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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Jan. 03, 2016
Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Smithfield Foods, Inc., together with its subsidiaries ("Smithfield," "the Company," "we," "us" or "our"), is the largest hog producer and pork processor in the world. We produce and market a wide variety of fresh meat and packaged meats products both domestically and internationally. We conduct our operations through five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. On September 26, 2013 (the Merger Date), pursuant to the Agreement and Plan of Merger dated May 28, 2013 (the Merger Agreement) with WH Group Limited, formerly Shuanghui International Holdings Limited, a corporation formed under the laws of the Cayman Islands hereinafter referred to as WH Group, the Company merged with Sun Merger Sub, Inc., a Virginia corporation and wholly owned subsidiary of WH Group (Merger Sub), in a transaction hereinafter referred to as the Merger. As a result of the Merger, the Company survived as a wholly owned subsidiary of WH Group. See Note 2—Merger and Acquisitions for further information on the Merger. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-K and Regulation S-X. The information reflects all normal recurring adjustments which we believe are necessary to present fairly the financial position and results of operations for all periods included. The Merger was accounted for as a business combination using the acquisition method of accounting. WH Groups's cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. Accordingly, the consolidated financial statements are presented for two periods, Predecessor and Successor, which represent the accounting periods preceding and succeeding the completion of the Merger. The Predecessor and Successor periods have been separated by a vertical line on the face of the consolidated financial statements to highlight the fact that the financial information for such periods has been prepared under two different historical-cost bases of accounting. Certain prior year amounts have been reclassified to conform to current year presentation. Change in Fiscal Year End On January 16, 2014, the Company elected to change its fiscal year end from the 52 or 53 week period which previously ended on the Sunday nearest to April 30 to the 52 or 53 week period which ends on the Sunday nearest to December 31. The change became effective at the end of the period ended December 29, 2013. Unless otherwise noted, all references to "2015" and "2014" in this report are to the 53 week period ended January 3, 2016 and the 52 week period ended December 28, 2014, respectively. For comparative purposes, the Consolidated Statements of Income for the eight months ended December 29, 2013 and December 30, 2012 are presented as follows:
|  | Successor |  | Predecessor
|  |  |  |  |  | (unaudited)
|  |  |  |  |  | Eight Months Ended
|  | September 27 - December 29, 2013 |  | April 29 - September 26, 2013 |  | December 30, 2012
|  | (in millions)
Sales |  | $ | 3,894.2 |  |  | $ | 5,679.5 |  |  | $ | 8,898.7 |
Cost of sales |  | 3,543.1 |  |  | 5,190.1 |  |  | 7,943.5 |
Gross profit |  | 351.1 |  |  | 489.4 |  |  | 955.2 |
Selling, general and administrative expenses |  | 213.4 |  |  | 341.7 |  |  | 540.5 |
Merger related costs |  | 23.9 |  |  | 18.0 |  |  | — |
Loss (income) from equity method investments |  | 2.6 |  |  | 0.5 |  |  | (6.5 | )
Operating profit |  | 111.2 |  |  | 129.2 |  |  | 421.2 |
Interest expense |  | 59.0 |  |  | 64.6 |  |  | 111.8 |
Loss on debt extinguishment |  | 1.7 |  |  | — |  |  | 120.7 |
Income before income taxes |  | 50.5 |  |  | 64.6 |  |  | 188.7 |
Income tax expense |  | 15.8 |  |  | 12.7 |  |  | 58.7 |
Net income |  | $ | 34.7 |  |  | $ | 51.9 |  |  | $ | 130.0 |
Principles of Consolidation The consolidated financial statements include the accounts of all wholly owned subsidiaries, as well as all majority owned subsidiaries and other entities for which we have a controlling interest. Entities that are 50% owned or less are accounted for under the equity method when we have the ability to exercise significant influence. We use the cost method of accounting for investments in which our ability to exercise significant influence is limited. All intercompany transactions and accounts have been eliminated. Consolidating the results of operations and financial position of variable interest entities for which we are the primary beneficiary does not have a material effect on sales, net income, or on our financial position for the fiscal periods presented. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations and cash flows in foreign currencies are translated into U.S. dollars using the average exchange rate over the course of the year. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of shareholder's equity in accumulated other comprehensive income (loss) and included in other comprehensive income (loss) for each period. Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in selling, general and administrative expenses as incurred. We recorded net losses on foreign currency transactions of $3.3 million and $4.0 million in 2015 and 2014, respectively, and net gains of $0.2 million, $0.3 million and $1.1 million in the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively. Our Polish operations have different fiscal period end dates. As such, we have elected to consolidate the results of these operations on a one-month lag. We do not believe the impact of reporting the results of these entities on a one-month lag is material to the consolidated financial statements. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which require us to make estimates and use assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The majority of our cash is concentrated in demand deposit accounts or money market funds. The carrying value of cash equivalents approximates market value. Accounts Receivable Accounts receivable are recorded net of the allowance for doubtful accounts. We regularly evaluate the collectibility of our accounts receivable based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer and historical experience. Based on our evaluation, we record reserves to reduce the related receivables to amounts we reasonably believe are collectible. Our reserve for uncollectible accounts receivable was $6.6 million and $7.5 million as of January 3, 2016 and December 28, 2014, respectively. Inventories Inventories consist of the following:
|  | January 3, 2016 |  | December 28, 2014
|  | (in millions)
Fresh and packaged meats |  | $ | 885.2 |  |  | $ | 961.9 |
Livestock |  | 882.3 |  |  | 928.1 |
Grains |  | 204.5 |  |  | 191.6 |
Manufacturing supplies |  | 80.3 |  |  | 79.8 |
Other |  | 47.4 |  |  | 45.4 |
Total inventories |  | $ | 2,099.7 |  |  | $ | 2,206.8 |
Livestock are valued at the lower of the average cost of production or market and further adjusted for changes in the fair value of livestock that are hedged. Costs include feed, medications, contract grower fees and other production expenses. Fresh and packaged meats are valued based on USDA and other market prices and adjusted for the cost of further processing. Costs for fresh and packaged meats include meat, labor, supplies and overhead. Average costing is primarily utilized to account for fresh and packaged meats and grains. Manufacturing supplies principally consist of ingredients and packaging materials. Derivative Financial Instruments and Hedging Activities See Note 4—Derivative Financial Instruments for our policy. Property, Plant and Equipment, Net Property, plant and equipment is generally stated at historical cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Assets held under capital leases are classified in property, plant and equipment, net and depreciated over the lease term. The depreciation of assets held under capital leases is included in depreciation expense. The cost of assets held under capital leases was $30.0 million and $28.5 million at January 3, 2016 and December 28, 2014, respectively. The assets held under capital leases had accumulated depreciation of $2.4 million and $1.2 million at January 3, 2016 and December 28, 2014, respectively. Depreciation expense is included in either cost of sales or selling, general and administrative (SG&A) expenses, as appropriate. Depreciation expense totaled $226.8 million, $223.7 million, $53.7 million, $104.8 million and $235.3 million in 2015, 2014, the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively. During the construction period of significant assets, the associated interest costs are capitalized. Total interest capitalized was $0.5 million, $1.1 million, $0.4 million, $0.7 million and $4.8 million in 2015, 2014, the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively. Property, plant and equipment, net, consists of the following:
|  | Useful Life |  | January 3, 2016 |  | December 28, 2014 |
|  | (in Years) |  | (in millions)
Land and improvements |  | 0-20 |  | $ | 549.1 |  |  | $ | 546.4 |  |
Buildings and improvements |  | 20-40 |  | 924.8 |  |  | 866.1 |  |
Machinery and equipment |  | 5-25 |  | 1,337.1 |  |  | 1,125.5 |  |
Breeding stock |  | 2 |  | 191.1 |  |  | 193.0 |  |
Computer hardware and software |  | 3-5 |  | 44.3 |  |  | 34.3 |  |
Other |  | 3-10 |  | 72.8 |  |  | 67.2 |  |
Construction in progress |  |  |  | 242.6 |  |  | 191.2 |  |
|  |  |  | 3,361.8 |  |  | 3,023.7 |  |
Accumulated depreciation |  |  |  | (494.5 | ) |  | (270.3 | ) |
Property, plant and equipment, net |  |  |  | $ | 2,867.3 |  |  | $ | 2,753.4 |  |
Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Intangible assets with finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter, or sooner if impairment indicators arise. In the evaluation of goodwill for impairment, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not, no further analysis is required. If it is, a prescribed two-step goodwill impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any. The first step in the two-step impairment test is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is estimated by applying valuation multiples and/or estimating future discounted cash flows. The selection of multiples is dependent upon assumptions regarding future levels of operating performance as well as business trends and prospects, and industry, market and economic conditions. When estimating future discounted cash flows, we consider the assumptions that hypothetical marketplace participants would use in estimating future cash flows. In addition, where applicable, an appropriate discount rate is used, based on an industry-wide average cost of capital or location-specific economic factors. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit). If the implied fair value of goodwill exceeds the carrying amount, goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. Based on the results of our annual goodwill impairment tests, as of our testing date, no impairment indicators were noted for all the periods presented. Intangible assets consist of the following:
|  | Useful Life |  | January 3, 2016 |  | December 28, 2014
|  | (in Years) |  | (in millions)
Amortized intangible assets: |  |  |  |  |  |
Customer relations assets |  | 14-16 |  | $ | 54.0 |  |  | $ | 54.4 |
Patents, rights and leasehold interests |  | 5-25 |  | 3.0 |  |  | 3.0 |
Contractual relationships |  | 17-22 |  | 40.0 |  |  | 40.0 |
Accumulated amortization |  |  |  | (14.7 | ) |  | (8.2 | )
Amortized intangible assets, net |  |  |  | 82.3 |  |  | 89.2 |
Non-amortized intangible assets: |  |  |  |  |  |
Trademarks |  | Indefinite |  | 1,283.4 |  |  | 1,291.7 |
Intangible assets, net |  |  |  | $ | 1,365.7 |  |  | $ | 1,380.9 |
The fair values of trademarks are calculated using a royalty rate method. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace. If the carrying value of our indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. Intangible assets with finite lives are reviewed for recoverability when indicators of impairment are present using estimated future undiscounted cash flows related to those assets. We have determined that no impairments of our intangible assets existed for any of the periods presented. Amortization expense for intangible assets was $7.0 million, $6.8 million, $1.7 million, $1.7 million and $3.1 million in 2015, 2014, the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively. As of January 3, 2016, the estimated amortization expense associated with our intangible assets for each of the next five years is expected to be $7.0 million. Investments See Note 5—Investments for our policy. Debt Issuance Costs, Premiums and Discounts Debt issuance costs, premiums and discounts are amortized into interest expense over the terms of the related loan agreements using the effective interest method or other methods which approximate the effective interest method. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to amounts more likely than not to be realized. The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due. We accrue interest and penalties related to unrecognized tax benefits in other liabilities and recognize the related expense in income tax expense. Pension Accounting We recognize the funded status of our defined benefit pension plans in the consolidated balance sheets. We measure our pension and other postretirement benefit plan obligations and related plan assets as of the month-end that is closest to our year-end. The measurement of our pension obligations and related costs is dependent on the use of assumptions and estimates. These assumptions include discount rates, salary growth, mortality rates and expected returns on plan assets. Changes in assumptions and future investment returns could potentially have a material impact on our expenses and related funding requirements. We also recognize in other comprehensive income (loss), the net of tax results of the gains or losses and prior service costs or credits that arise during the period but are not recognized in net periodic benefit cost. These amounts are adjusted out of accumulated other comprehensive income (loss) as they are subsequently recognized as components of net periodic benefit cost. Self-Insurance Programs We are self-insured for certain levels of general and vehicle liability, property, workers’ compensation, product recall and health care coverage. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current period earnings. Contingent Liabilities We are subject to lawsuits, investigations and other claims related to the operation of our farms, labor, livestock procurement, securities, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fees. A determination of the amount of accruals and disclosures required, if any, for these contingencies is made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of material loss is at least reasonably possible or probable. Our contingent liabilities contain uncertainties because the eventual outcome will result from future events. Our determination of accruals and any reasonably possible losses in excess of those accruals require estimates and judgments related to future changes in facts and circumstances, interpretations of the law, the amount of damages or fees, and the effectiveness of strategies or other factors beyond our control. If actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material. Revenue Recognition We recognize revenues from product sales upon delivery to customers or when title passes. Revenue is recorded at the invoice price for each product net of estimated returns and sales incentives provided to customers. Sales incentives include various rebate and trade allowance programs with our customers, primarily discounts and rebates based on achievement of specified volume or growth in volume levels. Advertising and Promotional Costs Advertising and promotional costs are expensed as incurred except for certain production costs, which are expensed upon the first airing of the advertisement. Promotional sponsorship costs are expensed as the promotional events occur. Advertising costs totaled $211.4 million, $165.8 million, $48.0 million, $63.5 million and $143.1 million in 2015, 2014, the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively, and are included in SG&A. Shipping and Handling Costs Shipping and handling costs are reported as a component of cost of sales. Research and Development Costs Research and development costs are expensed as incurred. Research and development costs totaled $78.5 million, $75.3 million, $23.2 million, $31.9 million and $80.9 million in 2015, 2014, the three months ended December 29, 2013, the five months ended September 26, 2013 and the twelve months ended April 28, 2013, respectively. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU applies to all contracts with customers, except those that are within the scope of other topics in the FASB Accounting Standards Codification. Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14) which defers the effective date by one year to fiscal year and interim periods within those years beginning after December 15, 2017. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. The guidance is not currently effective for us and has not been applied in this Form 10-K. We are currently in the process of evaluating the potential impact of future adoption but at this time do not anticipate it will have a material impact on our consolidated financial statements. In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015 with early adoption permitted. We elected to early adopt this new guidance effective for the first quarter of 2015 and have applied the changes retrospectively to all periods presented. As a result, debt issuance costs of approximately $11.3 million and $16.1 million are presented in long-term debt and capital lease obligations in the consolidated condensed balance sheets as of January 3, 2016 and December 28, 2014, respectively. In April 2015, the FASB issued ASU 2015-04, Compensation – Retirement Benefits (Topic 715) (ASU 2015-04). For an entity with a fiscal year-end that does not coincide with a month-end, ASU 2015-4 provides a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end. The practical expedient must be applied consistently from year to year and applied consistently to all plans. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015 with early adoption permitted. We elected to early adopt this new guidance for 2015. The new guidance does not have a material impact on our consolidated financial statements. In May 2015, the FASB issued Accounting Standards Update 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07). The standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015 with early adoption permitted. We elected to early adopt this new guidance for 2015. The changes resulting from the adoption of ASU 2015-07, including revising the prior year presentation, are reflected within Note 12, Fair Value Measurements. In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). Topic 330 currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016 with early adoption permitted. We elected to early adopt this new guidance for 2015. The new guidance does not have a material impact on our consolidated financial statements. In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). The standard requires that deferred income tax liabilities and assets be classified as noncurrent in the balance sheet and eliminates prior guidance which required an entity to separate deferred tax liabilities and assets into a current amount and noncurrent amount in the balance sheet based on the classification of the related asset or liability. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016 with early adoption permitted. We elected to early adopt this new guidance on a prospective basis and have applied the changes to all deferred tax liabilities and assets and to the consolidated condensed balance sheet as of January 3, 2016. We did not retrospectively apply the changes to prior periods.

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