10-K 1 fy201310k.htm 10-K FY 2013 10K


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 April 28, 2013
Commission file number: 1-15321
 
SMITHFIELD FOODS, INC.
 
 
(Exact name of registrant as specified in its charter)
 
 
Virginia
 
52-0845861
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
200 Commerce Street
Smithfield, Virginia
 
23430
(Address of principal executive offices)
 
(Zip Code)
(757) 365-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $.50 par value per share
 
New York Stock Exchange
 
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  þ    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.  ¨
 
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 October 28, 2012 was approximately $2.2 billion. This figure was calculated by multiplying (i) the $20.54 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 11, 2013138,952,618 shares of the registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. In the event we do not prepare and file such proxy statement, such information shall be provided instead by an amendment to this report filed no later than August 26, 2013.

SMITHFIELD FOODS, INC.
TABLE OF CONTENTS
 
 
 
 
 
PAGE
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
PART IV
ITEM 15.





PART I
 
ITEM 1.
BUSINESS
 
GENERAL DEVELOPMENT OF BUSINESS 
Smithfield Foods, Inc., together with its subsidiaries (the “Company,” "Smithfield," “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 affected by fluctuations in commodity prices. 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 four reportable segments: Pork, Hog Production, International and Corporate, each of which is comprised of a number of subsidiaries, joint ventures and other investments. A fifth reportable segment, the Other segment, contains the results of our former turkey production operations and our previous 49% interest in Butterball, LLC (Butterball), which were sold in December 2010 (fiscal 2011). The Pork segment consists mainly of our three wholly-owned U.S. fresh pork and packaged meats subsidiaries: The Smithfield Packing Company, Inc. (Smithfield Packing), Farmland Foods, Inc. (Farmland Foods) and John Morrell Food Group (John Morrell). The Hog Production segment consists of our hog production operations located in the U.S. The International segment is comprised mainly of our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico. The Corporate segment provides management and administrative services to support our other segments.
Merger Agreement
On May 28, 2013, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Shuanghui International Holdings Limited, a corporation formed under the laws of the Cayman Islands (Shuanghui) and Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of Shuanghui (Merger Sub and, together with Shuanghui, the Parent Parties), pursuant to which Merger Sub will merge with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Shuanghui.
At the effective time of the Merger (the Effective Time), each share of the Company's common stock issued and outstanding immediately prior to the Effective Time, other than certain excluded shares, will be converted into the right to receive $34.00 in cash, without interest (the Merger Consideration). In addition, upon completion of the Merger, all then-outstanding stock-based compensation awards, whether vested or unvested, will be converted into the right to receive the Merger Consideration, less the exercise price of such awards, if any.
The Company's shareholders will be asked to vote on the adoption of the Merger Agreement and the Merger at a special shareholder meeting that will be held on a date to be announced as promptly as reasonably practicable following the customary SEC clearance process.
The closing of the Merger is subject to a condition that the Merger Agreement be adopted by the affirmative vote of the holders of a majority of all of the outstanding shares of the Company's common stock entitled to vote thereon at such meeting (the Company Shareholder Approval). Consummation of the Merger is also subject to other customary closing conditions including, among other things, the satisfaction (or, in certain cases, waiver) of certain regulatory requirements including the receipt of approval under applicable U.S. and specified foreign antitrust and anti-competition laws and if review by the Committee on Foreign Investment in the United States (CFIUS) has concluded, the absence of any action by the President of the United States to block or prevent the consummation of the Merger . Each party's obligation to consummate the Merger also is subject to certain additional conditions that include, among other things, the accuracy of the other party's representations and warranties, and the other party's compliance with its covenants and agreements, contained in the Merger Agreement (in each case subject to certain materiality qualifiers).

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The Merger will be financed through a combination of cash provided by Shuanghui, rollover of certain existing Company debt, as well as debt financing which has been committed by Morgan Stanley Senior Funding, Inc. and a syndicate of banks. The Merger Agreement does not contain a financing condition.
The Merger Agreement contains representations and warranties customary for transactions of this type. The Company has agreed to various customary covenants and agreements, including, among others, agreements to conduct its business in all material respects in the ordinary course during the period between the execution of the Merger Agreement and the Effective Time and not to engage in certain kinds of transactions during this period.
Pursuant to the terms of a limited “go-shop” provision in the Merger Agreement, the Company and its subsidiaries and their respective representatives may initiate, solicit and encourage any alternative acquisition proposals from two third parties who provided acquisition proposals to the Company or its representatives during a specified period prior to the date of the Merger Agreement (the Qualified Pre-Existing Bidders), provide nonpublic information to such Qualified Pre-Existing Bidders and participate in discussions and negotiations with such Qualified Pre-Existing Bidders regarding alternative acquisition proposals. With respect to third parties other than the Qualified Pre-Existing Bidders, the Company is subject to customary “no-shop” restrictions on the ability of the Company to solicit third-party.
Prior to obtaining the Company Shareholder Approval, under specified circumstances our board of directors may change its recommendation in connection with an intervening event that was not known (or the consequences of which were not reasonably foreseen) as of the date of the Merger Agreement, or in connection with an alternative proposal that does not result from a breach of the “no shop” restrictions and that our board of directors determines in good faith would, if consummated, constitute a superior proposal (in which latter case the Company may also terminate the Merger Agreement to enter into such superior proposal). Before our board of directors may change its recommendation in connection with a superior proposal or intervening event, or terminate the Merger Agreement to accept a superior proposal, the Company must provide Shuanghui with customary match rights.
The Merger Agreement contains certain termination rights for the Company and Shuanghui including, subject to certain limitations, the right of either party to terminate the Merger Agreement if the Merger is not consummated by November 29, 2013. Upon termination of the Merger Agreement under specified customary circumstances, the Company will be required to pay Shuanghui a termination fee. The Merger Agreement also provides that Shuanghui will be required to pay the Company a reverse termination fee in certain circumstances if the Merger Agreement is terminated. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Additional Matters Affecting Liquidity—Definitive Merger Agreement” of this Annual Report on Form 10-K for additional information regarding termination rights under the Merger Agreement.
Additional information about the Merger Agreement is set forth in our Current Report on Form 8-K filed with the SEC on May 29, 2013.
Strategies for Growth
We are focused on top and bottom line growth and transforming the Company into a more value-added consumer packaged meats company. Our strategy includes growing our base business, further improving our cost structure and targeting branded and value-added acquisitions.
The fundamental tenets of our organic growth plan include:
Increased capital investment to upgrade facilities with new machinery and equipment to improve our competitive cost structure and achieve least cost and best in class operations. We expect $300 million to $350 million in annual capital expenditures over the next several years to fund this investment in our business.
Continued higher investment in marketing and advertising programs to build brand equity and grow sales. Our plan is to increase our annual marketing and advertising expenditures by double digits for the foreseeable future. Currently, marketing and advertising expense represents approximately 1% of packaged meats sales.
Establish a culture of innovation to build a strong product pipeline to drive packaged meats volume and margins. Our innovation initiative will be focused in five strategic areas: packaging, health and wellness, convenience, taste and pork consumer solutions. These platforms have a strong focus on product differentiation highlighting quality and convenience, better-for-you foods, including lower sodium, lean protein, and natural ingredients, and new taste experiences.

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Emphasize our hog production assets as a strategic point of difference. We believe that our vertically integrated platform is a competitive advantage for the Company as it allows us to meet customer specifications. Both domestic and export customers are asking for differentiated products, from gestation pen pork to ractopamine-free meat, and we are uniquely positioned to fill this demand. As of April 28, 2013, our facilities in Clinton, North Carolina and Bladen County, North Carolina were 100% ractopamine-free. Our facility in Milan, Missouri is expected to be 100% ractopamine-free by the end of the first quarter of fiscal 2014.
In addition to our organic growth strategy, we intend to apply a disciplined approach in acquiring branded and value-added companies while maintaining a conservative balance sheet. Our strategy is to target modest-sized companies that can be easily integrated into our existing business. We would expect to finance such acquisitions with a combination of cash generated from our existing businesses and debt.
Acquisitions
American Skin Food Group, LLC
In September 2012 (fiscal 2013), we acquired a 70% controlling interest in American Skin Food Group, LLC (American Skin) for $24.2 million in cash, including post-closing adjustments for differences in American Skin's calendar 2012 earnings and working capital at closing from agreed-upon targets.
Located in Burgaw, North Carolina, American Skin manufactures and supplies pork rinds to the snack food industry. By leveraging our coordinated sales and marketing team, we believe American Skin can expand into new markets both domestically and internationally, which could substantially increase current sales of approximately $25 million and net income of approximately $3 million annually over the next five to seven years with minimal additional plant investment.

Kansas City Sausage, LLC
In May 2013 (fiscal 2014), we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $35.0 million in cash, subject to a customary post-closing adjustment for differences between working capital at closing and an agreed-upon target. Upon closing, in addition to the cash purchase price, we advanced $10.0 million to the seller in exchange for a promissory note, which is secured by the remaining membership interests in KCS held by the seller. Additionally, we entered into a revolving loan agreement with KCS, under which we agreed to make loans from time to time up to an aggregate principal amount of $20.0 million. The aggregate amount of any obligations incurred under the revolving loan agreement is secured by a first priority security interest in all of the assets of KCS.
KCS is a leading U.S. sausage producer and sow processor. We intend to merge KCS's low-cost, efficient operations and high-quality products with our strong brands and sales and marketing team to continue to grow our packaged meats business. The venture will operate in Des Moines, Iowa and Kansas City, Missouri. In Des Moines, the venture will produce premium raw materials for sausage, as well as value-added products, including boneless hams and hides. The Kansas City plant is a modern sausage processing facility and is designed for optimum efficiency to provide retail and foodservice customers with high quality products. With our strong ongoing focus on building our packaged meats business, and our access to 15% of the U.S. sow population, this joint venture is a logical fit for the Company. It will provide a growth platform in two key packaged meats categories — breakfast sausage and dinner sausage — and will allow us to expand our product offerings to our customers. These categories represent over $4.0 billion in retail and foodservice sales annually.
Debt Refinancing
In August 2012 (fiscal 2013), we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes (2022 Notes) at a price equal to 99.5% of their face value. We used the net proceeds to repurchase $649.4 million of outstanding senior notes coming due in May 2013 and July 2014. As a result of these repurchases, we recognized losses on debt extinguishment of $120.7 million in the second quarter of fiscal 2013. We also extended the maturity date of our $200.0 million Rabobank Term Loan (the Rabobank Term Loan) from June 2016 (fiscal 2017) to May 2018 (fiscal 2019). These activities have significantly improved our debt maturity profile, removed the early maturity trigger on our inventory-based revolving credit facility (the Inventory Revolver), and released the encumbrances on our real estate and fixed assets.

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In the fourth quarter of fiscal 2013, we partially exercised the accordion feature of our Second Amended and Restated Credit Agreement and increased the borrowing capacity of the Inventory Revolver from a total of $925.0 million to a total of $1.025 billion. All other terms and conditions of the Inventory Revolver remain unchanged, including the limitation on the actual amount of credit that is available from time to time under the Inventory Revolver as a result of borrowing base valuations of our inventory, accounts receivable and certain cash balances. We also executed a new $200.0 million term loan with a scheduled maturity date of February 4, 2014 (the Bank of America Term Loan). The Bank of America Term Loan bears interest at a rate of LIBOR plus 3.25% per annum or, at our election, a base rate plus 2.25% per annum. These two financing activities increased our liquidity and provided capital funding at a lower interest rate, which will assist us in retiring upcoming debt maturities in the first quarter of fiscal 2014.
DESCRIPTION OF SEGMENTS 
Pork Segment 
The Pork segment consists mainly of three wholly-owned U.S. fresh pork and packaged meats subsidiaries: Smithfield Packing, Farmland Foods and John Morrell. 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 approximately 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 113,000 hogs per day. In fiscal 2013, the Pork segment processed approximately 28.5 million hogs.
The Pork segment sold approximately 3.8 billion pounds of fresh pork in fiscal 2013. 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 2.8 billion pounds of packaged meats products in fiscal 2013. 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 a number of labels including the following core brand names: Smithfield, Farmland, John Morrell, Gwaltney, Armour, Eckrich, Margherita, Carando, Kretschmar, Cook’s, Curly's and Healthy Ones. We also sell a substantial quantity of packaged meats as private-label products. 
Our product lines also 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. 
The following table shows the percentages of Pork segment revenues derived from packaged meats products and fresh pork for the fiscal years indicated.
 
 
Fiscal Years
 
 
2013
 
2012
 
2011
Packaged meats
 
56
%
 
54
%
 
56
%
Fresh pork (1)
 
44

 
46

 
44

 
 
100
%
 
100
%
 
100
%
 ——————————————
(1) 
Includes by-products and rendering.
In fiscal 2013, export sales comprised approximately 16% of the Pork segment’s volumes and approximately 14% of the segment’s revenues.
Hog Production Segment 
As a complement to our Pork segment, 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. The Hog Production segment operates numerous hog production facilities with approximately 853,000 sows producing about 16.0 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. 
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
 
 
2013
 
2012
 
2011
Internal hog sales
 
76
%
 
80
%
 
78
%
External hog sales
 
14

 
17

 
19

Other products (1)
 
10

 
3

 
3

 
 
100
%
 
100
%
 
100
%
——————————————
(1) 
Consists primarily of grains, feed and gains (losses) on derivatives.  
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 853,000 SPG breeding sows. In addition, we have sublicensed some of these rights to some of our strategic hog production partners. We believe that the hogs produced by these genetic lines 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 2013, we produced approximately 16.0 million hogs from SPG breeding stock.
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. In fiscal 2013, approximately 74% of our market hogs were finished on contract farms.
International Segment 
The International segment includes our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico. Our international meat processing operations produce a wide variety of fresh pork, beef, poultry and packaged meats products, including cooked hams, sausages, hot dogs, bacon and canned meats. Our noncontrolling interests in international meat processing operations include a 37% interest in the common stock of Campofrío Food Group (CFG), a leading European packaged meats company headquartered in Madrid, Spain, and one of the largest worldwide with annual sales of approximately $2.5 billion.

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The following table shows the percentages of International segment revenues derived from packaged meats, fresh meats and other products for the fiscal years indicated.
 
 
Fiscal Years
 
 
2013
 
2012
 
2011
Packaged meats
 
48
%
 
47
%
 
47
%
Fresh meats
 
43

 
43

 
42

Other products (1)
 
9

 
10

 
11

 
 
100
%
 
100
%
 
100
%
——————————————
(1) 
Includes external hog sales, feed, feathers, by-products and rendering  
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. 
SEGMENTS IN GENERAL
Sources and Availability of Raw Materials 
Feed grains, including corn, soybean meal and wheat, are the primary raw materials of our hog production operations. 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 fluctuations and have escalated in recent years due to increased worldwide demand. 
Live hogs are the primary raw materials of the Pork segment and our meat processing operations in the International 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 approximately 53% of its U.S. live hog requirements from the Hog Production segment in fiscal 2013. 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 12% of hogs processed by the Pork segment in fiscal 2013. We also purchase hogs on a daily basis at our Southeastern and Midwestern processing plants and our company-owned buying stations in the Southeast and Midwest.
Like the Pork segment, live hogs are the primary raw materials of our meat processing operations in the International segment with the primary source of hogs being our hog production operations located in Poland and Romania. Our meat processing operations in the International segment purchased approximately 68% of its live hog requirements from our hog production operations located in Poland and Romania in fiscal 2013
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.
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. 

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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 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.
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 2013, we sold our products to more than 3,200 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 tractor 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.
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. 

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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 our beef and turkey operations. 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 $80.9 million, $75.9 million and $47.0 million in fiscal 2013, 2012 and 2011, respectively.
FINANCIAL INFORMATION ABOUT SEGMENTS 
Financial information for each reportable segment, including revenues, operating profit and total assets, is disclosed in Note 15Reporting Segments 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.
We use internationally recognized management systems to manage many of our regulatory programs. For example, we use the International Organization for Standardization (ISO) 14001:2004 standard to manage and optimize environmental performance, and we were the first in the industry to achieve ISO 14001:2004 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 14001:2004 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. 

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Water 
In March 2011, the U.S. Court of Appeals for the Fifth Circuit overturned EPA's November 2008 rule requiring that confined animal feeding operations (CAFOs) that “discharge or propose to discharge” apply for permit coverage under the Clean Water Act's National Pollutant Discharge Elimination System (NPDES). The Fifth Circuit's decision (which held that only discharging CAFOs have a duty to apply for NPDES permit coverage) has clarified the extent of our obligations under the NPDES permit program. EPA has not yet proposed or finalized a rule in response to the Fifth Circuit's decision, and it is not clear whether any such action may attempt to impose additional obligations on our hog production operations.
Ai
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 paid a $100,000 penalty to EPA. Premium Standard Farm, Inc.'s (PSF's) (now Murphy-Brown of Missouri LLC'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, paid 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 was approximately $6.0 million. Monitoring under the study began in the spring 2007 and ended in the winter 2010. EPA made the data available to the public in January 2011 and also issued a Call for Information seeking additional emissions data to ensure it considers the broadest range of available scientific data as it develops improved methodologies for estimating emissions. EPA will review the data to develop emissions estimating methodologies where site-specific information is unavailable. In March 2012, EPA made available draft emission estimation methodologies for broilers and swine and dairy feedings operations for public comment. EPA has not announced when it expects to finalize the methodologies. 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 (GHGs) and Climate Change 
In calendar year 2009, EPA finalized its Mandatory Reporting of Greenhouse Gases (GHGs) rule, which requires owners or operators of certain facilities (including facilities that contain a manure management system) that emit at least 25,000 metric tons or more of GHGs per year to report their emissions. Although EPA has not been implementing the rule as it applies to manure management systems due to a congressional restriction prohibiting the expenditure of funds for this purpose, there is no assurance that this prohibition will not be lifted in the future. Should that occur, the rule would impose additional costs on our hog production operations; however, it is not expected that such costs would have a material adverse effect on our hog production operations.
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 and targeted enforcement.
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 require 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.

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As an agriculture-based company, changes to the climate and weather patterns 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.
E15 Ruling
In October 2010, the EPA granted a “partial waiver” to a statutory bar under the Clean Air Act prohibiting fuel manufacturers from introducing fuel additives that are not “substantially similar” to those already approved and in use for vehicles of model year (MY) 1975 or later. The EPA's decision allows fuel manufacturers to increase the ethanol content of gasoline to 15 percent (E15) for use in MY 2007 and newer light-duty motor vehicles, including passenger cars, light-duty trucks, and medium-duty passenger vehicles. In January 2011, the EPA granted another partial waiver authorizing E15 use in MY 2001-2006 light-duty motor vehicles. Prior to EPA's decisions, the ethanol content of gasoline in the United States was limited to 10 percent. Judicial challenges to these rulemakings by a coalition of industry groups were dismissed by the U.S. Court of Appeals for the D.C. Circuit on standing grounds. That ruling is now the subject of a petition to the U.S. Supreme Court which is currently pending.
These agency actions, along with subsequent evaluations by the EPA, allow the introduction of E15 into commerce and the marketplace by manufacturers. Although the long-term impact of E15 is currently unknown, studies have shown that expanded corn-based ethanol production has driven up the price of livestock feed and led to commodity-price volatility. We cannot presently assess the full economic impact of past and future waivers on the meat processing industry or on our 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 entered into a consent decree that settled two citizen lawsuits alleging among other things violations of certain environmental laws. The consent decree 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. Murphy-Brown has successfully completed a number of the measures called for in the consent decree and expects to fulfill its remaining consent degree obligations over the next 12 to 24 months, at which time it will move for termination of the decree.
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 farm operations. PSF has successfully completed  the measures called for in the state judgment and the state court terminated the judgment in the fall of 2012. PSF has also completed a number of the measures called for in the federal consent decree, but is unable to predict at this time when it will complete the remaining consent degree obligations or when the consent decree will be terminated.

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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. One of the features of the Agreement 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. To fulfill our commitment, we made annual contributions of $2.0 million beginning in fiscal 2001 through fiscal 2010. Due to the losses we were experiencing in our Hog Production segment in fiscal 2010, we entered into an agreement with the Attorney General of North Carolina to defer our annual payments in fiscal 2011 and fiscal 2012. This agreement does not reduce our $50.0 million commitment. We re-started our annual $2.0 million payment in fiscal 2013.
Animal Care
More than a decade ago, Smithfield developed and implemented a comprehensive, systematic animal care management program to monitor and measure the well-being of pigs on company-owned and contract farms. Developed in consultation with two of the world's foremost experts in animal behavior and handling, this system continues to guide our operations today. Our animal care management program guides the proper and humane care of our animals at every stage of their lives, from gestation to transport to processing plant. All farm employees and contract hog producers must employ the methods and techniques of the management system and take steps to verify their compliance. Adherence to proper animal welfare management is a condition of our agreements with contract producers.
Our Animal Care Policy underscores the company's Commitments to providing the following:
shelter that is designed, maintained, and operated to meet the animals' needs;
access to adequate water and high-quality feed to meet nutritional requirements;
humane treatment of animals that enhances their well-being and complies with all applicable laws and regulations;
identification and appropriate treatment of animals in need of health care; and
use of humane methods to euthanize sick or injured animals not responding to care and treatment.
Several years ago, we volunteered to provide input and recommendations to help the National Pork Board enhance its animal care management program for all pork producers. That program, which includes many of the tenets of our own guidelines, became the National Pork Board's Pork Quality Assurance Plus (PQA Plus®) program. A pork producer becomes PQA Plus certified only after staff attend training sessions on good production practices (which includes topics such as responsible animal handling, disease prevention, biosecurity, responsible antibiotic use, and appropriate feeding). Farms entered into the program undergo on-farm site assessments and are subject to random third-party audits. We obtained certification of all company-owned and contract farms under the PQA Plus program by the end of calendar year 2009.
Smithfield was also one of the founding adopters of the National Pork Board's “We Care” program, which demonstrates that pork producers are accountable to established ethical principles and animal well-being practices.
At all of our slaughter facilities, we also use a systematic approach that includes the following:
an animal welfare and humane handling manual;
a comprehensive training program; and
an auditing system with internal verification and third-party audits.
Our plants all have developed quality programs following the standards set in the U.S. Department of Agriculture's Process Verified Program (PVP), as described elsewhere in this report. Our PVP programs monitor aspects of traceability, country of origin, PQA Plus® adherence on farms, and Transport Quality Assurance status of drivers.

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In January 2007 (fiscal 2007), we announced a voluntary, ten-year program to phase out individual gestation stalls at our company-owned 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 $360.0 million, including associated maintenance and repairs. 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. As of the end of calendar year 2012, we had completed conversions to group housing for over 38% of our sows on company-owned farms. We will continue the conversion as planned with the objective of completing conversions for all sows on company-owned farms by the end of 2017.
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 April 28, 2013:
Segment
 
Employees
 
Employees Covered by Collective Bargaining Agreements (1)
Pork
 
31,750

 
18,300

International
 
9,950

 
2,300

Hog Production
 
5,050

 

Corporate
 
200

 

Totals
 
46,950

 
20,600

——————————————
(1) 
Includes employees that are members of labor unions.
Approximately 8,570 employees are covered by collective bargaining agreements that expire in fiscal 2014. Collective bargaining agreements covering other employees 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 15Reporting Segments 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.

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ITEM 1A.
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. 
Merger Risk Factors
The announcement and pendency of the Merger could adversely affect our business, financial results and operations.
The announcement and pendency of the proposed Merger could cause disruptions in and create uncertainty surrounding our business, which could have an adverse effect on our business, financial results and operations, regardless of whether the Merger is completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Merger:
the diversion of significant management time and resources towards the completion of the Merger;
the impairment of our ability to attract, retain and motivate key personnel, including our senior management;
difficulties maintaining relationships with customers, suppliers and other business partners;
the inability to pursue alternative business opportunities or make appropriate changes to our business because of requirements in the Merger Agreement that we conduct our business in all material respects only in the ordinary course of business and not engage in certain kinds of transactions prior to the completion of the proposed Merger;
the potential for litigation relating to the Merger and the costs related thereto; and
higher costs of accessing funds in the debt markets.
The proposed Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.
On May 28, 2013, we entered into the Merger Agreement with Shuanghui. The Merger Agreement is an executory contract subject to numerous closing conditions beyond our control, and there is no guarantee that these conditions will be satisfied in a timely manner or at all. Completion of the Merger is subject to various conditions, including the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of all of the outstanding shares of our common stock entitled to vote thereon, and certain other conditions, including, among other things, the receipt of certain regulatory approvals. If any of the conditions to the proposed Merger are not satisfied (or waived by the other party), we may not complete the Merger. In addition, the Merger Agreement may be terminated under certain specified circumstances, including a change in the recommendation of our board of directors or our termination of the Merger Agreement to enter into an agreement for a superior proposal, as defined in the Merger Agreement. Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including the following:
If the Merger is not completed, and there are no other parties willing and able to acquire us at a price of $34.00 per share or higher, on terms acceptable to us, our stock price will likely decline as our stock has recently traded at prices based on the proposed per share consideration for the Merger.
We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, for which we will have received little or no benefit if the Merger is not completed. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger.
A failed Merger may result in negative publicity and a negative impression of us in the investment community.
Upon termination of the Merger Agreement by the Company or Shuanghui under specified circumstances, our remedy may be limited to receipt of a reverse termination fee of $275 million from Shuanghui, and under some circumstances, we would not be entitled to receive any termination fee.
Upon termination of the Merger Agreement by the Company or Shuanghui under specified circumstances, including a termination by us in order to accept a superior proposal as defined in the Merger Agreement, we would be required to pay a termination fee of up to $175 million.
Our costs of accessing funds in the debt and capital markets may be higher than before execution of the Merger Agreement as a result of credit rating downgrades that could occur while the proposed Merger is pending.

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The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed Merger.
The Merger Agreement contains provisions that restrict our ability to entertain a third party proposal to acquire us. These provisions include the general prohibition other than pursuant to the limited “go-shop” provision on our soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, and the requirement that we pay a termination fee of $175 million (which amount is reduced to $75 million under specified conditions) if the Merger Agreement is terminated in specified circumstances. These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition transaction, even one that may be deemed of greater value than the proposed Merger to our shareholders. Furthermore, even if a third party elects to propose an acquisition, the requirement on our part to pay a termination fee may result in that third party offering a lower value to our shareholders than such third party might otherwise have offered.
Business Risk Factors
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. These fluctuations can be significant as shown in recent years with average domestic live hog prices going from $44 per hundredweight in fiscal 2010 to $65 per hundredweight in fiscal 2012. Further, hog raising costs are largely dependent on the fluctuations of commodity prices for corn and other feed ingredients. For example, our fiscal 2013 results of operations were negatively impacted by higher feed and feed ingredient costs which increased hog raising costs to $68 per hundredweight in fiscal 2013 compared to $54 per hundred weight in fiscal 2011. When hog prices are lower than our hog production costs which occurred in fiscal 2013, 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.  
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. 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. 

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From time to time, we have experienced outbreaks of certain livestock diseases and 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. 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. 
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. 
Our operations are subject to the general risks associated with the food industry, including perceived or real health risks related to our products or the food industry generally and risks associated with government regulations. 
We are subject to risks affecting the food industry generally, including risks posed by the following:
food spoilage,
food contamination,
food allergens,
evolving consumer preferences and nutritional and health-related concerns,
consumer product liability claims,
product tampering,
product labeling,
the possible unavailability and expense of product liability insurance,
the potential cost and disruption of a product recall, and
disruption to operations if government inspectors are unavailable due to furloughs.
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 occurred in late fiscal 2009 and early fiscal 2010 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 organisms and pathogens are generally found in the environment, there is a risk that one or more, 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 organisms and 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. 

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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.
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 federal, state, local and foreign 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 administrative, 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 lawsuits even if we are operating in compliance with applicable regulations. For example, before we acquired PSF and subsequent to our acquisition of PSF, certain nuisance suits in Missouri resulted in jury verdicts against PSF. In fiscal 2013, we consummated a global settlement that resolved the vast majority of the outstanding nuisance litigation in Missouri. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Missouri litigation” for additional details. However, we cannot assure you that additional environmental related lawsuits, including additional nuisance claims, will not arise in the future.
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 produce and/or sell livestock or adopt new regulations impacting our production or processing operations, 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 addition, Congress has in the past 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.

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Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position. 
 As of April 28, 2013, we had:
approximately $2.5 billion of indebtedness;
guarantees of $10.2 million for leases that were transferred to JBS S.A. in connection with the sale of Smithfield Beef, Inc.; and
aggregate unused capacity available totaling approximately $1.3 billion under (1) our inventory based revolving credit facility up to $1.025 billion, with an option to expand up to $1.225 billion (the Inventory Revolver), (2) our accounts receivable securitization facility up to $275.0 million (the Securitization Facility) and (3) our other credit facilities, such total taking into account outstanding borrowings of $82.3 million and $82.3 million of outstanding letters of credit under the Securitization Facility.
Because the borrowing capacity under the Inventory Revolver and Securitization Facility depend, in part, on inventory and accounts receivable levels, respectively, that fluctuate from time to time, such amounts may not reflect actual borrowing capacity.
Our indebtedness may increase from time to time 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 2013, margin deposits posted by us ranged from $(67.9) million to $77.5 million (negative amounts representing margin deposits we have received from our brokers). Our consolidated indebtedness level could significantly affect our business because: 
it may, together with the financial and other restrictive covenants in the agreements governing our indebtedness, 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,
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,
it may reduce our flexibility to respond to changing business and economic conditions or to take advantage of business opportunities that may arise,
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,
substantially all of our working capital assets in the United States secure the Inventory Revolver and the Securitization Facility, all of 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
it could make us more vulnerable to downturns in general economic or industry conditions or in our business.
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.

18



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 Inventory Revolver, the Securitization Facility, the Rabobank Term Loan, the Bank of America Term Loan and the holders of our senior unsecured notes, as the case may be, to declare all amounts outstanding under the Inventory Revolver, the Securitization Facility, the Rabobank Term Loan, the Bank of America Term Loan or the senior unsecured notes to be due and payable, together with accrued and unpaid interest, and the commitments of the relevant lenders to make further extensions of credit under the Inventory Revolver and the Securitization Facility could be terminated. If we were unable to repay our secured indebtedness to our lenders, these lenders could proceed against the collateral securing that indebtedness, which could include substantially all of our working capital assets in the United States. 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.
Our operations are subject to the risks associated with acquisitions and investments in joint ventures. 
From time to time we review opportunities for strategic growth through acquisitions. 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. These transactions present financial, managerial and operational challenges, including:
diversion of management attention from other business concerns,
difficulty with integrating businesses, operations, personnel and financial and other systems,
lack of experience in operating in the geographical market of the acquired business,
increased levels of debt potentially leading to associated reduction in ratings of our debt securities and adverse impact on our various financial ratios,
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,
potential loss of key employees and customers of the acquired business,
assumption of and exposure to unknown or contingent liabilities of acquired businesses,
potential disputes with the sellers, and
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.
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 April 28, 2013, none of our equity investments represented more than 5% 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 and could limit our ability to obtain financing in the future. See “Item 8. Notes to Consolidated Financial Statements—Note 5: Investments” for a discussion of the accounting treatment of our equity investments.

19



We are subject to risks associated with our international sales and operations. 
Sales to international customers accounted for approximately 23% of our net sales in fiscal 2013. 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 in Mexico and have a significant investment in Western Europe. As of April 28, 2013, 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.
Our international sales, operations and investments are subject to various risks related to economic or political uncertainties including among others:
general economic and political conditions,
imposition of tariffs, quotas, trade barriers and other trade protection measures imposed by foreign countries,
import or export licensing requirements imposed by various foreign countries,
the closing of borders by foreign countries to the import of our products due to, among other things, animal disease or other perceived health or safety issues,
difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex domestic and international laws, treaties and regulations, including the Foreign Corrupt Practices Act,
different regulatory structures and unexpected changes in regulatory environments,
tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation,
potentially negative consequences from changes in tax laws, and
distribution costs, disruptions in shipping or reduced availability of freight transportation.
Furthermore, our foreign operations are subject to the risks described above as well as additional risks and uncertainties including among others:
fluctuations in currency values, which have affected, among other things, the costs of our investments in foreign operations,
translation of foreign currencies into U.S. dollars, and
foreign currency exchange controls.
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.

20



We depend on availability of, and satisfactory relations with, our employees. 
As of April 28, 2013, we had approximately 46,950 employees, 20,600 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 labor 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 28% of net sales for fiscal 2013. 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 from the loss of some of our larger customers or 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) and/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 or 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 incurred in our hog production operations and decline in the market price of our common stock at that time. We determined that the fair value of our U.S. hog production reporting unit exceeded its carrying value by more than 20%. 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.
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 April 28, 2013, we had $782.4 million of goodwill, which represented approximately 10% of total assets.

21



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 and access to 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. 
Disruptions and instability in credit and other financial markets and deterioration of national and global economic conditions, could, among other things:
make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;
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;
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;
negatively impact global demand for protein products, which could result in a reduction of sales, operating income and cash flows;
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
impair the financial viability of our insurers.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None


22



ITEM 2.
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 565,000 head, and our domestic packaged meats capacity was 64.5 million pounds, as of April 28, 2013. During fiscal 2013, the average weekly capacity utilization for pork slaughter and packaged meats was 97% and 84%, respectively. We believe these properties are adequate and suitable for our needs.
Location
Segment
Operation
Smithfield Packing Plant
Bladen County, North Carolina
Pork
Slaughtering and cutting hogs
 
 
 
Smithfield Packing Plant
Smithfield, Virginia
Pork
Slaughtering and cutting hogs; fresh and packaged pork products
 
 
 
Smithfield Packing Plant
Kinston, North Carolina
Pork
Production of boneless cooked hams, deli hams and sliced deli products
 
 
 
Smithfield Packing Plant
Clinton, North Carolina
Pork
Slaughtering and cutting hogs; fresh and packaged pork products
 
 
 
Smithfield Packing Plant
Wilson, North Carolina
Pork
Production of bacon
 
 
 
John Morrell Plant
Sioux Falls, South Dakota
Pork
Slaughtering and cutting hogs; fresh and packaged pork products
 
 
 
John Morrell Plant
Springdale, OH
Pork
Production of hot dogs and luncheon meats
 
 
 
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
 
 
 
Armour-Eckrich Meats
(operated by John Morrell)
Omaha, Nebraska
Pork
Production of bulk and sliced dry sausages
 
 
 
Armour-Eckrich Meats
(operated by John Morrell)
Peru, Indiana
Pork
Production of pre-cooked bacon
 
 
 
Armour-Eckrich Meats
(operated by John Morrell)
Junction City, Kansas
Pork
Production of smoked sausage
 
 
 
Armour-Eckrich Meats
(operated by John Morrell)
Mason City, Iowa
Pork
Production of boneless bulk and sliced ham products
 
 
 
Armour-Eckrich Meats
(operated by John Morrell)
St. James, Minnesota
Pork
Production of sliced luncheon meats
 
 
 

23



 
 
 
Location
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; fresh and packaged pork products
 
 
 
Farmland Plant
Denison, Iowa
Pork
Slaughtering and cutting hogs; fresh and packaged pork products
 
 
 
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 smoked hams and other smoked meats
 
 
 
Cook’s Hams Plant
(operated by Smithfield Packing)
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 and refinery products
 
 
 
Animex Plant
Szczecin, Poland
International
Slaughtering and deboning hogs; production of packaged and other pork 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
 
 
 
Animex Plant
Ilawa, Poland
International
Slaughtering of turkey and geese; production of fresh and packaged poultry products
 
 
 
Animex Plant
Suwalki, Poland
International
Slaughtering of chicken; production of fresh and packaged poultry products
 
 
 
Animex Plant
Opole, Poland
International
Slaughtering of chicken; production of fresh and packaged poultry products

24



 
 
 
 
 
 
Location
Segment
Operation
Animex Plant
Debica, Poland
International
Production of packaged poultry products
 
 
 
Smithfield Prod Plants
Timisoara, Romania
International
Deboning, slaughtering and rendering hogs
 
 
 
Corporate Headquarters
Smithfield, Virginia
Corporate
Management and administrative support services for other segments
The Hog Production segment owns and leases numerous hog production and grain storage facilities, as well as feedmills, mainly in North Carolina, Utah, Missouri, Iowa, Colorado and Virginia, with additional facilities in Oklahoma, Texas, Illinois, South Carolina and Pennsylvania. A substantial number of these owned facilities are pledged under our credit facilities.
Also, the International segment owns and leases numerous hog production and grain storage facilities, as well as feedmills, in Poland and Romania.
ITEM 3. 
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 to 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. 
Farmland (Denison)
In November 2012, the Iowa Department of Natural Resources (IDNR) initiated a civil enforcement action against Farmland Foods, Inc. (Farmland) for exceeding certain effluent limitations contained in its wastewater pretreatment agreement in connection with operations at Farmland's Denison facility. IDNR and Farmland have initiated discussions as a first step towards resolving this matter by agreement, and Farmland has been working on improvements to its Denison wastewater facility. While we could face monetary penalties, depending upon the results of the action, we believe that any ultimate liability with respect to these matters will not have a material adverse effect on our financial position or operations.
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.

25



EXECUTIVE OFFICERS OF THE REGISTRANT 
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 (58)
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.
 
 
 
Robert W. Manly, IV (60)
Executive Vice President and Chief Financial Officer and President of Murphy-Brown
Mr. Manly assumed the role of President of Murphy-Brown in July 2012. 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 (48)

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 is the son of Joseph W. Luter, III, Chairman of the Board of Directors.
 
 
 
Dhamu Thamodaran (58)
Executive Vice President and Chief Commodity Hedging Officer

Mr. Thamodaran was elected Executive Vice President and Chief Commodity Hedging Officer in July 2011. He was named Senior Vice President and Chief Commodity Hedging Officer in June 2008. Prior to these appointments, Mr. Thamodaran served as Vice President, Price Risk Management.
 
 
 
Dennis H. Treacy (58)
Executive Vice President, Corporate Affairs, and Chief Sustainability Officer
Mr. Treacy was elected Executive Vice President, Corporate Affairs, and Chief Sustainability Officer in October 2011. He was named Senior Vice President of Corporate Affairs and Chief Sustainability Officer in February 2010. Prior to these appointments, Mr. Treacy served as Vice President, Environmental and Corporate Affairs.
 
 
 
George H. Richter (68)
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.
 
 
 
Michael E. Brown (54)
President of Farmland Foods
Mr. Brown was elected President of Farmland Foods in October 2010. He served as President of Armour-Eckrich and Executive Vice President of John Morrell Food Group from 2006 to October 2010.
 
 
 
Timothy O. Schellpeper (48)

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.
 
 
 
Joseph B. Sebring (66)
President of John Morrell
Mr. Sebring has served as President of John Morrell since May 1994.

26



PART II
 
ITEM 5.
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 2013 and fiscal 2012.
 
 
2013
 
2012
 
 
High
 
Low
 
High
 
Low
First quarter
 
$
21.93

 
$
17.75

 
$
23.85

 
$
18.81

Second quarter
 
21.17

 
17.55

 
23.95

 
17.79

Third quarter
 
23.86

 
20.34

 
25.12

 
21.75

Fourth quarter
 
27.33

 
21.98

 
24.23

 
20.04

 
HOLDERS 
As of June 11, 2013 there were approximately 833 record holders of our common stock. 
DIVIDENDS 
We have never paid a cash dividend on our common stock. In addition, the terms of certain of our debt agreements limit 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. Under the Merger Agreement described in "Part I—Item 1. Business—Merger Agreement," we are prohibited from paying any dividend or other distribution on our common stock prior to the completion of the Merger.
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)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 28, 2013 to February 27, 2013
 

 
n/a

 
n/a

 
$
24,490,059

February 28, 2013 to March 27, 2013
 
12,322

(2) 
$
25.96

 

 
$
24,490,059

March 28, 2013 to April 28, 2013
 

 
n/a

 
n/a

 
$
24,490,059

Total
 
12,322

 
$
25.96

 

 
$
24,490,059

——————————————
(1) 
On June 16, 2011, we announced that our board of directors had approved a share repurchase program authorizing the Company to buy up to $150,000,000 of its common stock. In September 2011, our board of directors approved a $100,000,000 increase to the authorized amount. In June 2012 and July 2012, our board of directors approved an increase in the authorized amount of $250,000,000 and $100,000,000, respectively. This share repurchase program expires on June 13, 2014.
The Merger Agreement discussed in "Part I—Item 1. Business—Merger Agreement" generally prohibits the Company from repurchasing any of its shares prior to the completion of the Merger.
(2) 
Purchases of 12,322 shares were made in open market transactions by Wells Fargo, as trustee, and these 12,322 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



ITEM 6.
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
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in millions, except per share data)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
13,221.1

 
$
13,094.3

 
$
12,202.7

 
$
11,202.6

 
$
12,487.7

Cost of sales
 
11,901.4

 
11,544.9

 
10,488.6

 
10,472.5

 
11,863.1

Gross profit
 
1,319.7

 
1,549.4

 
1,714.1

 
730.1

 
624.6

Selling, general and administrative expenses
 
815.4

 
816.9

 
789.8

 
705.9

 
798.4

Gain on fire insurance recovery
 

 

 
(120.6
)
 

 

(Income) loss from equity method investments
 
(15.0
)
 
9.9

 
(50.1
)
 
(38.6
)
 
50.1

Operating profit (loss)
 
519.3

 
722.6

 
1,095.0

 
62.8

 
(223.9
)
Interest expense
 
168.7

 
176.7

 
245.4

 
266.4

 
221.8

Other loss (income)
 
120.7

 
12.2

 
92.5

 
11.0

 
(63.5
)
Income (loss) from continuing operations before income taxes
 
229.9

 
533.7

 
757.1

 
(214.6
)
 
(382.2
)
Income tax expense (benefit)
 
46.1

 
172.4

 
236.1

 
(113.2
)
 
(131.3
)
Income (loss) from continuing operations
 
183.8

 
361.3

 
521.0

 
(101.4
)
 
(250.9
)
Income from discontinued operations, net of tax
 

 

 

 

 
52.5

Net income (loss)
 
$
183.8

 
$
361.3

 
$
521.0

 
$
(101.4
)
 
$
(198.4
)
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) Per Diluted Share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.26

 
$
2.21

 
$
3.12

 
$
(.65
)
 
$
(1.78
)
Discontinued operations
 

 

 

 

 
.37

Net income (loss) per diluted common share
 
$
1.26

 
$
2.21

 
$
3.12

 
$
(.65
)
 
$
(1.41
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average diluted shares outstanding
 
146.4

 
163.5

 
167.2

 
157.1

 
141.1

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
1,805.6

 
$
2,162.7

 
$
2,110.0

 
$
2,128.4

 
$
1,497.7

Total assets
 
7,716.4

 
7,422.2

 
7,611.8

 
7,708.9

 
7,200.2

Long-term debt and capital lease obligations
 
1,829.2

 
1,900.9

 
1,978.6

 
2,918.4

 
2,567.3

Shareholders’ equity
 
3,097.0

 
3,387.3

 
3,545.5

 
2,755.6

 
2,612.4

 
 
 
 
 
 
 
 
 
 
 
Other Consolidated Operational Data:
 
 
 
 
 
 
 
 
 
 
Total hogs processed (1)
 
32.0

 
30.7

 
30.4

 
32.9

 
35.2

Packaged meats sales (pounds) (1)
 
3,260.2

 
3,119.4

 
3,159.7

 
3,238.0

 
3,450.6

Fresh pork sales (pounds) (1)
 
4,234.3

 
4,154.6

 
4,035.0

 
4,289.9

 
4,702.0

Total hogs sold (2)
 
18.4

 
18.1

 
18.6

 
19.3

 
20.4

——————————————
(1) 
Comprised of Pork segment and International segment.
(2) 
Comprised of Hog Production segment and International segment and includes intercompany hog sales.

28



Notes to Selected Financial Data: 
Fiscal 2013
Includes losses of $120.7 million on debt extinguishment.
Fiscal 2012 
Includes our share of charges related to the CFG Consolidation Plan, as defined in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Significant Events Affecting Results of Operations," of $38.7 million.
Includes net charges of $22.2 million related to the litigation in Missouri that involved a number of claims alleging that hog farms owned by us or operated under hog raising contracts with third parties interfered with the plaintiffs' use and enjoyment of their properties (the Missouri Litigation).
Includes losses of $12.2 million on debt extinguishment.
Includes accelerated depreciation charges associated with the idling of certain Missouri hog farm assets of $8.2 million.
Includes accelerated depreciation and other charges associated with the planned closure of our Portsmouth facility of $4.7 million.
Includes $3.1 million of charges related to our plan to improve the cost structure and profitability of our domestic hog production operations (the Cost Savings Initiative).
Fiscal 2011
Includes an involuntary conversion gain on fire insurance recovery of $120.6 million.
Includes losses of $92.5 million on debt extinguishment.
Includes $28.0 million of charges related to the Cost Savings Initiative.
Includes a net benefit of $19.1 million related to the Missouri Litigation.
Includes net gains of $18.7 million on the sale of hog farms.
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 our plan to consolidate and streamline the corporate structure and manufacturing operations of our Pork segment (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.
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, Inc., net of tax of $45.4 million (discontinued operations).
Includes charges related to inventory write-downs totaling $25.8 million.

29



ITEM 7.
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. All fiscal years presented in this discussion consisted of 52 weeks. Unless otherwise stated, the amounts presented in the following discussion are based on continuing operations for all fiscal periods included.
EXECUTIVE OVERVIEW 
We are the largest hog producer and pork processor in the world. In the United States, we are also the leader in numerous packaged meats categories with popular brands including Farmland®, Smithfield®, Eckrich®, Armour® and John Morrell®. We are committed to providing good food in a responsible way and maintaining robust animal care, community involvement, employee safety, environmental, and food safety and quality programs.
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 four reportable segments: Pork, Hog Production, International and Corporate, each of which is comprised of a number of subsidiaries, joint ventures and other investments. A fifth reportable segment, the Other segment, contains the results of our former turkey production operations and our previous 49% interest in Butterball, LLC (Butterball), which were sold in December 2010 (fiscal 2011). The Pork segment consists mainly of our three wholly-owned U.S. fresh pork and packaged meats subsidiaries: The Smithfield Packing Company, Inc. (Smithfield Packing), Farmland Foods, Inc. and John Morrell Food Group (John Morrell). The Hog Production segment consists of our hog production operations located in the U.S. The International segment is comprised mainly of our meat processing and distribution operations in Poland, Romania and the United Kingdom, our interests in meat processing operations, mainly in Western Europe and Mexico, our hog production operations located in Poland and Romania and our interests in hog production operations in Mexico. The Corporate segment provides management and administrative services to support our other segments.
Fiscal 2013 Summary
Net income was $183.8 million, or $1.26 per diluted share, in fiscal 2013, compared to net income of $361.3 million, or $2.21 per diluted share, in fiscal 2012. The following summarizes the operating results of each of our reportable segments and other significant items impacting pre-tax income for fiscal 2013 compared to fiscal 2012
Pork segment operating profit increased $7.9 million as improvements in packaged meats profitability were largely offset by lower fresh pork profitability both being driven inversely by lower fresh meat market prices.
Hog Production segment operating profit decreased $285.2 million primarily as a result of lower hog prices and higher feed costs.
International segment operating profit increased $65.4 million. The prior year included certain charges recognized by CFG, of which our share was $38.7 million. Profitability improved significantly in our Eastern European operations.
Corporate segment results improved by $8.6 million. The prior year included $6.4 million of professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011, we terminated negotiations to purchase the additional interest.
Losses on debt extinguishment were $120.7 million in the current year compared to $12.2 million in the prior year.

30



Definitive Merger Agreement
As discussed in "Part I—Item 1. Business—Merger Agreement," on May 28, 2013 (fiscal 2014), we entered into the Merger Agreement with Shuanghui International Holdings Limited (Shuanghui). Shuanghui is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's largest meat processing enterprise and China's largest publicly traded meat products company as measured by market capitalization.
Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, Shuanghui will acquire all of the outstanding shares of Smithfield for $34.00 per share in cash. Upon completion of the Merger, all then-outstanding stock-based compensation awards, whether vested or unvested, will be converted into the right to receive cash of $34.00 per share (without interest), less the exercise price of such awards, if any.
The Merger will provide us with the opportunity to expand our offering of products to China through Shuanghui's distribution network.  Shuanghui will gain access to high-quality, competitively-priced and safe U.S. products, as well as our best practices and operational expertise. We do not anticipate any changes in how we do business operationally in the U.S. and throughout the world. The Merger would provide our shareholders with significant and immediate cash value for their investment, and would ensure that we continue to execute on our strategic priorities while maintaining our brand excellence, community involvement, and our commitment to environmental stewardship and animal welfare.
The Merger will be financed through a combination of cash provided by Shuanghui, rollover of certain existing Company debt, as well as debt financing which has been committed by Morgan Stanley Senior Funding, Inc. and a syndicate of banks. The Merger Agreement does not contain a financing condition.
The closing of the Merger is subject to certain conditions, including, among others, approval by our shareholders, the receipt of approval under applicable U.S. and specified foreign antitrust and anti-competition laws, and if review by CFIUS has concluded, the absence of any action by the President of the United States to block or prevent the consummation of the Merger and other customary closing conditions. 
The Merger is expected to close in the second half of calendar 2013.
Debt Refinancing
In August 2012 (fiscal 2013), we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes (2022 Notes) at a price equal to 99.5% of their face value. We used the net proceeds to repurchase $694.4 million of outstanding senior notes coming due in May 2013 and July 2014. As a result of these repurchases, we recognized losses on debt extinguishment of $120.7 million in the second quarter of fiscal 2013. We also extended the maturity date of our $200.0 million Rabobank Term Loan from June 2016 (fiscal 2017) to May 2018 (fiscal 2019). These activities have significantly improved our debt maturity profile, removed the early maturity trigger on our inventory-based revolving credit facility (the Inventory Revolver), and released the encumbrances on our real estate and fixed assets.
Share Repurchase Program
In June 2012 (fiscal 2013), we announced that our board of directors had approved a new share repurchase program authorizing us to buy up to $250.0 million of our common stock over the subsequent 24 months in addition to the $250.0 million authorized during fiscal 2012 (the Share Repurchase Program). In July 2012 (fiscal 2013), our board of directors approved an increase of $100.0 million to the authorized amount under the Share Repurchase Program. Share repurchases may be made on the open market or in privately negotiated transactions. The number of shares repurchased, and the timing of any buybacks, will depend on our corporate cash balances, business and economic conditions, and other factors, including investment opportunities. The program may be discontinued at any time. The Merger Agreement generally prohibits the Company from repurchasing any of its shares prior to the completion of the Merger
Since the inception of the Share Repurchase Program in June 2011 (fiscal 2012) and through April 28, 2013, we have repurchased 28,244,783 shares of our common stock for $575.9 million, including related commissions, at an average price of $20.38 per share. As of April 28, 2013, we had $24.5 million available for future repurchases under the Share Repurchase Program.

31



Strategy for Growth
We are focused on top and bottom line growth and transforming the Company into a more value-added consumer packaged meats company. Our strategy includes growing our base business, further improving our cost structure and targeting branded and value-added acquisitions.
The fundamental tenets of our organic growth plan include:
Increased capital investment to upgrade facilities with new machinery and equipment to improve our competitive cost structure and achieve least cost and best in class operations. We expect $300 million to $350 million in annual capital expenditures over the next several years to fund this investment in our business.
Continued higher investment in marketing and advertising programs to build brand equity and grow sales. Our plan is to increase our annual marketing and advertising expenditures by double digits for the foreseeable future. Currently, marketing and advertising expense represents approximately 1% of packaged meats sales.
Establish a culture of innovation to build a strong product pipeline to drive packaged meats volume and margins. Our innovation initiative will be focused in five strategic areas: packaging, health and wellness, convenience, taste and pork consumer solutions. These platforms have a strong focus on product differentiation highlighting quality and convenience, better-for-you foods, including lower sodium, lean protein, and natural ingredients, and new taste experiences.
Emphasize our hog production assets as a strategic point of difference. We believe that our vertically integrated platform is a competitive advantage for the Company as it allows us to meet customer specifications. Both domestic and export customers are asking for differentiated products, from gestation pen pork to ractopamine-free meat, and we are uniquely positioned to fill this demand. As of April 28, 2013, our facilities in Clinton, North Carolina and Bladen County, North Carolina were 100% ractopamine-free. Our facility in Milan, Missouri is expected to be 100% ractopamine-free by the end of the first quarter of fiscal 2014.
In addition to our organic growth strategy, we intend to apply a disciplined approach in acquiring branded and value-added companies while maintaining a conservative balance sheet. Our strategy is to target modest-sized companies that can be easily integrated into our existing business. We would expect to finance such acquisitions with a combination of cash generated from our existing businesses and debt.
For example, in May 2013 (fiscal 2014), we acquired a 50% interest in Kansas City Sausage Company, LLC (KCS), for $35.0 million in cash, subject to a customary post-closing adjustment for differences between working capital at closing and an agreed-upon target. KCS is a leading U.S. sausage producer and sow processor. We intend to merge KCS's low-cost, efficient operations and high-quality products with our strong brands and sales and marketing team to continue to grow our packaged meats business.
The venture operates in Des Moines, Iowa and Kansas City, Missouri. In Des Moines, the venture produces premium raw materials for sausage, as well as value-added products, including boneless hams and hides. The Kansas City plant is a modern sausage processing facility and is designed for optimum efficiency to provide retail and foodservice customers with high quality products. With our strong ongoing focus on building our packaged meats business, and with 15% of the U.S. sow population, this joint venture is a logical fit for the Company. It provides a growth platform in two key packaged meats categories — breakfast sausage and dinner sausage — and will allow us to expand our product offerings to our customers. These categories represent over $4.0 billion in retail and foodservice sales annually.
We expect the acquired stake in KCS to be immediately accretive to earnings.
Outlook
The commodity markets affecting our business fluctuate on a daily basis. In this operating environment, it is difficult to forecast industry trends and conditions. The outlook statements that follow must be viewed in this context.
Looking ahead to fiscal 2014, we will continue to execute our strategic growth plan to improve earnings and migrate the Company more towards a value-added consumer packaged meats company. We believe this plan will produce broad-based gains in volume, market share and distribution across our core brands and key product categories. The combination of those gains, an improving product mix toward differentiated, branded and value-added products, as well as loosening export market restrictions in our fresh pork business and higher contributions from our international meat processing business, should provide significant long-term growth potential for Smithfield.

32



Near-term, fresh pork margins continue to be weak, but we expect operating profit on a per head basis to average in the mid-single digits in fiscal 2014. We expect our packaged meats business to continue to post strong results in fiscal 2014 with operating margins averaging in the low to middle part of our newly established normalized range of $.15 to $.20 per pound. Lower raising costs and improved efficiencies and productivity in our Hog Production segment should result in improved operating margins in the mid-single digits on a per head basis for fiscal 2014. In our International segment, we anticipate some weakness in the first quarter of fiscal 2014 before results strengthen later in the year.
RESULTS OF OPERATIONS 
Significant Events Affecting Results of Operations
Missouri Litigation
During fiscal 2011, we reached a settlement with one of our insurance carriers regarding the reimbursement of certain past and future defense costs associated with the Missouri Litigation. Related to this matter, we recognized a net benefit of $19.1 million in selling, general and administrative expenses in the Hog Production segment in fiscal 2011.
During fiscal 2012, we engaged in global settlement negotiations and recognized $22.2 million in net charges associated with the expected settlement. The charges were recognized in selling, general and administrative expenses in the Hog Production segment. During fiscal 2013, the parties to the litigation reached an agreement and consummated the global settlement.
CFG Consolidation Plan
In December 2011 (fiscal 2012), the board of CFG approved a multi-year plan to consolidate and streamline its manufacturing operations to improve operating efficiencies and increase utilization (the CFG Consolidation Plan). The CFG Consolidation Plan included the disposal of certain assets, employee redundancy costs and the contribution of CFG's French cooked ham business into a newly formed joint venture. As a result, we recorded our share of CFG's charges totaling $38.7 million in equity in loss (income) of affiliates within the International segment in the third quarter of fiscal 2012.
Fire Insurance Settlement
In July 2009 (fiscal 2010), a fire occurred at the primary manufacturing facility of our subsidiary, Patrick Cudahy, Inc. (Patrick Cudahy), in Cudahy, Wisconsin. 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.
We maintain comprehensive general liability and property insurance, including business interruption insurance. In December 2010 (fiscal 2011), we reached an agreement with our insurance carriers to settle the claim for a total of $208.0 million, of which $70.0 million had been advanced to us in fiscal 2010. We allocated these proceeds to first recover the book value of the property lost, out-of-pocket expenses incurred and business interruption losses that resulted from the fire. The remaining proceeds were recognized as an involuntary conversion gain of $120.6 million in the Corporate segment in the third quarter of fiscal 2011. The involuntary conversion gain was classified in a separate line item on the consolidated statement of income. We also recognized $15.8 million of the insurance proceeds in fiscal 2011 in cost of sales in our Pork segment to offset business interruption losses incurred.
Hog Production Cost Savings Initiative
In fiscal 2010, we announced the Cost Savings Initiative. The plan included a number of undertakings designed to improve operating efficiencies and productivity. These consisted 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. The Cost Savings Initiative was completed in fiscal 2013. We incurred charges related to these activities totaling $3.1 million and $28.0 million in fiscal 2012 and fiscal 2011, respectively. No significant charges were incurred during fiscal 2013. All charges have been recorded in cost of sales in the Hog Production segment.

33



Impairment and Disposal of Long-lived Assets
Portsmouth, Virginia Plant
In November 2011 (fiscal 2012), we announced that we would shift the production of hot dogs and lunchmeat from Smithfield Packing's Portsmouth, Virginia plant to our Kinston, North Carolina plant and permanently close the Portsmouth facility. The Kinston facility will be expanded to handle the additional production and will incorporate state of the art technology and equipment, which is expected to produce significant production efficiencies and cost reductions. The Kinston expansion will require an estimated $85 million in capital expenditures, substantially all of which had been incurred by the end of fiscal 2013. The expansion of the Kinston facility and the closure of the Portsmouth facility are expected to be completed in the first half of fiscal 2014.
As a result of this decision, we performed an impairment analysis of the related assets at the Portsmouth facility in the second quarter of fiscal 2012 and determined that the net cash flows expected to be generated over the anticipated remaining useful life of the plant were sufficient to recover its book value. As such, no impairment existed. However, we revised depreciation estimates to reflect the use of the related assets at the Portsmouth facility over their shortened useful lives. As a result, we recognized accelerated depreciation charges of $4.4 million and $3.3 million in cost of sales during fiscal 2013 and fiscal 2012, respectively. Also, in connection with this decision, we wrote-down inventory by $0.8 million in cost of sales and accrued $0.6 million for employee severance in selling, general and administrative expenses in the second quarter of fiscal 2012. All of these charges are reflected in the Pork segment.
Hog Farms
Texas
In January 2011 (fiscal 2011), we sold a portion of our Dalhart, Texas hog production assets to a crop farmer for net proceeds of $9.1 million and recognized a loss on the sale of $1.8 million in selling, general and administrative expenses in our Hog Production segment in the third quarter of fiscal 2011. In April 2011 (fiscal 2011), we completed the sale of the remaining assets of our Dalhart, Texas operation and received net proceeds of $32.5 million. As a result of the sale, we recognized a gain of $13.6 million, after allocating $8.5 million in goodwill to the asset group, in selling, general and administrative expenses in our Hog Production segment in the fourth quarter of fiscal 2011.
Oklahoma and Iowa
In January 2011 (fiscal 2011), we completed the sale of certain hog production assets located in Oklahoma and Iowa. As a result of these sales, we received total net proceeds of $70.4 million and recognized gains totaling $6.9 million, after allocating $17.0 million of goodwill to these asset groups. The gains were recorded in selling, general and administrative expenses in our Hog Production segment in the third quarter of fiscal 2011.
Missouri
In the first half of fiscal 2011, we began reducing the hog population on certain hog farms in Missouri in order to comply with an amended consent decree. The amended consent decree allows us to return the farms to full capacity upon the installation of an approved "next generation" technology that would reduce the level of odor produced by the farms. The reduced hog raising capacity at these farms was replaced with third party contract farmers in Iowa. In the first quarter of fiscal 2011, in connection with the anticipated reduction in finishing capacity, we performed an impairment analysis of these hog farms and determined that the book value of the assets was recoverable and thus, no impairment existed.
Based on the favorable hog raising performance experienced with these third party contract farmers and the amount of capital required to install "next generation" technology at our Missouri farms, we made the decision in the first quarter of fiscal 2012 to permanently idle certain of the assets on these farms. Depreciation estimates were revised to reflect the shortened useful lives of the assets. As a result, we recognized accelerated depreciation charges of $8.2 million in fiscal 2012. These charges are reflected in the Hog Production segment.

34



Butterball, LLC (Butterball)
In June 2010 (fiscal 2011), we announced that we had made an offer to purchase our joint venture partner’s 51% ownership interest in Butterball and our partner’s related turkey production assets. In accordance with Butterball’s operating agreement, our partner had to either accept the offer to sell or be required to purchase our 49% interest and our related turkey production assets.
In September 2010 (fiscal 2011), we were notified of our joint venture partner’s decision to purchase our 49% interest in Butterball and our related turkey production assets. In December 2010 (fiscal 2011), we completed the sale of these assets for $167.0 million and recognized a gain of $0.2 million.
Consolidated Results of Operations
The tables presented below compare our results of operations for fiscal years 2013, 2012 and 2011. As used in the tables, "NM" means "not meaningful."
Sales and Cost of Sales
 
 
Fiscal Years
 
 
 
Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Sales
 
$
13,221.1

 
$
13,094.3

 
1
 %
 
$
13,094.3

 
$
12,202.7

 
7
 %
Cost of sales
 
11,901.4

 
11,544.9

 
3

 
11,544.9

 
10,488.6

 
10

Gross profit
 
$
1,319.7

 
$
1,549.4

 
(15
)
 
$
1,549.4

 
$
1,714.1

 
(10
)
Gross profit margin
 
10
%
 
12
%
 
 

 
12
%
 
14
%
 
 

 
The following items explain the significant changes in sales and gross profit:
2013 vs. 2012
Sales in the current year were slightly higher than the prior year as higher volumes across all segments were largely offset by lower domestic fresh meat and hog market prices and the effects of foreign currency translation.
The decline in gross profit margin was primarily caused by higher hog feed costs and lower pork prices in the U.S.
2012 vs. 2011 
The increase in consolidated sales was primarily driven by higher sales prices and volumes in the Pork segment. These increases were attributable to higher market prices for fresh pork, supported by export demand, and an improved sales mix in packaged meats to higher margin core brands.
Gross margin declined from fiscal 2011 levels as a result of significantly higher raw material costs in all segments. Domestic live hog market prices increased approximately 15% to $65 per hundredweight from $57 per hundredweight, and domestic raising costs increased 18% to $64 per hundredweight from $54 per hundredweight as a result of higher feed prices.
Cost of sales in fiscal 2011 included $28.0 million of charges associated with the Cost Savings Initiative compared to $3.1 million in fiscal 2012. Also, cost of sales in fiscal 2012 included $8.2 million and $4.7 million of accelerated depreciation and other charges related to the idling of certain of our Missouri hog farm assets and the planned closure of our Portsmouth, Virginia meat processing plant, respectively.

35



Selling, General and Administrative Expenses (SG&A)
 
 
Fiscal Years
 
 
 
Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Selling, general and administrative expenses
 
$
815.4

 
$
816.9

 
%
 
$
816.9

 
$
789.8

 
3
%
 
The following items explain the significant changes in SG&A: 
2013 vs. 2012
Fiscal 2012 included $22.2 million in net charges associated with the Missouri litigation.
Fiscal 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011 (fiscal 2012), we terminated negotiations to purchase the additional interest.
Pension and other post-retirement benefit expenses increased $26.4 million.

2012 vs. 2011
Fiscal 2012 included $22.2 million in net charges associated with the Missouri litigation compared to a $19.1 million net benefit in fiscal 2011.
Fiscal 2011 included a net gain of $18.7 million on the sale of hog farms in Texas, Oklahoma and Iowa.
Losses on foreign currency denominated transactions increased $7.0 million.
Fiscal 2012 included $6.4 million in professional fees related to the potential acquisition of a controlling interest in CFG. In June 2011 (fiscal 2012), we terminated negotiations to purchase the additional interest.
Variable compensation expense was $29.9 million lower due primarily to lower profitability levels in fiscal 2012.
Expense for pension and other postretirement benefits decreased $19.6 million.
(Income) Loss from Equity Method Investments
 
 
 Fiscal Years
 
 
 
 Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
CFG
 
$
(4.8
)
 
$
25.0

 
119
 %
 
$
25.0

 
$
(17.0
)
 
(247
)%
Mexican joint ventures
 
(9.3
)
 
(13.4
)
 
(31
)
 
(13.4
)
 
(29.6
)
 
(55
)
All other equity method investments
 
(0.9
)
 
(1.7
)
 
(47
)
 
(1.7
)
 
(3.5
)
 
(51
)
(Income) loss from equity method investments
 
$
(15.0
)
 
$
9.9

 
252

 
$
9.9

 
$
(50.1
)
 
(120
)
The following items explain the significant changes in loss (income) from equity method investments: 
2013 vs. 2012
CFG's results for fiscal 2012 included $38.7 million of charges related to the CFG Consolidation Plan.
Results from our Mexican joint ventures declined due to higher feed costs, lower hog prices and lower meat sales volumes.
2012 vs. 2011
CFG's results for fiscal 2012 included $38.7 million of charges related to the CFG Consolidation Plan.
Results from our Mexican joint ventures were negatively impacted by higher feed costs and unfavorable changes in foreign exchange rates.

36



Interest Expense
 
 
 Fiscal Years
 
 
 
 Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Interest expense
 
$
168.7

 
$
176.7

 
(5
)%
 
$
176.7

 
$
245.4

 
(28
)%
  
The following items explain the significant changes in loss (income) from equity method investments: 
2013 vs. 2012
Interest expense decreased due to lower average interest rates resulting from the refinancing of our 10% senior secured notes due July 2014 (2014 Notes) and our 7.75% senior unsecured notes due May 2013 (2013 Notes) as described under "Liquidity and Capital Resources" below.
2012 vs. 2011
Interest expense decreased in fiscal 2012 as a result of our Project 100 initiative, under which we redeemed more than $1 billion of debt since the first quarter of fiscal 2011, including $600 million of our 7% senior unsecured notes due August 2011, $260.6 million of our 2014 Notes and $190 million of our 2013 Notes.
 
Loss on Debt Extinguishment
 
 
 Fiscal Years
 
 
 
 Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Loss on debt extinguishment
 
$
120.7

 
$
12.2

 
889
%
 
$
12.2

 
$
92.5

 
(87
)%
 
The following items explain the losses on debt extinguishment for the fiscal years presented: 
Fiscal 2013
We recognized losses of $120.7 million during fiscal 2013 on the repurchase of $589.4 million of our 2014 Notes and $105.0 million of our 2013 Notes.
Fiscal 2012
We recognized losses of $11.0 million during fiscal 2012 on the repurchase of $59.7 million of our 2014 Notes.
We recognized a loss on debt extinguishment of $1.2 million in the first quarter of fiscal 2012 associated with the refinancing of our working capital facilities in June 2011 (fiscal 2012).
Fiscal 2011
We recognized losses of $92.5 million during fiscal 2011 on the repurchase of $522.2 million of our 7% senior unsecured notes due August 2011, $200.9 million of our 2014 Notes and $190.0 million of our 2013 Notes.
Income Tax Expense 
 
 
Fiscal Years
 
 
2013
 
2012
 
2011
Income tax expense (in millions)
 
$
46.1

 
$
172.4

 
$
236.1

Effective tax rate
 
20
%
 
32
%
 
31
%
The following items explain the significant changes in the effective tax rate from fiscal 2012 to fiscal 2013:
Tax credits increased due in part to the passage of the American Taxpayer Relief Act of 2012 that retroactively reinstated the Research and Development, Work Opportunity and Welfare to Work tax credits.

37



We released $11.1 million in deferred tax asset valuation allowances in the current year, primarily related to the utilization of tax losses in foreign jurisdictions.
The mix of earnings from foreign operations, which are taxed at lower rates, was higher in the current year.
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
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Fresh pork (1)
 
$
4,924.1

 
$
5,089.4

 
(3
)%
 
$
5,089.4

 
$
4,542.7

 
12
 %
Packaged meats
 
6,152.0

 
6,003.6

 
2

 
6,003.6

 
5,721.2

 
5

Total
 
$
11,076.1

 
$
11,093.0

 

 
$
11,093.0

 
$
10,263.9

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Fresh pork (1)
 
$
161.6

 
$
222.0

 
(27
)%
 
$
222.0

 
$
406.5

 
(45
)%
Packaged meats
 
470.0

 
401.7

 
17

 
401.7

 
346.9

 
16

Total
 
$
631.6

 
$
623.7

 
1

 
$
623.7

 
$
753.4

 
(17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales volume:
 
 

 
 

 
 
 
 
 
 
 
 
Fresh pork
 
 

 
 

 
3
 %
 
 
 
 
 
4
 %
Packaged meats
 
 

 
 

 
4

 
 
 
 
 

Total
 
 

 
 

 
4

 
 
 
 
 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
Average unit selling price:
 
 

 
 

 
 
 
 
 
 
 
 
Fresh pork
 
 

 
 

 
(6
)%
 
 
 
 
 
8
 %
Packaged meats
 
 

 
 

 
(1
)
 
 
 
 
 
5

Total
 
 

 
 

 
(4
)
 
 
 
 
 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
Hogs processed
 
 
 
 
 
3
 %
 
 
 
 
 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Average domestic live hog prices (per hundredweight) (3)
 
$
60.86

 
$
65.05

 
(6
)%
 
$
65.05

 
$
56.57

 
15
 %
——————————————
(1) 
Includes by-products and rendering.
(2) 
Fresh pork and packaged meats operating profits represent management's estimated allocation of total Pork segment operating profit.
(3) 
Represents the average live hog market price as quoted by the Iowa-Southern Minnesota hog market. 
In addition to information provided in the table above, the following items explain the significant changes in Pork segment sales and operating profit: 
2013 vs. 2012
Pork segment sales declined slightly as high pork supplies contributed to lower average fresh pork sales prices.
Fresh pork sales volumes increased as a result of higher slaughter levels and hog weights.

38



Packaged meats sales volumes increased across all trade channels. Lower average unit selling prices of private label products were largely offset by higher sales prices in our core brands.
Fresh pork operating profit decreased to $6 per head from $8 per head due primarily to lower sales prices.
Packaged meats operating profit increased to $.17 per pound from $.15 per pound, benefitting from lower raw material costs.
2012 vs. 2011
Sales and operating profit were positively impacted by higher average unit selling prices for both fresh pork and packaged meats driven by strong export demand, an improved mix in packaged meats to more core brand product sales, and strong pricing discipline.
Fresh pork volumes increased primarily as a result of stronger export demand.
Fresh pork operating profit decreased to $8 per head from a record $15 per head as live hog prices increased significantly more than fresh meat prices.
Packaged meats operating profit increased to $.15 per pound from $.13 per pound as a result of strong pricing discipline, an improved product mix to more high margin core brands and lower variable compensation and pension related expenses, which more than offset the impact of higher raw material costs.
Operating profit for packaged meats in fiscal 2012 included $4.7 million in charges associated with the anticipated closure of our Portsmouth plant.
Hog Production Segment
 
 
 Fiscal Years
 
 
 
 Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Sales
 
$
3,135.1

 
$
3,052.6

 
3
 %
 
$
3,052.6

 
$
2,705.1

 
13
 %
Operating (loss) profit
 
(119.1
)
 
166.1

 
(172
)
 
166.1

 
224.4

 
(26
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Head sold
 
15.97

 
15.77

 
1
 %
 
15.77

 
16.43

 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average domestic live hog prices (per hundredweight) (1)
 
$
60.86

 
$
65.05

 
(6
)%
 
$
65.05

 
$
56.57

 
15
 %
Raising costs (per hundredweight) (2)
 
$
67.82

 
$
63.93

 
6
 %
 
$
63.93

 
$
54.14

 
18
 %
——————————————
(1) 
Represents the average live hog market price as quoted by the Iowa-Southern Minnesota hog market. These prices do not reflect premiums we receive or the impact of hedging on our actual sales price.
(2) 
Includes the effects of grain derivative contracts designated in hedging relationships.
In addition to the information provided in the table above, the following items explain the significant changes in Hog Production segment sales and operating profit: 
2013 vs. 2012
Sales increased due to higher volumes, which more than offset the impact of lower market hog prices.
Fiscal 2013 operating profit was negatively impacted by higher hog supplies, resulting in a 6% decrease in live hog prices, and increased raising costs, primarily as a result of higher priced feed.
Fiscal 2013 operating profit included gains of $91.2 million compared to $58.6 million in fiscal 2012 on derivative contracts that are not reflected in the average live hog prices and raising costs presented in the table above; these are primarily lean hog derivative contracts, and grain derivative contracts that are not designated in hedging relationships for accounting purposes.

39



Fiscal 2012 operating profit included $22.2 million in net charges associated with the Missouri litigation.
Fiscal 2012 operating profit included accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri.
2012 vs. 2011
Sales and operating profit were positively impacted by significantly higher live hog market prices.
Volume declined due to temporary disruptions from the Cost Savings Initiative and the sale of our Oklahoma hog farms at the end of the third quarter of fiscal 2011.
Raising costs increased primarily as a result of higher feed costs.
Fiscal 2012 operating profit included $22.2 million in net charges associated with the Missouri litigation compared to a $19.1 million net benefit in fiscal 2011.
Operating profit in fiscal 2011 included a net gain of $18.7 million on the sale of hog farms in Oklahoma, Iowa and Texas.
Fiscal 2012 operating profit included accelerated depreciation charges of $8.2 million as a result of our decision to permanently idle certain farm assets in Missouri.
Fiscal 2012 operating profit included $3.1 million in charges associated with the Cost Savings Initiative compared to $28.0 million in fiscal 2011.
Fiscal 2012 operating profit included gains of $58.6 million compared to $22.2 million in fiscal 2011 on derivative contracts that are not reflected in the average live hog prices and raising costs presented in the table above; these are primarily lean hog derivative contracts, and grain derivative contracts that are not designated in hedging relationships for accounting purposes.

40



International Segment
 
 
Fiscal Years
 
Fiscal Years
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Poland
 
$
1,180.7

 
$
1,186.3

 
 %
 
$
1,186.3

 
$
1,096.9

 
8
 %
Romania
 
252.3

 
245.8

 
3

 
245.8

 
199.1

 
23

United Kingdom
 
87.4

 
92.6

 
(6
)
 
92.6

 
101.6

 
(9
)
Eliminations
 
(51.9
)
 
(58.0
)
 
(11
)
 
(58.0
)
 
(56.9
)
 
2

Total
 
$
1,468.5

 
$
1,466.7

 

 
$
1,466.7

 
$
1,340.7

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Poland
 
$
60.3

 
$
49.7

 
21
 %
 
$
49.7

 
$
64.0

 
(22
)%
Romania
 
41.4

 
7.9

 
424

 
7.9

 
9.2

 
(14
)
Other (1)
 
6.5

 
(14.8
)
 
144

 
(14.8
)
 
42.7

 
(135
)
Total
 
$
108.2

 
$
42.8

 
153

 
$
42.8

 
$
115.9

 
(63
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Poland: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Sales volume (pounds)
 
 
 
 
 
11
 %
 
 
 
 
 
(4
)%
Average unit selling price (3)
 
 
 
 
 
(4
)
 
 
 
 
 
13

Hogs processed
 
 
 
 
 
19

 
 
 
 
 
(6
)
Raising costs (per hundredweight)
 
 
 
 
 
8

 
 
 
 
 
16

 
 
 
 
 
 
 
 
 
 
 
 
 
Romania: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Sales volume (pounds)
 
 
 
 
 
3
 %
 
 
 
 
 
10
 %
Average unit selling price (3)
 
 
 
 
 
13

 
 
 
 
 
7

Hogs processed
 
 
 
 
 
9

 
 
 
 
 
8

Raising costs (per hundredweight)
 
 
 
 
 
(1
)
 
 
 
 
 
11

 ——————————————
(1) 
Includes the results from our equity method investments in Mexico and our investment in CFG.
(2) 
Percentages computed based on local currency amounts.
(3) 
Excludes the sale of live hogs.
In addition to the information provided in the table above, the following items explain the significant changes in International segment sales and operating profit: 
2013 vs. 2012
Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased sales by $116.1 million, or 7.9%.
Fluctuation in foreign exchange rates and their effect on foreign currency translation decreased operating profit by $11.5 million.
Sales and operating profit benefited from significantly higher volumes in our Polish operations due to a 19% increase in the number of hogs processed. Unit sales prices in our Polish operations increased in several key product categories; however, higher volumes of lower value by-products that resulted from more processed hogs effectively diminished the overall average unit selling price compared to the prior year.

41



Sales and operating profit in our Romanian operations improved on significantly higher average unit selling prices and sales volumes, which benefitted from the approval to export pork products to European Union member countries beginning in the fourth quarter of fiscal 2012. Sales and hog slaughter volumes benefited from an expansion in our hog production operations in the second quarter of fiscal 2012. Operating profit also improved as a result of a $5.4 million reduction in foreign exchange transaction losses and a $3.9 million increase in government farm subsidies received.
Fiscal 2012 operating profit included $38.7 million of charges related to the CFG Consolidation Plan.
Equity income from our Mexican joint ventures decreased by $4.1 million due to higher feed costs and unfavorable changes in foreign exchange rates.
2012 vs. 2011
Sales and operating profit in Poland were positively impacted by higher average unit selling prices primarily due to a shift in product mix to more packaged meats and our ability to pass along higher raw material costs, particularly in the second half of fiscal 2012.
Operating profit in Poland declined primarily as a result of higher raw material costs in our meat processing operations. Improvements in Polish hog production fundamentals partially offset the decline in profit.
Sales and operating profit in our Romania fresh pork operation were positively impacted by our approval to export pork products out of Romania to European Union member countries beginning in the fourth quarter of fiscal 2012. As a result, average unit selling prices increased 7%.
Our Romanian fresh pork and hog production operations both saw improvements in operating results. However, these improvements were more than offset by increased losses in our distribution operations and an unfavorable $8.4 million impact from foreign currency exposure.
Fiscal 2012 operating profit included $38.7 million of charges related to the CFG Consolidation Plan.
Equity income from our Mexican joint ventures decreased $16.2 million, primarily due to higher feed costs and unfavorable changes in foreign exchange rates.
Other Segment 
 
 
Fiscal Years
 
 
 
Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Sales
 
$

 
$

 
NM
 
$

 
$
74.7

 
(100
)%
Operating loss
 

 

 
NM
 

 
(2.4
)
 
(100
)
 
The change in sales and operating loss reflects the sale of our turkey operations, including our investment in Butterball, in December 2010 (fiscal 2011).

42



Corporate Segment
 
 
Fiscal Years
 
 
 
Fiscal Years
 
 
 
 
2013
 
2012
 
%  Change
 
2012
 
2011
 
%  Change
 
 
(in millions)
 
 
 
(in millions)
 
 
Operating (loss) profit
 
$
(101.4
)
 
$
(110.0
)