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Item 2. Management’s Discussion and Analysis

2016-04-28 compared with 2015-10-28 · 82 added, 206 removed, 201 unchanged (59% of the section changed)

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 Operations contained in our report on Form 10-K for the twelve months ended December 28, 2014 .

EXECUTIVE OVERVIEW

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We believe moving to a more centralized structure allows for a more efficient and effective approach to customers, best utilizes management talent, maximizes the manufacturing platform and plant efficiency and optimizes marketing, innovation and brand management.

Third Quarter Summary of Results

Net income for the third quarter of 2015 was $83.3 million compared to net income of $155.3 million for the third quarter of 2014 .

The following summarizes the operating results of each of our reportable segments for the third quarter of 2015 compared to the third quarter of 2014 :

Fresh Pork operating results increased by $26.6 million primarily as the impact of lower meat values was more than offset by lower hog prices.

Packaged Meats operating profit remained relatively unchanged as lower raw material costs and higher sales volume were largely offset by lower average selling prices.

Hog Production operating profit decreased by $92.5 million primarily as a result of lower live hog market prices driven by higher hog supplies.

International operating profit decreased by $25.0 million primarily due to lower pork market prices in Europe and Mexico and the impact of foreign currency translation due to a stronger U.S.

First Quarter Summary of Results

Net income for the first quarter of 2016 was $121.0 million compared to net income of $97.0 million for the first quarter of 2015 .

The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income:

Fresh Pork operating profit increased by $66.7 million primarily as a result of lower raw material costs.

Packaged Meats operating profit increased by $ 34.6 million as a result of higher sales volume and lower raw material costs.

Hog Production operating results decreased by $77.1 million primarily as a result of favorable hedging results in the prior year and lower live hog market prices in the current year.

International operating profit decreased by $1.7 million primarily due to unfavorable foreign currency translation.

The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA for all periods presented.

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Three Months Ended

Nine Months Ended

September 27, 2015

September 28, 2014

September 27, 2015

September 28, 2014

April 3, 2016

March 29, 2015

(in millions)

1 unchanged sentence

Income tax expense

Depreciation and amortization expense

Non-operating (gain) loss

Depreciation and amortization

Non-operating loss

Adjusted EBITDA

In June 2015, we completed the sale of our entire equity interest in CFG to Alfa for $354.0 million in cash.

As of the date of the sale, the book value of our investment in CFG was $298.7 million .

Additionally, we had $54.6 million of unrealized currency translation losses on our balance sheet related to our investment in CFG.

In January 2015, we commenced a cash tender offer for our 7.75% senior unsecured notes due July 2017, 5.25% senior unsecured notes due August 2018, 5.875% senior unsecured notes due August 2021 and 6.625% senior unsecured notes due August 2022, subject to a maximum aggregate purchase price up to $275 million (2015 Tender Offer).

As a result of the 2015 Tender Offer, we paid $275.0 million to repurchase $258.1 million of principal and recognized losses on debt extinguishment of $12.8 million in non-operating (gain) loss in the consolidated condensed income statement, including the write-off of related unamortized premiums and debt issuance costs.

Animal Health

Department of Agriculture (USDA) identified Porcine Epidemic Diarrhea Virus (PEDv) in the United States for the first time in 2013.

During 2014, the U.S.

pork market was significantly impacted by the spreading of PEDv, a disease that only infects pigs, not humans or other livestock, which has been an industry-wide issue and continues to have a presence in U.S.

Our herds in several regions in which we operate were affected in 2014 as PEDv spread throughout the U.S.

There are confirmed cases of PEDv in the U.S.

however, there are very few cases compared to the outbreak that occurred in 2014.

The USDA and the industry continue to monitor the situation.

During 2015, herds in several of our geographic regions have also been impacted by outbreaks of Porcine Reproductive and Respiratory Syndrome Virus (PRRSv).

While PRRSv is not new to the swine industry, the impact of these outbreaks has been more severe than observed in recent years.

We are subject to risks related to our ability to maintain animal health and control PEDv and PRRSv.

We are unable to predict the extent these diseases will impact our operations or market prices in the future.

In 2014, the spread of PEDv in the U.S.

reduced hog supplies and lead to higher hog and meat prices.

In 2015, the hog herds have recovered and the supply increase has yielded lower market prices.

The 2015 Tender Offer expired in February 2015.

As a result of the 2015 Tender Offer, we paid $275.0 million to repurchase $258.1 million of principal and recognized losses on debt extinguishment of $12.8 million, including the write-off of related unamortized premiums and debt issuance costs.

Renewable Fuel Standard

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The proposed volumes are below statutory levels, but above historical output of renewable fuels.

The EPA plans to finalize those standards by November 30, 2015.

On November 30, 2015, the EPA finalized RFS standards for 2014, 2015 and 2016 at higher levels than the proposed volumes, but below statutory targets.

The 2016 standard is set at 18.11 billion gallons of renewable fuels, or 10.10% of the motor fuel pool.

Representative Bob Goodlatte (R-VA) has re-introduced legislation in the 114th Congress that would eliminate the conventional (corn starch) ethanol mandate, cap the blendwall at E10, and require the EPA to set cellulosic standards at production levels.

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agricultural and manufactured product exports, including frozen and chilled pork products.

On September 16, 2015, the WTO Arbitrator hosted a public hearing in Geneva where Canada, Mexico and the U.S.

defended their respective retaliatory tariff proposals.

An Arbitration Panel report setting the final number of retaliatory tariffs is expected to be released in December.

At that time, Canada and Mexico will be permitted to impose retaliatory tariffs equal to a sum determined by the arbitrator.

House of Representatives passed legislation, H.R.

2393 the "Country of Origin Labeling Amendments Act of 2015," on June 10, 2015.

If enacted, this legislation would repeal the WTO non-compliant sections of the COOL statute, thus settling the dispute and eliminating the threat of retaliatory tariffs from Canada and Mexico.

Senate is considering this legislation, as well as other proposals to amend the COOL statute.

Although the long-term impact of COOL is currently unknown, industry groups have indicated that the rules impose additional costs on the industry including costs associated with segregation of livestock, record-keeping and new packaging and labeling along with potential retaliatory trade measures under WTO rules.

We cannot presently assess the full economic impact of COOL on the meat processing industry or on our operations.

In December 2015, a WTO Arbitration Panel report set retaliatory tariffs against the United States at just over $1 billion.

In December 2015, Congress passed and the President signed into law the Fiscal Year 2016 omnibus spending legislation which included legislative language to repeal the WTO-noncompliant components of the COOL statute.

Although Canada and Mexico still have the right to initiate retaliatory tariffs against the U.S.

under WTO rules, there is no indication that they intend to do so and the revocation of mandatory COOL for meat has essentially settled the dispute.

The commodity markets affecting our business fluctuate on a daily basis.

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We expect these actions to result in continued broad-based gains in packaged meats sales, volume, market share, distribution and margins.

With our organizational realignment, we are taking steps to build on our record results in 2014 as we continue to solidify Smithfield's position as a global leader in branded packaged meats.

With our organizational realignment, we are taking steps to build on our strong results in 2015 as we continue to solidify Smithfield's position as a global leader in branded packaged meats.

There is a plethora of benefits to moving to a centralized structure and unifying all our resources and brands together as “One Smithfield,” which should position us to take advantage of growth opportunities in the following ways:

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We will continue to sharpen our strategic focus and drive operational improvements across our entire platform, including our Fresh Pork, Hog Production and International divisions.

We are focused on growth and believe that Smithfield is in an ideal position to continue to achieve strong results for the remainder of 2015 as well as 2016.

We are focused on growth and believe that Smithfield is in an ideal position to continue to achieve strong results in 2016.

RESULTS OF OPERATIONS

Consolidated Results of Operations

The table presented below compares our results of operations for the third quarters of 2015 and 2014.

The table presented below compares our results of operations for the first quarters of 2016 and 2015 .

Three Months Ended

September 27, 2015

September 28, 2014

(in millions)

Cost of sales

Selling, general and administrative expenses

Income from equity method investments

Operating profit

Interest expense

Income before income taxes

Income tax expense

Sales and gross profit

Sales decreased primarily as a result of lower market prices across all of our segments and the impact of foreign currency translation as a result of a stronger U.S.

Gross profit decreased primarily as a result of lower sales, partially offset by lower pork processing raw material costs and lower feed costs.

Selling, general and administrative expenses (SG&A)

The increase in SG&A is primarily attributable to higher marketing and advertising costs as we focus on growing our brands through consumer-focused marketing programs.

Income from equity method investments

Equity income decreased primarily as a result of lower hog prices in Mexico.

Interest expense

The decrease in interest expense is primarily due to lower debt balances in the current year as a result of various debt repayment activities.

Income tax expense

The effective tax rate was 31% and 26% for the third quarters of 2015 and 2014, respectively.

For both the current year and prior year, taxable income relative to permanent items, the mix of income between jurisdictions, and the expiration of certain federal tax credits impacted the effective tax rate.

The table presented below compares our results of operations for the first nine months of 2015 and 2014.

As used in the table, "NM" means "not meaningful."

Nine Months Ended

September 27, 2015

September 28, 2014

April 3, 2016

March 29, 2015

(in millions)

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Interest expense

Non-operating (gain) loss

Non-operating loss

Income before income taxes

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Sales and gross profit

Sales decreased primarily as a result of lower market prices across all of our segments and the impact of foreign currency translation as a result of a stronger U.S.

Gross profit decreased primarily as a result of lower sales, partially offset by lower pork processing raw material costs and lower feed costs.

Sales decreased primarily as a result of lower average selling prices of domestic fresh pork products and lower domestic live hog market prices.

Gross profit increased primarily as a result of lower pork processing raw material costs and lower hog raising costs.

Selling, general and administrative expenses (SG&A)

The increase in SG&A is primarily attributable to higher marketing and advertising costs as we focus on growing our brands through consumer-focused marketing programs as well as higher stock-based compensation expense.

The decrease in SG&A is primarily attributed to lower marketing and advertising costs.

Income from equity method investments

Equity income decreased primarily as a result of lower hog prices in Mexico.

Additionally, equity income decreased due to a significant tax benefit recognized through our former investment in CFG in 2014.

Equity income in the prior year was negatively impacted by our former investment in CFG.

Current year equity income was negatively impacted by lower hog prices in Mexico.

Interest expense

The decrease in interest expense is primarily due to lower debt balances in the current year as a result of various debt repayment activities.

Non-operating (gain) loss

The decrease in interest expense is primarily due to lower debt balances in the current year as a result of various debt repayment activities in the prior year.

Non-operating loss

During 2015, we recognized a loss on debt extinguishment of $12.8 million as a result of the 2015 Tender Offer.

Income tax expense

Our effective tax rate was 32% and 31% for the first quarters of 2016 and 2015, respectively.

Both the current and prior year effective tax rates were impacted by taxable income relative to permanent items and the mix of income between jurisdictions.

Additionally, the prior year effective tax rate was impacted by the expiration of certain federal tax credits.

Segment Results

The following information reflects the results from each respective segment for the third quarters of 2015 and 2014.

The following information reflects the results from each respective segment for the first quarters of 2016 and 2015 .

Three Months Ended

September 27, 2015

September 28, 2014

April 3, 2016

March 29, 2015

(in millions)

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Consolidated operating profit

Sales decreased 16% due to a 27% decrease in average selling prices, partially offset by an 15% increase in volume.

Operating results increased to a $2 profit per head from a $2 loss per head due to lower hog prices, which more than offset the impact of lower meat values.

We processed 7.2 million hogs in 2015, an increase of 15% from the prior year.

Sales decreased 16% due to a 13% decrease in average selling prices and a 4% decrease in volume.

Operating profit increased to $13 per head from $4 per head due to lower raw material costs.

We processed 7.7 million hogs in 2016, relatively unchanged from the prior year.

Packaged Meats

Sales decreased 6% due to an 11% decrease in average selling prices, partially offset by a 5% increase in volume.

Sales increased 2% due to a 2% increase in volume.

Average selling prices remained relatively unchanged from the prior year.

Current year sales volume totaled 742.8 million pounds.

Operating profit decreased to $0.17 per pound from $0.18 per pound as advertising expenditures increased by $0.01 per pound.

Lower raw material costs were largely offset by lower average selling prices.

Hog Production

Sales decreased 5% due to lower domestic live hog market prices which were partially offset by favorable hedging results.

Head sold during the quarter amounted to 3.7 million , an increase of 12% from the prior year.

These changes in sales volumes and market prices were driven largely by the effects of PEDv in the prior year.

See "Executive Overview--Animal Health" for additional discussion about PEDv.

Operating profit decreased to $13 per head from $42 per head due to lower live hog market prices, partially offset by favorable hedging results and lower feed costs.

International

Sales decreased due primarily to changes in foreign exchange rates, which negatively impacted sales by $76.5 million , or 17% .

On a constant currency basis, sales increased 1% due to a 9% increase in volume to 394.6 million pounds, driven largely by an 11% increase in hogs processed and an 8% increase in poultry processed in Europe, partially offset by an 8% decrease in average selling prices.

We processed 1.2 million hogs in 2015.

Operating profit was negatively impacted by lower pork market prices in Europe along with lower equity income from our Mexican joint ventures.

Foreign currency translation also negatively impacted operating profit by approximately $2.3 million due to a stronger U.S.

The following information reflects the results from each respective segment for the first nine months of 2015 and 2014.

Nine Months Ended

September 27, 2015

September 28, 2014

(in millions)

Packaged Meats

Hog Production

International

Total segment sales

Intersegment sales

Consolidated sales

Operating profit (loss):

Packaged Meats

Hog Production

International

Consolidated operating profit

Sales decreased 12% due to a 20% decrease in average selling prices, partially offset by an 11% increase in volume.

Operating profit decreased to $1 per head from $4 per head due to lower fresh pork market prices.

We processed 22.2 million hogs in 2015, an increase of 12% from the prior year.

Packaged Meats

Sales decreased 2% due to an 8% decrease in average selling prices, partially offset by a 6% increase in volume.

Current year sales volume totaled 2.1 billion pounds.

Operating profit increased to $0.28 per pound from $0.24 per pound due to lower raw material costs.

Hog Production

Sales decreased 6% due to lower domestic live hog market prices which were partially offset by favorable hedging results.

Head sold during the year amounted to 11.5 million , an increase of 6% from the prior year.

These changes in sales volumes and market prices were driven largely by the effects of PEDv in the prior year.

See "Executive Overview--Animal Health" for additional discussion about PEDv.

Operating profit decreased to $7 per head from $26 per head due to lower sales, partially offset by favorable hedging results and lower feed costs.

Sales decreased 23% due to favorable hedging results in the prior year, lower domestic live hog market prices and a 2% decrease in head sold.

Head sold during the year amounted to 3.9 million .

Operating results decreased to a $21 loss per head from a $2 loss per head due to lower sales, partially offset by lower feed costs.

International

Sales decreased 4% due primarily to changes in foreign exchange rates, which negatively impacted sales by $29.9 million , or 9% .

On a constant currency basis, sales increased 1% due to a 9% increase in volume to 1.1 billion pounds, driven largely by an 8% increase in hogs processed and a 13% increase in poultry processed in Europe, partially offset by a 7% decrease in average selling prices.

On a constant currency basis, sales increased 5% due to a 11% increase in volume to 382.8 million pounds, driven largely by a 14% increase in hogs processed and a 14% increase in poultry processed in Europe, partially offset by a 5% decrease in average selling prices.

We processed 1.2 million hogs in 2016.

Operating profit was negatively impacted by lower pork market prices in Europe along with lower equity income from our Mexican joint ventures.

Foreign currency translation also negatively impacted operating profit by approximately $8.9 million due to a stronger U.S.

Operating profit was negatively impacted by foreign currency translation of $1.7 million due to a stronger U.S.

On a constant currency basis, operating profit was relatively unchanged from the prior year.

LIQUIDITY AND CAPITAL RESOURCES

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We believe that our current liquidity position is strong and that our cash flows from operations and availability under our credit facilities will be sufficient to meet our working capital needs and financial obligations for at least the next twelve months.

As of September 27, 2015 , our liquidity position was approximately $1.6 billion , comprised of approximately $1.4 billion in availability under our credit facilities, $115.2 million in cash and cash equivalents and $100.0 million in unutilized loans.

As of April 3, 2016 , our liquidity position was approximately $1.6 billion , comprised of approximately $1.3 billion in availability under our credit facilities and $260.6 million in cash and cash equivalents.

Sources of Liquidity

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Credit Facilities

September 27, 2015

April 3, 2016

Borrowing Base Adjustment

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Total credit facilities

In April 2015, we entered into a new $1.025 billion asset-based revolving credit facility agreement (the Inventory Revolver Credit Agreement) which replaced our previous $1.025 billion senior secured revolving credit facility which would have matured in June 2016.

The Inventory Revolver Credit Agreement provides for an option, subject to obtaining additional loan commitments and certain other conditions, to increase the available commitments by up to $375 million in the future.

It also includes a multicurrency subfacility for Canadian Dollars, Japanese Yen, Euros, British Pounds Sterling and U.S.

Dollars of up to the foreign currency equivalent of $100 million, a subfacility of up to $50 million for swingline borrowings and a subfacility of up to $150 million for issuances of letters of credit.

Availability under the Inventory Revolver Credit Agreement is based upon borrowing base valuations of our U.S.

inventory, live sows and certain accounts receivable.

The Inventory Revolver Credit Agreement is scheduled to mature on May 1, 2020.

Loans under the Inventory Revolver Credit Agreement bear interest at LIBOR plus a margin ranging from 1.75% to 2.75% per annum, or, at our election, at a base rate plus a margin ranging from 0.75% to 1.75% per annum, with either such margin varying according to the ratio of our consolidated funded debt to consolidated EBITDA.

Letters of credit issued under the Inventory Revolver Credit Agreement accrue fees at a rate equal to the applicable margin for LIBOR loans.

In addition, we are required to pay a commitment fee for the average daily unused commitments under the Inventory Revolver Credit Agreement, at rates ranging from 0.30% to 0.50% per annum depending on the ratio of our consolidated funded debt to consolidated EBITDA.

The obligations under the Inventory Revolver Credit Agreement are guaranteed by substantially all of our U.S.

subsidiaries and are secured by a first-priority lien, subject to permitted liens and exceptions for excluded assets, on substantially all of our and our subsidiary guarantors' personal property, including accounts receivable (other than those sold and financed pursuant to the Securitization Facility), inventory, cash and cash equivalents, deposit accounts, intercompany notes, intellectual property and certain capital stock and interests pledged by us and our subsidiary guarantors, and all proceeds thereof.

The Inventory Revolver Credit Agreement contains affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of our subsidiaries to create liens and encumbrances;

make capital expenditures;

make acquisitions and investments;

dispose of or transfer assets;

and pay dividends or make other payments in respect of our capital stock;

in each case, subject to certain qualifications and exceptions.

In addition, the Inventory Revolver Credit Agreement contains financial covenants requiring us to maintain a total consolidated leverage ratio (ratio of consolidated funded debt to consolidated capitalization) of, subject to certain exceptions, not more than 0.50 to 1.0, a minimum interest coverage ratio (ratio of consolidated EBITDA to consolidated interest expense) of not less than 2.50 to 1.0 and limitations on capital expenditures.

The Inventory Revolver Credit Agreement also includes usual and customary events of default for facilities of this nature, and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the facility may be accelerated, the lenders’ commitments may be terminated and the lenders may foreclose upon the collateral.

In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the facility will automatically become due and payable and the lenders’ commitments will automatically terminate.

Rabobank Term Loan

In May 2015, we refinanced the Rabobank Term Loan and extended its maturity date from May 1, 2018 to May 1, 2020.

After the refinancing, the total capacity of the Rabobank term loan was $150.0 million, with $50.0 million outstanding.

We may draw the additional $100.0 million until April 15, 2016.

We may elect to prepay the loan at any time, subject to the payment of certain prepayment fees in respect of any voluntary prepayment prior to April 15, 2017 and other customary breakage costs.

Interest accrues, at our option, at LIBOR plus 3.25%.

Operating Activities

Nine Months Ended

September 27,

September 28,

Three Months Ended

(in millions)

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The following items explain the significant changes in cash flows from operating activities:

Cash paid to outside hog suppliers decreased due to lower domestic live hog prices.

In the current year, we received $ 132.3 million for the settlement of derivative contracts and for margin requirements compared to $ 309.3 million paid in the prior year.

Cash interest payments decreased approximately $47.0 million .

In the current year, we received a cash dividend of $14.3 million from one of our Mexican joint ventures.

Net tax payments decreased approximately $12.8 million .

Cash received from customers decreased due to lower average meat selling prices.

In the current year, we contributed $125.0 million to our qualified pension plans.

In the current year, we paid $ 5.5 million for the settlement of derivative contracts and for margin requirements compared to $ 101.7 million received in the prior year.

The current year included net tax payments of $ 51.0 million for domestic income taxes as compared to net

tax refunds of $ 32.7 million in the prior year.

In the prior year we received a cash dividend of $14.3 million from one of our Mexican joint ventures.

Cash paid for grain and other ingredients purchased by the Hog Production segment decreased approximately $29.0 million from the prior year.

Investing Activities

Nine Months Ended

September 27,

September 28,

Three Months Ended

(in millions)

Proceeds from sale of equity interest in CFG

Capital expenditures

Net proceeds (expenditures) from breeding stock transactions

Business acquisitions

Net expenditures from breeding stock transactions

Proceeds from the sale of property, plant and equipment

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The following items explain the significant investing activities:

In June 2015, we sold our entire equity interest in CFG for $354.0 million in cash.

Capital expenditures during both years primarily related to plant and hog farm improvement and expansion projects, including the replacement of gestation stalls with group pens, which is more fully explained under "Additional Matters Affecting Liquidity" below.

In April 2014, Kansas City Sausage (KCS) bought a meat processing business for $11.0 million .

Other investing activities include construction expenditures pending sale leaseback treatment.

Financing Activities

Nine Months Ended

September 27,

September 28,

Three Months Ended

(in millions)

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Payments on Securitization Facility

Net payments on revolving credit facilities

Net proceeds (payments) on revolving credit facilities

Payment of dividends

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The following items explain the significant financing activities:

In the current year, we repurchased $258.1 million of senior unsecured notes in connection with the 2015 Tender Offer.

Additionally, we repaid $150.0 million on our Rabobank term loan.

In the current year, we received proceeds of $30.0 million to finance certain activities in Romania.

In the current year, we paid a $73.6 million dividend to our parent company.

In the prior year, we drew $65.0 million, net of repayments, on our Securitization Facility, primarily to cover margin requirements on our commodity derivative contracts.

In the prior year, we paid $258.1 million of principal payments as a result of the 2015 Tender Offer as well as $150.0 million on our Rabobank term loan.

In the prior year, we drew $145.0 million, net of repayments, on our Securitization Facility, primarily to repay other long-term debt, as noted above.

Financial Position

Our balance sheet as of September 27, 2015 , as compared to December 28, 2014 , was impacted by the following significant changes:

Investments decreased $358.2 million mainly due to the sale of CFG, a $14.3 million cash dividend received from one of our Mexican joint ventures and currency translation adjustments, a result of a stronger U.S.

Accounts payable decreased $179.9 million mainly due to the timing of payments.

Net long-term pension liability decreased $269.3 million mainly due to a $200.0 million voluntary contribution to fund our qualified pension plans.

We also elected to perform an interim remeasurement of our plan obligations and assets as of June 26, 2015 which resulted in a $76.1 million decrease to the pension obligation.

As part of our business, we are a party to various financial guarantees and other commitments.

Our balance sheet as of April 3, 2016 , as compared to January 3, 2016 , was impacted by the following significant changes:

Accounts payable decreased by $306.6 million mainly due to the timing of payments.

As part of our business, we are a party to various financial guarantees and other commitments as described below.

These arrangements involve elements of performance and credit risk that are not included in the consolidated condensed balance sheets.

We could become liable in connection with these obligations depending on the performance of the primary obligor or the occurrence of future events that we are unable to predict.

We could become liable in connection with these obligations depending on the performance of the guaranteed party or the occurrence of future events that we are unable to predict.

If we consider it probable that we will become responsible for an obligation, we will record the liability on our consolidated balance sheet.

As of September 27, 2015 , we continued to guarantee $6.9 million of leases that were transferred to JBS S.A.

As of April 3, 2016 , we continued to guarantee $6.4 million of leases that were transferred to JBS S.A.

in connection with the sale of Smithfield Beef, Inc which closed in October 2008.

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Capital Projects

We anticipate annual capital expenditures in the range of $325 million to $380 million over the next several years to upgrade facilities with new machinery and equipment in order to improve our competitive cost structure and achieve least cost/best in class operations.

These expenditures are expected to be funded with cash flows from operations and/or borrowings under our credit facilities.

We anticipate capital expenditures of approximately $350.0 million for 2016 to upgrade facilities with new machinery and equipment in order to improve our competitive cost structure and achieve least cost/best in class operations.

These expenditures are expected to be funded with cash flows from operations and/or borrowings under credit facilities.

In January 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.

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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 2014, we had completed conversions to group housing for over 71% of our sows on company-owned farms.

As of the end of 2015, we had completed conversions to group housing for 82% of our sows on company-owned farms.

We remain on track to finish conversion to group housing for all sows on company-owned farms by the end of 2017.

Our hog production operations in Poland and Romania completed their conversions to group housing facilities a number of years ago.

Worldwide, we have pledged to convert all company sow farms by 2022.

Our hog production operations in Poland and Romania completed their conversions to group housing facilities a number of years ago, and our joint ventures in Mexico are currently working toward the 2022 goal.

In January 2014, we announced the recommendation that all of our contract sow growers join us in converting their facilities to group housing systems for pregnant sows.

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To mitigate these risks, we utilize derivative instruments to hedge our exposure to changing prices and rates, as more fully described under "Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Derivative Financial Instruments" in our Report on Form 10-K for the twelve months ended December 28, 2014.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Derivative Financial Instruments" in our Report on Form 10-K for the twelve months ended January 3, 2016 .

Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative portfolio.

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Conversely, when the value of our open derivative contracts increases, our brokers may be required to deliver margin deposits to us for a portion of the increase.

During the nine months ended September 27, 2015 , margin deposits ranged from $(15.4) million to $80.7 million (negative amounts representing margin deposits we have received from our brokers).

The average daily amount on deposit with our brokers during the nine months ended September 27, 2015 was $42.9 million .

As of September 27, 2015 , the net amount on deposit with our brokers was $40.3 million .

During the three months ended April 3, 2016 , margin deposits ranged from $39.9 million to $57.8 million (negative amounts representing margin deposits we have received from our brokers).

The average daily amount on deposit with our brokers during the three months ended April 3, 2016 was $48.0 million .

As of April 3, 2016 , the net amount on deposit with our brokers was $48.8 million .

The effects, positive or negative, on liquidity resulting from our risk management activities tend to be mitigated by offsetting changes in cash prices in our core business.

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There have been no significant updates to our critical accounting policies and estimates described in "Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our report on Form 10-K for the twelve months ended December 28, 2014.

Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our report on Form 10-K for the twelve months ended January 3, 2016 .

FORWARD-LOOKING STATEMENTS

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by WH Group Limited, the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations and other risks and uncertainties described under Part I, Item 1A.

"Risk Factors" in our report on Form 10-K for the twelve months ended December 28, 2014.

"Risk Factors" in our report on Form 10-K for the twelve months ended January 3, 2016 .

Readers are cautioned not to place undue reliance on forward-looking statements because actual results may differ materially from those expressed in, or implied by, the statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis