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. 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 maintain 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. Third Quarter of Fiscal 2013 Summary
Net income was $81.5 million, or $.58 per diluted share, in the third quarter of fiscal 2013 compared to net income of $79.0 million, or $.49 per diluted share, in the same quarter last year. The following summarizes the operating results of each of our reportable segments and other significant items impacting pre-tax income for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012:
? Pork segment operating profit decreased by $16.0 million primarily as a result of lower fresh pork market prices.

? Hog Production segment operating profit decreased $57.9 million primarily as a result of higher feed costs and lower hog prices.

? International segment operating profit increased by $37.5 million primarily due to charges recognized by our equity method investee, Campofrío Food Group (CFG), in the prior year, of which our share was $38.7 million.

? The prior year included losses on debt extinguishments of $4.6 million.

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 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 January 27, 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 January 27, 2013, we had $24.5 million available for future repurchases under the Share Repurchase Program. Sequester
We are closely monitoring the situation with sequestration and how that may affect our plants. All of our domestic processing facilities are under mandatory inspection by USDA-FSIS, including our pork slaughter facilities that have mandatory USDA inspectors present during all times of operation. USDA has indicated that inspector furloughs would be concentrated in the July through September time frame and that the agency will send out furlough notices to individual inspectors at least 30 days in advance. However, industry representatives, elected leaders and others are working to prevent furloughs from occurring. Possible solutions include Congress striking a bargain to eliminate sequestration altogether; the passage of more targeted exemptions designed to allow funding of FSIS inspectors from other areas of the USDA budget; or elimination of certain cuts through the passage of another appropriations continuing resolution. There can be no assurance that sequestration will not have a material adverse affect on our operations.

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/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.

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 February 2013 (fiscal 2013), we signed a non-binding letter of intent to form a 50/50 joint venture with Kansas City Sausage Company, LLC (KCS), including its sister company, Pine Ridge Farms, LLC. This joint venture, as contemplated, will be 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 in the U.S. 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 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 billion in retail and foodservice sales annually.
The transaction, as anticipated, will be funded with cash on hand and is expected to close in the fourth quarter of fiscal 2013, subject to customary closing conditions. We expect the transaction 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.
• Pork-Our fresh pork business was solidly profitable in the third quarter of fiscal 2013. We continue to focus on improving our product mix toward differentiated, branded and value-added products, both domestically and in the export markets.

While the fresh pork complex was weak in the latter part of the third quarter of fiscal 2013 and early stages of the fourth quarter of fiscal 2013, we see positive fundamentals looking ahead. Lower per capita protein supplies and higher prices for competing proteins should help push pork retail prices higher in calendar 2013. Higher costs and more stringent regulations should yield lower European Union (EU) pork production and EU exports in calendar 2013, which should further strengthen demand for U.S. pork exports. While these are positive trends, consumers are facing higher taxes and energy costs, which could adversely impact domestic demand.
Taking all of this into account, we believe fresh pork operating margins will continue to be in the normalized range of $3 to $7 per head in the fourth quarter of fiscal 2013, as well as in fiscal 2014.
Our packaged meats business continues to post strong results. We anticipate consistent growth, with increased market share and broader distribution of our core brands. We expect packaged meats operating margins to be at the high end of the normalized range of $.12 to $.17 per pound with volume growth of at least 2-3% for fiscal 2013, and for this trend to continue into fiscal 2014.
• Hog Production-Live hog market prices averaged $60 per hundredweight in the third quarter of fiscal 2013, 2% lower than a year ago. As we move through the fourth quarter of fiscal 2013 and summer, hog prices should move seasonally higher from current levels.

Drought conditions last summer in the United States caused sharp increases in feed grain prices. Consequently, raising costs averaged $68 per hundredweight in the third quarter of fiscal 2013, up 7% from the prior year. We expect raising costs to remain at similar levels in the fourth quarter before trending downward by the second quarter of fiscal 2014.
Our grain hedges should dampen the effects of high priced grain for the balance of the fiscal year. However, we still expect losses per head in the mid single digit range in hog production for fiscal 2013. It is difficult to forecast hog production results for fiscal 2014 at this point, but we are actively working to mitigate commodity price risk in this segment.
• International-Our International segment delivered solid operating profits of $43.7 million in the third quarter of fiscal 2013. Our European hog production operations should continue to benefit from lower hog supplies on the continent. Our Mexican hog production joint ventures are currently operating in a challenging production environment. We expect minimal profitability in these operations for the balance of fiscal 2013. 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 profitable results from our Polish meat operations for the balance of fiscal 2013, despite higher raw material costs. The approval to export pork products out of Romania to EU member countries during the fourth quarter of fiscal 2012 should continue to benefit results from our Romanian meat operations. We also expect a solid contribution 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, however, we expect only modest positive contributions from CFG.
In total, we expect operating profits from this segment to be at the high end of the normalized range of $50 million to $125 million for fiscal 2013 and fiscal 2014.

RESULTS OF OPERATIONS
Significant Events Affecting Results of Operations Missouri Litigation
In the first quarter of fiscal 2012, we recognized $39.0 million in charges associated with negotiations over a global settlement for nuisance litigation in Missouri. The charges were recognized in selling, general and administrative expenses in the Hog Production segment. During the second quarter of fiscal 2013, the parties to the litigation reached an agreement and consummated the global settlement.
Missouri Hog Farms
In the first quarter of fiscal 2012, we made a decision to permanently idle certain farm assets in Missouri. Depreciation estimates were revised to reflect the shortened useful lives of the assets. As a result, we recognized accelerated depreciation charges of $0.7 million and $8.2 million in cost of sales for the three and nine months ended January 29, 2012, respectively. These charges are reflected in the Hog Production segment. These assets were fully depreciated by the end of the third quarter of fiscal 2012. 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 includes 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 (income) loss from equity method investments within the International segment in the third quarter of fiscal 2012. Consolidated Results of Operations
The tables presented below compare our results of operations for the three and nine months ended January 27, 2013 and January 29, 2012. As used in the tables, "NM" means "not meaningful."