Summary of SMITHFIELD FOODS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following information in conjunction with the unaudited consolidated condensed financial statements and the related notes in this Quarterly Report and the audited financial statements and the related notes as well as Management's Discussion and Analysis of Financial Condition and Results of Operation contained in our Annual Report on Form 10-K for the fiscal year ended April 29, 2012.
EXECUTIVE OVERVIEW We are the largest hog producer and pork processor in the world. 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. The Pork segment consists mainly of our three wholly-owned U.S. fresh pork and packaged meats subsidiaries. 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. First Quarter of Fiscal 2013 Summary
Net income was $61.7 million, or $.40 per diluted share, in the first quarter of fiscal 2013 compared to net income of $82.1 million, or $.49 per diluted share, in the same quarter last year. The following summarizes the results of each of our reportable segments and other significant changes impacting net income for the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012:
? Pork segment operating profit decreased to $118.6 million from $136.7 million as higher pork supplies pressured margins.

? Hog Production segment operating profit decreased $46.6 million primarily as a result of higher feed costs.

? International segment operating profit increased by $15.8 million driven by positive hog production fundamentals, higher meat volumes and higher unit sales prices in our Eastern European operations.

? Corporate segment results improved by $7.5 million. The prior year included $5.7 million in professional fees associated with the potential acquisition of a controlling interest in Campofrío Food Group (CFG). In June 2011 (fiscal 2012), we terminated negotiations to purchase the additional interest.

Debt Refinancing
In August 2012 (fiscal 2013), we issued $1.0 billion aggregate principal amount of ten year, 6.625% senior unsecured notes at a price equal to 99.5% of their face value. We used $804.9 million of the $981.2 million in net proceeds from the debt offering to repurchase the remaining $589.4 million of our 10% senior secured notes due July 2014 (2014 Notes) and $105.0 million of our 7.75% senior unsecured notes due May 2013 (2013 Notes). As a result of these repurchases, we will recognize losses on debt extinguishment of approximately $121 million in the second quarter of fiscal 2013, including the write-off of related unamortized discounts, premiums, and debt issuance costs. We also extended the maturity date of our $200.0 million 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 of our real estate and fixed assets. With the exception of the $400.0 million aggregate principal amount of our 4% senior unsecured convertible notes due June 2013 (fiscal 2014), we have no substantial debt obligations coming due until fiscal 2018 as a result of these refinancing activities. 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 next 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 corporate cash balances, business and economic conditions, and other factors, including investment opportunities. The program may be discontinued at any time.
Since the inception of the Share Repurchase Program in June 2011 (fiscal 2012) and through August 31, 2012, we have repurchased 17,448,215 shares of our common stock for $350.6 million, including related fees, at an average price of $20.07 per share. As of August 31, 2012, we had approximately $250 million available for future repurchases under the Share Repurchase Program. Strategies for Growth
We are focused on top and bottom line growth in our base business. Our strategies for growth include:
? Focus On Twelve Core Brands-In connection with our Pork segment restructuring, which was completed in fiscal 2011, we rationalized our large brand portfolio and began to focus our marketing support on twelve major brand names: Smithfield, Farmland, John Morrell, Gwaltney, Armour, Eckrich, Margherita, Carando, Kretschmar, Cook's, Curly's and Healthy Ones. Approximately three-quarters of our domestic retail packaged meats sales are branded products, with nearly 90% of those branded sales being core brands.

? Invest in Advertising to Activate Brands-We have begun to invest more heavily in marketing talent and advertising campaigns to drive consumer awareness. In December 2011 (fiscal 2012), we entered into a multi-year sponsorship agreement with the Richard Petty Motorsports NASCAR team to help activate our brands with consumer-focused marketing.

? Build a Strong Innovation Pipeline-We are driving consumer relevant product innovation by focusing on delivering convenience oriented products such as our Smithfield marinated pork products, convenient packaging such as our Smithfield bacon pouch pack and healthier, reduced sodium products. In fiscal 2012, we opened a 37,000 square foot research and development center with three state of the art kitchens, a dedicated cutting room, multimedia technology, and a pilot plant that simulates full scale manufacturing processes. This facility allows us to co-develop prototypes with customers and make quick product modifications for speed to the market.

? Coordinated Sales and Marketing Team-In connection with our Pork segment restructuring plan, we merged two independent fresh pork sales forces and consolidated our international sales organizations for our U.S. pork companies into one group responsible for exports. The restructured sales groups provide for a more coordinated and focused strategy to access markets and service customers.

Outlook
The commodity markets affecting our business are often volatile and fluctuate on a daily basis. In this unpredictable operating environment, it is very difficult to make meaningful forecasts of industry trends and conditions. The outlook statements that follow must be viewed in this context.
? Pork-The first quarter is a seasonally weak period for fresh pork. Fresh pork margins suffered from high pork supplies and sluggish retail demand during the quarter. However, margins have shown considerable improvement as we begin to emerge from the seasonally weak period. Looking forward, we believe the fundamentals support solid profitability in fresh pork for the full fiscal year. Lower supplies of competing proteins, continued strength in export demand and relatively high pork prices around the world should support healthy fresh pork profitability within the normalized range of $3-$7 per head for fiscal 2013.

We achieved record operating margins in our packaged meats business in the first quarter of fiscal 2013, benefiting from lower raw material costs, an enhanced product mix, a more coordinated and focused sales strategy and increased investment in marketing talent and consumer advertising. At the same time, we grew packaged meats volumes by 4%, driven by core brand volume growth of 7%. We are executing our strategy to grow our packaged meats business by continuing to utilize our coordinated sales and marketing team approach, focus on our twelve core brands, invest in consumer-focused advertising and build a strong product innovation pipeline to grow market share and distribution.
In summary, we are optimistic about our packaged meats business for fiscal 2013 and beyond. We expect packaged meats operating margins to be at the high end of the normalized range of $.12 to $.17 per pound with 2-3% volume growth in fiscal 2013.
? Hog Production-Live hog market prices averaged $66 per hundredweight in the first quarter of fiscal 2013. As we move into the second quarter of fiscal 2013, hog prices are expected to move seasonally lower before recovering in the second half of the fiscal year. Industry sow slaughter rates have turned noticeably positive over the past six weeks and supplies of other proteins are expected to contract, which should be supportive of healthy hog prices going forward.

Raising costs averaged $67 per hundredweight in the first quarter of fiscal 2013, up 6% from the prior year. Drought conditions in the United States have recently caused sharp increases in feed grain prices. However, we expect hedge positions placed prior to the run-up in grain prices will mitigate, to a meaningful extent, the negative impact on our raising costs. We expect our raising costs to average in the mid $60s per hundredweight throughout fiscal 2013, as the blended effect of hedge gains and higher spot corn prices are averaged into cost over the course of the year.
In summary, the current hog production environment is difficult, but our risk management strategy should dampen the effects of higher priced grain for the balance of the fiscal year. Consequently, we expect to produce results that are better than the industry average. Profitability is expected to range from a marginal loss to a marginal profit for the full fiscal year in the Hog Production segment.
? International-Our International segment generated $15.8 million of operating profit in the first quarter of fiscal 2013 compared to break even profitability in the same period a year ago. Our European hog production operations should continue to benefit from tightening hog supplies on the continent. Industry forecasters predict higher feed costs combined with heightened environmental and welfare regulations in Europe will cause producers to contract, improving an already favorable production environment for our Polish and Romanian hog farms. Our Mexican hog production joint ventures are currently operating in a challenging production environment. We expect modest improvements for the balance of fiscal 2013. However, before meaningful contributions to segment profitability can be expected, additional improvements in live hog prices and/or feed grain cost will be needed.

On the meat processing side of our international business, we expect improved results from our Polish meat operations for the balance of fiscal 2013. Recent approval to export pork products out of Romania to European Union member countries should continue to benefit results from our Romanian meat operations. We also expect modest contributions from our Mexican meat operations. Finally, in the third quarter of fiscal 2012, CFG announced a multi-year comprehensive plan to consolidate and streamline its manufacturing operations, which should improve operating results over the long-term. In the near-term, we expect only modest positive contributions from CFG.
In total, we anticipate operating profits from this segment will be in the upper half of the normalized range of $50 million to $125 million for fiscal 2013.

RESULTS OF OPERATIONS
Significant Events Affecting Results of Operations Missouri Litigation
Premium Standard Farms, Inc. (PSF), the Company and certain of our other subsidiaries are parties to litigation in Missouri involving a number of claims alleging that hog farms owned or under contract with the defendants interfered with the plaintiffs' use and enjoyment of their properties. During fiscal 2012 and continuing in fiscal 2013, we engaged in global settlement negotiations with counsel representing nearly all of the plaintiffs in the nuisance litigation and numerous carriers of commercial general liability and pollution liability policies. In fiscal 2012, based on these negotiations, we recognized $22.2 million in net charges associated with the Missouri litigation in selling, general and administrative expenses in the Hog Production segment, including $39.0 million in charges during the first quarter of fiscal 2012. The parties to the litigation have reached an agreement and consummated a global settlement that resolves substantially all of the nuisance litigation. Pursuant to the agreement, all pending cases previously disclosed, with one minor exception, will be dismissed with prejudice. In addition, we have agreements with the insurance carriers under which we receive payments that we contribute to pay a portion of the settlement, most of which were contingent on the consummation of the global settlement.
The global settlement, which was consummated after the end of the first quarter of fiscal 2013, is not materially different than the accrual we maintained for the settled litigation and, therefore, will not materially affect our profits or losses in future periods. Payments made by us under the global settlement and payments we receive from the insurance carriers will impact our cash flows for future periods; however, such impact is not expected to be material to our overall financial position or liquidity. Consolidated Results of Operations
The tables presented below compare our results of operations for the three months ended July 29, 2012 and July 31, 2011. Sales and cost of sales