Joseph W. Luter III, president and chief executive officer of Smithfield Foods Inc., says right off that he never envisioned his return to the company he left 8 1/2 years ago, shortly after it was bought by a young, aggressive Washington conglomerate for $20 million.

But the people around this town of 3,000 are glad that he is back.

The company's advertising budget has increased dramatically. Capital spending is climbing and production is humming merrily along. In short, things are looking rosy at the pork-processing and packing company for the first time in years, and Luter certainly has to get a big chunk of the credit.

It was a bit more than three years ago that Luter returned to Smithfield to face the challenge of turning around a company with a negligible net worth of $1.35 million and a burdensome of $17.4 million in long-term debt. Company stock was trading on the over-the-counter market at a paltry bid price of 62 cents a share.

"I had no burning desire to return," Luter says, "but a certain amount of family pride was at stake."

Today, the net worth of Smithfield Foods is about $10 million and the stock is trading at a bid price of $4.13, almost double the year-ago level. Long-term debt has been reduced to $7.9 million, due in part to proceeds from the sale of Family Fish Houses, Smithfield Foods' seafood restaurant chain, for $7.75 million in January.

Just as significant, the company that claims to be the largest producer of the famous Smithfield ham is imbued with a new sense of optimism.

"The sale of the restaurants has given us the funds we just haven't had to expand our company since 1969," says Luter. (That was when Smithfield packing, now the company's sole subsidiary, was acquired by Liberty Equities Corp., the Washington conglomerate).

"With the lack of availability of funds, we have been in a true holding pattern until now."

Luter says "no final determination" about exactly in what direction the company will be heading has been made. But a 300 percent increase in the company's advertising budget this year and a 26 percent boost in capital expenditures clearly shows that Smithfield Foods is bringing its hiatus from the competitive marketplace to a rapid close.

Luter, 38, stands 6 foot 2 and weights a strapping 215 pounds. But despites his size, he doesn't quite look like he fits the role of a hard-driving business executive whose paramount concern was to restore his company to profitability and chip away at a mountain of debt.

This day, his navy-blue suit and vest was complemented modishly with a baby-blue shirt with white stripes, a white collar and white cuffs, and a blue tie with bold red stripes. Luter is soft-spoken, and the impression that he has a boyish face is augmented by a headful of black, layered hair and black aviator glasses.

When asked a question, he sometimes will lean back in his chair, drop his eyes, and pause for perhaps as long as 30 seconds before responding. But business associates consider him thoroughly professional and unusually competent.

Luter also can be tough, as his grandfather, J.W. Luter, one of the founders of Smithfield Packing, was reputed to be. A portrait of J.W. sternly gazes across his grandson's office. When Luter returned to the company, he didn't hesitate to wield the budgetary ax and to thin management ranks.

"I make no bones about it - the revitalization of this company has been directly related to Joe assuming the top management position," says Aaron Trub, vice president and secretary-treasurer, who joined the firm almost five years before Luter came back.

"Joe really knows the meat-packing business, and he has uncannily good business ability," Trub adds. "And as far as leadership is concerned, I don't think it could have been supplied as well by anyone else."

George Brown, president and chief executive officer of archrival ITT Gwaltney, understandably is sparing with comments about his competitor. He does admit, however, that someone who manages to turn the fortunes of a major company, as Luter has, "is obviously an accomplished business individual."

Sharing similar sentiments is Doug Ludeman, president of United Virginia Bankshares, which threatened to recall a Smithfield Foods loan in excess of $10 million shortly before Luter's return. The company has since reduced that debt to $2.35 million.

"From our standpoint, the most important thing is that Joe Luter understands the meat-packing business," Ludeman says. "He realized that excess expenses were holding the company down, and so he was very rigid in expense control."

Ludeman also gives Luter high marks as a skilful negotiator who balanced the needs of his company with its debt obligation to United Virginia. As Smithfield Foods' largest creditor, United Virginia had to take a hard line, but Luter also "was a tough customer," Ludeman says.

Nonetheless, he adds: "We have had a very pleasant relationship from the start."

When Luter left Smithfield Packing in January 1970, six months after it was purchased by Liberty Equities, the company's fortunes fell into the hands of C. Wyatt Dickerson, a prominent member of the Washington social scene and husband of former TV commentator Nancy Dickerson.

Luter had good reason to be pleased with the sale. Although his father and grandfather were among the founders of the firm and he himself assumed the presidency in 1966 at only 26, the transaction was consummated at three times the company's book value.

But Luter's happiness was cut short within a couple of weeks when it became rudely apparent that Liberty Equities was not what it had made itself out to be.

Most of the company's half a dozen other subsidiaries were losing money, and a Securities and Exchange Commission investigation resulted in suspension of trading of company stock in July, the same month it purchased Smithfield Packing. Dickerson resigned as president in August. Three subsidiaries were sold by the end of the year.

When trading of Liberty Equities was resumed in December, it was selling for $1 a share compared with $32 earlier in the year.

The next year, under new Chairman Lattie Upchurch Jr., Liberty Equities changed its name to Smithfield Foods, moved its corporate base to Newport News and started the Family Fish House chain. Its sales boosted by low hog prices, the company began working out its problems and its stock climbed to the $10-11 level.

The firm's troubles re-emerged in 1972, however, apparently because of management problems. "management misjudged the earning power of the packing company," says Smithfield Foods' Trub. "The feeling was that the packing company would always earn the kind of dollars it did in 1970 and 1971."

Earning began to drop in 1972, then plummeted in 1973 with the notorious Russian grain deal, which hiked grain prices and cut sharply into hog production. The company's performance continued to drag in 1974. In July, when a $10 million note from the parent company's purchase of Smithfield Packing came due, Smithfield Foods sold two more subsidiaries.

Shortly afterward, top management personnel were changed, two key executives left the company, and the packing company began losing money. The crowning blow came in December, when the packing company suffered a loss in what traditionally is the most profitable month in the meat-packing business.

"It was like a beer company losing money in July," says Luter, who had been developing a successful, second-home development at Bryce Mountain, near Basye, Va., since his departure from Smithfield Packing.

United Virginia threatened to recall its loan to the company unless top management was changed. Luter, meanwhile, approached board members and also advocated a personnel switch, telling them that the alternative was bankruptcy in 1975.

He volunterred to return to rescue the company - and his offer was accepted.

Luter didn't want to see the demise of the business his family had helped to build, and he was concerned about the fate of the company's 1,200 employes, some of whom had been with the firm since its founding in 1936. There also was consideration of the effect that the closing of the company would have on the Town of Smithfield.

Luter came back aboard in April 1975, confident that he could correct the problems plaguing the company. Essentially, they boiled down to a bloated overhead in terms of business expenses and an overabundant corps of middle managers.

Computer expenses alone were running $600,000 a year, and Luter reduced that to $200,000 within three months. A number of middle managers were terminated, opening some space at the Smithfield plant. Corporate offices on the top floor of the Bank of Virginia building in downtown Newport News were closed, and all remaining executives were based at the plant.

Luter also concentrated on what he calls "putting the right people in the right spots with the right responsibilities," promoting from within. "We had the people who could do the job," he says. "We have never gone outside for management people."

His managerial techniques paid dividends immediately. Luter's response to the company's budding track record of continual losses was to turn a profit his first month on the job. Smithfield Foods has been profitable every quarter since.

Last year, the company earned $2.17 million on record sales of $139.1 million, up 6 percent from 1976. Earnings were up 42.1 percent. Because it expects increased hog supplies and lower prices this year, Smithfield Foods forecasts a better year for 1978.

Smithfield Packing became the sole component of Smithfield Foods when the 22 restaurants of the company's seafood chain were sold to the Macke Co. Luter once again consummated a good deal, selling the chain for more than $3 million above book value.

The restaurants were profitable, but Luter figured that the company's cash flow wouldn't be sufficient to finance the expansion of the meat-packing and restaurant businesses, as well as meet continuing debt repayments. He decided to sell the business he knew less well.

These days, Smithfield Foods is concentrating on marketing its processed pork products, which offer greater profits than fresh pork, throughout its Atlantic Seaboard market. The company's $800,000 advertising budget this year is aimed largely at supporting this thrust.

As for himself, he says his immediate plans are to stay with the company. However, he admits that he had a "fondness" for challenges and that things aren't quite so exciting now that business is approaching normalcy.