
|
Pork
|
Slaughtering
and cutting hogs; production of bacon and processed hams, extra tender and
ground pork
|
|
|
Farmland
Plant
Denison,
Iowa
|
Pork
|
Slaughtering
and cutting hogs; production of bacon and processed
hams
|
|
|
Farmland
Plant
Milan,
Missouri
|
Pork
|
Slaughtering
and cutting hogs; fresh pork
|
|
|
Farmland
Plant
Wichita,
Kansas
|
Pork
|
Production
of hot dogs and luncheon meats
|
|
|
Cook’s
Hams Plant
(operated by Farmland Foods)
Lincoln,
Nebraska
|
Pork
|
Production
of traditional and spiral sliced smoked bone-in hams; corned beef and
other smoked meat items
|
|
|
Cook’s
Hams Plant
(operated by Farmland Foods)
Grayson,
Kentucky
|
Pork
|
Production
of spiral hams and smoked ham products
|
|
|
Cook’s
Hams Plant
(operated by Farmland Foods)
Martin
City, Missouri
|
Pork
|
Production
of spiral hams
|
|
|
Patrick
Cudahy Plant
(operated
by John Morrell)
Cudahy,
Wisconsin
|
Pork
|
Production
of bacon, dry sausage, boneless cooked hams and refinery
products
|
|
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Animex
Plant
Szczecin,
Poland
|
International
|
Slaughtering
and deboning hogs; production of packaged and other pork
products
|
|
|
Animex
Plant
Ilawa,
Poland
|
International
|
Production
of fresh meat and packaged products
|
|
|
Animex
Plant
Starachowice,
Poland
|
International
|
Slaughtering
and deboning hogs; production of packaged and other pork
products
|
|
|
Animex
Plant
Elk,
Poland
|
International
|
Slaughtering
and deboning hogs; production of packaged and other pork
products
|
|
|
Animex Plant
Morliny,
Poland
|
International
|
Production
of packaged and other pork and beef products
|
|
|
Smithfield ProdPlants
Timisoara,
Romania
|
International
|
Deboning,
slaughtering and rendering hogs
|
|
|
Corporate
Headquarters
Smithfield,
Virginia
|
Corporate
|
Management
and administrative support services for other
segments
|
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(1)
|
Substantially
all of our Pork segment facilities are pledged as collateral under the ABL
Credit Facility.
|
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(2)
|
Facility
is leased.
|
The
Hog Production segment owns and leases numerous hog production and grain storage
facilities as well as feedmills, mainly in North Carolina, Utah and Virginia,
with additional facilities in Oklahoma, Colorado, Texas, Iowa, Illinois, South
Carolina, Missouri, Poland and Romania. A substantial number of these owned
facilities are pledged under our ABL Credit Facility.
23
|
LEGAL
PROCEEDINGS
|
We
and certain of our subsidiaries are parties to the environmental litigation
matters discussed in “Item 1. Business—Regulation” above. Apart from those
matters and the matters listed below, we and our affiliates are parties in
various lawsuits arising in the ordinary course of business. In the opinion of
management, any ultimate liability with respect to the ordinary course matters
will not have a material adverse effect on our financial position or results of
operations.
PSF
is a wholly-owned subsidiary that we acquired on May 7, 2007 when a
wholly-owned subsidiary of ours merged with and into PSF. As a result of our
acquisition of PSF and through other separate acquisitions by CGC of our common
stock, CGC beneficially owned approximately 7.7% of our common stock as of May
2, 2010.
In
2002, lawsuits based on the law of nuisance were filed against PSF and CGC in
the Circuit Court of Jackson County, Missouri entitled Steven Adwell, et al. v. PSF, et
al. and Michael Adwell,
et al. v. PSF, et al. In November 2006, a jury trial involving six
plaintiffs in the Adwell cases resulted in a
jury verdict of compensatory damages for those six plaintiffs in the amount of
$750,000 each for a total of $4.5 million. The jury also found that CGC and PSF
were liable for punitive damages; however, the parties agreed to settle the
plaintiffs’ claims for the amount of the compensatory damages, and the
plaintiffs waived punitive damages.
On
March 1, 2007, the court severed the claims of the remaining Adwell plaintiffs into
separate actions and ordered that they be consolidated for trial by household.
In the second Adwell
trial, a jury trial involving three plaintiffs resulted in a jury verdict in
December 2007 in favor of PSF and CGC as to all claims. On July 8, 2008,
the court reconsolidated the claims of the remaining 49 Adwell plaintiffs for trial
by farm.
On
March 4, 2010, a jury trial involving 15 plaintiffs who live near Homan farm
resulted in a jury verdict of compensatory damages for the plaintiffs for a
total of $11,050,000. Thirteen of the Homan farm plaintiffs received
damages in the amount of $825,000 each. One of the plaintiffs
received damages in the amount of $250,000, while another plaintiff received
$75,000. On May 24, 2010, the court denied defendants’ Motion for Judgment
Notwithstanding the Verdict and Motion for New Trial or, in the Alternative,
Motion for Remittitur. On June 2, 2010, the defendants filed their Notice
of Appeal. The Company believes that there are substantial grounds for reversal
of the verdict on appeal. Pursuant to a pre-existing arrangement, PSF
is obligated to indemnify CGC for certain liabilities, if any, resulting from
the Missouri litigation, including any liabilities resulting from the foregoing
verdict.
The
court previously scheduled the next Adwell trial, which will
resolve the claims of up to 28 plaintiffs who live near Scott Colby farm, to
commence on January 31, 2011. However, on April 27, 2010, defendants filed
a Motion for Separate Trials seeking deconsolidation of the remaining Adwell plaintiffs’ claims.
Plaintiffs have opposed the motion, which is currently pending before the
court.
In
March 2004, the same attorneys representing the Adwell plaintiffs filed two
additional nuisance lawsuits in the Circuit Court of Jackson County, Missouri
entitled Fred Torrey, et al.
v. PSF, et al. and Doyle Bounds, et al. v. PSF, et
al. There are seven plaintiffs in both suits combined, each of whom
claims to live near swine farms owned or under contract with PSF. Plaintiffs
allege that these farms interfered with the plaintiffs’ use and enjoyment of
their respective properties. Plaintiffs in the Torrey suit also allege
trespass.
In
May 2004, two additional nuisance suits were filed in the Circuit Court of
Daviess County, Missouri entitled Vernon Hanes, et al. v. PSF, et
al. and Steve Hanes, et
al. v. PSF, et al. Plaintiffs in the Vernon Hanes case allege
nuisance, negligence, violation of civil rights, and negligence of contractor.
In addition, plaintiffs in both the Vernon and Steve Hanes cases assert
personal injury and property damage claims. Plaintiffs seek recovery of an
unspecified amount of compensatory and punitive damages, costs and attorneys’
fees, as well as injunctive relief. On March 28, 2008, plaintiffs in the
Vernon Hanes case
voluntarily dismissed all claims without prejudice. A new petition was filed by
the Vernon Hanes
plaintiffs on April 14, 2008, alleging nuisance, negligence and trespass
against six defendants, including us. The Vernon Hanes case was
transferred to DeKalb County and has been set for trial to commence on
August 2, 2010.
Also
in May 2004, the same lead lawyer who filed the Adwell, Bounds and Torrey lawsuits filed a
putative class action lawsuit entitled Daniel Herrold, et al. and Others
Similarly Situated v. ContiGroup Companies, Inc., PSF, and PSF Group Holdings,
Inc. in the Circuit Court of Jackson County, Missouri. This action
originally sought to create a class of plaintiffs living within ten miles of
PSF’s farms in northern Missouri, including contract grower farms, who were
alleged to have suffered interference with their right to use and enjoy their
respective properties. On January 22, 2007, plaintiffs in the Herrold case filed a Second
Amended Petition in which they abandoned all class action allegations and
efforts to certify the action as a class action and added an additional 193
named plaintiffs to join the seven prior class representatives to pursue a one
count claim to recover monetary damages, both actual and punitive, for temporary
nuisance. PSF filed motions arguing that the Second Amended Petition, which
abandons the putative class action and adds 193 new plaintiffs, is void
procedurally and that the case should either be dismissed or the plaintiffs’
claims severed and removed under Missouri’s venue statute to the northern
Missouri counties in which the alleged injuries occurred. On June 28, 2007,
the court entered an order denying the motion to dismiss but granting
defendants’ motion to transfer venue. As a result of those rulings, the claims
of all but seven of the plaintiffs have been transferred to the appropriate
venue in northern Missouri.
24
Following
the initial transfers, plaintiffs filed motions to transfer each of the cases
back to Jackson County. Those motions were denied in all nine cases, but seven
cases were transferred to neighboring counties pursuant to Missouri’s venue
rules. Following all transfers, Herrold cases were pending in
Chariton, Clark, DeKalb, Harrison, Jackson, Linn, and Nodaway counties.
Plaintiffs agreed to file Amended Petitions in all cases except Jackson County;
however, Amended Petitions have been filed in only Chariton, Clark, Harrison,
Linn and Nodaway counties. In the Amended Petitions filed in Chariton on April
30, 2010 and in Linn on May 13, 2010, plaintiffs added claims of
negligence and also claim that defendants are liable for the
alleged negligence of several contract grower farms. Pursuant to notices of
dismissal filed by plaintiffs on January 6, February 23 and April 10,
2009, all cases in Nodaway County have been dismissed. Discovery is now
proceeding in the remaining cases where Amended Petitions have been
filed.
In
February 2006, the same lawyer who represents the plaintiffs in Hanes filed a nuisance
lawsuit entitled Garold
McDaniel, et al. v. PSF, et al. in the Circuit Court of Daviess County,
Missouri. In the First Amended Petition, which was filed on February 9,
2007, plaintiffs seek recovery of an unspecified amount of compensatory damages,
costs and injunctive relief. The parties are conducting discovery, and no trial
date has been set.
In
May 2007, the same lead lawyer who filed the Adwell, Bounds, Herrold and Torrey lawsuits filed a
nuisance lawsuit entitled Jake
Cooper, et al. v. Smithfield Foods, Inc., et al. in the Circuit Court of
Vernon County, Missouri. Murphy-Brown, LLC, Murphy Farms, LLC, Murphy Farms,
Inc. and we have all been named as defendants. The other seven named defendants
include Murphy Family Ventures, LLC, DM Farms of Rose Hill, LLC, and PSM
Associates, LLC, which are entities affiliated with Wendell Murphy, a director
of ours, and/or his family members. Initially there were 13 plaintiffs in the
lawsuit, but the claims of two plaintiffs were voluntarily dismissed without
prejudice. All remaining plaintiffs are current or former residents of Vernon
and Barton Counties, Missouri, each of whom claims to live or have lived near
swine farms presently or previously owned or managed by the defendants.
Plaintiffs allege that odors from these farms interfered with the use and
enjoyment of their respective properties. Plaintiffs seek recovery of an
unspecified amount of compensatory and punitive damages, costs and attorneys’
fees. Defendants have filed responsive pleadings and discovery is
ongoing.
In
July 2008, the same lawyers who filed the Adwell, Bounds, Herrold, Torrey and Cooper lawsuits filed a
nuisance lawsuit entitled John
Arnold, et al. v. Smithfield Foods, Inc., et al. in the Circuit Court of
Daviess County, Missouri. The Company, two of our subsidiaries, PSF and KC2 Real
Estate LLC, CGC, and one employee were all named as defendants. There were three
plaintiffs in the lawsuit, who are residents of Daviess County and who claimed
to live near swine farms owned or operated by defendants. Plaintiffs alleged
that odors from these farms cause nuisances that interfere with the use and
enjoyment of their properties. On April 20, 2009, plaintiffs voluntarily
dismissed this case without prejudice. Plaintiffs refiled the case on
April 20, 2010.
We
believe we have good defenses to all of the actions described above and intend
to defend vigorously these suits.
SOUDERTON
FACILITY
Our
former Souderton facility, which is now owned by JBS Souderton, Inc., a
wholly-owned subsidiary of JBS Packerland, Inc. (collectively JBS Packerland),
previously experienced wastewater releases and an operational upset while owned
by us. These incidents are the subject of a civil Clean Water Act enforcement
proceeding led by the U.S. Environmental Protection Agency, with involvement by
Pennsylvania Department of Environmental Protection and Pennsylvania Fish &
Boat Commission. One of these incidents is also the subject of a criminal Clean
Water Act investigation. Under the terms of sale of the facility (and the rest
of Smithfield Beef) to JBS Packerland in October 2008 (fiscal 2009), we
have indemnification obligations to JBS Packerland for specified losses
related to these pre-closing incidents. We have remained active in the
government proceedings and have cooperated in good faith to negotiate a civil
consent decree that we expect will resolve the federal and state civil
allegations without any admission of liability. The proposed decree, which was
lodged for public comment on June 16, 2010, includes an aggregate $2.0
million fine against JBS Packerland, as well as other capital expenditures
to be incurred by JBS Packerland. We believe that the decree is comprehensive
and protective, builds on the other environmental enhancements implemented
during our period of ownership and obviates the need for further civil
litigation. At this time, we believe that our indemnification obligations will
not have a material adverse effect on our financial position or results of
operations and that we are adequately reserved. If the civil settlement becomes
effective and criminal enforcement is declined as we anticipate, we believe that
our ultimate liability associated with these incidents will be $2.9 million of
the fine and capital expenditures in the aggregate.
25
BEDFORD
FACILITY
As
we have previously disclosed, environmental releases at our former meat
processing and packaging facility located in Bedford, Virginia occurred in
fiscal 2006 and fiscal 2007. Our Smithfield Packing subsidiary operated the
facility, which closed in fiscal 2007 as part of our previously announced east
coast restructuring plan. Federal, state and local officials investigated all of
the releases under applicable environmental laws in fiscal 2006 and fiscal 2007
and, as of the date of this report, we are not aware of any contemplated
material legal proceedings with respect to any of these releases. If any such
legal proceeding is commenced, depending on the results of the investigations,
then we could face potential monetary penalties. However, management believes,
although we can provide no assurance, that any ultimate liability with respect
to these matters will not have a material adverse effect on our financial
position or results of operations.
JOHN MORRELL/PATRICK CUDAHY FACILITY
On
January 14, 2010, the State of Wisconsin’s Department of Natural Resources
issued a notification to Patrick Cudahy advising that the Department referred
the facility to Wisconsin’s Department of Justice for
enforcement. The referral alleges that the facility violated its air
management permits by failing to obtain an approved NOx plan and to submit
various reports in a timely manner. We are negotiating a civil
consent decree that we expect to resolve the allegations. We
believe that such decree would obviate the need for
litigation. While we could receive monetary penalties, management
believes that any ultimate liability with respect to these matters will not have
a material adverse effect on our financial position or
operations.
|
(REMOVED
AND RESERVED)
|
Not
applicable.
The following table shows the name and
age, position and business experience during the past five years of each of our
executive officers. The board of directors elects executive officers to hold
office until the next annual meeting of the board of directors, until their
successors are elected or until their resignation or removal.
|
Name
and Age
|
Position
|
Business
Experience During Past Five Years
|
|
C.
Larry Pope (55)
|
President
and Chief
Executive
Officer
|
Mr.
Pope was elected President and Chief Executive Officer in June 2006,
effective September 1, 2006. Mr. Pope served as President and Chief
Operating Officer from October 2001 to September 2006.
|
|
Richard J. M. Poulson (71)
|
Executive Vice President
|
Mr.
Poulson was elected Executive Vice President in October
2001.
|
|
Robert
W. Manly, IV (57)
|
Executive Vice President
and Chief Financial Officer
|
Mr.
Manly was elected Executive Vice President in August 2006 and was named to
the additional position of Chief Financial Officer, effective July 1,
2008. He also served as Interim Chief Financial Officer from January 2007
to June 2007. Prior to August 2006, he was President since October 1996
and Chief Operating Officer since June 2005 of PSF.
|
|
Joseph
W. Luter, IV (45)
|
Executive
Vice President
|
Mr.
Luter was elected Executive Vice President in April 2008 concentrating on
sales and marketing. He served as President of Smithfield Packing from
November 2004 to April 2008. Mr. Luter served as Executive Vice President
from October 2001 until November 2004. Mr. Luter is the son of Joseph W.
Luter, III, Chairman of the Board of Directors.
|
|
George
H. Richter (65)
|
President
and Chief Operating Officer, Pork Group
|
Mr.
Richter was elected President and Chief Operating Officer, Pork Group in
April 2008. Mr. Richter served as President of Farmland Foods from October
2003 to April 2008.
|
|
Timothy O. Schellpeper (45)
|
President of Smithfield
Packing
|
Mr.
Schellpeper was elected President of Smithfield Packing in April 2008. He
was Senior Vice President of Operations at Farmland Foods from August 2005
to April 2008 and Vice President of Logistics at Farmland Foods from July
2002 to August 2005.
|
|
Jerry
H. Godwin (63)
|
President
of Murphy-Brown
|
Mr.
Godwin has served as President of Murphy-Brown since April
2001.
|
|
Joseph
B. Sebring (63)
|
President
of John Morrell
|
Mr.
Sebring has served as President of John Morrell since May
1994.
|
|
James
C. Sbarro (50)
|
President
of Farmland Foods
|
Mr.
Sbarro was elected President of Farmland Foods in April 2008. Prior to
April 2008, Mr. Sbarro served as Senior Vice President of Sales,
Marketing, Research and Development at Farmland Foods since
1999.
|
26
|
|
PART
II
|
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
MARKET
INFORMATION
Our
common stock trades on the New York Stock Exchange under the symbol “SFD”. The
following table shows the high and low sales price of our common stock for each
quarter of fiscal 2010 and 2009.
|
2010
|
2009
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
quarter
|
$ | 14.39 | $ | 8.80 | $ | 32.18 | $ | 16.61 | ||||||||
|
Second
quarter
|
14.78 | 11.36 | 26.75 | 11.82 | ||||||||||||
|
Third
quarter
|
17.62 | 13.20 | 15.15 | 5.40 | ||||||||||||
|
Fourth
quarter
|
21.48 | 14.70 | 11.95 | 5.55 | ||||||||||||
HOLDERS
As
of June 8, 2010 there were approximately 1,010
record holders of our common stock.
DIVIDENDS
We
have never paid a cash dividend on our common stock and have no current plan to
pay cash dividends. In addition, the terms of certain of our debt agreements
prohibit the payment of any cash dividends on our common stock. We would only
pay cash dividends from assets legally available for that purpose, and payment
of cash dividends would depend on our financial condition, results of
operations, current and anticipated capital requirements, restrictions under
then existing debt instruments and other factors then deemed relevant by the
board of directors.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Issuer
Purchases of Equity Securities
|
Period
|
(a)
Total Number of
Shares Purchased
|
(b)
Average Price
Paid per Share
|
(c)
Total Number
of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
(d)
Maximum Number
of Shares that May Yet Be Purchased Under the Plans or Programs(1)
|
||||||||||||
|
February
1, 2010 to March 1, 2010
|
- | n/a | n/a | 2,873,430 | ||||||||||||
|
March
2, 2010 to April 1, 2010
|
4,173 | $ | 18.63 | n/a | 2,873,430 | |||||||||||
|
April
2, 2010 to May 2, 2010
|
- | n/a | n/a | 2,873,430 | ||||||||||||
|
Total
|
4,173 | (2) | $ | 18.63 | n/a | 2,873,430 | ||||||||||
|
(1)
|
As
of May 2, 2010, our board of directors had authorized the repurchase of up
to 20,000,000 shares of our common stock. The original repurchase plan was
announced on May 6, 1999 and increases in the number of shares we may
repurchase under the plan were announced on December 15,
1999, January 20, 2000, February 26,
2001, February 14, 2002 and June 2, 2005. There is no
expiration date for this repurchase
plan.
|
|
(2)
|
The purchases were made in open
market transactions by Wells Fargo, as trustee, and the shares are held in
a rabbi trust for the benefit of participants in the Smithfield Foods,
Inc. 2008 Incentive Compensation Plan director fee deferral program. The
2008 Incentive Compensation Plan was approved by our shareholders on
August 27, 2008.
|
27
|
SELECTED
FINANCIAL DATA
|
The
following table shows selected consolidated financial data and other operational
data for the fiscal years indicated. The financial data was derived from our
audited consolidated financial statements. You should read the information in
conjunction with “Item 8. Financial Statements and Supplementary Data” and “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
|
Fiscal
Years
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||||||
|
Sales
|
$ | 11,202.6 | $ | 12,487.7 | $ | 11,351.2 | $ | 9,359.3 | $ | 8,828.1 | ||||||||||
|
Cost
of sales
|
10,472.5 | 11,863.1 | 10,202.8 | 8,298.8 | 7,788.0 | |||||||||||||||
|
Gross
profit
|
730.1 | 624.6 | 1,148.4 | 1,060.5 | 1,040.1 | |||||||||||||||
|
Selling,
general and administrative expenses
|
705.9 | 798.4 | 813.6 | 686.0 | 620.9 | |||||||||||||||
|
Equity
in (income) loss of affiliates
|
(38.6 | ) | 50.1 | (62.0 | ) | (48.2 | ) | (11.5 | ) | |||||||||||
|
Operating
profit (loss)
|
62.8 | (223.9 | ) | 396.8 | 422.7 | 430.7 | ||||||||||||||
|
Interest
expense
|
266.4 | 221.8 | 184.8 | 133.6 | 117.6 | |||||||||||||||
|
Other
loss (income)
|
11.0 | (63.5 | ) | - | - | - | ||||||||||||||
|
(Loss)
income from continuing operations before income taxes
|
(214.6 | ) | (382.2 | ) | 212.0 | 289.1 | 313.1 | |||||||||||||
|
Income
tax (benefit) expense
|
(113.2 | ) | (131.3 | ) | 72.8 | 77.2 | 106.9 | |||||||||||||
|
(Loss)
income from continuing operations
|
(101.4 | ) | (250.9 | ) | 139.2 | 211.9 | 206.2 | |||||||||||||
|
Income
(loss) from discontinued operations, net of tax
|
- | 52.5 | (10.3 | ) | (45.1 | ) | (33.5 | ) | ||||||||||||
|
Net
(loss) income
|
$ | (101.4 | ) | $ | (198.4 | ) | $ | 128.9 | $ | 166.8 | $ | 172.7 | ||||||||
|
(Loss)
income Per Diluted Share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (.65 | ) | $ | (1.78 | ) | $ | 1.04 | $ | 1.89 | $ | 1.84 | ||||||||
|
Discontinued
operations
|
- | .37 | (.08 | ) | (.40 | ) | (.30 | ) | ||||||||||||
|
Net
(loss) income per diluted share
|
$ | (.65 | ) | $ | (1.41 | ) | $ | .96 | $ | 1.49 | $ | 1.54 | ||||||||
|
Weighted
average diluted shares outstanding
|
157.1 | 141.1 | 134.2 | 111.9 | 112.0 | |||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
capital
|
$ | 2,128.4 | $ | 1,497.7 | $ | 2,215.3 | $ | 1,795.3 | $ | 1,597.2 | ||||||||||
|
Total
assets
|
7,708.9 | 7,200.2 | 8,867.9 | 6,968.6 | 6,177.3 | |||||||||||||||
|
Long-term
debt and capital lease obligations
|
2,918.4 | 2,567.3 | 3,474.4 | 2,838.6 | 2,299.5 | |||||||||||||||
|
Shareholders’
equity
|
2,755.6 | 2,612.4 | 3,048.2 | 2,240.8 | 2,028.2 | |||||||||||||||
|
Other
Operational Data:
|
||||||||||||||||||||
|
Total
hogs processed
|
32.9 | 35.2 | 33.9 | 26.7 | 28.5 | |||||||||||||||
|
Packaged
meats sales (pounds)
|
3,238.0 | 3,450.6 | 3,363.4 | 3,073.8 | 2,703.8 | |||||||||||||||
|
Fresh
pork sales (pounds)
|
4,289.9 | 4,702.0 | 4,356.7 | 3,389.0 | 3,796.9 | |||||||||||||||
|
Total
hogs sold
|
19.3 | 20.4 | 20.2 | 14.6 | 15.0 | |||||||||||||||
Notes
to Selected Financial Data:
Fiscal
2010
|
|
§
|
Includes
$34.1 million of impairment charges related to certain hog
farms.
|
|
|
§
|
Includes
restructuring and impairment charges totaling $17.3 million related to the
Pork segment restructuring plan (the Restructuring
Plan).
|
|
|
§
|
Includes
$13.1 million of impairment and severance costs primarily related to the
Sioux City plant closure.
|
|
|
§
|
Includes
$11.0 million of charges for the write-off of amendment fees and costs
associated with the U.S. Credit Facility and the Euro Credit
Facility.
|
28
|
|
§
|
Includes
$9.1 million of charges related to the Cost Savings
Initiative.
|
Fiscal
2009
|
|
§
|
Fiscal
2009 was a 53 week year.
|
|
|
§
|
Includes
a pre-tax write-down of assets and other restructuring charges totaling
$88.2 million related to the Restructuring
Plan.
|
|
|
§
|
Includes
a $56.0 million pre-tax gain on the sale of Groupe
Smithfield.
|
|
|
§
|
Includes
a $54.3 million gain on the sale of Smithfield Beef, net of tax of $45.4
million (discontinued operations).
|
|
|
§
|
Includes
charges related to inventory write-downs totaling $25.8
million.
|
Fiscal
2008
|
|
§
|
Includes
a pre-tax impairment charge on our shuttered Kinston, North Carolina plant
of $8.0 million.
|
|
|
§
|
Includes
a loss on the disposal of the assets of Smithfield Bioenergy, LLC (SBE) of
$9.6 million, net of tax of $5.4 million (discontinued
operations).
|
|
|
§
|
Includes
pre-tax inventory write-down and disposal costs of $13.0 million
associated with outbreaks of classical swine fever (CSF) in
Romania.
|
Fiscal
2007
|
|
§
|
Includes
a loss on the sale of Quik-to-Fix of $12.1 million, net of tax of
$7.1 million (discontinued
operations).
|
Fiscal
2006
|
|
§
|
Includes
$26.3 million in pre-tax plant closure charges related to our east coast
restructuring plan.
|
29
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You
should read the following information in conjunction with the audited
consolidated financial statements and the related notes in “Item 8. Financial
Statements and Supplementary Data.”
Our
fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest
April 30. Fiscal 2010 and fiscal 2008 consisted of 52 weeks. Fiscal 2009
consisted of 53 weeks. Unless otherwise stated, the amounts presented in the
following discussion are based on continuing operations for all fiscal periods
included. Certain prior year amounts have been reclassified to conform to
current year presentations.
EXECUTIVE
OVERVIEW
We
are 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 operate in a cyclical industry and our
results are significantly affected by fluctuations in commodity prices for
livestock (primarily hogs) and grains. Some of the factors that we believe are
critical to the success of our business are our ability to:
|
|
§
|
maintain
and expand market share, particularly in packaged
meats,
|
|
|
§
|
develop
and maintain strong customer
relationships,
|
|
|
§
|
continually
innovate and differentiate our
products,
|
|
|
§
|
manage
risk in volatile commodities markets,
and
|
|
|
§
|
maintain
our position as a low cost producer of live hogs, fresh pork and packaged
meats.
|
We
conduct our operations through five reporting segments: Pork, International, Hog
Production, Other and Corporate. Each segment 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 International segment is comprised mainly of our meat
processing and distribution operations in Poland, Romania and the United
Kingdom, as well as our interests in meat processing operations, mainly in
Western Europe and Mexico. The Hog Production segment consists of our hog
production operations located in the U.S., Poland and Romania as well as our
interests in hog production operations in Mexico. The Other segment is comprised
of our turkey production operations and our 49% interest in Butterball.
Through the first quarter of fiscal 2010, this segment also included our live
cattle operations. The Corporate segment provides management and administrative
services to support our other segments.
Fiscal
2010 Summary
Net
loss was $101.4 million, or $.65 per diluted share, in fiscal 2010, compared to
net loss of $198.4 million, or $1.41 per diluted share, in fiscal 2009. The
following significant factors impacted fiscal 2010 results compared to fiscal
2009:
|
|
§
|
Pork
segment operating profit increased $143.5 million reflecting lower hog
costs and a $54.3 million decline in restructuring and impairment charges.
The effect of the year-over-year improvement was partially
offset by lower average unit selling prices and lower sales volumes,
attributable in part to the additional week in the prior year. Operating
profits in this segment were among the highest we have ever recorded
despite year-over-year volume decreases, closure of major export markets
and a fresh pork environment that was depressed in the first part of the
year.
|
|
|
§
|
International
segment operating profit improved on record results in Poland, earnings at
CFG and foreign currency transaction
gains.
|
|
|
§
|
Hog
Production segment operating results improved $60.4 million due
primarily to significantly lower feed
costs.
|
|
|
§
|
Operating
results in the Other segment improved $50.2 million due primarily
to the elimination of losses from our former cattle operations
and joint venture.
|
Outlook
The
commodity markets affecting our business are volatile and fluctuate on a daily
basis. In this erratic and unpredictable operating environment, it is very
difficult to make meaningful forecasts of industry trends and conditions,
particularly in the Hog Production segment of our business. The outlook
statements that follow must be viewed in this context. You should read the
following outlook statements in conjuction with “Item 1A. Risk
Factors.”
|
|
§
|
Pork—We
expect tighter hog supplies and higher live hog prices to place modest
pressure on the fresh pork complex in the near term. However, we remain
optimistic about our fresh pork performance moving into fiscal 2011. Newly
coordinated international sales efforts are expected to drive improvements
in export sales. With the opening of the Chinese and Russian markets,
which were largely closed in fiscal 2010, we expect export volumes to
remain solid. Healthy levels of export demand will provide
additional domestic price support and help the overall fresh pork
complex.
|
30
Pricing
discipline, rationalization of low margin business, lower raw material costs and
the benefits of the Restructuring Plan (as defined below) pushed packaged meats
profits to record highs in fiscal 2010, despite $13.4 million in charges related
to the restructuring effort. In fiscal 2011, we expect our packaged
meats business will continue to be solidly profitable, notwithstanding expected
increases in raw material costs associated with expected higher live hog prices.
Margins may move lower, but are still expected to be strong in historical terms.
We expect margins in this end of the business to average in excess of $.10 per
pound.
In
summary, we are optimistic about the Pork segment as we move into fiscal
2011. We expect the actions we have taken on the sales, operating and
restructuring fronts will support segment profitability, even if raw
material prices move moderately higher. With the Restructuring Plan largely
completed, we expect to re-focus our efforts on sales and marketing initiatives
designed to drive profitable top line growth.
|
|
§
|
International—We
are pleased with the performance of our international operations,
especially in Poland where we had record profits in fiscal 2010 despite
very high live hog prices. We expect our international meat operations to
continue improving their operating performance as we move into fiscal
2011. We also expect to continue to see positive contributions from our
investment in CFG, as defined below, as the realization of synergies
associated with the merger with Groupe Smithfield begin to be more fully
realized. However, CFG will be operating in an adverse environment of high
unemployment and recessionary conditions across Western Europe, which may
hinder its ability to produce good
results.
|
|
|
§
|
Hog
Production—For
the last several quarters, the swine industry in the U.S. coped with an
oversupply of market hogs, spiking feed grains, unfounded fears about
A(H1N1) and worldwide recessionary conditions. Hog producers
industry-wide suffered significant
losses.
|
Finally,
after a considerable and extended period of sizable losses in the hog production
industry, we believe the cycle has turned and the environment is improving
significantly. Modest contractions in the U.S. sow herd have contributed to
tightening supplies which, in turn, has resulted in higher live hog market
prices. We do not foresee significant herd expansion on the horizon, which
should help stabilize prices at healthier levels than fiscal 2010. Live hog
prices appear to be favorable for the foreseeable
future.
For
the third straight year, our own domestic hog production operations incurred
losses as raising costs remained elevated relative to live hog market
prices. Our domestic raising costs spiked to all-time highs in the second
quarter of fiscal 2009, reaching a quarterly average of $63/cwt.
Since that time, raising costs have moderated substantially to the mid-$50’s per
hundredweight. The decrease largely reflects the effect of lower feed grain
costs on hog rations. While we may see some seasonal moderation, we expect
raising costs will remain in the mid-$50’s per hundredweight throughout
fiscal 2011. Poor grain quality in the Eastern Corn Belt will hinder further
meaningful downward reductions in cost. We are taking steps to lessen the impact
of the grain issue on feed conversions, including buying and blending local
corn. Beyond that, we have also developed a plan, described more fully below, to
improve our long-term cost structure. We expect the cost savings plan will
reduce our base raising costs by approximately $2 per hundredweight. However,
the plan may take several years to complete before the benefits are fully
realized.
Livestock
producers continue to feel the negative impacts of the current ethanol policy in
the United States. Currently, it is estimated that 30% of the U.S corn crop
is diverted from livestock feed and other consumer products to the ethanol
industry. Although we are encouraged by the EPA’s recent announcement to
delay its decision on the ethanol industry’s petition to raise the allowable
ethanol blend in gasoline from 10% to 15%, we remain concerned about these
proposals and their impact on the long-term profitability of livestock
production in this country. If such proposals are approved, the portion of
the U.S. corn crop diverted to ethanol production could increase to as much as
40%. The impact to the protein industry would be higher feed costs and,
ultimately, higher food prices for consumers.
On
the international front, our wholly owned live production operations in Poland
and Romania performed well in fiscal 2010. Relatively high live hog prices
persisted throughout Europe for most of fiscal 2010. Recently though, prices
have pulled back. Recessionary pressures are expected to dampen demand amid
static supplies. However, we expect downward pricing pressure to be somewhat
offset by relatively cheap feed grains. Additionally, we anticipate production
increases and the resultant increased utilization of farm assets, particularly
in Romania, to have a positive effect on profits. Although, our wholly owned
international live production operations in Poland and Romania represent only a
fraction of our domestic operations, we expect continued positive contributions
from this piece of the business.
|
|
§
|
Other—The
Other segment is comprised almost entirely of our wholly-owned turkey
operations and our 49% interest in Butterball. As more fully described
under "Additional Matters Affecting Liquidity—Butterball Buy/Sell Option,"
we have activated the buy/sell provision in our Butterball
joint venture. The outcome of the buy/sell decision will dictate whether
this segment will continue to be a reportable segment throughout fiscal
2011 and beyond. If we are successful in our bid to purchase
the remaining 51% interest, we will acquire control of Butterball and
include 100 percent of its results from operations in our consolidated
financial statements. If we sell our interest, the segment will likely
cease to exist.
|
From
an operations standpoint, we expect lower grain prices, relative to fiscal 2010,
will have a favorable effect on turkey results.
31
RESULTS
OF OPERATIONS
Significant
Events Affecting Results of Operations
Pork
Segment Restructuring
In
February 2009 (fiscal 2009), we announced a plan to consolidate and streamline
the corporate structure and manufacturing operations of our Pork segment (the
Restructuring Plan). The plan included the closure of six plants, the
last of which was closed in February 2010 (fiscal 2010). This restructuring is
intended to make us more competitive by improving operating efficiencies and
increasing plant utilization. For fiscal 2010, we achieved our
targeted cost savings and improved pre-tax earnings of $55 million in fiscal
2010, after applicable restructuring charges. We expect the benefits of the
Restructuring Plan will be fully reflected in our fiscal 2011
results.
The following table summarizes the balance of accrued expenses, the
cumulative expense incurred to date and the expected remaining expenses to be
incurred related to the Restructuring Plan by major type of cost. All of these
charges were recorded in the Pork segment.
|
Accrued
Balance
May
3, 2009
|
Total
Expense Fiscal 2010
|
Payments
|
Accrued
Balance
May
2, 2010
|
Cumulative
Expense-to-Date
|
Estimated
Remaining Expense
|
|||||||||||||||||||
|
Restructuring
charges:
|
(in millions) | |||||||||||||||||||||||
|
Employee
severance and related benefits
|
$ | 11.9 | $ | 0.1 | $ | (4.0 | ) | $ | 8.0 | $ | 12.4 | $ | 1.5 | |||||||||||
|
Other
associated costs
|
0.5 | 16.7 | (16.6 | ) | 0.6 | 18.4 | 4.4 | |||||||||||||||||
|
Total
restructuring charges
|
$ | 12.4 | 16.8 | $ | (20.6 | ) | $ | 8.6 | 30.8 | $ | 5.9 | |||||||||||||
|
Impairment
charges:
|
||||||||||||||||||||||||
|
Property,
plant and equipment
|
0.5 | 69.9 | ||||||||||||||||||||||
|
Inventory
|
- | 4.8 | ||||||||||||||||||||||
|
Total
impairment charges
|
0.5 | 74.7 | ||||||||||||||||||||||
|
Total
restructuring and impairment charges
|
$ | 17.3 | $ | 105.5 | ||||||||||||||||||||
Hog
Production Cost Savings Initiative
In
the fourth quarter of fiscal 2010, we announced a plan to improve the cost
structure and profitability of our domestic hog production operations (the Cost
Savings Initiative). The plan includes a number of undertakings designed to
improve operating efficiencies and productivity. These consist of farm
reconfigurations and conversions, termination of certain high cost, third party
hog grower contracts and breeding stock sourcing contracts, as well as a number
of other cost reduction activities.
As
a result of the Cost Savings Initiative, we recorded pre-tax charges totaling
$9.1 million in the fourth quarter of fiscal 2010, including impairment and
accelerated depreciation charges of $2.5 million and $3.8 million, respectively,
as well as contract termination costs of $2.8 million. These charges were
recorded in cost of sales in the Hog Production segment. The fair value of the
impaired farms of $1.8 million was determined based on prices and other relevant
information generated by recent market transactions for similar
assets.
Certain
of the activities associated with the Cost Savings Initiative are expected to
occur over a two to three-year period in order to allow for the successful
transformation of farms while minimizing disruption of supply. We anticipate
recording additional charges over this period in the range of $30 million to $35
million primarily associated with future contract terminations. We also
anticipate capital expenditures totaling approximately $86 million will be
required in connection with the farm reconfigurations and other cost savings
activities.
We
do not believe the benefits of the Cost Savings Initiative will have any
significant impact on our results of operations in fiscal 2011. Beginning in
fiscal 2012, we expect a gradual improvement in profitability of our Hog
Production segment. We expect that by fiscal 2014, the benefits of this
initiative will be fully realized and we currently estimate profitability
improvement of approximately $2 per hundredweight.
Dispositions
Smithfield
Beef
In
October 2008 (fiscal 2009), we completed the sale of Smithfield Beef, our beef
processing and cattle feeding operation that encompassed our entire Beef
segment, to a wholly-owned subsidiary of JBS S.A., a company organized and
existing under the laws of Brazil (JBS), for $575.5 million in
cash.
The
sale included 100 percent of Five Rivers Ranch Cattle Feeding LLC (Five Rivers),
which previously was a 50/50 joint venture with Continental Grain Company (CGC).
Immediately preceding the closing of the JBS transaction, we acquired CGC’s 50
percent investment in Five Rivers for 2,166,667 shares of our common stock
valued at $27.87 per share and $8.7 million for working capital adjustments. As
of May 2, 2010, CGC owned approximately 7.7% of our common stock.
32
The
JBS transaction excluded substantially all live cattle inventories held by
Smithfield Beef and Five Rivers as of the closing date, together with associated
debt. All of the live cattle inventories were sold by the first quarter of
fiscal 2010.
We
recorded a pre-tax gain of approximately $99.7 million ($54.3 million net of
tax) on the sale of Smithfield Beef in fiscal 2009. The results of Smithfield
Beef are reported as discontinued operations, including the gain on the
sale.
The
following table presents sales, interest expense and net income of Smithfield
Beef for the fiscal periods indicated:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Sales
|
$ | - | $ | 1,699.0 | $ | 2,885.9 | ||||||
|
Interest
expense
|
- | 17.3 | 41.0 | |||||||||
|
Net
income
|
- | 0.9 | 5.2 | |||||||||
Smithfield
Bioenergy, LLC (SBE)
In
April 2007 (fiscal 2007), we decided to exit the alternative fuels business. In
May 2008 (fiscal 2009), we completed the sale of substantially all of SBE’s
assets for $11.5 million. As a result of these events, we recorded impairment
charges of $9.6 million, net of tax of $5.4 million, during fiscal 2008 to
reflect the assets of SBE at their estimated fair value. The results of SBE are
reported as discontinued operations.
The
following table presents sales, interest expense and net loss of SBE for the
fiscal periods indicated:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Sales
|
$ | - | $ | 3.8 | $ | 27.0 | ||||||
|
Interest
expense
|
- | 1.3 | 3.4 | |||||||||
|
Net
loss
|
- | (2.7 | ) | (15.5 | ) | |||||||
Investment
Activities
Groupe
Smithfield S.L. (Groupe Smithfield) / Campofrío Alimentación, S.A.
(Campofrío)
In
June 2008 (fiscal 2009), we announced an agreement to sell Groupe Smithfield to
Campofrío in exchange for shares of Campofrío common stock. In
December 2008 (fiscal 2009), the merger of Campofrío and Groupe Smithfield was
finalized. The new company, known as Campofrío Food Group, S.A. (CFG), is listed
on the Madrid and Barcelona Stock Exchanges. The merger created one
of the largest pan-European companies in the packaged meats sector and one of
the five largest worldwide.
Immediately
prior to the merger, we owned 25% of Campofrío and 50% of Groupe Smithfield. We
currently own 37% of the combined company.
The
sale of Groupe Smithfield resulted in a pre-tax gain of $56.0 million, which was
recognized in other (loss) income in the third quarter of fiscal 2009. The
amounts presented for CFG throughout this discussion reflect the combined
historical results of Groupe Smithfield and Campofrío.
Other
Significant Events
Hog
Farm Impairments
In
fiscal 2008 and fiscal 2009, we announced that we would reduce the size of
our U.S. sow herd by 10% in order to reduce the overall supply of hogs in the
U.S. market.
In
June 2009 (fiscal 2010), we decided to further reduce our domestic sow herd by
3%, or approximately 30,000 sows, which was accomplished by ceasing
certain hog production operations and closing certain of our hog farms. In
addition, in the first quarter of fiscal 2010, we began marketing certain other
hog farms. As a result of these decisions, we recorded total
impairment charges of $34.1 million, including an allocation of
goodwill, in the first quarter of fiscal 2010 to write-down the hog farm
assets to their estimated fair values. The impairment charges were recorded in
cost of sales in the Hog Production segment.
Sioux
City Plant Closure
In
January 2010 (fiscal 2010), we announced that we would close our fresh pork
processing plant located in Sioux City, Iowa. The Sioux City plant was one of
our oldest and least efficient plants. The plant design severely limited our
ability to produce value-added packaged meats products and maximize production
throughput. A portion of the plant’s production was transferred to other
nearby Smithfield plants. We closed the Sioux City plant in April 2010 (fiscal
2010).
33
As a result of the planned closure, we recorded charges of $13.1 million in
the third quarter of fiscal 2010. These charges consisted of $3.6 million for
the write-down of long-lived assets, $2.5 million of unusable inventories and
$7.0 million for estimated severance benefits pursuant to contractual and
ongoing benefit arrangements, of which $5.5 million were paid-out during the
fourth quarter of fiscal 2010. Substantially all of these charges were recorded
in cost of sales in the Pork segment. We do not expect any significant future
charges associated with the plant closure.
Kinston,
North Carolina Plant Closure
In
March 2008 (fiscal 2008), we announced our plan to close one of our Kinston,
North Carolina plants. As a result, we recorded a pre-tax impairment charge of
$8.0 million in cost of sales in the Pork segment during the fourth quarter of
fiscal 2008 to write-down the facility to its fair value. The plant closed in
May 2008 (fiscal 2009).
Classical
Swine Fever (CSF)
In
August 2007 (fiscal 2008), outbreaks of CSF occurred at three of our
thirty-three hog farms in Romania. In fiscal 2008, we recorded approximately
$13.0 million of inventory write-downs and associated disposal costs related to
these outbreaks in the Hog Production segment.
Consolidated
Results of Operations
Sales
and Cost of Sales
|
Fiscal
Years
|
Fiscal
Years
|
|||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Sales
|
$ | 11,202.6 | $ | 12,487.7 | (10 | ) % | $ | 12,487.7 | $ | 11,351.2 | 10 | % | ||||||||||||
|
Cost
of sales
|
10,472.5 | 11,863.1 | (12 | ) | 11,863.1 | 10,202.8 | 16 | |||||||||||||||||
|
Gross
profit
|
$ | 730.1 | $ | 624.6 | 17 | $ | 624.6 | $ | 1,148.4 | (46 | ) | |||||||||||||
|
Gross
profit margin
|
7 | % | 5 | % | 5 | % | 10 | % | ||||||||||||||||
The
following items explain the significant changes in sales and gross
profit:
2010
vs. 2009
|
|
§
|
The
prior year included an additional week of results, which accounted for
approximately $217.2 million, or 2%, of additional sales in fiscal
2009.
|
|
|
§
|
Excluding
the effect of the additional week in the prior year, sales volumes in the
Pork segment decreased 7%, mainly due to pricing discipline and the
rationalization of low margin business. Average unit selling
prices in the Pork segment decreased 2%, with fresh pork decreasing 7% and
packaged meats increasing 2%. These factors had the effect of decreasing
consolidated sales by 7%.
|
|
|
§
|
Foreign
currency translation decreased sales by approximately $206 million, or 2%,
due to a stronger U.S. dollar.
|
|
|
§
|
Lower
feed costs contributed to a 13% decline in our domestic raising
costs.
|
|
|
§
|
Domestic
live hog market prices decreased
8%.
|
|
|
§
|
Cost
of sales for the current year included $72.4 million of impairment,
accelerated depreciation, contract termination, severance and other
restructuring charges compared to $82.3 million in the prior
year.
|
2009
vs. 2008
|
|
§
|
Fiscal
2009 consisted of 53 weeks compared to 52 in fiscal 2008, increasing sales
approximately $217.2 million, or
2%.
|
|
|
§
|
Volume
increases in the Pork segment, excluding the effect of the extra week,
increased sales approximately $445.0 million, or 4%. The volume increases
were primarily the result of strong exports and increased customer
demand.
|
|
|
§
|
Higher
fresh pork market prices in the Pork segment and substantially higher
sales prices in the International segment contributed to an increase in
sales of approximately $475 million, or
4%.
|
34
|
|
§
|
Domestic
raising costs increased to $62 per hundredweight from $50 per
hundredweight in the prior year as the cost of feed and feed ingredients
increased $527 million, or 36%.
|
|
|
§
|
Domestic
live hog market prices increased to $48 per hundredweight from $44 per
hundredweight in the prior year, which partially offset the significant
increase in our hog raising
costs.
|
|
|
§
|
Fiscal
2009 included $82.3 million of restructuring and impairment charges
related to the Restructuring
Plan.
|
Selling,
General and Administrative Expenses
|
Fiscal
Years
|
Fiscal
Years
|
|||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Selling,
general and administrative expenses
|
$ | 705.9 | $ | 798.4 | (12 | ) % | $ | 798.4 | $ | 813.6 | (2 | ) % | ||||||||||||
The
following items explain the significant changes in selling, general and
administrative expenses (SG&A):
2010
vs. 2009
|
|
§
|
Foreign
currency transaction gains in the current year were $3.8 million compared
to losses of $25.0 million in the prior year, resulting in a
year-over-year decrease in SG&A of $28.8
million.
|
|
|
§
|
Advertising
and marketing expenses decreased $22.8 million. The decrease is due to
synergies related to the consolidation of our sales
function.
|
|
|
§
|
Improvements
in the cash surrender value of company-owned life insurance policies
decreased SG&A by $19.4
million.
|
|
|
§
|
The
prior year included $18.1 million of union-related litigation and
settlement costs.
|
|
|
§
|
The
collection of additional farming subsidies related to our Romanian hog
production operations decreased SG&A by $12.9
million.
|
|
|
§
|
The
prior year included an additional week of results, which accounted
for approximately $12 million of additional SG&A in fiscal
2009.
|
|
|
§
|
SG&A
was negatively impacted by a $22.4 million increase in compensation
expense which is primarily attributable to higher performance
compensation due to higher operating results, as well as higher pension
expenses.
|
2009
vs. 2008
|
|
§
|
Variable
compensation expense and fringe costs decreased $52.9 million in fiscal
2009.
|
|
|
§
|
Prior
year gains in foreign currency were replaced with current year losses
causing an increase of $39.3
million.
|
35
Equity
in (Income) Loss of Affiliates
| Fiscal Years | Fiscal Years | |||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Butterball
|
$ | (18.8 | ) | $ | 19.5 | 196 | % | $ | 19.5 | $ | (23.4 | ) | (183 | ) % | ||||||||||
|
CFG(1)
|
(4.5 | ) | 5.6 | 180 | 5.6 | (43.0 | ) | (113 | ) | |||||||||||||||
|
Cattleco,
LLC (Cattleco)
|
- | 15.1 | 100 | 15.1 | - |
NM
|
||||||||||||||||||
|
Mexican
joint ventures
|
(13.2 | ) | 9.8 | 235 | 9.8 | 4.8 | (104 | ) | ||||||||||||||||
|
All
other equity method investments
|
(2.1 | ) | 0.1 |
NM
|
0.1 | (0.4 | ) | (125 | ) | |||||||||||||||
|
Equity
in (income) loss of affiliates
|
$ | (38.6 | ) | $ | 50.1 | 177 | $ | 50.1 | $ | (62.0 | ) | (181 | ) | |||||||||||
| (1) |
Reflects
the combined results of Groupe Smithfield and
Campofrío.
|
The
following items explain the significant changes in equity in (income) loss of
affiliates:
2010
vs. 2009
|
|
§
|
Improved
results at Butterball were mainly driven by lower raw material costs as a
result of lower feed prices and a modification of our live
turkey transfer pricing agreement with Butterball from a cost-based
pricing arrangement to a market-based pricing arrangement, as well as
reduced plant operating costs due to production
initiatives.
|
|
|
§
|
Our
investment in CFG was positively impacted by merger synergies and cost
reduction programs. The current year included $10.4 million of debt
restructuring charges at CFG and $1.3 million of charges related to CFG's
discontinued Russian operation. However, the year-over-year impact of
these charges was offset by $8.8 million of charges recorded in the prior
year related to CFG’s discontinued Russian operation and $3.2 million of
charges related to a restructuring at Groupe
Smithfield.
|
|
|
§
|
The
improvements in our Mexican hog production joint ventures reflect
substantially lower feed costs and foreign currency transaction gains
of $3.4 million in the current year compared to foreign currency
transaction losses of $7.6 million in the prior
year.
|
|
|
§
|
The
prior year included $15.1 million of losses related to our former cattle
joint venture, which had been completely liquidated by the fourth quarter
of fiscal 2009.
|
2009
vs. 2008
|
|
§
|
Our
Butterball investment was negatively impacted by a significant increase in
raw material costs.
|
|
|
§
|
CFG’s
results were negatively impacted by higher raw material costs and
competitive price pressures, especially at the former Groupe Smithfield
operation. In addition, prior to the merger, Campofrío’s results included
operating losses and impairment charges related to its discontinued
Russian operation, our share of which was $8.8 million. Also, prior to the
merger, Groupe Smithfield incurred restructuring and accelerated
depreciation charges in fiscal 2009 as a result of its planned closure of
one of its cooked meats production facilities. Our share of those charges
was $3.2 million.
|
|
|
§
|
Fiscal
2009 results of Cattleco, a former 50/50 joint venture with CGC that sold
the remaining live cattle from Five Rivers that were not sold to JBS
during fiscal 2009, included a write-down of cattle inventories, our share
of which was $14.5 million, due to a decline in live cattle market
prices.
|
|
|
§
|
Losses
on our Mexican hog production investments increased by $5.0 million,
primarily due to an increase in foreign currency transaction losses
recognized by our equity method
investees.
|
36
Interest
Expense
| Fiscal Years | Fiscal Years | |||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Interest
expense
|
$ | 266.4 | $ | 221.8 | 20 | % | $ | 221.8 | $ | 184.8 | 20 | % | ||||||||||||
The
following items explain the significant changes in interest
expense:
2010
vs. 2009
|
|
§
|
The
increase in interest expense was primarily due to the issuance of higher
cost debt in fiscal 2010 and the amortization of the associated debt
issuance costs. The new debt instruments are more fully described under
“Liquidity and Capital Resources” below. The increase in interest expense
was partially offset by the effect of an additional week in the prior
year.
|
2009
vs. 2008
|
|
§
|
The
increase in interest expense was primarily due to the allocation of
interest expense to Smithfield Beef prior to its disposal in October 2008
(fiscal 2009), as well as the effects of an additional week of interest
expense in fiscal 2009. These increases were partially offset by lower
average outstanding borrowings and significantly lower average rates on
our credit facilities. Total debt, including notes payable and capital
lease obligations, decreased to $2,988.2 million as of May 3, 2009 from
$3,883.4 million as of April 27, 2008, primarily due to the use of
proceeds from the sale of Smithfield Beef to pay down
debt.
|
Other
Loss (Income)
| Fiscal Years | Fiscal Years | ||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||
|
Other
loss (income)
|
$ | 11.0 | $ | (63.5 | ) | (117 | ) | $ | (63.5 | ) | $ | - |
NM
|
||||||||
Other
loss in fiscal 2010 consisted of $11.0 million of charges for the
write-off of amendment fees and costs associated with the extinguishment of the
U.S. Credit Facility and the Euro Credit Facility. The purpose of these
write-offs is more fully described under “Liquidity and Capital Resources”
below. Other income in fiscal 2009 consisted of a $56.0 million gain
on the sale of our interest in Groupe Smithfield to Campofrio and a $7.5 million
gain on the repurchase of long-term debt.
Income
Tax (Benefit) Expense
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Income
tax (benefit) expense (in millions)
|
$ | (113.2 | ) | $ | (131.3 | ) | $ | 72.8 | ||||
|
Effective
tax rate
|
53 | % | 34 | % | 34 | % | ||||||
The
following items explain the significant changes in the effective tax
rate:
2010
vs. 2009
|
|
§
|
The
increase in the beneficial income tax rate from 2009 to 2010 was
primarily due to the Company incurring domestic losses and earning foreign
profits in fiscal 2010. The domestic losses were benefited at rates that
are higher than rates in which the earnings were taxed in the foreign
jurisdictions.
|
37
2009 vs.
2008
|
|
§
|
The
effective tax rate was unchanged as an increase in deferred taxes related
to the merger of Campofrío and Groupe Smithfield was offset by benefits
related to foreign tax credits and the successful resolution of uncertain
tax positions.
|
Segment
Results
The
following information reflects the results from each respective segment prior to
eliminations of inter-segment sales.
Pork
Segment
|
Fiscal
Years
|
Fiscal
Years
|
|||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Sales:
|
||||||||||||||||||||||||
|
Fresh
pork(1)
|
$ | 4,199.7 | $ | 4,892.2 | (14 | ) % | $ | 4,892.2 | $ | 4,074.2 | 20 | % | ||||||||||||
|
Packaged
meats
|
5,126.6 | 5,558.7 | (8 | ) | 5,558.7 | 5,553.3 | - | |||||||||||||||||
|
Total
|
$ | 9,326.3 | $ | 10,450.9 | (11 | ) | $ | 10,450.9 | $ | 9,627.5 | 9 | |||||||||||||
|
Operating
profit:
|
||||||||||||||||||||||||
|
Fresh
pork(1)
|
$ | 61.1 | $ | 76.1 | (20 | ) % | $ | 76.1 | $ | 140.8 | (46 | ) % | ||||||||||||
|
Packaged
meats
|
477.6 | 319.1 | 50 | 319.1 | 308.6 | 3 | ||||||||||||||||||
|
Total
|
$ | 538.7 | $ | 395.2 | 36 | $ | 395.2 | $ | 449.4 | (12 | ) | |||||||||||||
|
Sales
volume:
|
||||||||||||||||||||||||
|
Fresh
pork(1)
|
(9 | ) % | 11 | % | ||||||||||||||||||||
|
Packaged
meats
|
(9 | ) | - | |||||||||||||||||||||
|
Total
|
(9 | ) | 6 | |||||||||||||||||||||
|
Average
unit selling price:
|
||||||||||||||||||||||||
|
Fresh
pork(1)
|
(7 | ) % | 5 | % | ||||||||||||||||||||
|
Packaged
meats
|
2 | - | ||||||||||||||||||||||
|
Total
|
(2 | ) | (1 | ) | ||||||||||||||||||||
|
Average
domestic live hog prices(2)
|
(8 | ) % | 8 | % | ||||||||||||||||||||
| (1) |
Includes
by-products and rendering.
|
| (2) |
Represents
the average live hog market price as quoted by the Iowa-Southern Minnesota
hog market.
|
In
addition to the changes in sales volume, selling prices and live hog prices
presented in the table above, the following items explain the significant
changes in Pork segment sales and operating profit:
2010
vs. 2009
|
|
§
|
The
prior year included an additional week of results, which accounted for
approximately $202.0 million, or 2%, of additional sales in fiscal
2009.
|
|
|
§
|
Excluding
the effect of an additional week of results in the prior year, fresh pork
and packaged meats sales volumes each decreased 7%. Sales volumes were
impacted by pricing discipline and the rationalization of low margin
business due to the Restructuring
Plan.
|
|
|
§
|
Operating
profit in the prior year included $88.2 million of restructuring and
impairment charges related to the Restructuring Plan. Of this amount,
$67.0 million related to our packaged meats operations and
$21.2 million related to our fresh pork operations. Operating profit
in the current year included $17.3 million of restructuring and impairment
charges related to the Restructuring Plan. Of this amount, $13.4 million
related to our packaged meats operations and $3.9 related to our fresh
pork operations.
|
38
|
|
§
|
Operating
profit in the prior year included $18.1 million of union-related
litigation and settlement charges.
|
|
|
§
|
Operating
profit in the current year included both incremental costs and
offsetting recoveries of business interruption losses related to
the fire that occurred at the primary manufacturing facility of
our subsidiary, Patrick Cudahy, Incorporated (PCI), in July 2009
(fiscal 2010). We recorded $31.8 million of insurance proceeds in
cost of sales in fiscal 2010, which offset the estimated business
interruption losses incurred during fiscal
2010.
|
|
|
§
|
Operating
profit in the current year was negatively impacted by $13. million of
impairment and severance costs related to the Sioux City plant
closure.
|
2009
vs. 2008
|
|
§
|
Fiscal
2009 consisted of 53 weeks compared to 52 weeks in fiscal
2008. The extra week increased sales approximately $202.0
million, or 2%.
|
|
|
§
|
Excluding
the effect of the additional week, total sales volume increased 4% with
fresh pork volume increasing 9% and packaged meats volume decreasing 2%.
The increase in fresh pork volume was primarily due to strong exports and
increased customer demand, particularly in the first half of the year.
Including the additional week of sales in fiscal 2009, pork exports rose
29% in volume and 36% in dollar
terms.
|
|
|
§
|
Operating
profit included $88.2 million in charges related to the Restructuring Plan
compared to $8.0 million in charges in fiscal 2008 for the closing of one
of our Kinston, North Carolina plants. $67.0 million of the Restructuring
Plan charges related to our packaged meats operations and $21.2 million
related to our fresh pork
operations.
|
|
|
§
|
Operating
profit was positively impacted as selling, general and administrative
expenses decreased $43.1 million primarily on decreases in salaries,
variable compensation and related fringe
costs.
|
|
|
§
|
Transportation
costs increased approximately 15% in fiscal 2009 compared to fiscal 2008
primarily due to more export shipments in fiscal
2009.
|
|
|
§
|
Fiscal
2009 was negatively impacted by substantially higher raw material costs,
which resulted in lower margins on fresh pork
sales.
|
International
Segment
| Fiscal Years | Fiscal Years | |||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Sales
|
$ | 1,294.7 | $ | 1,398.2 | (7 | ) % | $ | 1,398.2 | $ | 1,224.5 | 14 | % | ||||||||||||
|
Operating
profit
|
49.5 | 34.9 | 42 | 34.9 | 76.9 | (55 | ) | |||||||||||||||||
|
Sales
volume
|
17 | % | (7 | ) % | ||||||||||||||||||||
|
Average
unit selling price
|
(21 | ) | 23 | |||||||||||||||||||||
In
addition to the changes in sales volume and selling prices presented in the
table above, the following items explain the significant changes in
International segment sales and operating profit:
2010
vs. 2009
|
|
§
|
Foreign
currency translation caused sales to decrease by approximately
$205.9 million, or 15%, due to a stronger U.S. dollar. Excluding the
impact of foreign currency translation, average unit selling prices
decreased 8%.
|
|
|
§
|
Operating
profit was positively impacted by lower raw material
costs.
|
|
|
§
|
Operating
profit was positively impacted by $1.4 million in foreign currency
transaction gains in fiscal 2010, compared to $18.5 million in foreign
currency transaction losses in the prior
year.
|
39
|
|
§
|
Operating
profit was positively impacted by an $9.7 million improvement in equity
income as CFG benefited from merger synergies and cost reduction
programs. The current year included $10.4 million of debt restructuring
charges at CFG and $1.3 million of charges related to CFG's discontinued
Russian operation. However, the year-over-year impact of these charges was
offset by $8.8 million of charges recorded in the prior year related to
CFG’s discontinued Russian operation and $3.2 million of charges related
to a restructuring at Groupe
Smithfield.
|
2009
vs. 2008
|
|
§
|
Fiscal
2009 sales increased $108.7 million in our Polish operations due to a
shift in product mix to emphasize higher priced packaged
meats.
|
|
|
§
|
Fiscal
2009 sales increased in Romania $56.8 million, or 5%, primarily due to the
full year inclusion of an acquired business in
Romania.
|
|
|
§
|
Equity
income from investments decreased $48.4 million to a loss of $1.9 million
in fiscal 2009 from income of $46.5 million in fiscal 2008. The
decrease was primarily at CFG whose results were negatively impacted by
operating losses and impairment charges related to its discontinued
Russian operation, our share of which was $8.8 million, higher raw
material costs and competitive price pressures. Also, fiscal 2008 included
a net gain on the sale of one of Groupe Smithfield’s plants, our share of
which was $9.4 million. Additionally, prior to the merger, Groupe
Smithfield incurred restructuring and accelerated depreciation charges in
fiscal 2009 as a result of the planned closure of one of its cooked meats
production facilities. Our share of those charges was $3.2
million.
|
|
|
§
|
Selling,
general and administrative expenses increased in fiscal 2009 primarily as
a result of increased foreign currency transaction losses of $9.5
million.
|
Hog
Production Segment
| Fiscal Years | Fiscal Years | |||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Sales
|
$ | 2,541.8 | $ | 2,750.9 | (8 | ) % | $ | 2,750.9 | $ | 2,399.3 | 15 | % | ||||||||||||
|
Operating
loss
|
(460.8 | ) | (521.2 | ) | 12 | (521.2 | ) | (98.1 | ) | (431 | ) | |||||||||||||
|
Head
sold
|
(5 | ) % | 4 | % | ||||||||||||||||||||
|
Average
domestic live hog prices(1)
|
(8 | ) % | 8 | % | ||||||||||||||||||||
|
Domestic
raising costs
|
(13 | ) % | 24 | % | ||||||||||||||||||||
|
(1)
|
Represents
the average live hog market price as quoted by the Iowa-Southern Minnesota
hog market.
|
In
addition to the head sold and other statistical data above, the following items
explain the significant changes in Hog Production segment sales and operating
profit:
2010
vs. 2009
|
|
§
|
The
effect of an additional week of results in the prior year decreased sales
approximately $41.0 million, or 2%.
|
|
|
§
|
Excluding
the effect of the prior year additional week of results, head sold
decreased 4% reflecting the impact of our sow reduction
program.
|
|
|
§
|
The
decrease in domestic raising costs is primarily attributable to lower feed
prices.
|
40
|
|
§
|
Operating
loss was positively impacted by a $24.9 million increase in equity income,
which is primarily attributable to lower feed costs at our Mexican joint
ventures. Equity income from our Mexican joint ventures also included $3.4
million of foreign currency transaction gains in the current year compared
to $7.6 million of foreign currency transaction losses in the prior
year.
|
|
|
§
|
Operating
loss was positively impacted by a $12.9 million increase in farming
subsidies related to our Romanian hog production
operations.
|
|
|
§
|
Operating
loss in the current year included $34.1 million of impairment charges
related to certain hog farms, which are more fully explained under
"Significant Events Affecting Results of Operations"
above.
|
|
|
§
|
Operating
loss in the current year included $9.1 million of impairment, accelerated
depreciation and contract termination charges associated with the
Cost Savings Initiative.
|
2009
vs. 2008
|
|
§
|
The
additional week in fiscal 2009 contributed approximately $41.0 million of
sales, or a 2% increase.
|
|
|
§
|
Excluding
the additional week of sales, head sold increased
2%.
|
|
|
§
|
Higher
grain costs adversely affected operating profit by increasing our domestic
raising costs by 24%. Corn, which is the major component in our livestock
feed, increased 26%. Although prices fell dramatically from the record
high levels seen in the summer of 2008 (fiscal 2009), we locked in our
corn needs through the end of fiscal 2009 at price levels in excess of $6
per bushel as the industry became concerned over future availability at
that time.
|
|
|
§
|
Live
hog market prices in the U.S. averaged $48 per hundredweight in fiscal
2009 compared to $44 per hundredweight last
year.
|
Other
Segment
|
Fiscal
Years
|
Fiscal
Years
|
|||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Sales
|
$ | 153.3 | $ | 250.8 | (39 | ) % | $ | 250.8 | $ | 148.8 | 69 | % | ||||||||||||
|
Operating
profit (loss)
|
3.6 | (46.6 | ) | 108 | (46.6 | ) | 28.2 | (265 | ) | |||||||||||||||
The
following items explain the significant changes in Other segment sales and
operating profit:
2010
vs. 2009
|
|
§
|
We
sold our remaining live-cattle inventories in the first quarter of fiscal
2010, which resulted in a $41.0 million year-over-year decrease in
sales.
|
|
|
§
|
Sales
volume in our turkey production operations declined 15% due to production
cuts aimed at reducing the oversupply of turkeys in the
market.
|
|
|
§
|
Average
unit selling prices of turkeys decreased 20% as a result of a modification
to our live turkey transfer pricing agreement with
Butterball in the second quarter of fiscal 2010 from a cost-based
pricing arrangement to a market-based pricing arrangement. The same
modification was made to the transfer pricing agreement between Butterball
and our joint venture partner.
|
|
|
§
|
We
recorded income from our equity method investments of $18.5 million in the
current year compared to a loss of $34.9 million in the prior year. The
year-over-year change is primarily attributable to improvements in
Butterball’s results, which reflect substantially lower raw material costs
and $15.1 million of prior year losses from our former cattle joint
venture, Cattleco, which had been completely liquidated by the fourth
quarter of fiscal 2009.
|
41
2009 vs.
2008
|
|
§
|
Fiscal
2009 included sales of $74.3 million from the liquidation of cattle
inventories that were excluded from the JBS
transaction.
|
|
|
§
|
Sales
were positively impacted by a 23% increase in the average unit selling
price of our wholly-owned live turkey production
operations. The effect of sales growth on operating profit was
largely offset by higher feed
costs.
|
|
|
§
|
We
recorded a loss from our equity method investments of $34.9 million in
fiscal 2009 compared to equity income of $23.8 million in fiscal 2008.
This decline is primarily due to less favorable results at Butterball due
to substantially higher raw material costs and losses incurred at
Cattleco, our former 50/50 cattle feeding joint
venture. Cattleco’s fiscal 2009 results included a write-down
on cattle inventories, our share of which was $14.5 million, due to a
decline in live cattle market prices. Fiscal 2008 did not include any
results from Cattleco.
|
|
|
§
|
Fiscal
2009 operating profit was negatively impacted by a $4.3 million write-down
of company-owned cattle that were excluded from the JBS transaction due to
a decline in live cattle market
prices.
|
Corporate
Segment
|
Fiscal
Years
|
Fiscal
Years
|
|||||||||||||||||||||||
|
2010
|
2009
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Operating
loss
|
$ | (68.2 | ) | $ | (86.2 | ) | 21 | % | $ | (86.2 | ) | $ | (59.6 | ) | (45 | ) % | ||||||||
The
following items explain the significant changes in the Corporate segment’s
operating loss:
2010
vs. 2009
|
|
§
|
Operating
loss was positively impacted by a $19.4 million increase in the cash
surrender value of company-owned life insurance policies due to
improvements in the equity markets.
|
|
|
§
|
Foreign
currency transaction gains were $2.0 million in the current year compared
to losses of $9.3 million in the prior year, reflecting a year-over-year
improvement in operating loss of $11.3
million.
|
|
|
§
|
Operating loss was negatively
impacted by a $10.3 million increase in compensation expenses primarily
due to improved operating results of the
Company.
|
2009
vs. 2008
|
|
§
|
Fiscal
2009 included losses of $9.3 million on foreign currency transactions
(primarily inter-company loans denominated in foreign currencies) compared
to gains in fiscal 2008 of $22.2
million.
|
|
|
§
|
Losses
on company-owned life insurance policies increased approximately $12.1
million due to declines in the securities
markets.
|
|
|
§
|
Variable
compensation expenses decreased $13.1 million due to lower consolidated
operating results.
|
LIQUIDITY
AND CAPITAL RESOURCES
Summary
Our
cash requirements consist primarily of the purchase of raw materials used in our
hog production and pork processing operations, long-term debt obligations and
related interest, lease payments for real estate, machinery, vehicles and other
equipment, and expenditures for capital assets, other investments and other
general business purposes. Our primary sources of liquidity are cash
we receive as payment for the products we produce and sell, as well as our
credit facilities.
Our
focus has shifted from acquisitions and capital spending to integration and debt
reduction. Capital expenditures were well below depreciation expense in fiscal
2010 and are expected to be below depreciation expense in fiscal
2011.
We
took a number of steps to strengthen our balance sheet during fiscal 2010,
including a significant refinancing of our debt and the issuance of 22,258,790
shares of common stock. These steps reduced our near-term debt
maturities and increased our liquidity. We also significantly reduced our
exposure to financial covenant maintenance risk, and we believe that the steps
we took will enable us to better weather the current economic environment.
Based
on the following, we believe that our current liquidity position is strong and
that our cash flows from operations and availability under our credit facilities
will be sufficient to meet our working capital needs and financial obligations
for at least the next twelve months:
|
|
§
|
As
of May 2, 2010, our liquidity position exceeded $1.2 billion, comprised of
$707.2 million of availability under the ABL Credit Facility (as defined
below), $451.2 million in cash and cash equivalents and $56.0
million of availability under international credit
lines.
|
|
|
§
|
We
generated $258.2 million of net cash flows from operating activities in
fiscal 2010.
|
|
|
§
|
We
have no substantial debt obligations coming due until the first
quarter of fiscal 2012.
|
Sources
of Liquidity
We
have available a variety of sources of liquidity and capital resources, both
internal and external. These resources provide funds required for current
operations, acquisitions, integration costs, debt retirement and other capital
requirements.
Accounts
Receivable and Inventories
The
meat processing industry is characterized by high sales volume and rapid
turnover of inventories and accounts receivable. Because of the rapid turnover
rate, we consider our meat inventories and accounts receivable highly liquid and
readily convertible into cash. The HP segment also has rapid turnover of
accounts receivable. Although inventory turnover in the HP segment is slower,
mature hogs are readily convertible into cash. Borrowings under our credit
facilities are used, in part, to finance increases in the levels of inventories
and accounts receivable resulting from seasonal and other market-related
fluctuations in raw material costs.
Credit
Facilities
|
May
2, 2010
|
||||||||||||||||||||
|
Facility
|
Capacity
|
Borrowing
Base Adjustment
|
Outstanding
Letters of Credit
|
Outstanding
Borrowings
|
Amount
Available
|
|||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
ABL
Credit Facility
|
$ | 1,000.0 | $ | (74.9 | ) | $ | (217.9 | ) | $ | - | $ | 707.2 | ||||||||
|
International
facilities
|
101.3 | - | - | (45.3 | ) | 56.0 | ||||||||||||||
|
Total
credit facilities
|
$ | 1,101.3 | $ | (74.9 | ) | $ | (217.9 | ) | $ | (45.3 | ) | $ | 763.2 | |||||||
In
July 2009 (fiscal 2010), we entered into a new asset-based revolving credit
agreement totaling $1.0 billion that supports short-term funding needs and
letters of credit (the ABL Credit Facility), and terminated our secured
revolving credit agreement (the U.S. Credit Facility), which was scheduled
to expire in August 2010 (fiscal 2011). Loans made under the ABL Credit Facility
will mature and the commitments thereunder will terminate in July 2012 (fiscal
2013). However, the ABL Credit Facility will be subject to an earlier
maturity if we fail to satisfy certain conditions related to the refinancing or
repayment of our senior notes due 2011. The ABL Credit Facility
provides for an option, subject to certain conditions, to increase total
commitments to $1.3 billion in the future.
43
Availability
under the ABL Credit Facility is based on a percentage of certain eligible
accounts receivable and eligible inventory and is reduced by certain reserves.
The ABL Credit Facility requires an unused commitment fee of 1% per annum
on the undrawn portion of the facility (subject to a stepdown in the event more
than 50% of the commitments under the facility are utilized).
Obligations
under the ABL Credit Facility are guaranteed by substantially all of our U.S.
subsidiaries and are secured by a first priority lien on the ABL Collateral (as
defined below). Our obligations under the ABL Credit Facility are also secured
by a second-priority lien on the Non-ABL Collateral (as defined below), which
secures the 2014 Notes (as defined below) and our obligations under the Rabobank
Term Loan (as defined below) on a first-priority basis.
In
August 2009 (fiscal 2010), we paid off the outstanding balance under our
European secured revolving credit facility (the Euro Credit Facility) and
cancelled the facility, which was scheduled to mature in August 2010 (fiscal
2011).
The
weighted average interest rate on amounts outstanding under all of our credit
facilities and credit lines as of May 2, 2010 was 5.3%.
In
addition to these credit facilities, we enter into short-term uncommitted credit
lines from time to time as an ordinary course financing activity.
Securities
Our
shelf registration previously filed with the Securities and Exchange Commission
recently expired. We expect to file a new registration statement following the
filing of this Annual Report on Form 10-K, which would enable us to register
sales of debt, stock and other securities from time to time. We would use the
net proceeds from the possible sale of these securities for repayment of
existing debt or general corporate purposes.
Cash
Flows
Operating
Activities
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Net
cash flows from operating activities
|
$ | 258.2 | $ | 269.9 | $ | 9.6 | ||||||
The
following items explain the significant changes in cash flows from operating
activities over the past three fiscal years:
2010
vs. 2009
|
|
§
|
Cash
received from customers decreased significantly due to lower sales volumes
and fresh pork market prices.
|
|
|
§
|
Cash
paid for the settlement of derivative contracts and for margin
requirements increased $130.8
million.
|
|
|
§
|
Cash
paid to outside hog suppliers decreased as average live hog market prices
declined by 8%.
|
|
|
§
|
We
paid approximately $124.2 million less for grains in fiscal 2010 due to
substantially lower feed prices.
|
|
|
§
|
Cash
paid for transportation and energy decreased due to significantly lower
fuel prices and energy costs.
|
|
|
§
|
We
received $60.1 million of insurance proceeds in fiscal 2010, which we
determined were attributable to business interruption recoveries and
reimbursable costs related to the PCI
fire.
|
|
|
§
|
We
received a cash dividend from CFG of $16.6 million in fiscal
2010.
|
2009
vs. 2008
|
|
§
|
Cash
received from customers increased substantially as a result of higher sale
volumes and selling prices.
|
|
|
§
|
Cash
paid for grains and fuel increased as a result of higher commodity
prices.
|
|
|
§
|
Cash
paid for the settlement of derivative contracts and for margin
requirements was $56.0 million in fiscal 2009 compared to cash received of
$188.7 million in fiscal 2008.
|
|
|
§
|
The
liquidation of company-owned cattle inventories resulted in approximately
$33 million of net cash proceeds.
|
44
Investing Activities
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Capital
expenditures
|
$ | (182.7 | ) | $ | (174.5 | ) | $ | (460.2 | ) | |||
|
Dispositions
|
23.3 | 587.0 | - | |||||||||
|
Insurance
proceeds
|
9.9 | - | - | |||||||||
|
Dividends
received
|
5.3 | 56.5 | - | |||||||||
|
Investments
in partnerships
|
(1.3 | ) | (31.7 | ) | (6.6 | ) | ||||||
|
Proceeds
from sale of property, plant and equipment
|
11.7 | 21.4 | 24.7 | |||||||||
|
Business
acquisitions, net of cash acquired
|
- | (17.4 | ) | (41.8 | ) | |||||||
|
Net
cash flows from investing activities
|
$ | (133.8 | ) | $ | 441.3 | $ | (483.9 | ) | ||||
The
following items explain the significant investing activities for each of the
past three fiscal years:
2010
|
|
§
|
Dispositions
included $14.2 million in proceeds from the sale of our interest in
Farasia, a 50/50 Chinese joint venture, and $9.1 million in
proceeds from the sale of RMH Foods, LLC, a subsidiary in the Pork
segment.
|
|
|
§
|
Capital
expenditures were primarily related to the Restructuring Plan, the
purchase of property and equipment previously leased and plant and hog
farm improvement projects. Capital spending was reduced in fiscal 2010 due
to our continued focus on driving efficiencies and debt
reduction.
|
|
|
§
|
The
insurance proceeds represent the portion of total insurance proceeds
received through the third quarter of fiscal 2010, which we determined are
related to the destruction of property, plant and equipment due to the
fire that occured at our Patrick Cudahy
facility.
|
2009
|
|
§
|
We
received $575.5 million for the sale of Smithfield Beef and $11.5 million
for the sale of SBE. The proceeds were used to pay down the U.S. Credit
Facility and other long-term debt.
|
|
|
§
|
Capital
expenditures primarily related to plant and hog farm improvement projects.
Capital spending was reduced in fiscal 2009 due to our focus on driving
efficiencies and debt reduction.
|
|
|
§
|
We
received dividends of $56.5 million from the liquidation of
Cattleco.
|
2008
|
|
§
|
Capital
expenditures primarily related to Romanian farm expansion, information
systems, existing facility upgrades and packaged meats
expansion.
|
|
|
§
|
We paid $40.0 million in cash as
part of the purchase price for the acquisition of
PSF.
|
45
Financing
Activities
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Proceeds
from the issuance of long-term debt
|
$ | 840.4 | $ | 600.0 | $ | 505.6 | ||||||
|
Net
repayments on revolving credit facilities and notes
payables
|
(491.6 | ) | (962.5 | ) | 378.0 | |||||||
|
Principal
payments on long-term debt and capital lease obligations
|
(333.3 | ) | (270.4 | ) | (404.7 | ) | ||||||
|
Net
proceeds from the issuance of common stock and stock option
exercises
|
296.9 | 122.3 | 4.2 | |||||||||
|
Repurchases
of debt
|
- | (86.2 | ) | - | ||||||||
|
Purchase
of call options
|
- | (88.2 | ) | - | ||||||||
|
Purchase
of redeemable noncontrolling interest
|
(38.9 | ) | - | - | ||||||||
|
Proceeds
from the sale of warrants
|
- | 36.7 | - | |||||||||
|
Debt
issuance costs and other
|
(64.6 | ) | (25.2 | ) | (5.8 | ) | ||||||
|
Net
cash flows from financing activities
|
$ | 208.9 | $ | (673.5 | ) | $ | 477.3 | |||||
The
following items explain the significant financing activities for each of the
past three fiscal years:
2010
|
|
§
|
In
July 2009, we issued $625 million aggregate principal amount of 10% senior
secured notes at a price equal to 96.201% of their face value. In August
2009, we issued an additional $225 million aggregate principal amount of
10% senior secured notes at a price equal to 104% of their face value,
plus accrued interest from July 2, 2009 to August 14, 2009. Collectively,
these notes, which mature in July 2014, are referred to as the “2014
Notes.” Interest payments are due semi-annually on January 15 and July 15.
The 2014 Notes are guaranteed by substantially all of our U.S.
subsidiaries. The 2014 Notes are secured by first-priority liens, subject
to permitted liens and exceptions for excluded assets, in substantially
all of the guarantors’ real property, fixtures and equipment
(collectively, the Non-ABL Collateral) and are secured by second-priority
liens on cash and cash equivalents, deposit accounts, accounts receivable,
inventory, other personal property relating to such inventory and accounts
receivable and all proceeds therefrom, intellectual property, and certain
capital stock and interests, which secure the ABL Credit Facility on a
first-priority basis (collectively, the ABL
Collateral).
|
The
2014 Notes rank equally in right of payment to all of our existing and future
senior debt and senior in right of payment to all of our existing and future
subordinated debt. The guarantees will rank equally in right of payment with all
of the guarantors’ existing and future senior debt and senior in right of
payment to all of the guarantors’ existing and future subordinated debt. In
addition, the 2014 Notes are structurally subordinated to the liabilities of our
non-guarantor subsidiaries.
We
used the net proceeds from the issuance of the 2014 Notes, together with other
available cash, to repay borrowings and terminate commitments under the U.S.
Credit Facility, to repay the outstanding balance under the Euro Credit
Facility, to repay and/or refinance other indebtedness and for other general
corporate purposes.
|
|
§
|
In
July 2009, we entered into a new $200 million term loan due August 29,
2013 (the Rabobank Term Loan), which replaced our then existing $200
million term loan that was scheduled to mature in August 2011. We are
obligated to repay $25 million of the borrowings under the Rabobank Term
Loan on each of August 29, 2011 and August 29, 2012. We may elect to
prepay the loan at any time, subject to the payment of certain prepayment
fees in respect of any voluntary prepayment prior to August 29, 2011 and
other customary breakage costs. Outstanding borrowings under this loan
will accrue interest at variable rates. Our obligations under the Rabobank
Term Loan are guaranteed by substantially all of our U.S. subsidiaries on
a senior secured basis. The Rabobank Term Loan is secured by
first-priority liens on the Non-ABL Collateral and is secured by
second-priority liens on the ABL Collateral, which secures our obligations
under the ABL Credit Facility on a first-priority
basis.
|
|
|
§
|
In
September 2009, we issued 21,660,649 shares of common stock in a
registered public offering at $13.85 per share. In October 2009, we issued
an additional 598,141 shares of common stock at $13.85 per share to cover
over-allotments from the offering. We incurred costs of $13.5 million
associated with the offering. The net proceeds from the
offering
|
46
|
|
were
used to repay our $206.3 million senior unsecured notes, which matured in
October 2009, and for working capital and other general corporate
purposes.
|
|
|
§
|
We
paid debt issuance costs totaling $64.6 million related to the 2014 Notes,
the Rabobank Term Loan and the ABL Credit Facility. The debt issuance
costs were capitalized and are being amortized into interest expense over
the life of each instrument.
|
|
|
§
|
In
November 2009, the noncontrolling interest holders of Premium Pet Health,
LLC (PPH), a subsidiary in our Pork segment, notified us of their
intention to exercise their put option, requiring us to purchase all of
their ownership interests in the subsidiary. In December 2009, we acquired
the remaining 49% interest in PPH for $38.9 million. PPH is a leading
protein by-product processor that supplies many of the leading pet food
processors in the United States.
|
2009
|
|
§
|
In
July 2008, we issued $400.0 million aggregate principal amount of 4%
convertible senior notes due June 30, 2013 in a registered offering
(the Convertible Notes). The Convertible Notes are payable with cash and,
at certain times, are convertible into shares of our common stock based on
an initial conversion rate, subject to adjustment, of 44.082 shares per
$1,000 principal amount of Convertible Notes (which represents an initial
conversion price of approximately $22.68 per share). Upon conversion, a
holder will receive cash up to the principal amount of the Convertible
Notes and shares of our common stock for the remainder, if any, of the
conversion obligation.
|
In
connection with the issuance of the Convertible Notes, we entered into separate
convertible note hedge transactions with respect to our common stock to reduce
potential economic dilution upon conversion of the Convertible Notes, and
separate warrant transactions (collectively referred to as the Call Spread
Transactions). We purchased call options in private transactions that permit us
to acquire up to approximately 17.6 million shares of our common stock at
an initial strike price of $22.68 per share, subject to adjustment, for
$88.2 million. We also sold warrants in private transactions for total
proceeds of approximately $36.7 million. The warrants permit the purchasers
to acquire up to approximately 17.6 million shares of our common stock at
an initial exercise price of $30.54 per share, subject to
adjustment.
We
incurred fees and expenses associated with the issuance of the Convertible Notes
totaling $11.4 million, which were capitalized and will be amortized to interest
expense over the life of the Convertible Notes. The net proceeds of $337.1
million from the issuance of the Convertible Notes and the Call Spread
Transactions were used to retire short-term uncommitted credit lines and to
reduce amounts outstanding under the U.S. Credit Facility.
|
|
§
|
In
July 2008, we issued a total of 7,000,000 shares of our common stock to
Starbase International Limited, a company registered in the British Virgin
Islands which is a subsidiary of COFCO (Hong Kong) Limited (COFCO). The
shares were issued at a purchase price of $17.45 per share. The proceeds
from the issuance of these shares were used to reduce amounts outstanding
under the U.S. Credit Facility.
|
|
|
§
|
In
August 2008, we entered into a three-year $200.0 million term loan with
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) maturing
on August 29, 2011. This term loan was replaced with the Rabobank
Term Loan in July 2009 (fiscal
2010).
|
|
|
§
|
During
the third quarter of fiscal 2009, we redeemed a total of $93.7 million
principal amount of our 8% senior unsecured notes due in October 2009 for
$86.2 million and recorded a gain of $7.5 million in other
income.
|
|
|
§
|
In
June 2008, we entered into a $200.0 million unsecured committed credit
facility with JP Morgan Chase Bank and Goldman Sachs Credit Partners L.P.,
intended to help bridge our working capital needs through the time of the
closing of the sale of Smithfield Beef in the event we were unable to
issue the Convertible Notes. We only borrowed $50.0 million under this
credit facility as it replaced an existing and fully drawn $50.0 million
line. We repaid the $50.0 million in June 2008 and terminated this credit
facility in July 2008.
|
47
2008
|
|
§
|
In
June 2007, we issued $500.0 million of 7.75% senior unsecured notes that
mature in 2017. We used the proceeds from this issuance to repay existing
indebtedness, principally on the U.S. Credit
Facility.
|
|
|
§
|
We
used available funds under the former U.S. Credit Facility to redeem
$125.4 million of debt assumed in our acquisition of Premium Standard
Farms, Inc.
|
|
|
§
|
In
February 2008, we obtained one year uncommitted credit lines totaling
$200.0 million from three of our existing bank lenders and drew down
$100.0 million from one of the credit lines. We used the borrowings to pay
down the U.S. Credit Facility. We subsequently redeemed certain senior
subordinated notes in the amount of $182.1 million that came due in
February 2008 using borrowings under the U.S. Credit Facility. In April
2008, we increased the uncommitted credit lines to $250.0 million,
borrowed an additional $50.0 million under one of the credit lines and
used the additional funds to pay down the U.S. Credit
Facility.
|
Capitalization
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
10%
senior secured notes, due July 2014, including discount of $20.6
million
|
$ | 604.4 | $ | - | ||||
|
10%
senior secured notes, due July 2014, including premium of $7.8
million
|
232.8 | - | ||||||
|
7.00%
senior unsecured notes, due August 2011, including premiums of $2.3
million and $4.1 million
|
602.3 | 604.1 | ||||||
|
7.75%
senior unsecured notes, due July 2017
|
500.0 | 500.0 | ||||||
|
4.00%
senior unsecured Convertible Notes, due June 2013, including discounts of
$65.9 million and $82.6 million
|
334.1 | 317.4 | ||||||
|
7.75%
senior unsecured notes, due May 2013
|
350.0 | 350.0 | ||||||
|
Floating
rate senior secured term loan, due August 2013
|
200.0 | - | ||||||
|
Euro
Credit Facility, terminated August 2009
|
- | 330.3 | ||||||
|
8.00%
senior unsecured notes
|
- | 206.3 | ||||||
|
7.83%
term loan
|
- | 200.0 | ||||||
|
U.S.
Credit Facility, terminated July 2009
|
- | 109.5 | ||||||
|
8.44%
senior secured note
|
- | 30.0 | ||||||
|
7.89%
senior secured notes
|
- | 5.0 | ||||||
|
Various,
interest rates from 0.00% to 9.00%, due June 2010 through March
2017
|
139.4 | 229.5 | ||||||
|
Fair-value
derivative instrument adjustment
|
- | 0.6 | ||||||
|
Total
debt
|
2,963.0 | 2,882.7 | ||||||
|
Current
portion
|
(72.2 | ) | (319.4 | ) | ||||
|
Total
long-term debt
|
$ | 2,890.8 | $ | 2,563.3 | ||||
|
Total
equity
|
$ | 2,758.2 | $ | 2,616.5 | ||||
Credit
Ratings
On
August 7, 2009, Standard & Poor’s Rating Services (S&P) downgraded
our ‘B’ credit rating to ‘B-’. As of May 2, 2010, our credit ratings were ‘B-’
by S&P and ‘B2’ by Moody’s Investor Services
(Moody’s). Although we had no borrowings outstanding on the ABL
Credit Facility, the interest expense spread that would have been applicable
based on these ratings would have been 4.50%. Additionally, a further downgrade
by either rating agency would not result in an increase in our interest expense
spread because any borrowings would currently be subject to the maximum spread
under our ratings based pricing.
Debt
Covenants and the Incurrence Test
Our
various debt agreements contain covenants that limit additional borrowings,
acquisitions, dispositions, leasing of assets and payments of dividends to
shareholders, among other restrictions.
Our
senior unsecured and secured notes limit our ability to incur additional
indebtedness, subject to certain exceptions, when our interest coverage ratio
is, or after incurring additional indebtedness would be, less than 2.0 to 1.0
(the Incurrence Test). As of May 2, 2010, we did not meet the
Incurrence Test. Due to the trailing twelve month nature of the
Incurrence Test, we do not expect to meet the Incurrence Test again until
the second quarter of fiscal 2011 at the earliest. The
Incurrence Test is not a maintenance covenant and our failure to meet the
Incurrence Test is not a default. In addition to limiting our ability to incur
additional indebtedness, our failure to meet the Incurrence Test restricts us
from engaging in certain other activities, including paying cash dividends,
repurchasing our common stock and making certain investments. However, our
failure to meet the Incurrence Test does not preclude us from borrowing on the
ABL Credit Facility or from refinancing existing indebtedness. Therefore we do
not expect the limitations resulting from our inability to satisfy the
Incurrence Test to have a material adverse effect on our business or
liquidity.
48
Our
ABL Credit Facility contains a covenant requiring us to maintain a fixed charges
coverage ratio of at least 1.1 to 1.0 when the amounts available for borrowing
under the ABL Credit Facility are less than the greater of $120 million or 15%
of the total commitments under the facility (currently $1.0 billion). We
currently are not subject to this restriction and we do not anticipate that our
borrowing availability will decline below those thresholds during fiscal 2011,
although there can be no assurance that this will not occur because our
borrowing availability depends upon our borrowing base calculated for purposes
of that facility.
During
the first quarter of fiscal 2010, we determined that we previously and
unintentionally breached a non-financial covenant under our senior unsecured
notes relating to certain foreign subsidiaries' indebtedness. We promptly cured
this minor breach by amending certain debt agreements of the subsidiaries and
extinguishing other indebtedness of the subsidiaries, and, as a result, no event
of default occurred under our senior unsecured notes or any other
facilities.
Guarantees
As
part of our business, we are party to various financial guarantees and other
commitments as described below. These arrangements involve elements of
performance and credit risk that are not included in the consolidated balance
sheet. We could become liable in connection with these obligations depending on
the performance of the guaranteed party or the occurrence of future events that
we are unable to predict. If we consider it probable that we will become
responsible for an obligation, we will record the liability in our consolidated
balance sheet.
We
(together with our joint venture partners) guarantee financial obligations of
certain unconsolidated joint ventures. The financial obligations are: up to
$80.3 million of debt borrowed by Agroindustrial del Noroeste (Norson), of which
$68.3 million was outstanding as of May 2, 2010, and up to $3.5 million of
liabilities with respect to currency swaps executed by another of our
unconsolidated Mexican joint ventures, Granjas Carroll de Mexico (Granjas). The
covenants in the guarantee relating to Norson’s debt incorporate our covenants
under the ABL Credit Facility. In addition, we continue to guarantee $13.5
million of leases that were transferred to JBS in connection with the sale of
Smithfield Beef. Some of these lease guarantees will be released in the near
future and others will remain in place until the leases expire in February
2022.
Additional
Matters Affecting Liquidity
Capital
Projects
As
of May 2, 2010, we had total estimated remaining capital expenditures of $42
million on approved projects. These projects are
expected to be funded over the next several years with cash flows from
operations and borrowings under credit facilities. Total capital expenditures
are expected to remain below depreciation in fiscal 2011.
Group
Pens
In
January 2007 (fiscal 2007), we announced a ten-year program to phase out
individual gestation stalls at our sow farms and replace the gestation stalls
with group pens. We currently estimate the total cost of our transition to group
pens to be approximately $300.0 million. This program represents a significant
financial commitment and reflects our desire to be more animal friendly, as well
as to address the concerns and needs of our customers. We do not expect that the
switch to penning systems at sow farms will have a material adverse effect on
our operations. As a result of recent economic conditions in hog
production, this program is being implemented as cash flow permits. See “Item 1.
Business—Animal Welfare Program” for further details regarding this
program.
Risk
Management Activities
We
are exposed to market risks primarily from changes in commodity prices, and to a
lesser degree, interest rates and foreign exchange rates. To mitigate these
risks, we utilize derivative instruments to hedge our exposure to changing
prices and rates, as more fully described under “Derivative Financial
Instruments” below. Our liquidity position may be positively or negatively
affected by changes in the underlying value of our derivative portfolio. When
the value of our open derivative contracts decrease, we may be required to post
margin deposits with our brokers to cover a portion of the decrease. Conversely,
when the value of our open derivative contracts increase, our brokers may be
required to deliver margin deposits to us for a portion of the increase. During
fiscal 2010, margin deposits posted by us ranged from $(22.6) million to $233.4
million (negative amounts representing margin deposits we have received from our
brokers). The average daily amount on deposit with brokers during fiscal 2010
was $59.0 million. As of May 2, 2010, the net amount on deposit with brokers was
$150.3 million.
The
effects, positive or negative, on liquidity resulting from our risk management
activities tend to be mitigated by offsetting changes in cash prices in our core
business. For example, in a period of rising grain prices, gains resulting from
long grain derivative positions would generally be offset by higher cash prices
paid to farmers and other suppliers in spot markets. These offsetting changes do
not always occur, however, in the same amounts or in the same period, with lag
times of as much as twelve months.
49
Pension
Plan Funding
Funding
requirements for our pension plans are determined based on the funded status
measured at the end of each year. The values of our pension obligation and
related assets may fluctuate significantly, which may in turn lead to a larger
under funded status in our pension plans and a higher funding requirement. We
contributed $74.1 million to our pension plans in fiscal 2010. Our expected
funding requirement in fiscal 2011 is $90.4
million.
Litigation
Costs
PSF,
certain of our other subsidiaries and affiliates and we are parties to
litigation in Missouri involving a number of claims alleging that hog farms
owned or under contract with the defendants interfered with the plaintiffs’ use
and enjoyment of their properties. These claims are more fully described in
“Item 3. Legal Proceedings—Missouri Litigation.” We established a reserve
estimating our liability for these and similar potential claims on the opening
balance sheet for our acquisition of PSF. Consequently, expenses and other
liabilities 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. Although we
recognize the uncertainties of litigation, based on our historical experience
and our understanding of the facts and circumstances underlying these claims, we
believe that these claims will not have a material adverse effect on our results
of operations or financial condition.
Butterball Buy/Sell
Option
In June
2010 (fiscal 2011), we announced that we have made an offer to
purchase our joint venture partner’s 51% ownership interest in Butterball
and our partner’s related turkey production assets for approximately $200
million. In accordance with Butterball’s operating agreement, our partner may
either accept the offer to sell or be required to purchase our 49% interest
and our related turkey production assets. We expect to conclude the
buy/sell decision no later than September 2010 (fiscal 2011) and close
before the end of the calendar year. If we are the buyer, we will be
required to retire Butterball’s debt obligations totaling approximately $215
million as of May 2, 2010. Additionally, if we are the buyer, we anticipate
that a significant amount of capital investment and marketing will be necessary
to increase Butterball’s earnings potential. We believe our current
liquidity position will be sufficient to finance this transaction.
However, we will evaluate capital alternatives at the appropriate
time.
Increase
of Authorized Shares of Common Stock
On
August 26, 2009, our shareholders approved an amendment to our Articles of
Incorporation to increase the number of authorized shares of our common stock
from 200 million to 500 million.
Contractual
Obligations and Commercial Commitments
The
following table provides information about our contractual obligations and
commercial commitments as of May 2, 2010(1).
|
Payments
Due By Period
|
||||||||||||||||||||
|
Total
|
<
1 Year
|
1-3
Years
|
3-5
Years
|
>
5 Years
|
||||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
Long-term
debt
|
$ | 2,963.0 | $ | 72.2 | $ | 689.9 | $ | 1,678.3 | $ | 522.6 | ||||||||||
|
Interest
|
967.6 | 233.4 | 398.2 | 238.8 | 97.2 | |||||||||||||||
|
Notes
payable
|
16.9 | 16.9 | - | - | - | |||||||||||||||
|
Capital
lease obligations, including interest
|
29.9 | 0.2 | 1.2 | 1.1 | 27.4 | |||||||||||||||
|
Operating
leases
|
197.8 | 45.0 | 63.8 | 39.4 | 49.6 | |||||||||||||||
|
Capital
expenditure commitments
|
12.1 | 12.1 | - | - | - | |||||||||||||||
|
Purchase
obligations:
|
||||||||||||||||||||
|
Hog
procurement(2)
|
3,375.9 | 882.9 | 1,144.5 | 901.6 | 446.9 | |||||||||||||||
|
Contract
hog growers(3)
|
1,516.9 | 476.5 | 390.5 | 279.9 | 370.0 | |||||||||||||||
|
Other(4)
|
469.1 | 289.7 | 178.1 | 0.9 | 0.4 | |||||||||||||||
|
Total
|
$ | 9,549.2 | $ | 2,028.9 | $ | 2,866.2 | $ | 3,140.0 | $ | 1,514.1 | ||||||||||
|
(1)
|
The above table does
not include the cash outlays associated with the
potential purchase of the remaining interest in Butterball. See
"Butterball Buy/Sell Option" discussion
above.
|
50
|
(2)
|
Through the Pork and
International segments, we have purchase agreements with certain hog
producers. Some of these arrangements obligate us to purchase all of the
hogs produced by these producers. Other arrangements obligate us to
purchase a fixed amount of hogs. Due to the uncertainty of the number of
hogs that we
are obligated to purchase and the uncertainty of market prices at the time
of hog purchases, we have estimated our obligations under these
arrangements. For payments within the next fiscal year, the average
purchase price estimated is based on available futures contract prices and
internal projections adjusted for historical quality premiums. For
payments beyond fiscal 2011, we estimated the market price of hogs based
on the ten-year average of $.44 per
pound.
|
|
(3)
|
Through
the Hog Production segment, we use independent farmers and their
facilities to raise hogs produced from our breeding stock. Under
multi-year contracts, the farmers provide the initial facility investment,
labor and front line management in exchange for a performance-based
service fee payable upon delivery. We are obligated to pay this service
fee for all hogs delivered. We have estimated our obligation based on
expected hogs delivered from these
farmers.
|
|
(4)
|
Includes
fixed price forward grain purchase contracts totaling $39.3
million. Also includes unpriced forward grain purchase contracts
which, if valued as of May 2, 2010 market prices, would be
$159.3 million. These forward grain
contracts are accounted for as normal purchases. As a result, they are not
recorded in the balance sheet. In addition, these amounts include $300.0
million, allocated at $25.0 million per year for the next twelve years,
which represents our current estimated cost for our transition to group
pens from gestation stalls. See "Additional Matters Affecting Liquidity --
Group Pens" above for further information regarding the status and timing
of this
transition.
|
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements that have a material current
effect, or that are reasonably likely to have a material future effect, on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources.
DERIVATIVE
FINANCIAL INSTRUMENTS
We
are exposed to market risks primarily from changes in commodity prices, as well
as interest rates and foreign exchange rates. To mitigate these risks, we
utilize derivative instruments to hedge our exposure to changing prices and
rates.
Derivative
instruments are recorded in the balance sheet as either assets or liabilities at
fair value. For derivatives that qualify and have been designated as cash flow
or fair value hedges for accounting purposes, changes in fair value have no net
impact on earnings, to the extent the derivative is considered perfectly
effective in achieving offsetting changes in fair value or cash flows
attributable to the risk being hedged, until the hedged item is recognized in
earnings (commonly referred to as the “hedge accounting” method). For
derivatives that do not qualify or are not designated as hedging instruments for
accounting purposes, changes in fair value are recorded in current period
earnings (commonly referred to as the “mark-to-market” method). Under this
guidance, we may elect either method of accounting for our derivative portfolio,
assuming all the necessary requirements are met. We have in the past, and will
in the future, avail ourselves of either acceptable method. We believe all of
our derivative instruments represent economic hedges against changes in prices
and rates, regardless of their designation for accounting purposes.
51
When
available, we use quoted market prices to determine the fair value of our
derivative instruments. This may include exchange prices, quotes obtained
from brokers, or independent valuations from external sources, such as banks. In
some cases where market prices are not available, we make use of observable
market based inputs to calculate fair value.
The
size and mix of our derivative portfolio varies from time to time based upon our
analysis of current and future market conditions. The following table presents
the fair values of our open derivative financial instruments in the consolidated
balance sheets(1).
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Livestock
|
$ | (122.6 | ) | $ | 15.6 | |||
|
Grains
|
7.1 | (13.3 | ) | |||||
|
Energy
|
(4.0 | ) | (13.0 | ) | ||||
|
Interest
rates
|
(8.1 | ) | (9.7 | ) | ||||
|
Foreign
currency
|
3.3 | (12.9 | ) | |||||
|
(1)
|
Negative amounts represent net
liabilities
|
Sensitivity
Analysis
The
following table presents the sensitivity of the fair value of our open commodity
contracts and interest rate and foreign currency contracts to a hypothetical 10%
change in market prices or in interest rates and foreign exchange rates, as of
May 2, 2010.
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Livestock
|
$ | 137.2 | $ | 12.6 | ||||
|
Grains
|
48.8 | 17.1 | ||||||
|
Energy
|
0.9 | 2.0 | ||||||
|
Interest
rates
|
0.2 | 0.5 | ||||||
|
Foreign
currency
|
5.0 | 15.7 | ||||||
The
increase in the sensitivity of the fair value of our livestock contracts to a
hypothetical 10% change in market prices was due to more open livestock
contracts as of May 2, 2010 compared to May 3, 2009.
Commodities
Risk
Our
meat processing and hog production operations use various raw materials, mainly
corn, lean hogs, live cattle, pork bellies, soybeans and wheat, which are
actively traded on commodity exchanges. We hedge these commodities when we
determine conditions are appropriate to mitigate the inherent price risks. While
this hedging may limit our ability to participate in gains from favorable
commodity fluctuations, it also tends to reduce the risk of loss from adverse
changes in raw material prices. Commodities underlying our derivative
instruments are subject to significant price fluctuations. Any requirement to
mark-to-market the positions that have not been designated or do not qualify for
hedge accounting could result in volatility in our results of operations. We
attempt to closely match the hedging instrument terms with the hedged item’s
terms. Gains and losses resulting from our commodity derivative contracts are
recorded in cost of sales for grain contracts and sales for lean hog contracts
and are offset by increases and decreases in cash prices in our core business
(with such increases and decreases also reflected in cost of sales). For
example, in a period of rising grain prices, gains resulting from long grain
derivative positions would generally be offset by higher cash prices paid to
farmers and other suppliers in spot markets. However, under the “mark-to-market”
method described above, these offsetting changes do not always occur in the same
period, with lag times of as much as twelve months.
We
discontinued the use of hedge accounting for our commodity derivatives during
the third quarter of fiscal 2007 due to rising costs of compliance and the
complexity associated with the application of hedge accounting. All existing
commodity hedging relationships were de-designated as of January 1, 2007.
We also elected not to apply hedge designations for any exchange traded
commodity derivative contracts entered into between January 1, 2007 and
April 27, 2008. We began applying hedge accounting again to commodity
derivatives in fiscal 2009.
52
Interest
Rate and Foreign Currency Exchange Risk
We
enter into interest rate swaps to hedge our exposure to changes in interest
rates on certain financial instruments and to manage the overall mix of fixed
rate and floating rate debt instruments. We also periodically enter into foreign
exchange forward contracts to hedge exposure to changes in foreign currency
rates on foreign denominated assets and liabilities as well as forecasted
transactions denominated in foreign currencies.
The
following tables present the effects on our consolidated financial statements
from our derivative instruments and related hedged items:
|
Gain
(Loss) Recognized in OCI on Derivative (Effective Portion)
|
Gain
(Loss) Reclassified from Accumulated OCI into Earnings (Effective
Portion)
|
Gain
(Loss) Recognized in Earnings on Derivative (Ineffective
Portion)
|
||||||||||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
||||||||||||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||||||||||||||||
|
Commodity
contracts:
|
||||||||||||||||||||||||||||||||||||
|
Grain
contracts
|
$ | (4.0 | ) | $ | (201.5 | ) | $ | - | $ | (85.4 | ) | $ | (112.5 | ) | $ | (29.3 | ) | $ | (7.2 | ) | $ | (4.6 | ) | $ | - | |||||||||||
|
Lean
hog contracts
|
(22.8 | ) | - | - | 1.9 | - | - | (0.5 | ) | - | - | |||||||||||||||||||||||||
|
Interest
rate contracts
|
(4.6 | ) | (12.6 | ) | - | (6.8 | ) | (2.3 | ) | - | - | - | - | |||||||||||||||||||||||
|
Foreign
exchange contracts
|
6.1 | (37.5 | ) | (1.4 | ) | (8.0 | ) | (21.7 | ) | (2.6 | ) | - | - | - | ||||||||||||||||||||||
|
Total
|
$ | (25.3 | ) | $ | (251.6 | ) | $ | (1.4 | ) | $ | (98.3 | ) | $ | (136.5 | ) | $ | (31.9 | ) | $ | (7.7 | ) | $ | (4.6 | ) | $ | - | ||||||||||
|
Gain
(Loss) Recognized in Earnings on Derivative
|
Gain
(Loss) Recognized in Earnings on Related Hedged Item
|
|||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Commodity
contracts
|
$ | (36.2 | ) | $ | 12.8 | $ | 4.3 | $ | 32.4 | $ | (14.0 | ) | $ | (4.3 | ) | |||||||||
|
Interest
rate contracts
|
0.6 | 0.7 | (3.0 | ) | (0.6 | ) | (0.7 | ) | 3.0 | |||||||||||||||
|
Foreign
exchange contracts
|
3.4 | - | - | (1.5 | ) | - | - | |||||||||||||||||
|
Total
|
$ | (32.2 | ) | $ | 13.5 | $ | 1.3 | $ | 30.3 | $ | (14.7 | ) | $ | (1.3 | ) | |||||||||
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Commodity
contracts
|
$ | (92.4 | ) | $ | 104.0 | $ | 236.2 | |||||
|
Interest
rate contracts
|
- | 2.3 | (7.8 | ) | ||||||||
|
Foreign
exchange contracts
|
(11.1 | ) | (3.1 | ) | (0.2 | ) | ||||||
|
Total
|
$ | (103.5 | ) | $ | 103.2 | $ | 228.2 | |||||
53
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of consolidated financial statements requires us to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates and
assumptions are based on our experience and our understanding of the current
facts and circumstances. Actual results could differ from those estimates. The
following is a summary of certain accounting policies and estimates we consider
critical. Our accounting policies are more fully discussed in Note 1 in “Item 8.
Financial Statements and Supplementary Data.”
|
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
|
Contingent
liabilities
|
||
|
We
are subject to lawsuits, investigations and other claims related to the
operation of our farms, wage and hour/labor, livestock procurement,
securities, environmental, product, taxing authorities and other matters,
and are required to assess the likelihood of any adverse judgments or
outcomes to these matters, as well as potential ranges of probable losses
and fees.
A
determination of the amount of reserves and disclosures required, if any,
for these contingencies are made after considerable analysis of each
individual issue. We accrue for contingent liabilities when an assessment
of the risk of loss is probable and can be reasonably estimated. We
disclose contingent liabilities when the risk of loss is reasonably
possible or probable.
|
Our
contingent liabilities contain uncertainties because the eventual outcome
will result from future events, and determination of current reserves
requires estimates and judgments related to future changes in facts and
circumstances, differing interpretations of the law and assessments of the
amount of damages or fees, and the effectiveness of strategies or other
factors beyond our control.
|
We
have not made any material changes in the accounting methodology used to
establish our contingent liabilities during the past three fiscal
years.
We
do not believe there is a reasonable likelihood there will be a material
change in the estimates or assumptions used to calculate
our contingent liabilities. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to gains or losses
that could be material.
|
|
Marketing
and advertising costs
|
||
|
We
incur advertising, retailer incentive and consumer incentive costs to
promote products through marketing programs. These programs include
cooperative advertising, volume discounts, in-store display incentives,
coupons and other programs.
Marketing
and advertising costs are charged in the period incurred. We accrue costs
based on the estimated performance, historical utilization and redemption
of each program.
Cash
consideration given to customers is considered a reduction in the price of
our products, thus recorded as a reduction to sales. The remainder of
marketing and advertising costs is recorded as a selling, general and
administrative expense.
|
Recognition
of the costs related to these programs contains uncertainties due to
judgment required in estimating the potential performance and redemption
of each program. These
estimates are based on many factors, including experience of similar
promotional programs.
|
We
have not made any material changes in the accounting methodology used to
establish our marketing accruals during the past three fiscal
years.
We
do not believe there is a reasonable likelihood there will be a material
change in the estimates or assumptions used to calculate
our marketing accruals. However, if actual results are not consistent with
our
estimates or assumptions, we may be exposed to gains or losses that could
be material.
|
54
|
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results Differ
From
Assumptions
|
|
Accrued
self insurance
|
||
|
We
are self insured for certain losses related to health and welfare,
workers’ compensation, auto liability and general liability
claims.
We
use an independent third-party actuary to assist in the determination of
certain of our self-insurance liabilities. We and the actuary consider a
number of factors when estimating our self-insurance liability, including
claims experience, demographic factors, severity factors and other
actuarial assumptions.
We
periodically review our estimates and assumptions with our third-party
actuary to assist us in determining the adequacy of our self-insurance
liability.
|
Our
self-insurance liabilities contain uncertainties due to assumptions
required and judgment used. Costs
to settle our obligations, including legal and healthcare costs, could
increase or decrease causing estimates of our self-insurance liabilities
to change. Incident
rates, including frequency and severity, could increase or decrease
causing estimates in our self-insurance liabilities to
change.
|
We
have not made any material changes in the accounting methodology used to
establish our self-insurance liabilities during the past three fiscal
years.
We
do not believe there is a reasonable likelihood there will be a material
change in the estimates or assumptions used to calculate
our self-insurance liabilities. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to gains
or losses that could be material. A
10% increase in the estimates as of May 2, 2010, would result in an
increase in the amount we recorded for our self-insurance liabilities of
approximately $11.0
million.
|
|
Impairment
of long-lived assets
|
||
|
Long-lived
assets are evaluated for impairment whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Examples
include a current expectation that a long-lived asset will be disposed of
significantly before the end of its previously estimated useful life, a
significant adverse change in the extent or manner in which we use a
long-lived asset or a change in its physical condition.
When
evaluating long-lived assets for impairment, we compare the carrying value
of the asset to the asset’s estimated undiscounted future cash flows.
Impairment is recorded if the estimated future cash flows are less than
the carrying value of the asset. The impairment is the excess of the
carrying value over the fair value of the long-lived asset.
We
recorded impairment charges related to long-lived assets of $48.1 million
(including $6.5 million of goodwill), $70.9 million and $11.8 million in
fiscal 2010, 2009 and 2008, respectively.
|
Our
impairment analysis contains uncertainties due to judgment in assumptions
and estimates surrounding undiscounted future cash flows of the long-lived
asset, including forecasting useful lives of assets and selecting the
discount rate that reflects the risk inherent in future cash
flows.
|
We
have not made any material changes in the accounting methodology used to
evaluate the impairment of long-lived assets during the last three
years.
We
do not believe there is a reasonable likelihood there will be a material
change in the estimates or assumptions used to calculate
impairments of long- lived assets. However, if actual results are not
consistent with our estimates and assumptions used to calculate estimated
future cash flows, we may be exposed to future impairment losses that
could be material.
|
55
|
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results Differ
From
Assumptions
|
|
Impairment
of goodwill and other intangible assets
|
||
|
Goodwill
impairment is determined using a two-step process. The first step is to
identify if a potential impairment exists by comparing the fair value of a
reporting unit with its carrying amount, including goodwill. If the fair
value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered to have a potential impairment and the
second step of the impairment test is not necessary. However, if the
carrying amount of a reporting unit exceeds its fair value, the second
step is performed to determine if goodwill is impaired and to measure the
amount of impairment loss to recognize, if any.
The
second step compares the implied fair value of goodwill with the carrying
amount of goodwill. If the implied fair value of goodwill exceeds the
carrying amount, goodwill is not considered impaired. However, if the
carrying amount of goodwill exceeds the implied fair value, an impairment
loss is recognized in an amount equal to that excess.
The
implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination (i.e., the fair
value of the reporting unit is allocated to all the assets and
liabilities, including any unrecognized intangible assets, as if the
reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the
reporting unit).
For our
other intangible assets, if the carrying value of the intangible asset
exceeds its fair value, an impairment loss is recognized in an amount
equal to that excess.
|
We
estimate the fair value of our reporting units by applying valuation
multiples or estimating future discounted cash flows.
The
selection of multiples is dependent upon assumptions regarding future
levels of operating performance as well as business trends and prospects,
and industry, market and economic conditions.
A
discounted cash flow analysis requires us to make various judgmental
assumptions about sales, operating margins, growth rates and discount
rates. When estimating future discounted cash flows, we consider the
assumptions that hypothetical marketplace participants would use in
estimating future cash flows. In addition, where applicable, an
appropriate discount rate is used, based on our cost of capital or
location-specific economic factors.
We
experienced significant losses in our hog production operations in fiscal
2010 resulting primarily from record high grain prices. The fair value
estimates of our Hog Production reporting units assume normalized
operating margin assumptions and improved operating efficiencies based on
long-term expectations and margins historically realized in the hog
production industry.
The
fair values of trademarks have been calculated using a royalty rate
method. Assumptions about royalty rates are based on the rates at which
similar brands and trademarks are licensed in the
marketplace.
Our impairment analysis contains uncertainties due to
uncontrollable events that could positively or negatively impact the
anticipated future economic and operating conditions.
|
We
have not made any material changes in the accounting methodology used to
evaluate impairment of goodwill and other intangible assets during the
last three years.
As
of May 2, 2010, we had $822.9 million of goodwill and $389.6 million of
other
intangible
assets. Our goodwill is included in the following segments:
§$216.5 million –
Pork
§$136.8 million –
International
§$450.1 million –
Hog Production
§$19.5 million –
Other
As
a result of the first step of the 2010 goodwill impairment analysis, the
fair value of each reporting unit exceeded its carrying value. Therefore,
the second step was not necessary. A hypothetical 10% decrease in the
estimated fair value of our reporting units would not result in a material
impairment.
Beginning in the first quarter of fiscal 2009, our market
capitalization was below book value. By the fourth quarter of fiscal
2010, our book value once again exceeded our market capitalization. While
we considered the temporary market capitalization decline in our
evaluation of fair value of goodwill, we determined it did not impact the
overall goodwill impairment analysis as we believe the decline to be
primarily attributed to the view by market participants of our risk of
credit default, the current status of the hog production cycle, and
overall negative market conditions as a result of the credit crisis and
the ongoing recession. We will continue to monitor our market
capitalization as a potential impairment indicator considering overall
market conditions.
|
56
|
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results Differ
From
Assumptions
|
|
We
have elected to make the first day of the fourth quarter the annual
impairment assessment date for goodwill and other intangible assets.
However, we could be required to evaluate the recoverability of goodwill
and other intangible assets prior to the required annual assessment if we
experience disruptions to the business, unexpected significant declines in
operating results, divestiture of a significant component of the business
or a decline in market capitalization. For example, in fiscal 2009, we
performed an interim test of the carrying amount of goodwill related to
our U.S. hog production operations due to significant losses incurred in
our hog production operations, the deteriorating macro-economic
environment, the continued market volatility and the decrease in our
market capitalization.
|
Our
fiscal 2010 other intangible asset impairment analysis did not result in
an impairment charge. A hypothetical 10% decrease in the estimated fair
value of our intangible assets would not result in a material
impairment.
|
|
Income
taxes
|
||
|
We
estimate total income tax expense based on statutory tax rates and tax
planning opportunities available to us in various jurisdictions in which
we earn income.
Federal
income taxes include an estimate for taxes on earnings of foreign
subsidiaries expected to be remitted to the United States and be taxable,
but not for earnings considered indefinitely invested in the foreign
subsidiary.
Deferred
income taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting using tax rates in
effect for the years in which the differences are expected to
reverse.
Valuation
allowances are recorded when it is likely a tax benefit will not be
realized for a deferred tax asset.
We
record unrecognized tax benefit liabilities for known or anticipated tax
issues based on our analysis of whether, and the extent to which,
additional taxes will be due. This analysis is performed in accordance
with the applicable FASB issued accounting guidance.
|
Changes
in tax laws and rates could affect recorded deferred tax assets and
liabilities in the future.
Changes
in projected future earnings could affect the recorded valuation
allowances in the future.
Our
calculations related to income taxes contain uncertainties due to judgment
used to calculate tax liabilities in the application of complex tax
regulations across the tax jurisdictions where we operate.
Our
analysis of unrecognized tax benefits contain uncertainties based on
judgment used to apply the more likely than not recognition and
measurement thresholds.
|
We
do not believe there is a reasonable likelihood there will be a material
change in the tax related balances or valuation allowances.
However, due to the complexity of some of these uncertainties, the
ultimate resolution may result in a payment that is materially
different from the current estimate of the tax
liabilities.
To
the extent we prevail in matters for which liabilities have been
established, or are required to pay amounts in excess of our recorded
liabilities, our effective tax rate in a given financial statement period
could be materially affected. An unfavorable tax settlement may require
use of our cash and result in an increase in our effective tax rate in the
period of resolution. A favorable tax settlement
could be recognized as a reduction in our effective tax rate in the period
of resolution.
|
57
|
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results Differ
From
Assumptions
|
|
Pension
Accounting
|
||
|
We
provide the majority of our U.S. employees with pension benefits. We
account for our pension plans in accordance with accounting guidance
issued by the FASB, which requires us to recognize the funded status of
our pension plans in our consolidated balance sheets and to recognize, as
a component of other comprehensive income (loss), the gains or losses and
prior service costs or credits that arise during the period, but are not
recognized in net periodic benefit cost.
We
use an independent third-party actuary to assist in the determination of
our pension obligation and related costs.
Our
pension plan funding policy is to contribute the minimum amount required
under government regulations. We funded $74.1 million, $53.8 million and
$47.8 million to our pension plans during fiscal 2010, 2009 and 2008,
respectively. We expect to fund at least $90.4
million in fiscal 2011.
|
The
measurement of our pension obligation and costs is dependent on a variety
of assumptions regarding future events. The key assumptions we use include
discount rates, salary growth, retirement ages/mortality rates and the
expected return on plan assets.
These
assumptions may have an effect on the amount and timing of future
contributions. The discount rate assumption is based on investment yields
available at year-end on corporate bonds rated AA and above with a
maturity to match our expected benefit payment stream. The salary growth
assumption reflects our long-term actual experience, the near-term outlook
and assumed inflation. Retirement rates are based primarily on actual plan
experience. Mortality rates are based on mandated mortality tables, which
have flexibility to consider industry specific groups, such as blue collar
or white collar. The expected return on plan assets reflects asset
allocations, investment strategy and historical returns of the asset
categories. The effects of actual results differing from these assumptions
are accumulated and amortized over future periods and, therefore,
generally affect our recognized expense in such future
periods.
The
following weighted average assumptions were used to determine our benefit
obligation and net benefit cost for fiscal 2010:
§8.25% – Discount
rate to determine net benefit cost
§6.00% – Discount
rate to determine
pension
benefit obligation §8.25% – Expected
return on plan assets
§4.00% – Salary
growth
|
If actual results
are not consistent with our estimates or assumptions, we may be exposed to
gains or losses that could be material. For
example, the discount rate used to measure our projected benefit
obligation decreased from 8.25% as of May 3, 2009 to 6.00% as of May
2, 2010, which is the primary cause for an increased expected net pension
cost of $82.0 million in fiscal 2011.
An
additional 0.50% decrease in the discount rate would have caused a
decrease in funded status of $86.7 million as of May 2, 2010, and would
result in additional net pension cost of $7.3 million in fiscal
2011.
A
0.50% decrease in expected return on plan assets would result in a $4.0
million increase in net pension cost in fiscal 2010.
In addition
to higher net pension cost, a significant decrease in the funded status of
our pension plans caused by either a devaluation of plan assets or a
decline in the discount rate would result in higher pension funding
requirements. The increased funding requirement in fiscal 2011 is a result
of the economic downturn in 2008, which resulted in poor asset
performance.
|
|
Derivatives
Accounting
|
||
|
See
“Derivative Financial Instruments” above for a discussion of our
derivative accounting policy.
|
58
Recent
Accounting Pronouncements
See
Note 1 in “Item 8. Financial Statements and Supplementary Data” for information
about recently issued accounting standards not yet adopted by us, including
their potential effects on our financial statements.
FORWARD-LOOKING
INFORMATION
This
report contains “forward-looking” statements within the meaning of the federal
securities laws. The forward-looking statements include statements concerning
our outlook for the future, as well as other statements of beliefs, future plans
and strategies or anticipated events, and similar expressions concerning matters
that are not historical facts. Our forward-looking information and statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in, or implied by, the statements. These risks
and uncertainties include the availability and prices of live hogs, raw
materials, fuel and supplies, food safety, livestock disease, live hog
production costs, product pricing, the competitive environment and related
market conditions, hedging risk, operating efficiencies, changes in interest
rate and foreign currency exchange rates, changes in our credit ratings, access
to capital, the investment performance of our pension plan assets and the
availability of legislative funding relief, the cost of compliance with
environmental and health standards, adverse results from on-going litigation,
actions of domestic and foreign governments, labor relations issues, credit
exposure to large customers, the ability to make effective acquisitions and
dispositions and successfully integrate newly acquired businesses into existing
operations, our ability to effectively restructure portions of our operations
and achieve cost savings from such restructurings and other risks and
uncertainties described under “Item 1A. Risk Factors.” Readers are
cautioned not to place undue reliance on forward-looking statements because
actual results may differ materially from those expressed in, or implied by, the
statements. Any forward-looking statement that we make speaks only as of the
date of such statement, and we undertake no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise. Comparisons of results for current and any prior periods
are not intended to express any future trends or indications of future
performance, unless expressed as such, and should only be viewed as historical
data.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Information
about our exposure to market risk is included in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Derivative Financial Instruments” of this Annual Report on Form
10-K.
All
statements other than historical information required by this item are
forward-looking statements. The actual impact of future market changes could
differ materially because of, among others, the factors discussed in this Annual
Report on Form 10-K.
59
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
| Page | |
|
61
|
|
|
62
|
|
|
63
|
|
|
64
|
|
|
65
|
|
|
66
|
|
|
67
|
|
|
107
|
60
INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of Smithfield Foods,
Inc.
We have audited Smithfield Foods, Inc. and subsidiaries’ internal
control over financial reporting as of May 2, 2010, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Smithfield Foods, Inc. and subsidiaries’ management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting in Item 9A. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Smithfield Foods, Inc. and subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of May 2, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Smithfield Foods, Inc. and subsidiaries as of May 2, 2010 and May 3,
2009, and the related consolidated statements of income, shareholders’ equity
and cash flows for each of the three years in the period ended May 2, 2010 and
our report dated June 18, 2010 expressed an unqualified opinion
thereon.
/s/
Ernst & Young LLP
Richmond,
Virginia
June
18, 2010
61
ON
CONSOLIDATED FINANCIAL STATEMENTS
The
Board of Directors and Shareholders of Smithfield Foods, Inc.
We
have audited the accompanying consolidated balance sheets of Smithfield Foods,
Inc. and subsidiaries as of May 2, 2010 and May 3, 2009, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended May 2, 2010. Our audits also included the
financial statement schedule listed in the Index at Item 15. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Smithfield Foods, Inc.
and subsidiaries at May 2, 2010 and May 3, 2009, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended May 2, 2010, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As
discussed in Note 2 to the consolidated financial statements, in fiscal 2010 the
Company changed its method for accounting for convertible debt instruments with
the adoption of the guidance originally issued in the accounting provisions of
Financial Accounting Standards Board (FASB) Staff Position ABP 14-1, Accounting for Convertible Debt Instruments That May
be Settled in Cash upon Conversion (codified in FASB ASC Topic 470, Debt) effective January 1,
2009.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Smithfield Foods, Inc. and
subsidiaries’ internal control over financial reporting as of May 2, 2010, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated June 18, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
June 18, 2010
62
CONSOLIDATED
STATEMENTS OF INCOME
(in
millions, except per share data)
.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Sales
|
$ | 11,202.6 | $ | 12,487.7 | $ | 11,351.2 | ||||||
|
Cost
of sales
|
10,472.5 | 11,863.1 | 10,202.8 | |||||||||
|
Gross
profit
|
730.1 | 624.6 | 1,148.4 | |||||||||
|
Selling,
general and administrative expenses
|
705.9 | 798.4 | 813.6 | |||||||||
|
Equity
in (income) loss of affiliates
|
(38.6 | ) | 50.1 | (62.0 | ) | |||||||
|
Operating
profit (loss)
|
62.8 | (223.9 | ) | 396.8 | ||||||||
|
Interest
expense
|
266.4 | 221.8 | 184.8 | |||||||||
|
Other
loss (income)
|
11.0 | (63.5 | ) | - | ||||||||
|
(Loss)
income from continuing operations before income taxes
|
(214.6 | ) | (382.2 | ) | 212.0 | |||||||
|
Income
tax (benefit) expense
|
(113.2 | ) | (131.3 | ) | 72.8 | |||||||
|
(Loss)
income from continuing operations
|
(101.4 | ) | (250.9 | ) | 139.2 | |||||||
|
Income
(loss) from discontinued operations, net of tax of $44.3 and
$(2.4)
|
- | 52.5 | (10.3 | ) | ||||||||
|
Net
(loss) income
|
$ | (101.4 | ) | $ | (198.4 | ) | $ | 128.9 | ||||
|
(Loss)
income per basic and diluted common share:
|
||||||||||||
|
Continuing
operations
|
$ | (.65 | ) | $ | (1.78 | ) | $ | 1.04 | ||||
|
Discontinued
operations
|
- | .37 | (.08 | ) | ||||||||
|
Net
(loss) income per basic common share
|
$ | (.65 | ) | $ | (1.41 | ) | $ | .96 | ||||
|
Weighted
average shares:
|
||||||||||||
|
Weighted
average basic shares
|
157.1 | 141.1 | 133.9 | |||||||||
|
Effect
of dilutive stock options
|
- | - | 0.3 | |||||||||
|
Weighted
average diluted shares
|
157.1 | 141.1 | 134.2 | |||||||||
See
Notes to Consolidated Financial Statements
63
CONSOLIDATED
BALANCE SHEETS
(in
millions, except share data)
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 451.2 | $ | 119.0 | ||||
|
Accounts
receivable, net of allowances of $8.1 and $9.9
|
621.5 | 595.2 | ||||||
|
Inventories
|
1,860.0 | 1,896.1 | ||||||
|
Prepaid
expenses and other current assets
|
387.6 | 174.2 | ||||||
|
Total
current assets
|
3,320.3 | 2,784.5 | ||||||
|
Property,
plant and equipment, net
|
2,358.7 | 2,443.0 | ||||||
|
Goodwill
|
822.9 | 820.0 | ||||||
|
Investments
|
625.0 | 601.6 | ||||||
|
Intangible
assets, net
|
389.6 | 392.2 | ||||||
|
Other
assets
|
192.4 | 158.9 | ||||||
|
Total
assets
|
$ | 7,708.9 | $ | 7,200.2 | ||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Notes
payable
|
$ | 16.9 | $ | 17.5 | ||||
|
Current
portion of long-term debt and capital lease obligations
|
72.8 | 320.8 | ||||||
|
Accounts
payable
|
383.8 | 390.2 | ||||||
|
Accrued
expenses and other current liabilities
|
718.4 | 558.3 | ||||||
|
Total
current liabilities
|
1,191.9 | 1,286.8 | ||||||
|
Long-term
debt and capital lease obligations
|
2,918.4 | 2,567.3 | ||||||
|
Pension
obligations
|
496.0 | 340.5 | ||||||
|
Other
liabilities
|
342.4 | 375.0 | ||||||
|
Redeemable
noncontrolling interests
|
2.0 | 14.1 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Equity:
|
||||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, $1.00 par value, 1,000,000 authorized shares
|
- | - | ||||||
|
Common
stock, $.50 par value, 500,000,000 authorized shares; 165,995,732 and
143,576,842 issued and outstanding
|
83.0 | 71.8 | ||||||
|
Additional
paid-in capital
|
1,626.9 | 1,353.8 | ||||||
|
Stock
held in trust
|
(65.5 | ) | (64.8 | ) | ||||
|
Retained
earnings
|
1,538.7 | 1,640.1 | ||||||
|
Accumulated
other comprehensive loss
|
(427.5 | ) | (388.5 | ) | ||||
|
Total
shareholders’ equity
|
2,755.6 | 2,612.4 | ||||||
|
Noncontrolling
interests
|
2.6 | 4.1 | ||||||
|
Total
equity
|
2,758.2 | 2,616.5 | ||||||
|
Total
liabilities and equity
|
$ | 7,708.9 | $ | 7,200.2 | ||||
See
Notes to Consolidated Financial Statements
64
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
millions)
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | (101.4 | ) | $ | (198.4 | ) | $ | 128.9 | ||||
|
Adjustments
to reconcile net cash flows from operating activities:
|
||||||||||||
|
(Income)
loss from discontinued operations, net of tax
|
- | (52.5 | ) | 10.3 | ||||||||
|
Equity
in (income) loss of affiliates
|
(38.6 | ) | 50.1 | (62.0 | ) | |||||||
|
Depreciation
and amortization
|
242.3 | 270.5 | 264.2 | |||||||||
|
Deferred
income taxes
|
35.3 | (98.6 | ) | 86.4 | ||||||||
|
Impairment
of assets
|
51.3 | 81.8 | 11.8 | |||||||||
|
Loss
on sale of property, plant and equipment
|
22.7 | 8.0 | 16.5 | |||||||||
|
Gain
on sale of investments
|
(4.5 | ) | (58.0 | ) | - | |||||||
|
Changes
in operating assets and liabilities and other, net:
|
||||||||||||
|
Accounts
receivable
|
(12.6 | ) | 53.9 | (59.4 | ) | |||||||
|
Inventories
|
46.5 | 225.6 | (425.4 | ) | ||||||||
|
Prepaid
expenses and other current assets
|
(209.6 | ) | (66.5 | ) | 88.4 | |||||||
|
Accounts
payable
|
(12.6 | ) | (91.7 | ) | 91.3 | |||||||
|
Accrued
expenses and other current liabilities
|
160.3 | 13.1 | (91.4 | ) | ||||||||
|
Other
|
79.1 | 132.6 | (50.0 | ) | ||||||||
|
Net
cash flows from operating activities
|
258.2 | 269.9 | 9.6 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(182.7 | ) | (174.5 | ) | (460.2 | ) | ||||||
|
Dispositions
|
23.3 | 587.0 | - | |||||||||
|
Insurance
proceeds
|
9.9 | - | - | |||||||||
|
Dividends
received
|
5.3 | 56.5 | - | |||||||||
|
Investments
in partnerships
|
(1.3 | ) | (31.7 | ) | (6.6 | ) | ||||||
|
Proceeds
from sale of property, plant and equipment
|
11.7 | 21.4 | 24.7 | |||||||||
|
Business
acquisitions, net of cash acquired
|
- | (17.4 | ) | (41.8 | ) | |||||||
|
Net
cash flows from investing activities
|
(133.8 | ) | 441.3 | (483.9 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from the issuance of long-term debt
|
840.4 | 600.0 | 505.6 | |||||||||
|
Net
repayments on revolving credit facilities and notes
payables
|
(491.6 | ) | (962.5 | ) | 378.0 | |||||||
|
Principal
payments on long-term debt and capital lease obligations
|
(333.3 | ) | (270.4 | ) | (404.7 | ) | ||||||
|
Net
proceeds from the issuance of common stock and stock option
exercises
|
296.9 | 122.3 | 4.2 | |||||||||
|
Repurchases
of debt
|
- | (86.2 | ) | - | ||||||||
|
Purchase
of call options
|
- | (88.2 | ) | - | ||||||||
|
Purchase
of redeemable noncontrolling interest
|
(38.9 | ) | - | - | ||||||||
|
Proceeds
from the sale of warrants
|
- | 36.7 | - | |||||||||
|
Debt
issuance costs and other
|
(64.6 | ) | (25.2 | ) | (5.8 | ) | ||||||
|
Net
cash flows from financing activities
|
208.9 | (673.5 | ) | 477.3 | ||||||||
|
Cash
flows from discontinued operations:
|
||||||||||||
|
Net
cash flows from operating activities
|
- | 34.7 | 4.4 | |||||||||
|
Net
cash flows from investing activities
|
- | (7.0 | ) | (8.2 | ) | |||||||
|
Net
cash flows from financing activities
|
- | (0.8 | ) | - | ||||||||
|
Net
cash flows from discontinued operations activities
|
- | 26.9 | (3.8 | ) | ||||||||
|
Effect
of foreign exchange rate changes on cash
|
(1.1 | ) | (2.9 | ) | 0.3 | |||||||
|
Net
change in cash and cash equivalents
|
332.2 | 61.7 | (0.5 | ) | ||||||||
|
Cash
and cash equivalents at beginning of period
|
119.0 | 57.3 | 57.8 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 451.2 | $ | 119.0 | $ | 57.3 | ||||||
See
Notes to Consolidated Financial Statements
65
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
millions)
|
Common
Stock (Shares)
|
Common
Stock (Amount)
|
Additional
Paid-in Capital
|
Stock
Held
in Trust |
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
Shareholders' Equity
|
Noncontrolling
Interests
|
Total
Equity |
||||||||||||||||||||||
|
Balance
at April 29, 2007
|
112.4 | $ | 56.2 | $ | 510.1 | $ | (52.5 | ) | $ | 1,724.8 | $ | 2.2 | $ | 2,240.8 | $ | 3.5 | $ | 2,244.3 | ||||||||||||
|
Common
stock issued
|
21.7 | 10.8 | 609.4 | - | - | - | 620.2 | - | 620.2 | |||||||||||||||||||||
|
Exercise
of stock options
|
0.3 | 0.2 | 2.7 | - | - | - | 2.9 | - | 2.9 | |||||||||||||||||||||
|
Stock compensation
expense
|
- | - | 2.0 | - | - | - | 2.0 | - | 2.0 | |||||||||||||||||||||
|
Tax
benefit of stock option exercises
|
- | - | 1.3 | - | - | - | 1.3 | - | 1.3 | |||||||||||||||||||||
|
Equity
method investee acquisitions of treasury shares
|
- | - | 4.7 | - | - | - | 4.7 | - | 4.7 | |||||||||||||||||||||
|
Purchase
of stock for trust
|
- | - | - | (0.6 | ) | - | - | (0.6 | ) | - | (0.6 | ) | ||||||||||||||||||
|
Adoption
of new accounting guidance on income tax
|
- | - | - | - | (15.2 | ) | - | (15.2 | ) | - | (15.2 | ) | ||||||||||||||||||
| Change in ownership of noncontrolling interest | - | - | - | - | - | - | - | 2.5 | 2.5 | |||||||||||||||||||||
|
Distributions
to noncontrolling interest
|
- | - | - | - | - | - | - | (0.4 | ) | (0.4 | ) | |||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||
|
Net
income (loss)
|
- | - | - | - | 128.9 | - | 128.9 | - | 128.9 | |||||||||||||||||||||
|
Hedge
accounting
|
- | - | - | - | - | (18.5 | ) | (18.5 | ) | - | (18.5 | ) | ||||||||||||||||||
|
Pension
accounting
|
- | - | - | - | - | (4.0 | ) | (4.0 | ) | - | (4.0 | ) | ||||||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | - | 85.7 | 85.7 | - | 85.7 | |||||||||||||||||||||
|
Total
comprehensive income (loss)
|
- | - | - | - | 128.9 | 63.2 | 192.1 | - | 192.1 | |||||||||||||||||||||
|
Balance
at April 27, 2008
|
134.4 | 67.2 | 1,130.2 | (53.1 | ) | 1,838.5 | 65.4 | 3,048.2 | 5.6 | 3,053.8 | ||||||||||||||||||||
|
Common
stock issued
|
9.2 | 4.6 | 177.7 | - | - | - | 182.3 | - | 182.3 | |||||||||||||||||||||
|
Exercise
of stock options
|
- | - | 0.2 | - | - | - | 0.2 | - | 0.2 | |||||||||||||||||||||
|
Stock compensation
expense
|
- | - | 3.8 | - | - | - | 3.8 | - | 3.8 | |||||||||||||||||||||
|
Sale
of warrants
|
- | - | 36.7 | - | - | - | 36.7 | - | 36.7 | |||||||||||||||||||||
|
Purchase
of call options
|
- | - | (53.9 | ) | - | - | - | (53.9 | ) | - | (53.9 | ) | ||||||||||||||||||
|
Adoption
of new accounting guidance on convertible debt
|
- | - | 59.1 | - | - | - | 59.1 | - | 59.1 | |||||||||||||||||||||
|
Purchase
of stock for trust
|
- | - | - | (0.6 | ) | - | - | (0.6 | ) | - | (0.6 | ) | ||||||||||||||||||
|
Purchase
of stock for supplemental employee
retirement plan
|
- | - | - | (11.1 | ) | - | - | (11.1 | ) | - | (11.1 | ) | ||||||||||||||||||
| Change in ownership of noncontrolling interest | - | - | - | - | - | - | - | (0.8 | ) | (0.8 | ) | |||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||
|
Net
income (loss)
|
- | - | - | - | (198.4 | ) | - | (198.4 | ) | (0.7 | ) | (199.1 | ) | |||||||||||||||||
|
Hedge
accounting
|
- | - | - | - | - | (72.0 | ) | (72.0 | ) | - | (72.0 | ) | ||||||||||||||||||
|
Pension
accounting
|
- | - | - | - | - | (121.9 | ) | (121.9 | ) | - | (121.9 | ) | ||||||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | - | (260.0 | ) | (260.0 | ) | - | (260.0 | ) | ||||||||||||||||||
|
Total
comprehensive income (loss)
|
- | - | - | - | (198.4 | ) | (453.9 | ) | (652.3 | ) | (0.7 | ) | (653.0 | ) | ||||||||||||||||
|
Balance
at May 3, 2009
|
143.6 | 71.8 | 1,353.8 | (64.8 | ) | 1,640.1 | (388.5 | ) | 2,612.4 | 4.1 | 2,616.5 | |||||||||||||||||||
|
Common
stock issued
|
22.2 | 11.1 | 283.7 | - | - | - | 294.8 | - | 294.8 | |||||||||||||||||||||
|
Exercise
of stock options
|
0.2 | 0.1 | 2.0 | - | - | - | 2.1 | - | 2.1 | |||||||||||||||||||||
|
Stock compensation
expense
|
- | - | 6.6 | - | - | - | 6.6 | - | 6.6 | |||||||||||||||||||||
|
Adjustment
for redeemable noncontrolling interest
|
- | - | (19.4 | ) | - | - | - | (19.4 | ) | - | (19.4 | ) | ||||||||||||||||||
|
Distributions
to noncontrolling interest
|
- | - | - | - | - | - | - | (1.6 | ) | (1.6 | ) | |||||||||||||||||||
|
Purchase
of stock for trust
|
- | - | - | (0.7 | ) | - | - | (0.7 | ) | - | (0.7 | ) | ||||||||||||||||||
|
Other
|
- | - | 0.2 | - | - | - | 0.2 | - | 0.2 | |||||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||
|
Net
income (loss)
|
- | - | - | - | (101.4 | ) | - | (101.4 | ) | 0.1 | (101.3 | ) | ||||||||||||||||||
|
Hedge
accounting
|
- | - | - | - | - | 52.6 | 52.6 | - | 52.6 | |||||||||||||||||||||
|
Pension
accounting
|
- | - | - | - | - | (96.5 | ) | (96.5 | ) | - | (96.5 | ) | ||||||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | - | 4.9 | 4.9 | - | 4.9 | |||||||||||||||||||||
|
Total
comprehensive income (loss)
|
- | - | - | - | (101.4 | ) | (39.0 | ) | (140.4 | ) | 0.1 | (140.3 | ) | |||||||||||||||||
|
Balance
at May 2, 2010
|
166.0 | $ | 83.0 | $ | 1,626.9 | $ | (65.5 | ) | $ | 1,538.7 | $ | (427.5 | ) | $ | 2,755.6 | $ | 2.6 | $ | 2,758.2 | |||||||||||
See
Notes to Consolidated Financial Statements
66
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless
otherwise stated, amounts presented in these notes to our consolidated financial
statements are based on continuing operations for all fiscal periods included.
Certain prior year amounts have been reclassified to conform to fiscal 2010
presentations.
Principles
of Consolidation
The
consolidated financial statements include the accounts of all wholly-owned
subsidiaries, as well as all majority-owned subsidiaries and other entities for
which we have a controlling interest. Entities that are 50% owned or less are
accounted for under the equity method when we have the ability to exercise
significant influence. We use the cost method of accounting for investments in
which our ability to exercise significant influence is limited. All intercompany
transactions and accounts have been eliminated. The results of operations
include our proportionate share of the results of operations of entities
acquired from the date of each acquisition for purchase business combinations.
Consolidating the results of operations and financial position of variable
interest entities for which we are the primary beneficiary does not have a
material effect on sales, net income (loss), or net income (loss) per diluted
share or on our financial position for the fiscal periods
presented.
Foreign
currency denominated assets and liabilities are translated into U.S. dollars
using the exchange rates in effect at the balance sheet date. Results of
operations and cash flows in foreign currencies are translated into U.S. dollars
using the average exchange rate over the course of the fiscal year. The effect
of exchange rate fluctuations on the translation of assets and liabilities is
included as a component of shareholders’ equity in accumulated other
comprehensive income (loss). Gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. We recorded
net gains on foreign currency transactions of $3.7 million in fiscal 2010,
net losses on foreign currency transactions of $25.6 million in fiscal
2009 and net gains on foreign currency transactions of $13.7 million in fiscal
2008.
Our
Polish operations have different fiscal period end dates. As such, we have
elected to consolidate the results of these operations on a one-month lag. We do
not believe the impact of reporting the results of these entities on a one-month
lag is material to the consolidated financial statements. Prior to fiscal 2009,
the results of our Romanian operations were reported on a one-month
lag. Fiscal 2009 included thirteen months of results from our
Romanian operations in order to bring these operations in line with our standard
fiscal reporting period. The effects of the additional month of results were not
material to our consolidated financial statements.
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the U.S., which requires us to make estimates
and use assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Our
fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest
April 30. Fiscal 2010 and fiscal 2008 consisted of 52 weeks. Fiscal 2009
consisted of 53 weeks.
Cash
and Cash Equivalents
We consider all highly liquid
investments with original maturities of 90 days or less to be cash equivalents.
Cash and cash equivalents included $325.4 million and $4.6 million of money
market funds as of May 2, 2010 and May 3, 2009, respectively. The majority
of our cash is concentrated in a demand deposit account. The carrying value of cash equivalents
approximates market value.
Accounts
Receivable
Accounts
receivable are recorded net of the allowance for doubtful accounts. We regularly
evaluate the collectibility of our accounts receivable based on a variety of
factors, including the length of time the receivables are past due, the
financial health of the customer and historical experience. Based on our
evaluation, we record reserves to reduce the related receivables to amounts we
reasonably believe are collectible.
Inventories
Fresh
meat is valued at USDA market price and adjusted for the cost of further
processing. Packaged meats are valued at the lower of cost or market. Costs for
packaged products include meat, labor, supplies and overhead. Average costing is
primarily utilized to account for fresh and packaged meat. Live hogs are
generally valued at the lower of first-in,
first-out cost or market or at fair value, for live hogs that are hedged. Costs
include purchase costs, feed, medications, contract grower fees and other
production expenses. Manufacturing supplies are principally ingredients and
packaging materials.
67
Inventories
consist of the following:
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Live
hogs
|
$ | 853.5 | $ | 838.4 | ||||
|
Fresh
and packaged meats
|
786.0 | 789.1 | ||||||
|
Manufacturing
supplies
|
70.5 | 72.7 | ||||||
|
Live
cattle
|
- | 29.8 | ||||||
|
Grains
and other
|
150.0 | 166.1 | ||||||
|
Total
inventories
|
$ | 1,860.0 | $ | 1,896.1 | ||||
In
fiscal 2009, prior to the sale of Smithfield Beef, Inc. (Smithfield Beef), we
recorded after-tax charges of approximately $36 million in income (loss) from
discontinued operations on the write-down of cattle inventories due to a decline
in live cattle market prices. Refer to Note 3—Acquisitions and Dispositions for
further discussion of our sale of Smithfield Beef. Also, in fiscal 2009, we
recorded pre-tax charges totaling $4.3 million in income (loss) from continuing
operations in the Other segment for the write-down of cattle inventories due to
a decline in live cattle market prices. See Note 8—Investments for a
discussion of inventory write-downs at our former cattle feeding joint venture.
Additionally, we incurred inventory write-downs and other associated costs in
the Pork segment totaling approximately $7 million in fiscal 2009.
Property,
Plant and Equipment, Net
Property,
plant and equipment is generally stated at historical cost, which includes the
fair values of assets acquired in business combinations, and depreciated on a
straight-line basis over the estimated useful lives of the assets. Assets held
under capital leases are classified in property, plant and equipment, net and
amortized over the lease term. The amortization of assets held under capital
leases is included in depreciation expense. The cost of assets held under
capital leases was $35.0
million and $12.8 million
at May 2, 2010 and May 3, 2009, respectively. The assets held under capital
leases had accumulated amortization of $1.4 million and $3.0 million, at May
2, 2010 and May 3, 2009, respectively. Depreciation expense is included as
either cost of sales or selling, general and administrative expenses, as
appropriate. Depreciation expense totaled $236.9 million, $264.0 million and
$258.0 million in fiscal 2010, 2009 and 2008, respectively.
Interest
is capitalized on property, plant and equipment over the construction period.
Total interest capitalized was $2.8 million, $2.0 million and $1.7 million
in fiscal 2010, 2009 and 2008, respectively.
Property,
plant and equipment, net, consist of the following:
|
Useful
Life
|
May
2,
2010
|
May
3,
2009
|
||||||||||
|
(in
Years)
|
(in
millions)
|
|||||||||||
|
Land
and improvements
|
0-20 | $ | 300.1 | $ | 288.1 | |||||||
|
Buildings
and improvements
|
20-40 | 1,681.2 | 1,679.4 | |||||||||
|
Machinery
and equipment
|
5-25 | 1,639.7 | 1,617.5 | |||||||||
|
Breeding
stock
|
2 | 151.5 | 160.7 | |||||||||
|
Other
|
3-10 | 168.6 | 125.4 | |||||||||
|
Construction
in progress
|
97.4 | 64.1 | ||||||||||
| 4,038.5 | 3,935.2 | |||||||||||
|
Accumulated
depreciation
|
(1,679.8 | ) | (1,492.2 | ) | ||||||||
|
Property,
plant and equipment, net
|
$ | 2,358.7 | $ | 2,443.0 | ||||||||
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the purchase price over the fair value of identifiable
net assets of businesses acquired. The fair value of identifiable intangible
assets is estimated based upon discounted future cash flow projections.
Intangible assets with finite lives are amortized over their estimated useful
lives. The useful life of an intangible asset is the period over which the asset
is expected to contribute directly or indirectly to future cash
flows.
68
Goodwill
and indefinite-lived intangible assets are tested for impairment annually in the
fourth quarter, or sooner if impairment indicators arise. Goodwill impairment is
determined using a two-step process. The first step is to identify if a
potential impairment exists by comparing the fair value of a reporting unit with
its carrying amount, including goodwill. The fair value of a reporting unit is
estimated by applying valuation multiples and/or estimating future discounted
cash flows. The selection of multiples is dependent upon assumptions regarding
future levels of operating performance as well as business trends and prospects,
and industry, market and economic conditions. When estimating future discounted
cash flows, we consider the assumptions that hypothetical marketplace
participants would use in estimating future cash flows. In addition, where
applicable, an appropriate discount rate is used, based on our cost of capital
or location-specific economic factors. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is not considered to
have a potential impairment and the second step of the impairment test is not
necessary. However, if the carrying amount of a reporting unit exceeds its fair
value, the second step is performed to determine if goodwill is impaired and to
measure the amount of impairment loss to recognize, if any.
The
second step compares the implied fair value of goodwill with the carrying amount
of goodwill. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination (i.e., the fair
value of the reporting unit is allocated to all the assets and liabilities,
including any unrecognized intangible assets, as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the purchase price paid to acquire the reporting unit). If the implied fair
value of goodwill exceeds the carrying amount, goodwill is not considered
impaired. However, if the carrying amount of goodwill exceeds the implied fair
value, an impairment loss is recognized in an amount equal to that
excess.
Based
on the results of the first step of our annual goodwill impairment tests, as of
our testing date, no impairment indicators were noted for all
the periods presented.
The carrying amount of goodwill includes cumulative impairment
losses of $6.0 million.
Intangible
assets consist of the following:
|
Useful
Life
|
May
2,
2010
|
May
3,
2009
|
||||||||||
|
(in
Years)
|
(in
millions)
|
|||||||||||
|
Amortized
intangible assets:
|
||||||||||||
|
Customer
relations assets
|
15-16 | $ | 13.3 | $ | 13.3 | |||||||
|
Patents,
rights and leasehold interests
|
5-25 | 12.7 | 12.2 | |||||||||
|
Contractual
relationships
|
22 | 33.1 | 33.1 | |||||||||
|
Accumulated
amortization
|
(17.4 | ) | (13.9 | ) | ||||||||
|
Amortized
intangible assets, net
|
41.7 | 44.7 | ||||||||||
|
Unamortized
intangible assets:
|
||||||||||||
|
Trademarks
|
Indefinite
|
341.6 | 341.1 | |||||||||
|
Permits
|
Indefinite
|
6.3 | 6.4 | |||||||||
|
Intangible
assets, net
|
$ | 389.6 | $ | 392.2 | ||||||||
The fair values of trademarks have been
calculated using a royalty rate method. Assumptions about royalty rates are
based on the rates at which similar brands and trademarks are licensed in the
marketplace. If the carrying value of our indefinite-lived intangible assets
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. Intangible assets with finite lives are reviewed for recoverability
when indicators of impairment are present using estimated future undiscounted
cash flows related to those assets. We have determined that no impairments of
our intangible assets existed for any of the periods
presented.
Amortization
expense for intangible assets was $3.1 million, $2.9 million and $2.8 million in
fiscal 2010, 2009 and 2008, respectively. As of May 2, 2010, the estimated
amortization expense associated with our intangible assets for each of the next
five fiscal years is expected to be $3.0 million.
Debt
Deferred
debt issuance costs are amortized into interest expense over the terms of the
related loan agreements using the effective interest method or other
methods which approximate the effective interest method.
Premiums
and discounts related to the issuance of debt are amortized into interest
expense over the terms of the related loan agreements using the effective
interest method or other methods which approximate the effective interest
method.
69
Investments
We
record our share of earnings and losses from our equity method investments in
equity in (income) loss of affiliates. Some of these results are reported on a
one-month lag which, in our opinion, does not materially impact our consolidated
financial statements. We consider whether the fair values of any of our equity
method investments have declined below their carrying value whenever adverse
events or changes in circumstances indicate that recorded values may not be
recoverable. If we consider any such decline to be other than temporary (based
on various factors, including historical financial results, product development
activities and the overall health of the affiliate’s industry), then a
write-down of the investment would be recorded to its estimated fair value. We
have determined that no write-down was necessary for all periods presented. See
Note 8—Investments for further discussion.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in earnings in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to amounts more likely than not to be realized.
The
determination of our provision for income taxes requires significant judgment,
the use of estimates, and the interpretation and application of complex tax
laws. Significant judgment is required in assessing the timing and amounts of
deductible and taxable items.
We
record unrecognized tax benefit liabilities for known or anticipated tax issues
based on our analysis of whether, and the extent to which, additional taxes will
be due. We accrue interest and penalties related to unrecognized tax benefits as
other noncurrent liabilities and recognize the related expense as income tax
expense.
Pension
Accounting
We
recognize the funded status of our benefit plans in the consolidated balance
sheets. We also recognize as a component of accumulated other comprehensive
loss, the net of tax results of the gains or losses and prior service costs or
credits that arise during the period but are not recognized in net periodic
benefit cost. These amounts will be adjusted out of accumulated other
comprehensive income (loss) as they are subsequently recognized as components of
net periodic benefit cost.
We
measure our pension and other postretirement benefit plan obligations and
related plan assets as of the last day of our fiscal year. The measurement of
our pension obligations and related costs is dependent on the use of assumptions
and estimates. These assumptions include discount rates, salary growth,
mortality rates and expected returns on plan assets. Changes in assumptions and
future investment returns could potentially have a material impact on our
expenses and related funding requirements.
Derivative
Financial Instruments and Hedging Activities
See
Note 7—Derivative Financial Instruments for our policy.
Self-Insurance
Programs
We
are self-insured for certain levels of general and vehicle liability, property,
workers’ compensation, product recall and health care coverage. The cost of
these self-insurance programs is accrued based upon estimated settlements for
known and anticipated claims. Any resulting adjustments to previously recorded
reserves are reflected in current period earnings.
Revenue
Recognition
We
recognize revenues from product sales upon delivery to customers. Revenue is
recorded at the invoice price for each product net of estimated returns and
sales incentives provided to customers. Sales incentives include various rebate
and trade allowance programs with our customers, primarily discounts and rebates
based on achievement of specified volume or growth in volume
levels.
70
Advertising
and Promotional Costs
Advertising
and promotional costs are expensed as incurred except for certain production
costs, which are expensed upon the first airing of the advertisement.
Promotional sponsorship costs are expensed as the promotional events occur.
Advertising costs totaled $111.3 million,
$119.6 million and $119.4 million in fiscal 2010, 2009 and 2008,
respectively.
Shipping
and Handling Costs
Shipping
and handling costs are reported as a component of cost of sales.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and development costs
totaled $38.8
million, $52.6 million and $90.9 million in fiscal 2010, 2009 and
2008, respectively.
Net
Income (Loss) per Share
We
present dual computations of net income (loss) per share. The basic computation
is based on weighted average common shares outstanding during the period. The
diluted computation reflects the potentially dilutive effect of common stock
equivalents, such as stock options, during the period.
NOTE
2: ACCOUNTING CHANGES AND NEW ACCOUNTING GUIDANCE
In
January 2010, the FASB issued authoritative guidance intended to improve
disclosures about fair value measurements. The guidance requires entities to
disclose significant transfers in and out of fair value hierarchy levels and the
reasons for the transfers and to present information about purchases, sales,
issuances and settlements separately in the reconciliation of fair value
measurements using significant unobservable inputs (Level 3). Additionally, the
guidance clarifies that a reporting entity should provide fair value
measurements for each class of assets and liabilities and disclose the inputs
and valuation techniques used for fair value measurements using significant
other observable inputs (Level 2) and significant unobservable inputs (Level 3).
The new guidance is effective for interim and annual periods beginning after
December 15, 2009. We adopted the new requirements in the fourth quarter of
fiscal 2010.
In
June 2009 and December 2009, the FASB issued guidance requiring an analysis to
determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. This guidance requires an ongoing
assessment and eliminates the quantitative approach previously required for
determining whether an entity is the primary beneficiary. This guidance is
effective for fiscal years beginning after November 15, 2009. Accordingly, we
will adopt this guidance in fiscal year 2011. We are in the process of
evaluating the potential impacts of such adoption.
In
April 2009, the FASB issued new disclosure requirements about the fair value of
financial instruments in interim financial statements. We adopted the new
requirements in the first quarter of fiscal 2010. See Note 16—Fair Value
Measurements for required disclosures.
In
September 2008, the Emerging Issues Task Force (EITF) issued guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock. The new guidance requires retrospective
application with restatement of prior periods. We adopted the new guidance in
the first quarter of fiscal 2010 and determined that it had no impact on our
consolidated financial statements.
In
May 2008, the FASB issued new accounting guidance for convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement). Under the new guidance, issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. The amount allocated to the equity component
represents a discount to the debt, which is amortized into interest expense
using the effective interest method over the life of the debt. We adopted the
new accounting guidance in the first quarter of fiscal 2010 and applied it
retrospectively to all periods presented. Refer to Note 10—Debt for further
discussion of the impact of this new accounting guidance on our consolidated
financial statements.
In
December 2007, the FASB issued new accounting and disclosure guidance on how to
recognize, measure and present assets acquired, liabilities assumed,
noncontrolling interests and any goodwill recognized in a business combination.
The objective of this new guidance is to improve the information included in
financial reports about the nature and financial effects of business
combinations. We adopted the new guidance in the first
quarter of fiscal 2010, and will apply it prospectively to all future business
combinations. The adoption did not have a significant impact on our consolidated
condensed financial statements, and the impact on our consolidated condensed
financial statements in future periods will depend on the nature and size of any
future business combinations.
71
In
December 2007, the FASB issued new accounting and reporting guidance for a
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity and should be
reported as equity in the consolidated financial statements, rather than as a
liability or in the mezzanine section between liabilities and equity. The new
guidance also requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. We adopted the new accounting guidance in the first quarter of fiscal
2010, and are applying
it prospectively, except for the consolidated condensed statements of income
where income attributable to noncontrolling interests is immaterial for the
periods presented. The new presentation and disclosure requirements have been
applied retrospectively. The adoption of this guidance did not have a
significant impact on our consolidated financial statements.
In
September 2006, the FASB issued new accounting and disclosure guidance that
defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States, and expands
disclosures about fair value measurements. It does not require any new fair
value measurements. The new guidance was effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years for
financial assets and liabilities, and for fiscal years beginning after
November 15, 2008 for all nonrecurring fair value measurements of
nonfinancial assets and liabilities. We adopted the new guidance for financial
assets and liabilities in the first quarter of fiscal 2009 and for nonrecurring
fair value measurements of nonfinancial assets and liabilities in the first
quarter of fiscal 2010. The adoption did not have a significant impact on our
consolidated financial statements. See Note 16— Fair Value Measurements for
additional disclosures on fair value measurements.
NOTE
3: ACQUISITIONS AND DISPOSITIONS
Premium
Standard Farms, Inc. (PSF)
In
May 2007 (fiscal 2008), we acquired PSF for approximately $800.0 million in
stock and cash, including $125.4 million of assumed debt. PSF was one of the
largest providers of pork products to the retail, wholesale, foodservice,
further processor and export markets. Through our acquisition of PSF, we
acquired processing facilities in Missouri and North Carolina. PSF was also one
of the largest owners of sows in the U.S. with operations located in Missouri,
North Carolina and Texas. PSF’s results from pork processing operations are
reported in our Pork segment and results from hog production operations are
reported in our Hog Production segment. For its fiscal year ended March 31,
2007, PSF had net sales of approximately $893.0 million.
Pursuant
to the Agreement and Plan of Merger, PSF became a wholly-owned subsidiary as the
outstanding shares of PSF common stock were exchanged for 21.7 million
shares of our common stock and $40.0 million in cash. We used available funds
under the U.S. Credit Facility (See Note 10—Debt) to pay for the cash portion of
the consideration and to redeem the assumed debt of PSF. In determining the
purchase price, we considered PSF’s strong management team and the efficiency of
its hog production and pork processing operations. Because these factors do not
arise from contractual or other legal rights, nor are they separable, the value
attributable to these factors is included in the amount recognized as
goodwill.
We
recorded the fair value of contractual relationships of $33.1 million in the HP
segment, $6.2 million for permits in the Hog Production and Pork segments, $3.8
million for trademarks in the Pork segment and $2.6 million for customer
relationships in the Pork segment. The weighted average amortization period for
the contractual relationships is 22 years. The useful lives of the permits
and trademarks are indefinite. We also recorded estimated contingent liabilities
related to the PSF nuisance suits, which suits are discussed in Note
18—Regulation and Contingencies. The balance of the purchase price in excess of
the fair value of the assets acquired and liabilities assumed of $310.6 million
was recorded as goodwill.
The
acquisition of PSF was accounted for using the purchase method of accounting
and, accordingly, the accompanying financial statements include the financial
position and the results of operations from the date of acquisition. Had such
acquisition occurred at the beginning of fiscal 2008 there would not have been a
material effect on sales, net income or net income per diluted share for fiscal
2008.
Smithfield
Beef, Inc. (Smithfield Beef )
In
March 2008 (fiscal 2008), we entered into an agreement with JBS S.A., a company
organized and existing under the laws of Brazil (JBS), to sell Smithfield Beef,
our beef processing and cattle feeding operation that encompassed our entire
Beef segment. In October 2008 (fiscal 2009), we completed the sale of Smithfield
Beef for $575.5 million in cash.
72
The
sale included 100 percent of Five Rivers Ranch Cattle Feeding LLC (Five Rivers),
which was previously a 50/50 joint venture with Continental Grain Company (CGC).
Immediately preceding the closing of the JBS transaction, we acquired CGC’s 50
percent investment in Five Rivers for 2,166,667 shares of our common stock
valued at $27.87 per share and $8.7 million for working capital
adjustments.
The
JBS transaction excluded substantially all live cattle inventories held by
Smithfield Beef and Five Rivers as of the closing date, together with associated
debt. All live cattle inventories previously held by Five Rivers were sold by
the end of fiscal 2009. The remaining live cattle inventories of Smithfield
Beef, which were excluded from the JBS transaction, were sold in the first
quarter of fiscal 2010. Our results from the sale of the live cattle inventories
that were excluded from the JBS transaction are reported in income from
continuing operations in the Other segment.
We
recorded an estimated pre-tax gain of $95.2 million ($51.9 million net of tax)
on the sale of Smithfield Beef in income from discontinued operations in the
second quarter of fiscal 2009. We recorded an additional gain of
approximately $4.5 million ($2.4 million net of tax) in the third quarter of
fiscal 2009 for the settlement of differences in working capital at closing from
agreed-upon targets. These gains were recorded in income (loss) from
discontinued operations.
The
following table presents sales, interest expense and net income of
Smithfield Beef for the fiscal periods indicated. Interest expense is allocated
to discontinued operations based on specific borrowings by the discontinued
operations. These results are reported in income from discontinued
operations.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Sales
|
$ | - | $ | 1,699.0 | $ | 2,885.9 | ||||||
|
Interest
expense
|
- | 17.3 | 41.0 | |||||||||
|
Net
income
|
- | 0.9 | 5.2 | |||||||||
Smithfield
Bioenergy, LLC (SBE)
In
April 2007 (fiscal 2007), we decided to exit the alternative fuels business and
dispose of substantially all of the assets of SBE. In February 2008 (fiscal
2008), we signed a definitive agreement to sell substantially all of SBE’s
assets, and in May 2008 (fiscal 2009), we completed the sale for $11.5 million.
During the first quarter of fiscal 2008, we recorded an impairment charge of
$6.7 million, net of tax of $3.8 million, to write-down the assets to their
estimated fair value. We recorded an additional impairment charge of $2.9
million, net of tax of $1.6 million, in the third quarter of fiscal
2008. The results of SBE, including these impairment charges are
reflected in income (loss) from discontinued operations.
The
following table presents sales, interest expense and net loss of SBE for the
fiscal periods indicated:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Sales
|
$ | - | $ | 3.8 | $ | 27.0 | ||||||
|
Interest
expense
|
- | 1.3 | 3.4 | |||||||||
|
Net
loss
|
- | (2.7 | ) | (15.5 | ) | |||||||
NOTE
4: IMPAIRMENT OF LONG-LIVED ASSETS
Hog Farms
In
fiscal 2008 and fiscal 2009, we announced that we would reduce the size of
our U.S. sow herd by 10% in order to reduce the overall supply of hogs in the
U.S. market.
In
June 2009 (fiscal 2010), we decided to further reduce our domestic sow herd by
3%, or approximately 30,000 sows, which was accomplished by ceasing
certain hog production operations and closing certain of our hog farms. In
addition, in the first quarter of fiscal 2010, we began marketing certain other
hog farms. As a result of these decisions, we recorded total
impairment charges of $34.1 million, including an allocation of
goodwill, in the first quarter of fiscal 2010 to write-down the hog farm
assets to their estimated fair values. The impairment charges were recorded in
cost of sales in the Hog Production segment. These
hog farm assets, which consist primarily of property, plant and
equipment, were classified as held and used as of May 2, 2010.
The carrying amount of these assets was $27.9 million as of May 2,
2010 and $33.1 million as of May 3, 2009.
73
RMH
Foods, LLC (RMH)
In October
2009 (fiscal 2010), we entered into an agreement to sell substantially all of
the assets of RMH, a subsidiary within the Pork segment, for $9.5 million, plus
the assumption by the buyer of certain liabilities, subject to customary
post-closing adjustments, including adjustments for differences in working
capital at closing from agreed-upon targets. We recorded pre-tax charges
totaling $3.5 million, including $0.5 million of goodwill impairment, in
the Pork segment in the second quarter of fiscal 2010 to write-down the assets
of RMH to their fair values. These charges were recorded in cost of sales. In
December 2009 (fiscal 2010), we completed the sale of RMH for $9.1 million, plus
$1.4 million of liabilities assumed by the buyer.
Sioux City, Iowa
Plant
In
January 2010 (fiscal 2010), we announced that we would close our fresh pork
processing plant located in Sioux City, Iowa. The Sioux City plant was one of
our oldest and least efficient plants. The plant design severely limited our
ability to produce value-added packaged meats products and maximize production
throughput. A portion of the plant’s production has been transferred to other
nearby Smithfield plants. We closed the Sioux City plant in April 2010 (fiscal
2010).
As
a result of the planned closure, we recorded charges of $13.1 million in the
third quarter of fiscal 2010. These charges consisted of $3.6 million for the
write-down of long-lived assets, $2.5 million of unusable inventories and $7.0
million for estimated severance benefits pursuant to contractual and ongoing
benefit arrangements, of which $5.5 million were paid-out during the fourth
quarter of fiscal 2010. Substantially all of these charges were recorded in cost
of sales in the Pork segment. We do not expect any significant future charges
associated with the plant closure.
Kinston,
North Carolina Plant
In
March 2008 (fiscal 2008), we announced our plan to close one of our Kinston,
North Carolina plants. As a result, we recorded a pre-tax impairment charge of
$8.0 million in cost of sales in the Pork segment during the fourth quarter of
fiscal 2008 to write-down the facility to its fair value. The plant closed in
May 2008 (fiscal 2009).
NOTE
5: PORK RESTRUCTURING
Pork
Group Restructuring
In
February 2009 (fiscal 2009), we announced a plan to consolidate and streamline
the corporate structure and manufacturing operations of our Pork segment (the
Restructuring Plan). This restructuring is intended to make us more
competitive by improving operating efficiencies and increasing plant
utilization. The
Restructuring Plan includes the following primary
initiatives:
|
|
§
|
the
closing of the following six plants, the last of which closed in February
2010 (fiscal 2010), with the transfer of production to more efficient
facilities:
|
|
|
§
|
The
Smithfield Packing Company, Incorporated’s (Smithfield Packing) Smithfield
South plant in Smithfield,
Virginia;
|
|
|
§
|
Smithfield
Packing’s Plant City, Florida
plant;
|
|
|
§
|
Smithfield
Packing’s Elon, North Carolina
plant;
|
|
|
§
|
John
Morrell & Co’s (John Morrell) Great Bend, Kansas
plant;
|
|
|
§
|
Farmland
Foods, Inc.’s (Farmland Foods) New Riegel, Ohio plant;
and
|
|
|
§
|
Armour-Eckrich’s
Hastings, Nebraska plant;
|
|
|
§
|
a
reduction in the number of operating companies in the Pork segment from
seven to three;
|
|
|
§
|
the
merger of the fresh pork sales forces of the John Morrell and Farmland
Foods business units; and
|
|
|
§
|
the
consolidation of the international sales organizations of our U.S.
operating companies into one group that is responsible for
exports.
|
74
As
a result of the Restructuring Plan, we recorded pre-tax restructuring and
impairment charges totaling $17.3 million and $88.2 million in fiscal 2010 and
fiscal 2009, respectively. All of these charges were recorded in the Pork
segment. The following table summarizes the balance of accrued expenses, the
cumulative expense incurred to date and the expected remaining expenses to be
incurred related to the Restructuring Plan by major type of cost.
|
Accrued
Balance
May
3, 2009
|
Total
Expense Fiscal 2010
|
Payments
|
Accrued
Balance
May
2, 2010
|
Cumulative
Expense-to-Date
|
Estimated
Remaining Expense
|
|||||||||||||||||||
|
Restructuring
charges:
|
(in millions) | |||||||||||||||||||||||
|
Employee
severance and related benefits
|
$ | 11.9 | $ | 0.1 | $ | (4.0 | ) | $ | 8.0 | $ | 12.4 | $ | 1.5 | |||||||||||
|
Other
associated costs
|
0.5 | 16.7 | (16.6 | ) | 0.6 | 18.4 | 4.4 | |||||||||||||||||
|
Total
restructuring charges
|
$ | 12.4 | 16.8 | $ | (20.6 | ) | $ | 8.6 | 30.8 | $ | 5.9 | |||||||||||||
|
Impairment
charges:
|
||||||||||||||||||||||||
|
Property,
plant and equipment
|
0.5 | 69.9 | ||||||||||||||||||||||
|
Inventory
|
- | 4.8 | ||||||||||||||||||||||
|
Total
impairment charges
|
0.5 | 74.7 | ||||||||||||||||||||||
|
Total
restructuring and impairment charges
|
$ | 17.3 | $ | 105.5 | ||||||||||||||||||||
Employee
severance and related benefits primarily include severance benefits and an
estimated obligation for the partial withdrawal from a multiemployer pension
plan. Other associated costs consist primarily of plant consolidation and
plant wind-down expenses, all of which are expensed as incurred. Of the $16.8
million and $14.0 million of restructuring charges in fiscal 2010 and fiscal
2009, respectively, $12.1 million and $8.1 million was recorded in cost of sales
with the remainder recorded in selling, general and administrative expenses in
fiscal 2010 and fiscal 2009, respectively. Substantially all of the estimated
remaining expenses are expected to be incurred by the first
half of fiscal 2011.
NOTE
6: HOG PRODUCTION COST SAVINGS INITIATIVE
In
the fourth quarter of fiscal 2010, we announced a plan to improve the cost
structure and profitability of our domestic hog production operations (the Cost
Savings Initiative). The plan includes a number of undertakings designed to
improve operating efficiencies and productivity. These consist of farm
reconfigurations and conversions, termination of certain high cost, third party
hog grower contracts and breeding stock sourcing contracts, as well as a number
of other cost reduction activities.
As
a result of Cost Savings Initiative, we recorded pre-tax charges totaling $9.1
million in the fourth quarter of fiscal 2010, including impairment and
accelerated depreciation charges of $2.5 million and $3.8 million, respectively,
as well as contract termination costs of $2.8 million. These charges were
recorded in cost of sales in the Hog Production segment. The fair value of the
impaired farms of $1.8 million was determined based on prices and other relevant
information generated by recent market transactions for similar
assets.
Certain
of the activities associated with the Cost Savings Initiative are expected to
occur over a two to three-year period in order to allow for the successful
transformation of farms while minimizing disruption of supply. We anticipate
recording additional charges over this period in the range of $30 million to $35
million primarily associated with future contract terminations. We also
anticipate capital expenditures totaling approximately $86 million will be
required in connection with the farm reconfigurations and other cost savings
activities.
NOTE
7: 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
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, and will in the future, avail ourselves of either acceptable
method. We believe all of our derivative instruments represent economic hedges
against changes in prices and rates, regardless of their designation for
accounting purposes.
We
do not offset the fair value of derivative instruments with cash
collateral held with or received from the same counterparty under a master
netting arrangement. As of May 2, 2010, prepaid expenses and other current
assets included $150.3 million representing cash on deposit with brokers to
cover losses on our open derivative instruments. Changes in commodity prices
could have a significant impact on cash deposit requirements under our
broker and counterparty agreements. We have reviewed our derivative contracts
and have determined that they do not contain credit contingent features which
would require us to post additional collateral if we did not maintain a credit
rating equivalent to what was in place at the time the contracts were entered
into.
75
We
are exposed to losses in the event of nonperformance or nonpayment by
counterparties under financial instruments. Although our counterparties
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 counterparties with whom we maintain
margin accounts that are settled on a daily basis, and therefore our credit risk
is not significant. Determination of the credit quality of our
counterparties is based upon a number of factors, including credit ratings and
our evaluation
of their financial condition. As of May 2, 1010, we had
credit exposure of $4.5 million on non-exchange traded derivative contracts,
excluding the effects of netting arrangements. As a result of netting
arrangements, our credit exposure was reduced to $3.5 million. No significant
concentrations of credit risk existed as of May 2,
2010.
The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. The following table presents the fair values of our open derivative financial instruments in the consolidated balance sheets on a gross basis. All grain contracts, livestock contracts and foreign exchange 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. Interest rate contracts are recorded in accrued expenses and other current liabilities or other liabilities, as appropriate.
|
Assets
|
Liabilities
|
|||||||||||||||
|
May
2,
2010
|
May
3,
2009
|
May
2,
2010
|
May
3,
2009
|
|||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||
|
Derivatives
using the "hedge accounting" method:
|
||||||||||||||||
|
Grain
contracts
|
$ | 11.5 | $ | 10.4 | $ | 3.4 | $ | 17.7 | ||||||||
|
Livestock
contracts
|
- | - | 40.8 | - | ||||||||||||
|
Interest
rate contracts
|
- | 0.6 | 8.1 | 10.3 | ||||||||||||
|
Foreign
exchange contracts
|
3.0 | 1.4 | - | 14.4 | ||||||||||||
|
Total
|
14.5 | 12.4 | 52.3 | 42.4 | ||||||||||||
|
Derivatives
using the "mark-to-market" method:
|
||||||||||||||||
|
Grain
contracts
|
5.5 | 10.2 | 6.5 | 16.2 | ||||||||||||
|
Livestock
contracts
|
5.8 | 21.9 | 87.6 | 6.3 | ||||||||||||
|
Energy
contracts
|
- | - | 4.0 | 13.0 | ||||||||||||
|
Foreign
exchange contracts
|
0.5 | 1.7 | 0.2 | 1.6 | ||||||||||||
|
Total
|
11.8 | 33.8 | 98.3 | 37.1 | ||||||||||||
|
Total
fair value of derivative instruments
|
$ | 26.3 | $ | 46.2 | $ | 150.6 | $ | 79.5 | ||||||||
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 the forecasted purchase of corn 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. We generally do not hedge anticipated transactions beyond twelve
months.
During
fiscal 2010, the range of notional volumes associated with open derivative
instruments designated in cash flow hedging relationships was as
follows:
|
Minimum
|
Maximum
|
Metric
|
|||||||
|
Commodities:
|
|||||||||
|
Corn
|
- | 79,035,000 |
Bushels
|
||||||
|
Soybean
meal
|
78,900 | 551,200 |
Tons
|
||||||
|
Lean
Hogs
|
- | 264,800,000 |
Pounds
|
||||||
|
Interest
rate
|
200,000,000 | 200,000,000 |
U.S.
Dollars
|
||||||
|
Foreign
currency (1)
|
32,653,181 | 114,691,273 |
U.S.
Dollars
|
||||||
|
(1)
|
Amounts represent the U.S. dollar
equivalent of various foreign currency
contracts.
|
76
The
following table presents the effects on our consolidated financial statements of
pre-tax gains and losses on derivative instruments designated in cash flow
hedging relationships for the fiscal years indicated:
|
Gain
(Loss) Recognized in OCI on Derivative (Effective Portion)
|
Gain
(Loss) Reclassified from Accumulated OCI into Earnings (Effective
Portion)
|
Gain
(Loss) Recognized in Earnings on Derivative (Ineffective
Portion)
|
||||||||||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
||||||||||||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||||||||||||||||
|
Commodity
contracts:
|
||||||||||||||||||||||||||||||||||||
|
Grain
contracts
|
$ | (4.0 | ) | $ | (201.5 | ) | $ | - | $ | (85.4 | ) | $ | (112.5 | ) | $ | (29.3 | ) | $ | (7.2 | ) | $ | (4.6 | ) | $ | - | |||||||||||
|
Lean
hog contracts
|
(22.8 | ) | - | - | 1.9 | - | - | (0.5 | ) | - | - | |||||||||||||||||||||||||
|
Interest
rate contracts
|
(4.6 | ) | (12.6 | ) | - | (6.8 | ) | (2.3 | ) | - | - | - | - | |||||||||||||||||||||||
|
Foreign
exchange contracts
|
6.1 | (37.5 | ) | (1.4 | ) | (8.0 | ) | (21.7 | ) | (2.6 | ) | - | - | - | ||||||||||||||||||||||
|
Total
|
$ | (25.3 | ) | $ | (251.6 | ) | $ | (1.4 | ) | $ | (98.3 | ) | $ | (136.5 | ) | $ | (31.9 | ) | $ | (7.7 | ) | $ | (4.6 | ) | $ | - | ||||||||||
When
cash flow hedge accounting is applied, derivative gains or losses from these
cash flow hedges 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. 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 for foreign currency
contracts.
As
of May 2, 2010, there were deferred net losses of $24.5
million, net of tax of $15.5
million, in accumulated other comprehensive loss. We expect to
reclassify $25.2 million ($15.4 million net of tax) of the deferred net losses
on closed commodity contracts into earnings in fiscal 2011.
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. We also enter into interest rate swaps
to manage interest rate risk associated with our fixed rate borrowings. When
fair value hedge accounting is applied, derivative gains and losses from these
fair value hedges 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,
interest expense for interest rate contracts and selling, general and
administrative expenses for foreign currency contracts.
During
fiscal 2010, the range of notional volumes associated with open derivative
instruments designated in fair value hedging relationships was as
follows:
|
Minimum
|
Maximum
|
Metric
|
|||||||
|
Commodities:
|
|||||||||
|
Corn
|
2,070,000 | 11,610,000 |
Bushels
|
||||||
|
Lean
Hogs
|
- | 726,160,000 |
Pounds
|
||||||
|
Interest
rate
|
- | 50,000,000 |
U.S.
Dollars
|
||||||
|
Foreign
currency (1)
|
16,051,549 | 24,836,547 |
U.S.
Dollars
|
||||||
|
(1)
|
Amounts represent the U.S. dollar
equivalent of various foreign currency
contracts.
|
77
The
following table presents the effects on our consolidated statements of income of
gains and losses on derivative instruments designated in fair value hedging
relationships and the related hedged items for the fiscal years
indicated:
|
Gain
(Loss) Recognized in Earnings on Derivative
|
Gain
(Loss) Recognized in Earnings on Related Hedged Item
|
|||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
|||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
|||||||||||||||||||||||
|
Commodity
contracts
|
$ | (36.2 | ) | $ | 12.8 | $ | 4.3 | $ | 32.4 | $ | (14.0 | ) | $ | (4.3 | ) | |||||||||
|
Interest
rate contracts
|
0.6 | 0.7 | (3.0 | ) | (0.6 | ) | (0.7 | ) | 3.0 | |||||||||||||||
|
Foreign
exchange contracts
|
3.4 | - | - | (1.5 | ) | - | - | |||||||||||||||||
|
Total
|
$ | (32.2 | ) | $ | 13.5 | $ | 1.3 | $ | 30.3 | $ | (14.7 | ) | $ | (1.3 | ) | |||||||||
Mark-to-Market
Method
Derivative
instruments that are not designated as a hedge, that 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. Derivative gains and losses are recorded in cost of sales for
commodity contracts, interest expense for interest rate contracts and
selling, general and administrative expenses for foreign currency
contracts.
During
fiscal 2010, 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
|
9,000,000 | 1,146,200,000 |
Pounds
|
||||||
|
Corn
|
3,125,000 | 63,304,300 |
Bushels
|
||||||
|
Soybean
meal
|
- | 516,421 |
Tons
|
||||||
|
Soybeans
|
10,000 | 595,000 |
Bushels
|
||||||
|
Wheat
|
- | 360,000 |
Bushels
|
||||||
|
Live
cattle
|
- | 6,000,000 |
Pounds
|
||||||
|
Pork
bellies
|
- | 1,920,000 |
Pounds
|
||||||
|
Natural
gas
|
2,145,000 | 5,040,000 |
Million
BTU
|
||||||
|
Foreign
currency (1)
|
55,909,712 | 152,889,945 |
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 statements of income on derivative instruments using the
“mark-to-market” method by type of derivative contract for the fiscal years
indicated:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Commodity
contracts
|
$ | (92.4 | ) | $ | 104.0 | $ | 236.2 | |||||
|
Interest
rate contracts
|
- | 2.3 | (7.8 | ) | ||||||||
|
Foreign
exchange contracts
|
(11.1 | ) | (3.1 | ) | (0.2 | ) | ||||||
|
Total
|
$ | (103.5 | ) | $ | 103.2 | $ | 228.2 | |||||
78
NOTE
8: INVESTMENTS
Investments
consist of the following:
|
Segment
|
% Owned
|
May
2,
2010
|
May
3,
2009
|
||||||||||
|
(in
millions)
|
|||||||||||||
|
Equity
investment:
|
|||||||||||||
|
Campofrío
Food Group (CFG)(1)
|
International
|
37 | % | $ | 417.3 | $ | 417.8 | ||||||
|
Butterball,
LLC (Butterball)
|
Other
|
49 | % | 99.8 | 78.2 | ||||||||
|
Mexican
joint ventures
|
Various
|
50 | % | 75.1 | 53.9 | ||||||||
|
All
other equity method investments
|
Various
|
Various
|
32.8 | 51.7 | |||||||||
|
Total
investments
|
$ | 625.0 | $ | 601.6 | |||||||||
|
(1)
|
Prior to the 3rd quarter of fiscal
2009, we owned 50% of Groupe Smithfield S.L. (Groupe Smithfield) and 24%
of Campofrío Alimentación, S.A. (Campofrío). Those entities
merged in the third quarter of fiscal 2009 to form CFG, of which we own
37%. Immediately prior to the merger, our investment in
Campofrío had grown to 25%. The amounts presented for CFG throughout this
Annual Report on Form 10-K represent the combined historical results of
Groupe Smithfield and Campofrío. See CFG below for further discussion
about the merger.
|
Equity
in (income) loss of affiliates consists of the following:
|
Fiscal
Years
|
|||||||||||||
|
Segment
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
|||||||||||||
|
Equity
investment:
|
|||||||||||||
|
Butterball
|
Other
|
$ | (18.8 | ) | $ | 19.5 | $ | (23.4 | ) | ||||
|
CFG(2)
|
International
|
(4.5 | ) | 5.6 | (43.0 | ) | |||||||
|
Cattleco,
LLC (Cattleco)
|
Other
|
- | 15.1 | - | |||||||||
|
Mexican
joint ventures
|
Various
|
(13.2 | ) | 9.8 | 4.8 | ||||||||
|
All
other equity method investments
|
Various
|
(2.1 | ) | 0.1 | (0.4 | ) | |||||||
|
Equity
in (income) loss of affiliates
|
$ | (38.6 | ) | $ | 50.1 | $ | (62.0 | ) | |||||
|
(2)
|
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.
|
The
combined summarized financial information for CFG and Butterball consists of the
following:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Income
statement information:
|
||||||||||||
|
Sales
|
$ | 3,686.8 | $ | 3,976.4 | $ | 4,349.8 | ||||||
|
Gross
profit
|
642.6 | 548.3 | 703.8 | |||||||||
|
Net
income (loss)
|
51.4 | (49.8 | ) | 160.6 | ||||||||
|
May
2,
2010
|
May
3,
2009
|
|||||||||||
|
(in
millions)
|
||||||||||||
|
Balance
sheet information:
|
||||||||||||
|
Current
assets
|
$ | 1,139.4 | $ | 1,211.0 | ||||||||
|
Long-term
assets
|
1,933.6 | 1,965.7 | ||||||||||
|
Current
liabilities
|
823.0 | 973.4 | ||||||||||
|
Long-term
liabilities
|
1,202.3 | 1,214.3 | ||||||||||
79
CFG
In
June 2008 (fiscal 2009), we announced an agreement to sell Groupe Smithfield to
Campofrío in exchange for shares of Campofrío common stock. In
December 2008 (fiscal 2009), the merger of Campofrío and Groupe Smithfield was
finalized. The new company, known as CFG, is listed on the Madrid and Barcelona
Stock Exchanges. The merger created the largest pan-European company
in the packaged meats sector and one of the five largest worldwide. The sale of
Groupe Smithfield resulted in a pre-tax gain of $56.0 million, recognized in the
third quarter of fiscal 2009.
As
of May 2, 2010, we held 37,811,302 shares of CFG common stock. The stock was
valued at €6.90 per share (approximately $9.13 per share) on the close of
the last day of
trading before the end of fiscal 2010. Based on the stock price and foreign
exchange rate as of May 2, 2010, the carrying value of our investment in CFG,
net of the pre-tax cumulative translation adjustment, exceeded the market
value of the underlying securities by $76.4
million. We have analyzed our investment in CFG for
impairment and have determined that the fair value of our investment exceeded
the carrying value as of May 2, 2010. We have estimated the fair value based on
the historical prices and trading volumes of the stock, the impact of the
movement in foreign currency translation, the duration of time in which the
carrying value of the investment exceeded its market value, the premium
applied for our noncontrolling interest in CFG, and our intent and ability
to hold the investment long term. Based on our assessment, no impairment was
recorded.
In
the third quarter of fiscal 2010, as part of a debt restructuring, CFG redeemed
certain of its debt instruments and as a result, we recorded $10.4 million of
charges in equity income in the third quarter of fiscal 2010.
Farasia
Corporation (Farasia)
In
November 2009 (fiscal 2010), we completed the sale of our investment in Farasia,
a 50/50 Chinese joint venture formed in 2001, for RMB 97.0 million ($14.2
million at the time of the transaction). Farasia's wholly-owned subsidiary,
Maverick Food Company Limited, focuses mainly on hot dogs and other sausages,
whole and sliced ham, bacon, Chinese-style processed meats, and frozen and
convenience food. We recorded, in selling, general and administrative expenses,
a $4.5 million pre-tax gain in the third quarter of fiscal 2010 on the sale of
our investment in Farasia.
Butterball
In
July 2008 (fiscal 2009), we increased our investment in Butterball by converting
$24.5 million of receivables due from Butterball to equity. Our joint venture
partner made a similar investment.
Cattleco
In
October 2008 (fiscal 2009), in conjunction with the sale of Smithfield Beef, we
formed a 50/50 joint venture with CGC, named Cattleco, to sell the remaining
live cattle from Five Rivers that were not sold to JBS. All of the remaining
live cattle were sold before the end of fiscal 2009 at market-based prices. See
Note 3—Acquisitions and Dispositions for further discussion.
NOTE
9: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Payroll
and related benefits
|
$ | 192.4 | $ | 160.3 | ||||
|
Derivative
instruments
|
119.7 | 15.4 | ||||||
|
Self-insurance
reserves
|
60.3 | 62.1 | ||||||
|
Accrued
interest
|
70.4 | 49.3 | ||||||
|
Other
|
275.6 | 271.2 | ||||||
|
Total
accrued expenses and other current liabilities
|
$ | 718.4 | $ | 558.3 | ||||
80
NOTE
10: DEBT
Long-term
debt consists of the following:
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
10%
senior secured notes, due July 2014, including discount of $20.6
million
|
$ | 604.4 | $ | - | ||||
|
10%
senior secured notes, due July 2014, including premium of $7.8
million
|
232.8 | - | ||||||
|
7.00%
senior unsecured notes, due August 2011, including premiums of $2.3
million and $4.1 million
|
602.3 | 604.1 | ||||||
|
7.75%
senior unsecured notes, due July 2017
|
500.0 | 500.0 | ||||||
|
4.00%
senior unsecured Convertible Notes, due June 2013, including discounts of
$65.9 million and $82.6 million
|
334.1 | 317.4 | ||||||
|
7.75%
senior unsecured notes, due May 2013
|
350.0 | 350.0 | ||||||
|
Floating
rate senior secured term loan, due August 2013
|
200.0 | - | ||||||
|
Euro
Credit Facility, terminated August 2009
|
- | 330.3 | ||||||
|
8.00%
senior unsecured notes
|
- | 206.3 | ||||||
|
7.83%
term loan
|
- | 200.0 | ||||||
|
U.S.
Credit Facility, terminated July 2009
|
- | 109.5 | ||||||
|
8.44%
senior secured note
|
- | 30.0 | ||||||
|
7.89%
senior secured notes
|
- | 5.0 | ||||||
|
Various,
interest rates from 0.00% to 9.00%, due June 2010 through March
2017
|
139.4 | 229.5 | ||||||
|
Fair-value
derivative instrument adjustment
|
- | 0.6 | ||||||
|
Total
debt
|
2,963.0 | 2,882.7 | ||||||
|
Current
portion
|
(72.2 | ) | (319.4 | ) | ||||
|
Total
long-term debt
|
$ | 2,890.8 | $ | 2,563.3 | ||||
Scheduled
maturities of long-term debt are as follows:
|
Fiscal
Year
|
(in
millions)
|
||||
|
2011
|
$ | 72.2 | |||
|
2012
|
639.9 | ||||
|
2013
|
50.0 | ||||
|
2014
|
837.7 | ||||
|
2015
|
840.6 | ||||
|
Thereafter
|
522.6 | ||||
|
Total
debt
|
$ | 2,963.0 | |||
2014
Notes
In
July 2009 (fiscal 2010), we issued $625 million aggregate principal amount of
10% senior secured notes at a price equal to 96.201% of their face value. In
August 2009 (fiscal 2010), we issued an additional $225 million aggregate
principal amount of 10% senior secured notes at a price equal to 104% of their
face value, plus accrued interest from July 2, 2009 to August 14, 2009.
Collectively, these notes, which mature in July 2014, are referred to as the
“2014 Notes.”
Interest
payments are due semi-annually on January 15 and July 15. The 2014 Notes are
guaranteed by substantially all of our U.S. subsidiaries. The 2014 Notes are
secured by first-priority liens, subject to permitted liens and exceptions for
excluded assets, in substantially all of the guarantors’ real property, fixtures
and equipment (collectively, the Non-ABL Collateral) and are secured by
second-priority liens on cash and cash equivalents, deposit accounts, accounts
receivable, inventory, other personal property relating to such inventory and
accounts receivable and all proceeds therefrom, intellectual property, and
certain capital stock and interests, which secure the ABL Credit Facility (as
defined below) on a first-priority basis (collectively, the ABL
Collateral).
81
The 2014 Notes will rank
equally in right of payment to all of our existing and future senior debt and
senior in right of payment to all of our existing and future subordinated debt.
The guarantees will rank equally in right of payment with all of the guarantors’
existing and future senior debt and senior in right of payment to all of the
guarantors’ existing and future subordinated debt. In addition, the 2014 Notes
are structurally subordinated to the liabilities of our non-guarantor
subsidiaries.
We
incurred offering expenses of approximately $22.9 million, which are being
amortized, along with the discount and premium, into interest expense over the
five-year life of the 2014 Notes. We used the net proceeds from the
issuance of the 2014 Notes, together with other available cash, to repay
borrowings and terminate commitments under our then existing $1.3 billion
secured revolving credit agreement (the U.S. Credit Facility), to repay the
outstanding balance under our then existing €300 million European secured
revolving credit facility (the Euro Credit Facility), to repay and/or refinance
other indebtedness and for other general corporate purposes. In the first
quarter of fiscal 2010, we recognized a $7.4 million charge related to the
write-off of amendment fees and costs associated with the U.S. Credit Facility
as a loss on debt extinguishment. In the second quarter of fiscal 2010, in
connection with the cancellation of the Euro Credit Facility, we recorded $3.0
million of charges primarily related to the write-off of unamortized costs
associated with the facility as a loss on debt
extinguishment.
Credit
Facilities
In
July 2009 (fiscal 2010), we entered into a new asset-based revolving credit
agreement totaling $1.0 billion that supports short-term funding needs and
letters of credit (the ABL Credit Facility), which, along with the 2014 Notes,
replaced the U.S. Credit Facility, which was scheduled to expire in August
2010 (fiscal 2011). Loans made under the ABL Credit Facility will mature and the
commitments thereunder will terminate in July 2012. However, the ABL
Credit Facility will be subject to an earlier maturity if we fail to satisfy
certain conditions related to the refinancing or repayment of our senior notes
due 2011. The ABL Credit Facility provides for an option, subject to
certain conditions, to increase total commitments to $1.3 billion in the
future.
The
ABL Credit Facility requires an unused commitment fee of 1% per annum on
the undrawn portion of the facility (subject to a stepdown in the event more
than 50% of the commitments under the facility are utilized).
Obligations
under the ABL Credit Facility are guaranteed by substantially all of our U.S.
subsidiaries and are secured by a first-priority lien on the ABL Collateral. Our
obligations under the ABL Credit Facility are also secured by a second-priority
lien on the Non-ABL Collateral, which secures the 2014 Notes and our obligations
under the Rabobank Term Loan (as defined below) on a first-priority
basis.
Availability
under the ABL Credit Facility is based on a percentage of certain eligible
accounts receivable and eligible inventory and is reduced by certain reserves.
After reducing the amount available by outstanding letters of credit issued
under the ABL Credit Facility of $217.9 million and a borrowing base adjustment
of $74.9 million, the amount available for borrowing, as of May 2, 2010, was
$707.2 million, of which, we had no outstanding borrowings.
We
incurred approximately $41.7 million in transaction fees which will be amortized
into interest expense over the three-year life of the ABL Credit
Facility.
As
of May 2, 2010, we had aggregate credit facilities and credit lines totaling
$1,101.3 million. Our unused capacity under these credit facilities and credit
lines was $763.2 million. These facilities and lines are generally at prevailing
market rates. We pay commitment fees on the unused portion of the
facilities.
Average
borrowings under credit facilities and credit lines were $163.7 million, $936.4
million and $1,320.2 million at average interest rates of 4.9%, 4.5% and 5.3%
during fiscal 2010, 2009 and 2008, respectively. Maximum borrowings were $609.3
million, $1,490.9 million and $1,722.4 million in fiscal 2010, 2009 and 2008,
respectively. Total outstanding borrowings were $45.3 million as of May 2, 2010
and $487.0 million as of May 3, 2009 with average interest rates of 5.3% and
4.8%, respectively.
Rabobank
Term Loan
In
July 2009 (fiscal 2010), we entered into a new $200 million term loan due August
29, 2013 (the Rabobank Term Loan), which replaced our then existing $200 million
term loan that was scheduled to mature in August 2011. We are obligated to repay
$25 million of the borrowings under the Rabobank Term Loan on each of
August 29, 2011 and August 29, 2012. We may elect to prepay the loan
at any time, subject to the payment of certain prepayment fees in respect of any
voluntary prepayment prior to August 29, 2011 and other customary breakage
costs. Outstanding borrowings under this loan will accrue interest at variable
rates. Our obligations under the Rabobank Term Loan are guaranteed by
substantially all of our U.S. subsidiaries on a senior secured basis. The
Rabobank Term Loan is secured by first-priority liens on the Non-ABL Collateral
and is secured by second-priority liens on the ABL Collateral, which secures our
obligations under the ABL Credit Facility on a first-priority
basis. Transaction fees for the Rabobank Term Loan were
immaterial.
82
Convertible
Notes
In
July 2008 (fiscal 2009), we issued $400.0 million aggregate principal
amount of 4% convertible senior notes due June 30, 2013 (the Convertible
Notes) in a registered offering. The Convertible Notes are senior unsecured
obligations. The Convertible Notes are payable with cash and, at certain times,
are convertible into shares of our common stock based on an initial conversion
rate, subject to adjustment, of 44.082 shares per $1,000 principal amount of
Convertible Notes (which represents an initial conversion price of approximately
$22.68 per share). Upon conversion, a holder will receive cash up to the
principal amount of the Convertible Notes and shares of our common stock for the
remainder, if any, of the conversion obligation.
Prior
to April 1, 2013, holders may convert their notes into cash and shares of
our common stock, if any, at the applicable conversion rate under the following
circumstances:
|
|
§
|
during
any fiscal quarter if the last reported sale price of our common stock is
greater than or equal to 120% of the applicable conversion price for at
least 20 trading days during the period of 30 consecutive trading days
ending on the last trading day of the preceding fiscal
quarter;
|
|
|
§
|
during
the five business-day period after any ten consecutive trading-day period
in which the trading price per $1,000 principal amount of notes was less
than 98% of the last reported sale price of our common stock multiplied by
the applicable conversion rate; or
|
|
|
§
|
upon
the occurrence of specified corporate
transactions.
|
On
or after April 1, 2013, holders may convert their Convertible Notes at any
time prior to the close of business on the third scheduled trading day
immediately preceding the maturity date, regardless of the foregoing
circumstances.
The
Convertible Notes were originally accounted for as a combined debt instrument as
the conversion feature did not meet the requirements to be accounted for
separately as a derivative financial instrument. In May 2008, the FASB issued
new accounting guidance specifying that issuers of convertible debt instruments
that may be settled in cash upon conversion (including partial cash settlement)
should separately account for the liability and equity components in a manner
that will reflect the entity’s nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. The amount allocated to the equity
component represents a discount to the debt recorded. This discount represents
the amount of additional interest expense to be recognized using the effective
interest method over the life of the debt, to accrete the debt to the principal
amount due at maturity. We adopted the new accounting guidance beginning in the
first quarter of fiscal 2010 (beginning May 4, 2009).
In
connection with the issuance of the Convertible Notes, we entered into separate
convertible note hedge transactions with respect to our common stock to reduce
potential economic dilution upon conversion of the Convertible Notes, and
separate warrant transactions (collectively referred to as the Call Spread
Transactions). We purchased call options that permit us to acquire up to
approximately 17.6 million shares of our common stock, subject to
adjustment, which is the number of shares initially issuable upon conversion of
the Convertible Notes. In addition, we sold warrants permitting the purchasers
to acquire up to approximately 17.6 million shares of our common stock,
subject to adjustment. See Note 15—Equity for more information on the Call
Spread Transactions.
We
incurred fees and expenses associated with the issuance of the Convertible Notes
totaling $11.4 million, substantially all of which were capitalized and are
being amortized to interest expense over the life of the Convertible
Notes.
On
the date of issuance of the Convertible Notes, our nonconvertible debt borrowing
rate was determined to be 10.2%. Based on that rate of interest, the liability
component and equity component of the Convertible Notes were determined to be
$304.2 million and $95.8 million, respectively.
The
following table presents the effects of the retrospective application of the new
accounting guidance on our consolidated condensed balance sheet as of May 3,
2009:
|
As
Originally Presented May 3, 2009
|
Adjustments
|
As
Adjusted May 3, 2009
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Other
assets
|
$ | 161.2 | $ | (2.3 | ) | $ | 158.9 | |||||
|
Total
assets
|
7,202.5 | (2.3 | ) | 7,200.2 | ||||||||
|
Long-term
debt and capital lease obligations
|
2,649.9 | (82.6 | ) | 2,567.3 | ||||||||
|
Other
liabilities (original presentation included pension obligations of $340.5
million)
|
345.7 | 29.3 | 375.0 | |||||||||
|
Additional
paid-in capital
|
1,294.7 | 59.1 | 1,353.8 | |||||||||
|
Retained
earnings
|
1,648.2 | (8.1 | ) | 1,640.1 | ||||||||
|
Total
shareholders’ equity
|
2,561.4 | 51.0 | 2,612.4 | |||||||||
|
Total
liabilities and equity
|
7,202.5 | (2.3 | ) | 7,200.2 | ||||||||
83
The
following table presents the effects of the retrospective application of the new
accounting guidance on our consolidated income statement for fiscal
2009:
|
As
Originally Presented Fiscal 2009
|
Adjustments
|
As
Adjusted Fiscal 2009
|
||||||||||
|
(in
millions, except per share data)
|
||||||||||||
|
Interest
expense
|
$ | 209.1 | $ | 12.7 | $ | 221.8 | ||||||
|
Loss
from continuing operations before income taxes
|
(369.5 | ) | (12.7 | ) | (382.2 | ) | ||||||
|
Income
tax benefit
|
(126.7 | ) | (4.6 | ) | (131.3 | ) | ||||||
|
Loss
from continuing operations
|
(242.8 | ) | (8.1 | ) | (250.9 | ) | ||||||
|
Net
loss
|
(190.3 | ) | (8.1 | ) | (198.4 | ) | ||||||
|
Loss
per basic and diluted share:
|
||||||||||||
|
Continuing
operations
|
$ | (1.72 | ) | $ | (.06 | ) | $ | (1.78 | ) | |||
|
Net
loss
|
(1.35 | ) | (.06 | ) | (1.41 | ) | ||||||
The
adoption of the new accounting guidance impacted our results for fiscal 2010 as
follows:
|
Fiscal
2010
|
||||
|
(in
millions, except per share data)
|
||||
|
Interest
expense
|
$ | 16.7 | ||
|
Loss
from continuing operations before income taxes
|
(16.7 | ) | ||
|
Income
tax benefit
|
(6.1 | ) | ||
|
Loss
from continuing operations
|
(10.6 | ) | ||
|
Net
loss
|
(10.6 | ) | ||
|
Loss
per basic and diluted share:
|
||||
|
Continuing
operations
|
$ | (.07 | ) | |
|
Net
loss
|
(.07 | ) | ||
Debt
Covenants
Our
various debt agreements contain covenants that limit additional borrowings,
acquisitions, dispositions, leasing of assets and payments of dividends to
shareholders, among other restrictions.
Our
senior unsecured and secured notes limit our ability to incur additional
indebtedness, subject to certain exceptions, when our interest coverage ratio
is, or after incurring additional indebtedness would be, less than 2.0 to 1.0
(the Incurrence Test). As of May 2, 2010, we did not meet the
Incurrence Test. Due to the trailing twelve month nature of the
Incurrence Test, we do not expect to meet the Incurrence Test again until the
second quarter of fiscal 2011 at the earliest. The Incurrence Test is
not a maintenance covenant and our failure to meet the Incurrence Test is not a
default. In addition to limiting our ability to incur additional indebtedness,
our failure to meet the Incurrence Test restricts us from engaging in certain
other activities, including paying cash dividends, repurchasing our common stock
and making certain investments. However, our failure to meet the Incurrence Test
does not preclude us from borrowing on the ABL Credit Facility or from
refinancing existing indebtedness. Therefore we do not expect the limitations
resulting from our inability to satisfy the Incurrence Test to have a material
adverse effect on our business or liquidity.
Our
ABL Credit Facility contains a covenant requiring us to maintain a fixed charges
coverage ratio of at least 1.1 to 1.0 when the amounts available for borrowing
under the ABL Credit Facility are less than the greater of $120 million or 15%
of the total commitments under the facility (currently $1.0 billion). We
currently are not subject to this restriction and we do not anticipate that our
borrowing availability will decline below those thresholds during fiscal 2010,
although there can be no assurance that this will not occur because our
borrowing availability depends upon our borrowing base calculated for purposes
of that facility.
During
the first quarter of fiscal 2010, we determined that we previously and
unintentionally breached a non-financial covenant under our senior unsecured
notes relating to certain foreign subsidiaries' indebtedness. We promptly cured
this minor breach by amending certain debt agreements of the subsidiaries and
extinguishing other indebtedness of the subsidiaries, and, as a result, no event
of default occurred under our senior unsecured notes or any other
facilities.
84
Debt Repurchases
During
the third quarter of fiscal 2009, we redeemed a total of $93.7 million of our 8%
senior unsecured notes due in October 2009 for $86.2 million and recorded a gain
of $7.5 million in other income.
NOTE
11: LEASE OBLIGATIONS, COMMITMENTS AND GUARANTEES
We
lease facilities and equipment under non-cancelable operating leases. The terms
of each lease agreement vary and may contain renewal or purchase options. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the lease. Rental expense under operating leases of
real estate, machinery, vehicles and other equipment was $49.3 million, $50.3
million and $69.8 million in fiscal 2010, 2009 and 2008,
respectively.
Future
rental commitments under non-cancelable operating leases as of May 2, 2010 are
as follows:
|
Fiscal
Year
|
(in
millions)
|
||||
|
2011
|
$ | 45.0 | |||
|
2012
|
35.2 | ||||
|
2013
|
28.6 | ||||
|
2014
|
21.6 | ||||
|
2015
|
17.8 | ||||
|
Thereafter
|
49.6 | ||||
|
Total
|
$ | 197.8 | |||
As
of May 2, 2010, future minimum lease payments under capital leases were
approximately $29.9
million. The present value of the future minimum lease payments
was $28.2
million. The long-term portion of capital lease obligations was
$27.6 million and the current portion was $0.6 million.
We
have agreements, expiring through fiscal 2013, to use cold storage warehouses
owned by partnerships, of which we are 50% partners. We have agreed to pay
prevailing competitive rates for use of the facilities, subject to aggregate
guaranteed minimum annual fees. In fiscal 2010, 2009 and 2008, we paid $19.7
million, $18.7 million and $14.2 million, respectively, in fees for use of the
facilities. We had investments in the partnerships of $2.2 million as of May 2,
2010, and $2.9 million as of May 3, 2009, respectively.
We
have purchase commitments with certain livestock producers that obligate us to
purchase all the livestock that these producers deliver. Other arrangements
obligate us to purchase a fixed amount of livestock. We also use independent
farmers and their facilities to raise hogs produced from our breeding stock in
exchange for a performance-based service fee payable upon delivery. We estimate
the future obligations under these commitments based on commodity livestock
futures prices, expected quantities delivered and anticipated performance. Our
estimated future obligations under these commitments are as
follows:
|
Fiscal
Year
|
(in
millions)
|
||||
|
2011
|
$ | 1,359.4 | |||
|
2012
|
822.8 | ||||
|
2013
|
712.2 | ||||
|
2014
|
596.2 | ||||
|
2015
|
585.3 | ||||
As
of May 2, 2010, we were also committed to purchase approximately $198.6
million under forward grain contracts payable in fiscal
2011.
85
As
of May 2, 2010, we had total estimated remaining capital expenditures of $42
million on approved projects. These projects are expected to be
funded over the next several years with cash flows from operations and
borrowings under credit facilities. Total capital expenditures are expected to
remain below depreciation in fiscal 2011.
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 balance
sheets as of May 2, 2010. 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.
We
(together with our joint venture partners) guarantee financial obligations of
certain unconsolidated joint ventures. The financial obligations are: up to
$80.3 million of debt borrowed by Agroindustrial del Noroeste (Norson), of which
$68.3 million was outstanding as of May 2, 2010, and up to $3.5 million of
liabilities with respect to currency swaps executed by another of our
unconsolidated Mexican joint ventures, Granjas Carroll de Mexico (Granjas). The
covenants in the guarantee relating to Norson’s debt incorporate our covenants
under the ABL Credit Facility. In addition, we continue to guarantee $13.5
million of leases that were transferred to JBS in connection with the sale of
Smithfield Beef. Some of these lease guarantees will be released in the near
future and others will remain in place until the leases expires in February
2022.
NOTE 12:
INCOME TAXES
Income
tax consists of the following:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Current
income tax (benefit) expense:
|
||||||||||||
|
Federal
|
$ | (150.2 | ) | $ | (45.1 | ) | $ | (21.0 | ) | |||
|
State
|
2.5 | 2.0 | 2.5 | |||||||||
|
Foreign
|
(0.8 | ) | 10.4 | 4.9 | ||||||||
| (148.5 | ) | (32.7 | ) | (13.6 | ) | |||||||
|
Deferred
income tax (benefit) expense:
|
||||||||||||
|
Federal
|
55.0 | (78.1 | ) | 85.9 | ||||||||
|
State
|
(23.1 | ) | (17.0 | ) | (0.1 | ) | ||||||
|
Foreign
|
3.4 | (3.5 | ) | 0.6 | ||||||||
| 35.3 | (98.6 | ) | 86.4 | |||||||||
|
Total
income tax (benefit) expense
|
$ | (113.2 | ) | $ | (131.3 | ) | $ | 72.8 | ||||
A
reconciliation of taxes computed at the federal statutory rate to the provision
for income taxes is as follows:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Federal
income taxes at statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal tax benefit
|
6.5 | 4.5 | (0.1 | ) | ||||||||
|
Foreign
income taxes
|
9.6 | 8.7 | (0.2 | ) | ||||||||
|
Groupe
Smithfield / Campofrío merger
|
- | (7.2 | ) | - | ||||||||
|
Net
change in valuation allowance
|
(0.4 | ) | (4.9 | ) | 8.7 | |||||||
|
Tax
credits
|
2.3 | 2.5 | (6.4 | ) | ||||||||
|
Other
|
(0.3 | ) | (4.2 | ) | (2.7 | ) | ||||||
|
Effective
tax rate
|
52.7 | % | 34.4 | % | 34.3 | % | ||||||
We had
income tax receivables of $103.6 million and $27.6 million as of May 2, 2010 and
May 3, 2009, respectively.
86
The tax
effects of temporary differences consist of the following:
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Pension
liabilities
|
$ | 175.3 | $ | 111.6 | ||||
|
Tax
credits, carryforwards and net operating losses
|
141.2 | 134.2 | ||||||
|
Accrued
expenses
|
48.3 | 63.8 | ||||||
|
Derivatives
|
52.8 | 63.4 | ||||||
|
Other
|
45.3 | 45.2 | ||||||
|
Employee
benefits
|
11.1 | 8.6 | ||||||
| 474.0 | 426.8 | |||||||
|
Valuation
allowance
|
(91.5 | ) | (98.7 | ) | ||||
|
Total
deferred tax assets
|
$ | 382.5 | $ | 328.1 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Property,
plant and equipment
|
$ | 267.5 | $ | 255.2 | ||||
|
Intangible
assets
|
98.2 | 104.4 | ||||||
|
Investments
in subsidiaries
|
59.6 | 31.1 | ||||||
|
Total
deferred tax liabilities
|
$ | 425.3 | $ | 390.7 | ||||
The
following table presents the classification of deferred taxes in our balance
sheets as of May 2, 2010 and May 3, 2009:
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Other
current assets
|
$ | 96.5 | $ | 109.4 | ||||
|
Other
assets
|
5.2 | 8.8 | ||||||
|
Accrued
expenses and other current liabilities
|
- | - | ||||||
|
Other
liabilities
|
144.4 | 180.8 | ||||||
Management
makes an assessment to determine if its deferred tax assets are more likely than
not to be realized. Valuation allowances are established in the event
that management believes the related tax benefits will not be realized. Our
valuation allowance related to income tax assets was $91.5 million as of May 2,
2010 and $98.7 million as of May 3, 2009. The valuation allowance primarily
relates to state credits, state net operating loss carryforwards,
foreign tax credit carryforwards and losses in foreign jurisdictions for which
no tax benefit was recognized. During fiscal year 2010, the valuation allowance
decreased by $7.2 million resulting primarily from currency translation and
deferred tax adjustments with an immaterial amount impacting the effective
tax rate.
The
tax credits, carry forwards and net operating losses expire from fiscal 2011 to
2030.
As
a result of the merger of Groupe Smithfield with and into Campofrío during
fiscal 2009, we were required to provide additional deferred taxes on the
earnings of Groupe Smithfield that were previously deferred because they were
considered permanently reinvested, as well as on inherent gains related to the
pre-merger holdings of Groupe Smithfield and Campofrío. There
were foreign subsidiary net earnings that were considered permanently
reinvested of $19.5 million and $3.9 million as of May 2, 2010 and May 3, 2009,
respectively. It is not reasonably determinable as to the amount of deferred tax
liability that would need to be provided if such earnings were not
reinvested.
87
A
reconciliation of the beginning and ending liability for unrecognized tax
benefits is as follows:
|
(in millions)
|
||||
|
Balance
as of April 27, 2008
|
$ | 40.9 | ||
|
Additions
for tax positions taken in the current year
|
5.7 | |||
|
Additions
for tax positions taken in prior years
|
0.7 | |||
|
Additions
for tax positions assumed in business combinations
|
(2.3 | ) | ||
|
Settlements
with taxing authorities
|
(2.5 | ) | ||
|
Lapse
of statute of limitations
|
(2.0 | ) | ||
|
Balance
as of May 3, 2009
|
40.5 | |||
|
Additions
for tax positions taken in the current year
|
3.3 | |||
|
Additions
for tax positions taken in prior years
|
4.0 | |||
|
Reductions
for tax positions taken in prior years
|
(2.1 | ) | ||
|
Settlements
with taxing authorities
|
(1.6 | ) | ||
|
Lapse
of statute of limitations
|
(0.9 | ) | ||
|
Balance
as of May 2, 2010
|
$ | 43.2 | ||
We
operate in multiple taxing jurisdictions, both within the U.S. and outside of
the U.S., and are subject to examination from various tax authorities. The
liability for unrecognized tax benefits included $10.5 million and $9.6 million
of accrued interest as of May 2, 2010 and May 3, 2009, respectively.
We recognized $0.4 and $0.5 million of net interest expense in income tax
expense (benefit) during fiscal 2010 and 2009, respectively. The liability for
unrecognized tax benefits included $32.9 million as of May 2, 2010 and $31.8
million as of May 3, 2009, that if recognized, would impact the effective tax
rate.
We are
currently being audited in several tax jurisdictions and remain subject to
examination until the statute of limitations expires for the respective tax
jurisdiction. Within specific countries, we may be subject to audit by various
tax authorities, or subsidiaries operating within the country may be subject to
different statute of limitations expiration dates. We have concluded all U.S.
federal income tax matters through fiscal 2005. We are currently under U.S.
federal examination for the 2006 through 2010 tax years.
Based upon the expiration of statutes of limitations and/or the
conclusion of tax examinations in several jurisdictions as of May 2, 2010, we
believe it is reasonably possible that the total amount of previously
unrecognized tax benefits may decrease by up to $20.3 million within twelve
months of May 2, 2010.
NOTE
13: PENSION AND OTHER RETIREMENT PLANS
We
provide the majority of our U.S. employees with pension benefits. Salaried
employees are provided benefits based on years of service and average salary
levels. Hourly employees are provided benefits of stated amounts for each year
of service.
88
The
following table presents a reconciliation of the pension benefit obligation,
plan assets and the funded status of these pension plans.
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 926.4 | $ | 1,025.9 | ||||
|
Service
cost
|
22.6 | 25.5 | ||||||
|
Interest
cost
|
73.7 | 68.6 | ||||||
|
Plan
amendment
|
- | - | ||||||
|
Benefits
paid
|
(64.2 | ) | (62.9 | ) | ||||
|
Acquisitions
|
- | - | ||||||
|
Actuarial
loss (gain)
|
325.4 | (130.7 | ) | |||||
|
Benefit
obligation at end of year
|
1,283.9 | 926.4 | ||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
586.2 | 847.3 | ||||||
|
Actual
return on plan assets
|
192.6 | (252.0 | ) | |||||
|
Employer
contributions
|
74.1 | 53.8 | ||||||
|
Benefits
paid
|
(64.2 | ) | (62.9 | ) | ||||
|
Fair
value of plan assets at end of year
|
788.7 | 586.2 | ||||||
|
Funded
status
|
$ | (495.2 | ) | $ | (340.2 | ) | ||
|
Amounts
recognized in the consolidated balance sheet:
|
||||||||
|
Accrued
benefit liability
|
$ | (482.5 | ) | $ | (329.6 | ) | ||
|
Noncurrent
pension asset
|
- | 1.2 | ||||||
|
Current
pension liability
|
(12.7 | ) | (11.8 | ) | ||||
|
Net
amount recognized at end of year
|
$ | (495.2 | ) | $ | (340.2 | ) | ||
The
accumulated benefit obligation for all defined benefit pension plans was
$1.2 billion and $0.9 billion as of May 2, 2010 and May 3, 2009,
respectively. In fiscal 2010, we merged certain of our pension plans together
and, as a result, the accumulated benefit obligation for all of
our defined benefit pension plans exceeded the fair value of plan assets
for both periods presented.
The
following table shows the pre-tax unrecognized items included as components of
accumulated other comprehensive income (loss) related to our defined benefit
pension plans for the periods indicated.
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Unrecognized
actuarial loss
|
$ | (460.5 | ) | $ | (298.7 | ) | ||
|
Unrecognized
prior service credit
|
7.6 | 7.6 | ||||||
We
expect to recognize $34.0
million of the actuarial loss and prior service cost as net periodic
pension cost in fiscal 2011.
89
The
following table presents the components of the net periodic pension costs for
the periods indicated:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Service
cost
|
$ | 22.6 | $ | 25.5 | $ | 28.9 | ||||||
|
Interest
cost
|
73.7 | 68.6 | 64.1 | |||||||||
|
Expected
return on plan assets
|
(49.3 | ) | (69.7 | ) | (70.6 | ) | ||||||
|
Net
amortization
|
20.3 | 6.4 | 8.1 | |||||||||
|
Net
periodic pension cost
|
$ | 67.3 | $ | 30.8 | $ | 30.5 | ||||||
The
following table shows our weighted-average assumptions for the periods
indicated.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Discount
rate to determine net periodic benefit cost
|
8.25 | % | 6.90 | % | 6.25 | % | ||||||
|
Discount
rate to determine benefit obligation
|
6.00 | 8.25 | 6.90 | |||||||||
|
Expected
long-term rate of return on plan assets
|
8.25 | 8.25 | 8.25 | |||||||||
|
Rate
of compensation increase
|
4.00 | 4.00 | 4.00 | |||||||||
We
use an independent third-party actuary to assist in the determination of
assumptions used and the measurement of our pension obligation and related
costs. We review and select the discount rate to be used in connection with our
pension obligation annually. In determining the discount rate, we use the yield
on corporate bonds (rated AA or better) that coincides with the cash flows of
the plans’ estimated benefit payouts. The model uses a yield curve approach to
discount each cash flow of the liability stream at an interest rate specifically
applicable to the timing of each respective cash flow. Using imputed interest
rates, the model sums the present value of each cash flow stream to calculate an
equivalent weighted average discount rate. We use this resulting weighted
average discount rate to determine our final discount
rate.
To
determine the expected long-term return on plan assets, we consider the current
and anticipated asset allocations, as well as historical and estimated returns
on various categories of plan assets. Long-term trends are evaluated
relative to market factors such as inflation, interest rates and fiscal and
monetary polices in order to assess the capital market assumptions. Over the
5-year period ended May 2, 2010 and May 3, 2009, the average rate of return on
plan assets was approximately 2.87%
and (1.24)% percent, respectively. The increase
in the 5-year average rate of return on pension assets was due to an upward turn
in the global economy as credit markets began recovering from
the turmoil experienced in fiscal 2009. Actual results that
differ from our assumptions are accumulated and amortized over future periods
and, therefore, affect expense and obligation in future periods.
Pension
plan assets may be invested in cash and cash equivalents, equities, debt
securities, insurance contracts and real estate. Our investment policy for the
pension plans is to balance risk and return through a diversified portfolio of
high-quality equity and fixed income securities. Equity targets for the pension
plans are as indicated in the following table. Maturity for fixed income
securities is managed such that sufficient liquidity exists to meet near-term
benefit payment obligations. The plans retain outside investment advisors to
manage plan investments within parameters established by our plan
trustees.
The
following table presents the fair value of our pension plan assets by major
asset category as of May 2, 2010 and May 3, 2009. The allocation of our pension
plan assets is based on the target range presented in the following
table.
|
May
2,
2010
|
May
3,
2009
|
Target
Range
|
||||||||||
|
Asset
category:
|
(in
millions)
|
|||||||||||
|
Cash
and cash equivalents, net of payables for unsettled
transactions
|
$ | 86.2 | $ | 28.2 | 0-4 | % | ||||||
|
Equity
securities
|
421.9 | 325.3 | 45-65 | |||||||||
|
Debt
securities
|
249.6 | 206.8 | 18-38 | |||||||||
|
Alternative
assets
|
31.0 | 25.9 | 2-10 | |||||||||
|
Total
|
$ | 788.7 | $ | 586.2 | ||||||||
See Note
16—Fair Value Measurements for additional information about the fair value of
our pension assets.
90
As
of May 2, 2010 and May 3, 2009, the amount of our common stock included in plan
assets was 3,850,837
shares for both years with market values of $72.2
million and $33.2 million, respectively.
Our
funding policy for our qualified pension plans is to contribute the minimum
amount required under government regulations, plus amounts necessary to maintain
an 80% funded status in order to avoid benefit restrictions under the Pension
Protection Act. Minimum employer contributions to our qualified pension plans
along with contributions to our non-qualified pension plans are expected to
be $90.4
million for fiscal 2011.
Expected
future benefit payments are as follows:
|
Fiscal
Year
|
(in
millions)
|
||||
|
2011
|
$ | 69.6 | |||
|
2012
|
62.0 | ||||
|
2013
|
64.9 | ||||
|
2014
|
68.0 | ||||
|
2015
|
70.8 | ||||
| 2016-2020 | 414.8 | ||||
We
sponsor defined contribution pension plans (401(k) plans) covering
substantially all U.S. employees. Our contributions vary depending on the
plan but are based primarily on each participant’s level of contribution and
cannot exceed the maximum allowable for tax purposes. Total contributions were
$13.9
million, $13.7 million and $11.6 million for fiscal 2010, 2009 and
2008, respectively.
We
also provide health care and life insurance benefits for certain retired
employees. These plans are unfunded and generally pay covered costs reduced by
retiree premium contributions, co-payments and deductibles. We retain the right
to modify or eliminate these benefits. We consider disclosures related to these
plans immaterial to the consolidated financial statements and related
notes.
NOTE
14: REDEMPTION OF NONCONTROLLING INTERESTS
Prior
to fiscal 2010, we held a 51% ownership interest in Premium Pet Health, LLC
(PPH), a leading protein by-product processor that supplies many of the leading
pet food processors in the United States. The partnership agreement afforded the
noncontrolling interest holders an option to require us to redeem their
ownership interests beginning in November 2009 (fiscal 2010). The redemption
value was determinable from a specified formula based on the earnings of
PPH.
In
fiscal 2010, as a result of discussions with the noncontrolling
interest holders, we determined that the noncontrolling interests were
probable of becoming redeemable. As such, in fiscal 2010, we recorded an
adjustment to increase the carrying amount of the redeemable noncontrolling
interests by $32.2 million with an offsetting decrease of $19.4 million
to additional paid-in capital and $12.8 million to deferred tax
assets.
In
November 2009 (fiscal 2010), the noncontrolling interest holders exercised their
put option. In December 2009 (fiscal 2010), we acquired the remaining 49%
interest in PPH for $38.9 million. Because PPH was previously consolidated into
our financial statements, the acquisition of the remaining 49% interest in PPH
was accounted for as an equity transaction.
NOTE
15: EQUITY
Increase
of Authorized Shares of Common Stock
On
August 26, 2009, our shareholders approved an amendment to our Articles of
Incorporation to increase the number of authorized shares of our common stock
from 200 million to 500 million.
Common
Stock Offering
In
September 2009 (fiscal 2010), we issued 21,660,649 shares of common stock in a
registered public offering at $13.85 per share. In October 2009 (fiscal 2010),
we issued an additional 598,141 shares of common stock at $13.85 per share to
cover over-allotments from the offering. The net proceeds of $294.8 million from
the offering were used to repay our $206.3 million senior unsecured notes, which
matured in October 2009 (fiscal 2010), and for working capital and other general
corporate purposes.
91
Share
Repurchase Program
As
of May 2, 2010, the board of directors had authorized the repurchase of up to
20,000,000 shares of our common stock. As of May 2, 2010, we had 2,873,430
additional shares remaining under the authorization.
Preferred
Stock
We
have 1,000,000 shares of $1.00 par value preferred stock authorized, none of
which are issued. The board of directors is authorized to issue preferred stock
in series and to fix, by resolution, the designation, dividend rate, redemption
provisions, liquidation rights, sinking fund provisions, conversion rights and
voting rights of each series of preferred stock.
Stock
Options
During
fiscal 2009, we adopted the 2008 Incentive Compensation Plan (the Incentive
Plan), which replaced the 1998 Stock Incentive Plan and provides for the
issuance of non-statutory stock options and other awards to employees,
non-employee directors and consultants. Under the Incentive Plan, we grant
options for periods not exceeding 10 years, which either cliff vest five years
after the date of grant or vest ratably over a three-year period with an
exercise price of not less than 100% of the fair market value of the common
stock on the date of grant. There are 12,442,897 shares reserved under the
Incentive Plan. As of May 2, 2010, there were 10,977,378 shares available
for grant under this plan.
Compensation
expense for stock options was $3.5 million, $2.3 million and $2.0 million for
fiscal 2010, 2009 and 2008, respectively. The related income tax benefit
recognized was $1.4 million, $0.9 million and $0.8 million, for fiscal
2010, 2009 and 2008, respectively. There was no compensation expense capitalized
as part of inventory or fixed assets during fiscal 2010, 2009 or
2008.
The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The expected annual volatility is based on
the historical volatility of our stock and other factors. We use historical data
to estimate option exercises and employee termination within the pricing model.
The expected term of options granted represents the period of time that options
are expected to be outstanding. The following table summarizes the assumptions
made in determining the fair value of stock options granted in the fiscal years
indicated:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Expected
annual volatility
|
52 | % | 25 | % | 27 | % | ||||||
|
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Risk
free interest rate
|
1.92 | % | 3.96 | % | 4.80 | % | ||||||
|
Expected
option life (years)
|
4 | 8 | 8 | |||||||||
The
options granted in fiscal 2010 were valued in separate tranches according to the
expected life of each tranche. The above table reflects the weighted average
risk free interest rate and expected option life of each tranche. The expected
annual volatility and dividend yield were the same for all options granted in
fiscal 2010.
The
following table summarizes stock option activity under the Incentive Plan as of
May 2, 2010, and changes during the year then ended:
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Aggregate
Intrinsic Value (in millions)
|
|||||||||||||
|
Outstanding
as of May 3, 2009
|
1,668,703 | 25.38 | ||||||||||||||
|
Granted
|
494,833 | 13.52 | ||||||||||||||
|
Exercised
|
(160,100 | ) | 13.22 | |||||||||||||
|
Forfeited
|
(8,000 | ) | 32.20 | |||||||||||||
|
Outstanding
as of May 2, 2010
|
1,995,436 | 23.39 | 5.3 | $ | 2.8 | |||||||||||
|
Exercisable
as of May 2, 2010
|
722,603 | 23.04 | 3.0 | $ | 0.2 | |||||||||||
92
The
weighted average grant-date fair value of options granted during fiscal years
2010, 2009 and 2008 was $5.62, $9.43 and $14.21, respectively. The total
intrinsic value of options exercised during fiscal years 2010, 2009 and 2008 was
$1.0 million, $0.1 million and $3.3 million, respectively.
As
of May 2, 2010, there was $4.4 million of total unrecognized compensation cost
related to nonvested stock options granted under the Incentive Plan. That cost
is expected to be recognized over a weighted average period of 2 years. The
total fair value of stock options vested during fiscal 2010, 2009 and 2008 was
$2.4 million, $0.2 million and $1.2 million, respectively.
Performance
Share Units
The
Incentive Plan also provides for the issuance of performance share units to
reward employees for the achievement of performance goals. In July 2009 (fiscal
2010), we granted a total of 622,000 performance share units under the Incentive
Plan. Each performance share unit represents and has a value equal to one share
of our common stock. The performance share units will vest ratably over a
three-year service period provided that the Company achieves a certain earnings
target in any of fiscal years 2010, 2011 or 2012. Payment of the vested
performance share units shall be in our common stock. The fair value of the
performance share units was determined based on our closing stock price on the
date of grant of $10.64. The fair value is being recognized over the
expected life of each award. If the expected life of each tranche is
inconsistent with the actual vesting period, for example, because the earnings
target is met in a period that differs from our expectation, then compensation
expense will be adjusted prospectively to reflect the change in the expected
life of the award.
In
December 2009 (fiscal 2010), we granted a total of 100,000 performance share
units under the Incentive Plan. Each performance share unit represents and has a
value equal to one share of our common stock. The performance share units will
vest two years from the grant date provided that certain performance goals are
met and the employees remain employed through the vesting date. The fair value
of these performance share units was also determined based on our closing stock
price on the date of grant of $16.68. The fair value of each performance share
unit is being recognized as compensation expense over the two-year requisite
service period.
In
fiscal 2009, we granted a total of 160,000 performance share units. The
performance share units have a five-year term and each performance share
unit represents and has a value equal to one share of our common stock. The
performance share units vest in 20% increments once the volume-weighted average
of the closing price of our common stock for 15 consecutive trading days equals
or exceeds $26, $32, $38, $44 and $50. In addition to these vesting
requirements, a participant must generally be employed by us one year
from the date of grant for the performance share units granted to such
participant to vest. Payment of the vested performance share units shall be
in our common stock. As of May 2, 2010, none of the performance share units were
vested. The fair value of the performance share units was estimated on the date
of grant using a Monte-Carlo Simulation technique. The weighted average
grant-date fair value of the performance share units was $12.13.
Compensation
expense related to all outstanding performance share units was $3.1 million and
$1.6 million in fiscal 2010 and fiscal 2009, respectively. The related income
tax benefit recognized was $1.2 million and $0.6 million for fiscal 2010 and
fiscal 2009, respectively. As of May 2, 2010, there was approximately $5.5
million of total unrecognized compensation cost related to the performance share
units, substantially all of which is expected to be recognized over the next two
years.
Call Spread
Transactions
In
connection with the issuance of the Convertible Notes (see Note 10—Debt),
we entered into separate convertible note hedge transactions with respect to our
common stock to minimize the impact of potential economic dilution upon
conversion of the Convertible Notes, and separate warrant
transactions.
We
purchased call options in private transactions that permit us to acquire up to
approximately 17.6 million shares of our common stock at an initial strike
price of $22.68 per share, subject to adjustment, for $88.2 million. In
general, the call options allow us to acquire a number of shares of our common
stock initially equal to the number of shares of common stock issuable to the
holders of the Convertible Notes upon conversion. These call options will
terminate upon the maturity of the Convertible Notes.
We
also sold warrants in private transactions for total proceeds of approximately
$36.7 million. The warrants permit the purchasers to acquire up to
approximately 17.6 million shares of our common stock at an initial
exercise price of $30.54 per share, subject to adjustment. The warrants expire
on various dates from October 2013 (fiscal 2014) to December 2013 (fiscal
2014).
The
Call Spread Transactions, in effect, increase the initial conversion price of
the Convertible Notes from $22.68 per share to $30.54 per share, thus
reducing the potential future economic dilution associated with conversion of
the notes. The Convertible Notes and the warrants could have a dilutive effect
on our earnings per share to the extent that the price of our common stock
during a given measurement period exceeds the respective exercise prices of
those instruments. The call options are excluded from the calculation of diluted
earnings per share as their impact is anti-dilutive.
93
We
have analyzed the Call Spread Transactions and determined that they meet the
criteria for classification as equity instruments. As a result, we recorded the
purchase of the call options as a reduction to additional paid-in capital
and the proceeds of the warrants as an increase to additional paid-in capital.
Subsequent changes in fair value of those instruments are not recognized in the
financial statements as long as the instruments continue to meet the criteria
for equity classification.
New
Accounting Guidance for Convertible Notes
As
more fully described in Note 10—Debt, the FASB issued new accounting guidance in
the first quarter of fiscal 2010, which required us to separately account for
the conversion feature of the Convertible Notes as a component of equity,
thereby increasing additional paid-in capital by $59.1 million.
COFCO Share
Issuance
In
July 2008 (fiscal 2009), we issued a total of 7,000,000 shares of our common
stock to Starbase International Limited, a company registered in the British
Virgin Islands, which is a subsidiary of COFCO (Hong Kong) Limited (COFCO). The
shares were issued at a purchase price of $17.45 per share. The proceeds from
the issuance of these shares were used to reduce amounts outstanding under the
U.S. Credit Facility.
COFCO’s
investment in the Company is passive in nature and the purchase agreement
contains standstill provisions. The purchase agreement also contained
restrictions on sales or other transfers of the shares by COFCO until
July 9, 2009.
In
connection with the sale, Mr. Gaoning Ning, the chairman of COFCO, was elected
as a director at our 2008 annual shareholders’ meeting, to serve for a term that
will expire after three years (or earlier under certain
circumstances).
CGC
Share Issuance
In
October 2008 (fiscal 2009), we acquired CGC’s 50 percent investment in Five
Rivers for 2,166,667 shares of our common stock valued at $27.87 per share and
$8.7 million for working capital adjustments. See Note 3—Acquisitions and
Dispositions for further discussion of this transaction.
Preferred
Share Purchase Rights
On
May 30, 2001, the board of directors adopted a Shareholder Rights Plan (the
Rights Plan) and declared a dividend of one preferred share purchase right (a
Right) on each outstanding share of common stock. Under the terms of the Rights
Plan, if a person or group acquires 15% (or other applicable percentage, as
provided in the Rights Plan) or more of the outstanding common stock, each Right
will entitle its holder (other than such person or members of such group) to
purchase, at the Right’s then current exercise price, a number of shares of
common stock having a market value of twice such price. In addition, if we are
acquired in a merger or other business transaction after a person or group has
acquired such percentage of the outstanding common stock, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right’s then current exercise price, a number of the acquiring
company’s common shares having a market value of twice such price.
Upon
the occurrence of certain events, each Right will entitle its holder to buy one
two-thousandth of a Series A junior participating preferred share (Preferred
Share), par value $1.00 per share, at an exercise price of $90.00 subject to
adjustment. Each Preferred Share will entitle its holder to 2,000 votes and will
have an aggregate dividend rate of 2,000 times the amount, if any, paid to
holders of common stock. The Rights will expire on May 31, 2011, unless the
date is extended or unless the Rights are earlier redeemed or exchanged at the
option of the board of directors for $.00005 per Right. Generally, each share of
common stock issued after May 31, 2001 will have one Right attached. The
adoption of the Rights Plan has no impact on our financial position or results
of operations.
Stock
Held in Trust
We
maintain a Supplemental Pension Plan (the Supplemental Plan) the purpose of
which is to provide supplemental retirement income benefits for those eligible
employees whose benefits under the tax-qualified plans are subject to statutory
limitations. The plan is unfunded but a grantor trust has been established for
the purpose of satisfying the obligations under the plan.
As
of May 2, 2010, the Supplemental Plan held 2,616,687 shares of our common stock
at an average cost of $23.75.
94
Accumulated
Other Comprehensive Income (Loss)
The
table summarizes the components of accumulated other comprehensive income (loss)
and the activity during fiscal 2010, fiscal 2009 and fiscal 2008:
|
Foreign
Currency Translation
|
Pension
Accounting
|
Hedge
Accounting
|
Accumulated
Other Comprehensive Income (Loss)
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Balance
at April 29, 2007
|
$ | 46.7 | $ | (57.9 | ) | $ | 13.4 | $ | 2.2 | |||||||
|
Unrecognized
gains (losses)
|
85.7 | (13.9 | ) | 0.3 | 72.1 | |||||||||||
|
Reclassification
into net earnings
|
- | 7.3 | (30.1 | ) | (22.8 | ) | ||||||||||
|
Tax
effect
|
- | 2.6 | 11.3 | 13.9 | ||||||||||||
|
Other
comprehensive income (loss)
|
85.7 | (4.0 | ) | (18.5 | ) | 63.2 | ||||||||||
|
Balance
at April 27, 2008
|
132.4 | (61.9 | ) | (5.1 | ) | 65.4 | ||||||||||
|
Unrecognized
gains (losses)
|
(261.0 | ) | (199.2 | ) | (251.6 | ) | (711.8 | ) | ||||||||
|
Reclassification
into net earnings
|
1.0 | 5.7 | 146.8 | 153.5 | ||||||||||||
|
Tax
effect
|
- | 71.6 | 32.8 | 104.4 | ||||||||||||
|
Other
comprehensive income (loss)
|
(260.0 | ) | (121.9 | ) | (72.0 | ) | (453.9 | ) | ||||||||
|
Balance
at May 3, 2009
|
(127.6 | ) | (183.8 | ) | (77.1 | ) | (388.5 | ) | ||||||||
|
Unrecognized
gains (losses)
|
3.4 | (179.9 | ) | (26.6 | ) | (202.1 | ) | |||||||||
|
Reclassification
into net earnings
|
- | 20.3 | 98.3 | 118.2 | ||||||||||||
|
Tax
effect
|
1.5 | 63.1 | (19.1 | ) | 44.9 | |||||||||||
|
Other
comprehensive income (loss)
|
4.9 | (96.5 | ) | 52.6 | (39.0 | ) | ||||||||||
|
Balance
at May 2, 2010
|
$ | (122.7 | ) | $ | (280.3 | ) | $ | (24.5 | ) | $ | (427.5 | ) | ||||
NOTE
16: 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 the 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 management believes 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.
|
95
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The
following table sets 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 May 2, 2010. The fair value hierarchy gives the highest
priority to quoted marketprices (Level 1) and the lowest priority to
unobservable inputs (Level 3). Financial assets and liabilities have been
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
|
Fair
Value Measurements
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Derivatives:
|
||||||||||||||||
|
Foreign
exchange contracts
|
$ | 3.5 | $ | - | $ | 3.5 | $ | - | ||||||||
|
Money
market fund
|
325.4 | 325.4 | - | - | ||||||||||||
|
Insurance
contracts
|
32.5 | 32.5 | - | - | ||||||||||||
|
Total
|
$ | 361.4 | $ | 357.9 | $ | 3.5 | $ | - | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives:
|
||||||||||||||||
|
Commodity
contracts
|
$ | 119.5 | $ | 112.2 | $ | 7.3 | $ | - | ||||||||
|
Interest
rate contracts
|
8.1 | - | 8.1 | - | ||||||||||||
|
Foreign
exchange contracts
|
0.2 | - | 0.2 | - | ||||||||||||
|
Total
|
$ | 127.8 | $ | 112.2 | $ | 15.6 | $ | - | ||||||||
When
available, we use quoted market prices to determine fair value and we classify
such measurements within Level 1. In some cases where market prices
are not available, we make use of observable market-based inputs (i.e.,
Bloomberg and commodity exchanges) to calculate fair value, in which case the
measurements are classified within Level 2. When quoted market prices or
observable market-based inputs are unavailable, or when our fair value
measurements incorporate significant unobservable inputs, we would classify such
measurements within Level 3.
We
invest our cash in an overnight money market fund, which is treated as a trading
security with the unrealized gains recorded in earnings.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; 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.
In
fiscal 2010, we recorded impairment charges totaling $51.3 million to write-down
certain assets to their estimated fair values. Certain of these assets have
since been sold. The fair value of the remaining assets, which consist
primarily of property, plant and equipment, was determined to be approximately
$50.8 million as of May 2, 2010. The fair value measurements of these assets
were determined using relevant market data based on recent transactions for
similar assets and third party estimates, which we classify as Level 2
inputs. Fair values were also determined using valuation techniques,
which incorporate unobservable inputs that reflect our own assumptions regarding
how market participants would price the assets, which we classify as Level 3
inputs.
96
Pension
Plan Assets
The
following table summarizes our pension plan assets measured at fair value on a
recurring basis (at least annually) as of May 2, 2010:
|
Fair
Value Measurements
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Cash
equivalents
|
$ | 96.7 | $ | 2.8 | $ | 93.9 | $ | - | ||||||||
|
Equity securities:
|
||||||||||||||||
|
Preferred
stock
|
0.2 | - | 0.2 | - | ||||||||||||
|
U.S.
common stock:
|
||||||||||||||||
|
Health
care
|
27.3 | 27.3 | - | - | ||||||||||||
|
Utilities
|
3.9 | 3.9 | - | - | ||||||||||||
|
Financials
|
32.9 | 32.9 | - | - | ||||||||||||
|
Consumer
staples
|
82.0 | 82.0 | - | - | ||||||||||||
|
Consumer
discretionary
|
23.3 | 23.3 | - | - | ||||||||||||
|
Materials
|
9.1 | 9.1 | - | - | ||||||||||||
|
Energy
|
18.6 | 18.6 | - | - | ||||||||||||
|
Information
technology
|
19.4 | 19.4 | - | - | ||||||||||||
|
Industrials
|
25.1 | 25.1 | - | - | ||||||||||||
|
Telecommunication
service
|
1.2 | 1.2 | - | - | ||||||||||||
|
International
common stock
|
15.2 | 15.2 | - | - | ||||||||||||
|
Mutual
funds:
|
- | |||||||||||||||
|
International
|
105.9 | 35.8 | 70.1 | - | ||||||||||||
|
Domestic
large cap
|
57.8 | - | 57.8 | - | ||||||||||||
|
Fixed
income:
|
||||||||||||||||
|
Mutual
funds
|
75.4 | 72.7 | 2.7 | - | ||||||||||||
|
Asset-backed
securities
|
53.4 | - | 53.4 | - | ||||||||||||
|
Corporate
debt securities
|
67.7 | - | 67.7 | - | ||||||||||||
|
Government
debt securities
|
53.1 | 35.7 | 17.4 | - | ||||||||||||
|
Limited
partnerships
|
29.2 | - | - | 29.2 | ||||||||||||
|
Insurance
contracts
|
1.8 | - | - | 1.8 | ||||||||||||
|
Total
fair value
|
799.2 | $ | 405.0 | $ | 363.2 | $ | 31.0 | |||||||||
|
Net
payables for unsettled transactions
|
(10.5 | ) | ||||||||||||||
|
Total
plan assets
|
$ | 788.7 | ||||||||||||||
The
following table summarizes the changes in our Level 3 pension plan assets for
the year-ended May 2, 2010:
|
Insurance
Contracts
|
Limited
Partnerships
|
|||||||
|
(in
millions)
|
||||||||
|
Balance,
May 3, 2009
|
$ | 2.0 | $ | 23.9 | ||||
|
Unrealized
losses
|
- | (2.9 | ) | |||||
|
Realized
gains
|
- | 0.2 | ||||||
|
Purchases,
sales and settlements, net
|
(0.2 | ) | 8.0 | |||||
|
Balance,
May 2, 2010
|
$ | 1.8 | $ | 29.2 | ||||
97
Other
Financial Instruments
We
determine the fair value of public debt using quoted market prices. We value all
other debt using discounted cash flow techniques at estimated market prices for
similar issues. The following table presents the fair value and carrying value
of long-term debt, including the current portion of long-term debt as of May 2,
2010 and May 3, 2009.
|
May
2, 2010
|
May
3, 2009
|
|||||||||||||||
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Total
Debt
|
$ | 3,229.3 | $ | 2,963.0 | $ | 2,448.2 | $ | 2,882.7 | ||||||||
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
17: RELATED PARTY TRANSACTIONS
The
following table presents amounts owed from and to related parties as of May 2,
2010 and May 3, 2009:
|
May
2,
2010
|
May
3,
2009
|
|||||||
|
(in
millions)
|
||||||||
|
Current
receivables from related parties
|
$ | 19.2 | $ | 27.8 | ||||
|
Non-current
receivables from related parties
|
17.4 | 16.5 | ||||||
|
Total
receivables from related parties
|
$ | 36.6 | $ | 44.3 | ||||
|
Current
payables to related parties
|
$ | 13.9 | $ | 11.8 | ||||
|
Non-current
payables to related parties
|
- | 4.8 | ||||||
|
Total
payables to related parties
|
$ | 13.9 | $ | 16.6 | ||||
Wendell
Murphy, a director of ours, is an owner of Murfam Enterprises, LLC (Murfam) and
DM Farms, LLC both of which own hog production farms. These farms produce hogs
under contract to us. Murfam also produces and sells feed ingredients to us. In
fiscal 2010, 2009 and 2008, we paid $30.6
million, $26.2 million and $25.1 million, respectively, to
these entities for the production of hogs and feed ingredients.
Wendell
Murphy also has immediate family members who hold ownership interests in
Arrowhead Farms, Inc., Enviro-Tech Farms, Inc., Golden Farms, Inc., Lisbon 1
Farm, Inc., Murphy-Honour Farms, Inc., PSM Associates LLC, Pure Country Farms,
LLC, Stantonsburg Farm, Inc., Triumph Associates LLC and Webber Farms, Inc.
These farms either produce and sell hogs to us or produce and sell feed
ingredients to us. In fiscal 2010, 2009 and 2008, we paid $14.3
million, $20.6 million and $20.0 million, respectively, to these
entities for hogs and feed ingredients.
The
chief executive officer of our Hog Production segment holds a 33% ownership
interest in JCT LLC (JCT). JCT owns certain farms that produce hogs under
contract with the Hog Production segment. In fiscal 2010, 2009 and 2008, we
paid $8.0
million, $7.3 million and $7.5 million, respectively, to JCT for
the production of hogs. In fiscal 2010, 2009 and 2008, we received $3.1
million, $3.2 million and $3.0 million, respectively, from JCT for
reimbursement of associated farm and other support costs.
As
described in Note 3—Acquisitions and Dispositions, immediately preceding the
closing of the JBS transaction we acquired CGC’s 50 percent investment in Five
Rivers for 2,166,667 shares of our common stock valued at $27.87 per share and
$8.7 million for working capital adjustments. CGC is now a beneficial owner of
approximately 7.7% of our common stock. Paul J. Fribourg, a former member of our
board of directors, is Chairman, President and Chief Executive Officer of CGC.
Michael Zimmerman, a former advisory director of the Company, is Executive
Vice President and Chief Financial Officer of CGC.
We
believe that the terms of the foregoing arrangements were no less favorable to
us than if entered into with unaffiliated companies.
98
NOTE
18: REGULATION AND CONTINGENCIES
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.
Missouri
Litigation
PSF
is a wholly-owned subsidiary that we acquired on May 7, 2007 when a wholly-owned
subsidiary of ours merged with and into PSF. As a result of our acquisition of
PSF and through other separate acquisitions by CGC of our common stock, CGC
currently beneficially owns approximately 7.7% of our common stock.
In
2002, lawsuits based on the law of nuisance were filed against PSF and CGC in
the Circuit Court of Jackson County, Missouri entitled Steven Adwell, et al. v.
PSF, et al. and Michael Adwell, et al. v. PSF, et al. In November 2006, a jury
trial involving six plaintiffs in the Adwell cases resulted in a jury verdict of
compensatory damages for those six plaintiffs in the amount of $750,000 each for
a total of $4.5 million. The jury also found that CGC and PSF were liable for
punitive damages; however, the parties agreed to settle the plaintiffs’ claims
for the amount of the compensatory damages, and the plaintiffs waived punitive
damages.
On
March 1, 2007, the court severed the claims of the remaining Adwell plaintiffs
into separate actions and ordered that they be consolidated for trial by
household. In the second Adwell trial, a jury trial involving three plaintiffs
resulted in a jury verdict in December 2007 in favor of PSF and CGC as to all
claims. On July 8, 2008, the court reconsolidated the claims of the remaining 49
Adwell plaintiffs for trial by farm.
On
March 4, 2010, a jury trial involving 15 plaintiffs who live near Homan farm
resulted in a jury verdict of compensatory damages for the plaintiffs for a
total of $11,050,000. Thirteen of the Homan farm plaintiffs received damages in
the amount of $825,000 each. One of the plaintiffs received damages
in the amount of $250,000, while another plaintiff received
$75,000. On May 24, 2010, the court denied defendants’ Motion for
Judgment Notwithstanding the Verdict and Motion for New Trial or, in the
Alternative, Motion for Remittitur. On June 2, 2010, the
defendants filed their Notice of Appeal. The Company believes that there are
substantial grounds for reversal of the verdict on appeal. Pursuant
to a pre-existing arrangement, PSF is obligated to indemnify CGC for certain
liabilities, if any, resulting from the Missouri litigation, including any
liabilities resulting from the foregoing verdict.
The
court previously scheduled the next Adwell trial, which will resolve the claims
of up to 28 plaintiffs who live near Scott Colby farm, to commence on January
31, 2011. However, on April 27, 2010, defendants filed a Motion
for Separate Trials seeking deconsolidation of the remaining Adwell plaintiffs’
claims. Plaintiffs have opposed the motion, which is currently pending before
the court.
In
March 2004, the same attorneys representing the Adwell plaintiffs filed two
additional nuisance lawsuits in the Circuit Court of Jackson County, Missouri
entitled Fred Torrey, et al. v. PSF, et al. and Doyle Bounds, et al. v. PSF, et
al. There are seven plaintiffs in both suits combined, each of whom claims to
live near swine farms owned or under contract with PSF. Plaintiffs allege that
these farms interfered with the plaintiffs’ use and enjoyment of their
respective properties. Plaintiffs in the Torrey suit also allege
trespass.
In
May 2004, two additional nuisance suits were filed in the Circuit Court of
Daviess County, Missouri entitled Vernon Hanes, et al. v. PSF, et al. and Steve
Hanes, et al. v. PSF, et al. Plaintiffs in the Vernon Hanes case allege
nuisance, negligence, violation of civil rights, and negligence of contractor.
In addition, plaintiffs in both the Vernon and Steve Hanes cases assert personal
injury and property damage claims. Plaintiffs seek recovery of an unspecified
amount of compensatory and punitive damages, costs and attorneys’ fees, as well
as injunctive relief. On March 28, 2008, plaintiffs in the Vernon Hanes case
voluntarily dismissed all claims without prejudice. A new petition was filed by
the Vernon Hanes plaintiffs on April 14, 2008, alleging nuisance, negligence and
trespass against six defendants, including us. The Vernon Hanes case was
transferred to DeKalb County and has been set for trial to commence on August 2,
2010.
99
Also
in May 2004, the same lead lawyer who filed the Adwell, Bounds and Torrey
lawsuits filed a putative class action lawsuit entitled Daniel Herrold, et al.
and Others Similarly Situated v. ContiGroup Companies, Inc., PSF, and PSF Group
Holdings, Inc. in the Circuit Court of Jackson County, Missouri. This action
originally sought to create a class of plaintiffs living within ten miles of
PSF’s farms in northern Missouri, including contract grower farms, who were
alleged to have suffered interference with their right to use and enjoy their
respective properties. On January 22, 2007, plaintiffs in the Herrold case filed
a Second Amended Petition in which they abandoned all class action allegations
and efforts to certify the action as a class action and added an additional 193
named plaintiffs to join the seven prior class representatives to pursue a one
count claim to recover monetary damages, both actual and punitive, for temporary
nuisance. PSF filed motions arguing that the Second Amended Petition, which
abandons the putative class action and adds 193 new plaintiffs, is void
procedurally and that the case should either be dismissed or the plaintiffs’
claims severed and removed under Missouri’s venue statute to the northern
Missouri counties in which the alleged injuries occurred. On June 28, 2007, the
court entered an order denying the motion to dismiss but granting defendants’
motion to transfer venue. As a result of those rulings, the claims of all but
seven of the plaintiffs have been transferred to the appropriate venue in
northern Missouri.
Following
the initial transfers, plaintiffs filed motions to transfer each of the cases
back to Jackson County. Those motions were denied in all nine cases, but seven
cases were transferred to neighboring counties pursuant to Missouri’s venue
rules. Following all transfers, Herrold cases were pending in Chariton, Clark,
DeKalb, Harrison, Jackson, Linn, and Nodaway counties. Plaintiffs agreed to file
Amended Petitions in all cases except Jackson County; however, Amended Petitions
have been filed in only Chariton, Clark, Harrison, Linn and Nodaway counties. In
the Amended Petitions filed in Chariton on April 30, 2010 and in Linn on May 13,
2010, plaintiffs added claims of negligence and also claim that defendants
are liable for the alleged negligence of several contract grower farms. Pursuant
to notices of dismissal filed by plaintiffs on January 6, February 23 and April
10, 2009, all cases in Nodaway County have been dismissed. Discovery is now
proceeding in the remaining cases where Amended Petitions have been
filed.
In
February 2006, the same lawyer who represents the plaintiffs in Hanes filed a
nuisance lawsuit entitled Garold McDaniel, et al. v. PSF, et al. in the Circuit
Court of Daviess County, Missouri. In the First Amended Petition, which was
filed on February 9, 2007, plaintiffs seek recovery of an unspecified amount of
compensatory damages, costs and injunctive relief. The parties are conducting
discovery, and no trial date has been set.
In
May 2007, the same lead lawyer who filed the Adwell, Bounds, Herrold and Torrey
lawsuits filed a nuisance lawsuit entitled Jake Cooper, et al. v. Smithfield
Foods, Inc., et al. in the Circuit Court of Vernon County, Missouri.
Murphy-Brown, LLC, Murphy Farms, LLC, Murphy Farms, Inc. and we have all been
named as defendants. The other seven named defendants include Murphy Family
Ventures, LLC, DM Farms of Rose Hill, LLC, and PSM Associates, LLC, which are
entities affiliated with Wendell Murphy, a director of ours, and/or his family
members. Initially there were 13 plaintiffs in the lawsuit, but the claims of
two plaintiffs were voluntarily dismissed without prejudice. All remaining
plaintiffs are current or former residents of Vernon and Barton Counties,
Missouri, each of whom claims to live or have lived near swine farms presently
or previously owned or managed by the defendants. Plaintiffs allege that odors
from these farms interfered with the use and enjoyment of their respective
properties. Plaintiffs seek recovery of an unspecified amount of compensatory
and punitive damages, costs and attorneys’ fees. Defendants have filed
responsive pleadings and discovery is ongoing.
In
July 2008, the same lawyers who filed the Adwell, Bounds, Herrold, Torrey and
Cooper lawsuits filed a nuisance lawsuit entitled John Arnold, et al. v.
Smithfield Foods, Inc., et al. in the Circuit Court of Daviess County, Missouri.
The Company, two of our subsidiaries, PSF and KC2 Real Estate LLC, CGC, and one
employee were all named as defendants. There were three plaintiffs in the
lawsuit, who are residents of Daviess County and who claimed to live near swine
farms owned or operated by defendants. Plaintiffs alleged that odors from these
farms cause nuisances that interfere with the use and enjoyment of their
properties. On April 20, 2009, plaintiffs voluntarily dismissed this case
without prejudice. Plaintiffs refilled the case on April 20,
2010.
We
established a reserve estimating our liability for these and similar potential
claims on the opening balance sheet for our acquisition of PSF. Consequently,
expenses and other liabilities 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.
Although we recognize the uncertainties of litigation, based on our historical
experience and our understanding of the facts and circumstances underlying these
claims, we believe that these claims will not have a material adverse effect on
our results of operations or financial condition.
We
believe we have good defenses to all of the actions described above and intend
to defend vigorously these suits.
Insurance
Recoveries
In
July 2009 (fiscal 2010), a fire occurred at the primary manufacturing facility
of our subsidiary, Patrick Cudahy, Incorporated (Patrick Cudahy), in Cudahy,
WI. The fire damaged a portion of the facility’s production space and
required the temporary cessation of operations, but did not consume the entire
facility. Shortly after the fire, we resumed production activities in undamaged
portions of the plant, including the distribution center, and took steps to
address the supply needs for Patrick Cudahy products by shifting production to
other Company and third party facilities.
100
The
products produced at the facility include precooked and traditional bacon, dry
sausage, ham and sliced meats. Patrick Cudahy’s operating results are reported
in the Pork segment. Annual revenues for Patrick Cudahy’s packaged meats
business have exceeded $450 million in recent years.
We
maintain comprehensive general liability and property insurance, including
business interruption insurance, with loss limits that we believe will provide
substantial and broad coverage for the currently foreseeable losses arising from
this accident. We are working with our insurance carrier to determine
the extent of loss. We have received advances totaling $70.0 million toward the
ultimate settlement in fiscal 2010. The magnitude and timing of the ultimate
settlement is currently unknown. However, we expect the level of insurance
proceeds to fully cover the costs and losses incurred from the
fire.
We
have also been working with a third-party specialist to determine the
amount of business interruption losses incurred. Based on an evaluation of
business interruption losses incurred, we recognized $31.8 million of the
insurance proceeds in cost of sales to offset these previously recorded losses.
Additionally, $33.0
million of the insurance proceeds was recorded to offset the asset
write-offs and other costs incurred. The remaining $5.2
million has been deferred in accrued expenses and other
current liabilities to offset future business interruption losses and other
reimbursable costs associated with the fire.
Of
the $70.0 million in insurance proceeds received during fiscal 2010, $9.9
million has been classified in net cash flows from investing activities in the
consolidated condensed statements of cash flows, which represents the portion of
proceeds related to destruction of the plant. The remainder of the proceeds was
recorded in net cash flows from operating activities in the consolidated
condensed statements of cash flows and was attributed to business
interruption recoveries and reimbursable costs covered under our insurance
policy.
NOTE
19: REPORTING SEGMENTS
We
conduct our operations through five reportable segments: Pork, International,
Hog Production, Other and Corporate, each of which is comprised of a number
of subsidiaries, joint ventures and other investments. These operating segments
are determined on the basis of how we internally report and evaluate financial
information used to make operating decisions. 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. As discussed in
Note 3—Acquisitions and Dispositions, we sold our Beef operations, the
results of which are reported as discontinued operations.
Pork
Segment
The
Pork segment consists mainly of our three wholly-owned U.S. fresh pork and
packaged meats subsidiaries. The Pork segment produces a wide variety of fresh
pork and packaged meats products in the U.S. and markets them nationwide and to
numerous foreign markets, including China, Japan, Mexico, Russia and Canada.
Fresh pork products include loins, butts, picnics and ribs, among others.
Packaged meats products include smoked and boiled hams, bacon, sausage, hot dogs
(pork, beef and chicken), deli and luncheon meats, specialty products such as
pepperoni, dry meat products, and ready-to-eat, prepared foods such as
pre-cooked entrees and pre-cooked bacon and sausage.
The
following table shows the percentages of Pork segment revenues derived from
packaged meats and fresh pork, including by-products and rendering, for the
fiscal years indicated.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Packaged
meats
|
55 | % | 53 | % | 58 | % | ||||||
|
Fresh
Pork
|
45 | 47 | 42 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
International
Segment
The
International segment is comprised mainly of our meat processing and
distribution operations in Poland, Romania and the United Kingdom, as well as
our interests in meat processing operations, mainly in Western Europe and
Mexico. The International segment produces a wide variety of fresh and packaged
meats products.
101
The
following table shows the percentages of International segment revenues derived
from packaged meats, fresh pork and other products for the fiscal years
indicated.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Packaged
meats
|
35 | % | 34 | % | 41 | % | ||||||
|
Fresh
pork
|
24 | 31 | 19 | |||||||||
|
Other
products(1)
|
41 | 35 | 40 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
(1)
|
Includes poultry, beef,
by-products and rendering
|
Hog
Production Segment
The
Hog Production segment consists of our hog production operations located in the
U.S., Poland and Romania as well as our interests in hog production operations
in Mexico. The Hog Production segment operates numerous facilities with
approximately 1.0 million sows producing about 19.3 million market hogs
annually. In addition, through our joint ventures, we have approximately 90,000
sows producing about 1.7 million market hogs annually. Domestically, the Hog
Production segment produces approximately 46% of the Pork segment’s live hog
requirements. The Hog Production segment produces approximately 87% of the
International segment’s live hog requirements. We own certain genetic lines of
specialized breeding stock which are marketed using the name Smithfield Premium
Genetics (SPG). All SPG hogs are processed internally.
The
following table shows the percentages of Hog Production segment revenues derived
from hogs sold internally and externally, and other products for the fiscal
years indicated.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Internal
hog sales
|
80 | % | 82 | % | 81 | % | ||||||
|
External
hog sales
|
18 | 15 | 17 | |||||||||
|
Other
products(1)
|
2 | 3 | 2 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
(1)
|
Consists primarily of
feed
|
Other
Segment
The
Other segment is comprised of our turkey production operations and our 49%
interest in Butterball. Through the first quarter of fiscal 2010, this segment
also included our live cattle operations.
Corporate
Segment
The
Corporate segment provides management and administrative services to support our
other segments.
102
Segment
Results
The
following tables present information about the results of operations and the
assets of our reportable segments for the fiscal years presented. The
information contains certain allocations of expenses that we deem reasonable and
appropriate for the evaluation of results of operations. We do not allocate
income taxes to segments. Segment assets exclude intersegment account balances
as we believe that inclusion would be misleading or not meaningful. We believe
all intersegment sales are at prices that approximate market.
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Segment
Profit Information
|
||||||||||||
|
Sales:
|
||||||||||||
|
Segment
sales—
|
||||||||||||
|
Pork
|
$ | 9,326.3 | $ | 10,450.9 | $ | 9,627.5 | ||||||
|
International
|
1,294.7 | 1,398.2 | 1,224.5 | |||||||||
|
Hog
Production
|
2,541.8 | 2,750.9 | 2,399.3 | |||||||||
|
Other
|
153.3 | 250.8 | 148.8 | |||||||||
|
Total
segment sales
|
13,316.1 | 14,850.8 | 13,400.1 | |||||||||
|
Intersegment
sales—
|
||||||||||||
|
Pork
|
(31.5 | ) | (43.9 | ) | (53.3 | ) | ||||||
|
International
|
(57.7 | ) | (63.8 | ) | (58.2 | ) | ||||||
|
Hog
Production
|
(2,024.3 | ) | (2,255.4 | ) | (1,937.4 | ) | ||||||
|
Total
intersegment sales
|
(2,113.5 | ) | (2,363.1 | ) | (2,048.9 | ) | ||||||
|
Consolidated
sales
|
$ | 11,202.6 | $ | 12,487.7 | $ | 11,351.2 | ||||||
|
Depreciation
and amortization:
|
||||||||||||
|
Pork
|
$ | 126.0 | $ | 140.5 | $ | 136.8 | ||||||
|
International
|
22.3 | 25.2 | 21.2 | |||||||||
|
Hog
Production
|
90.0 | 99.8 | 102.1 | |||||||||
|
Other
|
0.2 | 0.4 | 0.4 | |||||||||
|
Corporate
|
3.8 | 4.6 | 3.7 | |||||||||
|
Consolidated
depreciation and amortization
|
$ | 242.3 | $ | 270.5 | $ | 264.2 | ||||||
|
Interest
expense:
|
||||||||||||
|
Pork
|
$ | 48.9 | $ | 76.6 | $ | 86.2 | ||||||
|
International
|
14.7 | 29.1 | 21.6 | |||||||||
|
Hog
Production
|
123.5 | 74.4 | 35.8 | |||||||||
|
Other
|
6.9 | 2.7 | 0.3 | |||||||||
|
Corporate
|
72.4 | 39.0 | 40.9 | |||||||||
|
Consolidated
interest expense
|
$ | 266.4 | $ | 221.8 | $ | 184.8 | ||||||
|
Equity
in (income) loss of affiliates:
|
||||||||||||
|
Pork
|
$ | (3.6 | ) | $ | (3.0 | ) | $ | (2.3 | ) | |||
|
International
|
(7.8 | ) | 1.9 | (46.5 | ) | |||||||
|
Hog
Production
|
(8.7 | ) | 16.3 | 10.6 | ||||||||
|
Other
|
(18.5 | ) | 34.9 | (23.8 | ) | |||||||
|
Corporate
|
- | - | - | |||||||||
|
Consolidated
equity in (income) loss of affiliates
|
$ | (38.6 | ) | $ | 50.1 | $ | (62.0 | ) | ||||
|
Operating
profit (loss):
|
||||||||||||
|
Pork
|
$ | 538.7 | $ | 395.2 | $ | 449.4 | ||||||
|
International
|
49.5 | 34.9 | 76.9 | |||||||||
|
Hog
Production
|
(460.8 | ) | (521.2 | ) | (98.1 | ) | ||||||
|
Other
|
3.6 | (46.6 | ) | 28.2 | ||||||||
|
Corporate
|
(68.2 | ) | (86.2 | ) | (59.6 | ) | ||||||
|
Consolidated
operating profit (loss)
|
$ | 62.8 | $ | (223.9 | ) | $ | 396.8 | |||||
103
|
May
2,
2010
|
May
3,
2009
|
April
27,
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Segment
Asset Information
|
||||||||||||
|
Total
assets:
|
||||||||||||
|
Pork
|
$ | 2,579.3 | $ | 2,571.3 | $ | 2,864.8 | ||||||
|
International
|
1,114.9 | 1,083.0 | 1,420.0 | |||||||||
|
Hog
Production
|
2,556.1 | 2,679.2 | 3,095.3 | |||||||||
|
Other
|
169.4 | 186.5 | 300.0 | |||||||||
|
Corporate
|
1,289.2 | 680.2 | 531.3 | |||||||||
|
Assets
of discontinued operations held for sale
|
- | - | 656.5 | |||||||||
|
Consolidated
total assets
|
$ | 7,708.9 | $ | 7,200.2 | $ | 8,867.9 | ||||||
|
Investments:
|
||||||||||||
|
Pork
|
$ | 17.1 | $ | 15.5 | $ | 13.5 | ||||||
|
International
|
450.4 | 450.1 | 529.6 | |||||||||
|
Hog
Production
|
30.7 | 17.7 | 33.0 | |||||||||
|
Other
|
106.7 | 87.0 | 88.5 | |||||||||
|
Corporate
|
20.1 | 31.3 | 30.0 | |||||||||
|
Consolidated
investments
|
$ | 625.0 | $ | 601.6 | $ | 694.6 | ||||||
|
Capital
expenditures:
|
||||||||||||
|
Pork
|
$ | 141.7 | $ | 115.1 | $ | 167.5 | ||||||
|
International
|
19.5 | 11.4 | 43.7 | |||||||||
|
Hog
Production
|
20.6 | 33.2 | 233.7 | |||||||||
|
Corporate
|
0.9 | 14.8 | 15.3 | |||||||||
|
Discontinued
operations
|
- | 7.1 | 13.5 | |||||||||
|
Consolidated
capital expenditures
|
$ | 182.7 | $ | 181.6 | $ | 473.7 | ||||||
The following table shows
the change in the carrying amount of goodwill by reportable
segment:
|
Pork
|
International
|
Hog
Production
|
Other
|
Total
|
||||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
Balance,
April 27, 2008
|
$ | 219.8 | $ | 172.4 | $ | 452.9 | $ | 19.5 | $ | 864.6 | ||||||||||
|
Acquisitions(1)
|
- | 7.1 | - | - | 7.1 | |||||||||||||||
|
Other
goodwill adjustments(2)
|
(2.2 | ) | (56.2 | ) | 6.7 | - | (51.7 | ) | ||||||||||||
|
Balance,
May 3, 2009
|
217.6 | 123.3 | 459.6 | 19.5 | 820.0 | |||||||||||||||
|
Impairment(3)
|
(0.5 | ) | - | (6.0 | ) | - | (6.5 | ) | ||||||||||||
|
Other
goodwill adjustments(2)
|
(0.6 | ) | 13.5 | (3.5 | ) | - | 9.4 | |||||||||||||
|
Balance,
May 2, 2010
|
$ | 216.5 | $ | 136.8 | $ | 450.1 | $ | 19.5 | $ | 822.9 | ||||||||||
|
(1)
|
Reflects
the acquisition of PSF and amounts related to the acquisition of a
business in the International
segment.
|
|
(2)
|
Other goodwill adjustments
primarily include the effects of foreign currency
translation.
|
|
(3)
|
See Note 4—Impairment of Long-lived Assets for discussion on
impairment.
|
104
The
following table presents our consolidated sales and long-lived assets attributed
to operations by geographic area for the fiscal years ended May 2,
2010, May 3, 2009 and April 27, 2008:
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Sales:
|
||||||||||||
|
U.S.
|
$ | 9,960.9 | $ | 11,149.2 | $ | 10,136.2 | ||||||
|
International
|
1,241.7 | 1,338.5 | 1,215.0 | |||||||||
|
Total
sales
|
$ | 11,202.6 | $ | 12,487.7 | $ | 11,351.2 | ||||||
|
May
2,
2010
|
May
3,
2009
|
April
29,
2007
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Long-lived
assets:
|
||||||||||||
|
U.S.
|
$ | 3,203.0 | $ | 3,237.7 | $ | 3,409.5 | ||||||
|
International
|
1,185.6 | 1,178.0 | 1,608.4 | |||||||||
|
Total
long-lived assets
|
$ | 4,388.6 | $ | 4,415.7 | $ | 5,017.9 | ||||||
NOTE
20: SUPPLEMENTAL CASH FLOW INFORMATION
|
Fiscal
Years
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Interest
paid
|
$ | 210.6 | $ | 194.4 | $ | 174.5 | ||||||
|
Income
taxes paid (received)
|
$ | (76.8 | ) | $ | (48.4 | ) | $ | 56.9 | ||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Capital
lease
|
$ | 24.7 | $ | - | $ | - | ||||||
|
Sale
of interest in Groupe Smithfield in exchange for shares of
Campofrío
|
$ | - | $ | 272.0 | $ | - | ||||||
|
Investment
in Butterball
|
$ | - | $ | (24.5 | ) | $ | - | |||||
|
Common
stock issued for acquisition
|
$ | - | $ | (60.4 | ) | $ | (620.2 | ) | ||||
105
NOTE
21: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
Fiscal
Year
|
||||||||||||||||
|
(in
millions, except per share data)
|
||||||||||||||||||||
|
Fiscal
2010
|
||||||||||||||||||||
|
Sales
|
$ | 2,715.3 | $ | 2,692.4 | $ | 2,884.7 | $ | 2,910.2 | $ | 11,202.6 | ||||||||||
|
Gross
profit
|
98.7 | 168.3 | 284.2 | 178.9 | 730.1 | |||||||||||||||
|
Operating
(loss) profit
|
(74.8 | ) | 1.8 | 96.5 | 39.3 | 62.8 | ||||||||||||||
|
(Loss)
income from continuing operations
|
(107.7 | ) | (26.4 | ) | 37.3 | (4.6 | ) | (101.4 | ) | |||||||||||
|
Net
(loss) income
|
(107.7 | ) | (26.4 | ) | 37.3 | (4.6 | ) | (101.4 | ) | |||||||||||
|
(Loss)
income per basic and diluted common share:(1)
|
||||||||||||||||||||
|
Net
(loss) income
|
$ | (.75 | ) | $ | (.17 | ) | $ | .22 | $ | (.03 | ) | $ | (.65 | ) | ||||||
|
Fiscal
2009
|
||||||||||||||||||||
|
Sales
|
$ | 3,141.8 | $ | 3,147.1 | $ | 3,348.2 | $ | 2,850.6 | $ | 12,487.7 | ||||||||||
|
Gross
profit
|
195.2 | 232.6 | 84.3 | 112.5 | 624.6 | |||||||||||||||
|
Operating
profit (loss)
|
2.5 | 1.0 | (135.5 | ) | (91.9 | ) | (223.9 | ) | ||||||||||||
|
(Loss)
income from continuing operations
|
(29.1 | ) | (32.5 | ) | (108.1 | ) | (81.2 | ) | (250.9 | ) | ||||||||||
|
Income
from discontinued operations
|
15.9 | 34.2 | 2.4 | - | 52.5 | |||||||||||||||
|
Net
(loss) income
|
(13.2 | ) | 1.7 | (105.7 | ) | (81.2 | ) | (198.4 | ) | |||||||||||
|
(Loss)
income per basic and diluted common share:(1)
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (.22 | ) | $ | (.23 | ) | $ | (.75 | ) | $ | (.57 | ) | $ | (1.78 | ) | |||||
|
Discontinued
operations
|
.12 | .24 | .01 | - | .37 | |||||||||||||||
|
Net
(loss) income
|
$ | (.10 | ) | $ | .01 | $ | (.74 | ) | $ | (.57 | ) | $ | (1.41 | ) | ||||||
|
(1)
|
Per
common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amounts because of differences in the weighted average common
shares outstanding during each
period.
|
106
SMITHFIELD
FOODS, INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE THREE YEARS ENDED MAY 2, 2010
(in
millions)
|
Column
A
|
Column
B
|
Column
C Additions
|
Column
D
|
Column
E
|
||||||||||||||||
|
Description
|
Balance
at Beginning of Year
|
Charged
to costs and expenses
|
Charged
to other
accounts(1) |
Deductions
|
Balance
at End of Year
|
|||||||||||||||
|
Reserve
for uncollectible accounts receivable:
|
||||||||||||||||||||
|
Fiscal
year ended May 2, 2010
|
$ | 9.9 | $ | 1.3 | $ | 0.1 | $ | (3.2 | ) | $ | 8.1 | |||||||||
|
Fiscal
year ended May 3, 2009
|
8.1 | 4.2 | (1.0 | ) | (1.4 | ) | 9.9 | |||||||||||||
|
Fiscal
year ended April 27, 2008
|
4.9 | 2.7 | 1.4 | (0.9 | ) | 8.1 | ||||||||||||||
|
Reserve
for obsolete inventory:
|
||||||||||||||||||||
|
Fiscal
year ended May 2, 2010
|
$ | 21.0 | $ | 6.3 | $ | 0.2 | $ | (10.1 | ) | $ | 17.4 | |||||||||
|
Fiscal
year ended May 3, 2009
|
16.2 | 12.4 | (2.5 | ) | (5.1 | ) | 21.0 | |||||||||||||
|
Fiscal
year ended April 27, 2008
|
13.4 | 8.7 | 0.2 | (6.1 | ) | 16.2 | ||||||||||||||
|
Deferred
tax valuation allowance:
|
||||||||||||||||||||
|
Fiscal
year ended May 2, 2010
|
$ | 98.7 | $ | 2.3 | $ | (7.5 | ) | $ | (2.0 | ) | $ | 91.5 | ||||||||
|
Fiscal
year ended May 3, 2009
|
96.2 | 35.8 | (15.1 | ) | (18.2 | ) | 98.7 | |||||||||||||
|
Fiscal
year ended April 27, 2008
|
58.1 | 27.7 | 18.2 | (7.8 | ) | 96.2 | ||||||||||||||
|
(1)
|
Activity
primarily includes the reserves recorded in connection with the
creation of the opening balance sheets of entities acquired
and currency translation
adjustments.
|
107
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
CONTROLS
AND PROCEDURES
|
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
An
evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), regarding the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended) as of May 2, 2010. Based
on that evaluation, management, including the CEO and CFO, has concluded that
our disclosure controls and procedures were effective as of May 2,
2010.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) of the Securities Exchange
Act of 1934. Our internal control system was designed to provide reasonable
assurance to management and the board of directors regarding the preparation and
fair presentation of published financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of May 2, 2010. In making this assessment, we used
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on this
evaluation under the framework in Internal Control – Integrated Framework issued
by COSO, management concluded that the Company’s internal control over financial
reporting was effective as of May 2, 2010.
Our
independent registered public accounting firm, Ernst & Young LLP, has
audited the financial statements included in this Form 10-K and has issued an
attestation report on our internal control over financial reporting. Their
attestation report on our internal control over financial reporting and their
attestation report on the audit of the consolidated financial statements are
included in “Item 8. Financial Statements and Supplementary Data” of this Annual
Report on Form 10-K.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In
the quarter ended May 2, 2010, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
|
OTHER
INFORMATION
|
Not
applicable.
108
PART
III
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
required by this Item regarding our executive officers is included in Part I of
this Annual Report on Form 10-K.
All
other information required by this Item is incorporated by reference to our
definitive proxy statement to be filed with respect to our Annual Meeting of
Shareholders to be held on September 1, 2010 under the headings entitled
“Nominees for Election to Three-Year Terms,” “Directors whose Terms do not
Expire this Year,” “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Corporate Governance.”
|
EXECUTIVE
COMPENSATION
|
Information
required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our Annual Meeting of Shareholders to be
held on September 1, 2010 under the headings (including the narrative
disclosures following a referenced table) entitled “Compensation Discussion and
Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,”
“Outstanding Equity Awards at Fiscal Year-End,” “Options Exercises and Stock
Vested,” “Pension Benefits,” “Non-Qualified Deferred Compensation,” “Estimated
Payments Upon Severance or Change-in-Control,” “Director Compensation,”
“Compensation Committee Report,” and “Compensation Committee Interlocks and
Insider Participation.”
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our Annual Meeting of Shareholders to be
held on September 1, 2010 under the headings entitled “Principal Shareholders,”
“Common Stock Ownership of Executive Officers and Directors” and “Equity
Compensation Plan Information.”
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Information
required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our Annual Meeting of Shareholders to be
held on September 1, 2010 under the headings entitled “Related Party
Transactions” and “Corporate Governance.”
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information
required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our Annual Meeting of Shareholders to be
held on September 1, 2010 under the headings entitled “Audit Committee Report”
and “Ratification of Selection of Independent Auditors.”
109
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
The
following documents are filed as part of this report:
1.
Financial Statements:
|
|
§
|
Consolidated
Statements of Income for the Fiscal Years 2010, 2009 and
2008
|
|
|
§
|
Consolidated
Balance Sheets for the Fiscal Years 2010 and
2009
|
|
|
§
|
Consolidated
Statements of Cash Flows for the Fiscal Years 2010, 2009 and
2008
|
|
|
§
|
Consolidated
Statements of Shareholders’ Equity for the Fiscal Years 2010, 2009 and
2008
|
|
|
§
|
Notes
to Consolidated Financial
Statements
|
|
|
§
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
|
|
|
§
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
|
2.
Financial Statement Schedule – Schedule II—Valuation and Qualifying
Accounts
Certain
financial statement schedules are omitted because they are not applicable or the
required information is included herein or is shown in the consolidated
financial statements or related notes filed as part of this report.
3.
Exhibits
|
Exhibit
2.1
|
—
|
Agreement
and Plan of Merger, dated as of September 17, 2006, among the Company, KC2
Merger Sub, Inc. and Premium Standard Farms, Inc. (incorporated by
reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
with the SEC on September 20, 2006).
|
|
Exhibit
2.2
|
—
|
Stock
Purchase Agreement, dated March 4, 2008, by and among Smithfield Foods,
Inc., and JBS S.A. (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed with the SEC on March 5,
2008).
|
|
Exhibit
2.3(a)
|
—
|
Purchase
Agreement, dated March 4, 2008, by and among Continental Grain Company,
ContiBeef LLC, Smithfield Foods, Inc., and MF Cattle Feeding, Inc.
(incorporated by reference to Exhibit 2.2 to the Company’s Current Report
on Form 8-K filed with the SEC on March 5, 2008).
|
|
Exhibit
2.3(b)
|
—
|
Amendment,
dated October 23, 2008, to the Purchase Agreement, dated as of March 4,
2008, by and among Continental Grain Company, ContiBeef LLC, Smithfield
Foods, Inc. and MF Cattle Feeding, Inc. (incorporated by reference to
Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the SEC
on October 24, 2008).
|
|
Exhibit
3.1
|
—
|
Articles
of Amendment effective August 27, 2009 to the Amended and Restated
Articles of Incorporation, including the Amended and Restated Articles of
Incorporation of the Company, as amended to date (incorporated by
reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q
filed with the SEC on September 11, 2009).
|
|
Exhibit
3.2*
|
—
|
Amendment
to the Bylaws effective June 16, 2010, including the Bylaws of the
Company, as amended to date.
|
|
Exhibit 4.1
|
—
|
Indenture
between the Company and U.S. Bank, National Association (successor to
SunTrust Bank), as trustee, dated October 23, 2001 regarding the issuance
by the Company of $300,000,000 senior notes (incorporated by reference to
Exhibit 4.3(a) to the Company’s Registration Statement on Form S-4 filed
with the SEC on November 30, 2001).
|
|
Exhibit
4.2
|
—
|
Rights
Agreement, dated as of May 30, 2001, between the Company and ComputerShare
Investor Services, LLC, Rights Agent (incorporated by reference to Exhibit
4 to the Company’s Registration Statement on Form 8-A filed with the SEC
on May 30, 2001).
|
110
|
Exhibit
4.3
|
—
|
Indenture
between the Company and SunTrust Bank, as trustee, dated May 21, 2003
regarding the issuance by the Company of $350,000,000 senior notes
(incorporated by reference to Exhibit 4.11(a) to the Company’s Annual
Report on Form 10-K filed with the SEC on July 23,
2003).
|
|
Exhibit
4.4
|
—
|
Indenture
between the Company and U.S. Bank National Association (successor to
SunTrust Bank), as trustee, dated August 4, 2004 regarding the issuance by
the Company of senior notes (incorporated by reference to Exhibit 4.1 to
the Company’s Quarterly Report on Form 10-Q filed with the SEC on
September 10, 2004).
|
|
Exhibit
4.5(a)
|
—
|
Registration
Rights Agreement, dated May 7, 2007, among the Company and ContiGroup
Companies, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed with the SEC on May 7,
2007).
|
|
Exhibit
4.5(b)
|
—
|
Amendment
No. 1, dated as of October 23, 2008, to the Registration Rights Agreement,
dated as of May 7, 2007, by and between Smithfield Foods, Inc. and
Continental Grain Company (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on October 24,
2008).
|
|
Exhibit
4.6(a)
|
—
|
Indenture—Senior
Debt Securities, dated June 1, 2007, between the Company and U.S. Bank
National Association as trustee (incorporated by reference to Exhibit
4.10(a) to the Company’s Annual Report on Form 10-K filed with the SEC on
June 28, 2007).
|
|
Exhibit
4.6(b)
|
—
|
First
Supplemental Indenture to the Indenture—Senior Debt Securities between the
Company and U.S. Bank National Association, as trustee, dated as of June
22, 2007 regarding the issuance by the Company of the 2007 7.750% Senior
Notes due 2017 (incorporated by reference to Exhibit 4.10(b) to the
Company’s Annual Report on Form 10-K filed with the SEC on June 28,
2007).
|
|
Exhibit
4.6(c)
|
—
|
Second
Supplemental Indenture to the Indenture—Senior Debt Securities between the
Company and U.S. Bank National Association, as trustee, dated as of July
8, 2008 regarding the issuance by the Company of the 2008 4.00%
Convertible Senior Notes due 2013 (incorporated by reference to Exhibit
4.8 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on
September 5, 2008).
|
|
Exhibit
4.7
|
—
|
Waiver,
dated as of June 22, 2009, to the Revolving Credit Agreement, dated as of
August 19, 2005, among the Company, the Subsidiary Guarantors from time to
time party thereto, the lenders from time to time party thereto, Calyon
New York Branch, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.
“Rabobank International,” New York Branch and SunTrust Bank, as
co-documentation agents, Citicorp USA, Inc., as syndication agent and
JPMorgan Chase Bank, N.A., as administrative agent, relating to a
$1,300,000,000 secured revolving credit facility, as amended (incorporated
by reference to Exhibit 4.6(f) to the Company’s Annual Report on Form 10-K
filed with the SEC on June 23, 2009).
|
|
Exhibit
4.8(a)
|
—
|
Indenture,
dated July 2, 2009, among the Company, the Guarantors and U.S. Bank
National Association, as Trustee (incorporated by reference to Exhibit 4.1
to the Company’s Current Report on Form 8-K filed with the SEC on July 8,
2009).
|
|
Exhibit
4.8(b)
|
—
|
Form
of 10% Senior Secured Note Due 2014 (incorporated by reference to Exhibit
4.2 to the Company’s Current Report on Form 8-K filed with the SEC on July
8, 2009).
|
|
Exhibit
4.8(c)
|
—
|
Form
of 10% Senior Secured Note Due 2014 (incorporated by reference to Exhibit
4.2 to the Company’s Current Report on Form 8-K filed with the SEC on
August 14, 2009).
|
|
Exhibit
4.9(a)
|
—
|
Credit
Agreement, dated July 2, 2009, among the Company, the Guarantors, the
lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent
and joint collateral agent, J.P. Morgan Securities Inc., General Electric
Capital Corporation, Barclays Capital, Morgan Stanley Bank, N.A. and
Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank
Nederland”, New York Branch, as joint bookrunners and co-lead arrangers,
General Electric Capital Corporation, as co-documentation and joint
collateral agent, Barclay’s Capital and Morgan Stanley Bank, N.A., as
co-documentation agents and Coöperatieve Centrale
Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch, as
syndication agent (incorporated by reference to Exhibit 4.3 to the
Company’s Current Report on Form 8-K filed with the SEC on July 8,
2009).
|
111
|
Exhibit
4.9(b)
|
—
|
Amended
and Restated Pledge and Security Agreement, dated July 2, 2009, among the
Company, the Guarantors and JPMorgan Chase Bank, N.A., as administrative
agent (incorporated by reference to Exhibit 4.5 to the Company’s Current
Report on Form 8-K filed with the SEC on July 8, 2009).
|
|
Exhibit
4.9(c)
|
—
|
First
Amendment and Consent, dated as of October 29, 2009, to the Amended and
Restated Credit Agreement, dated as of July 2, 2009, among the Company,
the Subsidiary Guarantors, Coöperatieve Centrale Raiffeisen-Boerenleenbank
B.A., “Rabobank Nederland”, New York Branch, as syndication agent,
Barclays Bank PLC, Morgan Stanley Bank, N.A. and General Electric Capital
Corporation, as co-documentation agents, JPMorgan Chase Bank, N.A. and
General Electric Capital Corporation, as joint collateral agents, and
JPMorgan Chase Bank, N.A. as administrative agent and the Amended and
Restated Pledge Agreement, dated as of July 2, 2009, among the Company,
the Subsidiary Guarantors and JPMorgan Chase Bank, N.A. as administrative
agent (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on December 11,
2009).
|
|
Exhibit
4.10
|
—
|
Term
Loan Agreement, dated July 2, 2009, among the Company, the
Guarantors, the lenders party thereto and Coöperatieve Centrale
Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch, as
administrative agent (incorporated by reference to Exhibit 4.4 to the
Company’s Current Report on Form 8-K filed with the SEC on July 8,
2009).
|
|
Exhibit
4.11
|
—
|
Pledge
and Security Agreement, dated July 2, 2009, among the Company, the
Guarantors, and U.S. Bank National Association, as collateral agent
(incorporated by reference to Exhibit 4.6 to the Company’s Current Report
on Form 8-K filed with the SEC on July 8, 2009).
|
|
Exhibit
4.12
|
—
|
Intercreditor
Agreement, dated July 2, 2009, among the Company, the Guarantors, JPMorgan
Chase Bank, N.A., as administrative agent, and U.S. Bank National
Association, as collateral agent (incorporated by reference to Exhibit 4.7
to the Company’s Current Report on Form 8-K filed with the SEC on July 8,
2009).
|
|
Exhibit
4.13
|
—
|
Intercreditor
and Collateral Agency Agreement, dated July 2, 2009, among the Company,
the Guarantors, U.S Bank National Association, as collateral agent, U.S.
Bank National Association, as trustee for the Notes, and Coöperatieve
Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York
Branch, as administrative agent (incorporated by reference to Exhibit 4.8
to the Company’s Current Report on Form 8-K filed with the SEC on July 8,
2009).
|
|
Registrant
hereby agrees to furnish the SEC, upon request, other instruments defining
the rights of holders of long-term debt of the
Registrant.
|
||
|
Exhibit
10.1(a)**
|
—
|
Smithfield
Foods, Inc. 1998 Stock Incentive Plan (incorporated by reference to
Exhibit 10.7 to the Company’s Form 10-K Annual Report filed with the SEC
on July 30, 1998).
|
|
Exhibit
10.1(b)**
|
—
|
Amendment
No. 1 to the Smithfield Foods, Inc. 1998 Stock Incentive Plan dated August
29, 2000 (incorporated by reference to Exhibit 10.6(b) of the Company’s
Annual Report on Form 10-K filed with the SEC on July 29,
2002).
|
|
Exhibit
10.1(c)**
|
—
|
Amendment
No. 2 to the Smithfield Foods, Inc. 1998 Stock Incentive Plan dated August
29, 2001 (incorporated by reference to Exhibit 10.6(c) of the Company’s
Annual Report on Form 10-K filed with the SEC on July 29,
2002).
|
|
Exhibit
10.1(d)**
|
—
|
Form
of Nonstatutory Stock Option Agreement for the Smithfield Foods, Inc. 1998
Stock Incentive Plan (incorporated by reference to Exhibit 10.3(d) to the
Company’s Annual Report on Form 10-K filed with the SEC on July 11,
2005).
|
|
Exhibit
10.2**
|
—
|
Smithfield
Foods, Inc. 2005 Non-Employee Directors Stock Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on September 1, 2005).
|
|
Exhibit
10.3**
|
—
|
Consulting
Agreement, dated August 30, 2006, by and between the Company and Joseph W.
Luter, III (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the SEC on September 6,
2006).
|
|
Exhibit
10.4**
|
—
|
Compensation
for Non-Employee Directors as of May 3, 2009 (incorporated by reference to
Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed with the
SEC on June 23, 2009).
|
112
|
Exhibit
10.5
|
—
|
Purchase
Agreement, dated as of June 30, 2008, among Smithfield Foods, Inc.,
Starbase International Limited and COFCO (Hong Kong) Limited (incorporated
by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q filed with the SEC on September 5, 2008).
|
|
Exhibit
10.6
|
—
|
Merger
Protocol, dated June 30, 2008, between Campofrío Alimentación, S.A. and
Groupe Smithfield Holdings, S.L. and others (incorporated by reference to
Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the
SEC on September 5, 2008).
|
|
Exhibit
10.7(a)
|
—
|
Master
Terms and Conditions for Convertible Bond Hedging Transactions, dated as
of July 1, 2008, between Citibank, N.A. and Smithfield Foods, Inc.
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the SEC on July 8, 2008).
|
|
Exhibit
10.7(b)
|
—
|
Master
Terms and Conditions for Convertible Bond Hedging Transactions, dated as
of July 1, 2008, between Goldman, Sachs & Co. and Smithfield
Foods, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the SEC on July 8,
2008).
|
|
Exhibit
10.7(c)
|
—
|
Master
Terms and Conditions for Convertible Bond Hedging Transactions, dated as
of July 1, 2008, between JPMorgan Chase Bank, National Association, London
Branch and Smithfield Foods, Inc. (incorporated by reference to Exhibit
10.3 to the Company’s Current Report on Form 8-K filed with the SEC on
July 8, 2008).
|
|
Exhibit
10.7(d)
|
—
|
Confirmation
for Convertible Bond Hedging Transaction, dated July 1, 2008, between
Citibank, N.A. and Smithfield Foods, Inc. (incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the
SEC on July 8, 2008).
|
|
Exhibit
10.7(e)
|
—
|
Confirmation
for Convertible Bond Hedging Transaction, dated July 1, 2008, between
Goldman, Sachs & Co. and Smithfield Foods, Inc. (incorporated by
reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
filed with the SEC on July 8, 2008).
|
|
Exhibit
10.7(f)
|
—
|
Confirmation
for Convertible Bond Hedging Transaction, dated July 1, 2008, between
JPMorgan Chase Bank, National Association, London Branch and Smithfield
Foods, Inc. (incorporated by reference to Exhibit 10.6 to the Company’s
Current Report on Form 8-K filed with the SEC on July 8,
2008).
|
|
Exhibit
10.7(g)
|
—
|
Master
Terms and Conditions for Warrants Issued by Smithfield Foods, Inc. to
Citibank, N.A., dated as of July 1, 2008 (incorporated by reference to
Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the
SEC on July 8, 2008).
|
|
Exhibit
10.7(h)
|
—
|
Master
Terms and Conditions for Warrants Issued by Smithfield Foods, Inc. to
Goldman, Sachs & Co., dated as of July 1, 2008 (incorporated by
reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K
filed with the SEC on July 8, 2008).
|
|
Exhibit
10.7(i)
|
—
|
Master
Terms and Conditions for Warrants Issued by Smithfield Foods, Inc. to
JPMorgan Chase Bank, National Association, London Branch, dated as of July
1, 2008 (incorporated by reference to Exhibit 10.9 to the Company’s
Current Report on Form 8-K filed with the SEC on July 8,
2008).
|
|
Exhibit
10.7(j)
|
—
|
Confirmation
for Warrants Issued by Smithfield Foods, Inc. to Citibank, N.A., dated
July 1, 2008 (incorporated by reference to Exhibit 10.10 to the Company’s
Current Report on Form 8-K filed with the SEC on July 8,
2008).
|
|
Exhibit
10.7(k)
|
—
|
Confirmation
for Warrants Issued by Smithfield Foods, Inc. to Goldman, Sachs & Co.,
dated July 1, 2008 (incorporated by reference to Exhibit 10.11 to the
Company’s Current Report on Form 8-K filed with the SEC on July 8,
2008).
|
|
Exhibit
10.7(l)
|
—
|
Confirmation
for Warrants Issued by Smithfield Foods, Inc. to JPMorgan Chase Bank,
National Association, London Branch, dated July 1, 2008 (incorporated by
reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K
filed with the SEC on July 8, 2008).
|
|
Exhibit
10.8(a)**
|
—
|
Smithfield
Foods, Inc. Amended and Restated 2008 Incentive Compensation Plan
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on September 11,
2009).
|
113
|
Exhibit
10.8(b)**
|
—
|
Form
of Smithfield Foods, Inc. 2008 Incentive Compensation Plan Performance
Share Unit Award for fiscal 2009 (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed with the SEC on
September 3, 2008).
|
|
Exhibit
10.8(c)**
|
—
|
Form
of Smithfield Foods, Inc. 2008 Incentive Compensation Plan Stock Option
Award (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the SEC on July 10,
2009).
|
|
Exhibit
10.8(d)**
|
—
|
Form
of Smithfield Foods, Inc. 2008 Incentive Compensation Plan Performance
Share Unit Award for fiscal 2010 (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed with the SEC on
July 10, 2009).
|
|
Exhibit
10.8(e)**
|
—
|
Form
of Smithfield Foods, Inc. 2008 Incentive Compensation Plan Performance
Share Unit Award granted December 2009 (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the
SEC on March 12, 2010).
|
|
Exhibit
10.9**
|
—
|
Compensation
for Named Executive Officers for fiscal 2010 (incorporated by reference to
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the
SEC on September 11, 2009).
|
|
Exhibit
10.10**
|
—
|
Description
of Incentive Award granted to George H. Richter (incorporated by reference
to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the
SEC on October 6, 2009).
|
|
Exhibit
10.11**
|
—
|
Summary
of Incentive Award, One-Time Cash Bonus and Performance Share Units
granted to Robert W. Manly, IV (incorporated by reference to Exhibit 99.1
to the Company’s Current Report on Form 8-K filed with the SEC on December
14, 2009).
|
|
Exhibit
10.12
|
—
|
Market
Hog Contract Grower Agreement, dated May 13, 1998, by and
between Continental Grain Company and CGC Asset Acquisition Corp.
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on March 12,
2010).
|
|
Exhibit
21*
|
—
|
Subsidiaries
of the Company.
|
|
Exhibit
23.1*
|
—
|
Consent
of Independent Registered Public Accounting Firm.
|
|
Exhibit
31.1*
|
—
|
Certification
of C. Larry Pope, President and Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit
31.2*
|
—
|
Certification
of Robert W. Manly, IV, Executive Vice President and Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
Exhibit
32.1*
|
—
|
Certification
of C. Larry Pope, President and Chief Executive Officer, pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
Exhibit
32.2*
|
—
|
Certification
of Robert W. Manly, IV, Executive Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
|
*
|
Filed
herewith.
|
|
**
|
Management
contract or compensatory plan or arrangement of the Company required to be
filed as an exhibit.
|
114
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
REGISTRANT: SMITHFIELD FOODS, INC.
|
||
|
By:
|
/s/ C.
LARRY POPE
|
|
|
C.
Larry Pope
President
and Chief Executive Officer
|
|
|
Date: June
18, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ JOSEPH W. LUTER, III
|
Chairman of
the Board and Director
|
June 18,
2010
|
|
Joseph
W. Luter, III
|
||
|
/s/ C.
LARRY POPE
|
President,
Chief Executive Officer and Director
|
June 18,
2010
|
| C. Larry Pope | ||
|
/s/ ROBERT W. MANLY, IV
|
Executive
Vice President and Chief Financial
Officer
|
June 18,
2010
|
|
Robert
W. Manly, IV
|
(Principal Financial Officer) | |
|
/s/ KENNETH M. SULLIVAN
|
Vice
President and Chief Accounting Officer
|
June 18,
2010
|
|
Kenneth
M. Sullivan
|
(Principal Accounting Officer) | |
|
/s/ ROBERT L. BURRUS, JR.
|
Director
|
June 18,
2010
|
|
Robert
L. Burrus, Jr.
|
||
|
/s/ CAROL T. CRAWFORD
|
Director
|
June 18,
2010
|
|
Carol
T. Crawford
|
||
|
/s/ RAY A. GOLDBERG
|
Director
|
June 18,
2010
|
|
Ray
A. Goldberg
|
||
|
/s/ WENDELL H. MURPHY
|
Director
|
June 18,
2010
|
|
Wendell
H. Murphy
|
||
|
/s/ DAVID C. NELSON
|
Director
|
June 18,
2010
|
|
David
C. Nelson
|
||
|
/s/ GAONING NING
|
Director
|
June 18,
2010
|
|
Gaoning
Ning
|
||
|
/s/ FRANK S. ROYAL, M.D.
|
Director
|
June 18,
2010
|
|
Frank
S. Royal, M.D.
|
||
|
/s/ JOHN T. SCHWIETERS
|
Director
|
June 18,
2010
|
|
John
T. Schwieters
|
||
|
/s/ PAUL S. TRIBLE, JR.
|
Director
|
June 18,
2010
|
|
Paul
S. Trible, Jr.
|
||
|
/s/ MELVIN O. WRIGHT
|
Director
|
June 18,
2010
|
|
Melvin
O. Wright
|
115