SMITHFIELD FOODS INC 10-Q

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 Operations contained in our report on Form 10-K for the twelve months ended December 28, 2014 . 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 Smithfield®, Eckrich®, Farmland®, 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 five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. The Fresh Pork segment consists of our U.S. fresh pork operations. The Packaged Meats segment consists of our U.S. packaged meats operations. The Hog Production segment consists of our U.S. hog production operations. 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. In February 2015, we announced an organizational realignment and key senior management appointments that unify all of our independent operating companies, brands, marketing and employees under one corporate umbrella. 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. First Quarter Summary of Results Net income for the first quarter of 2015 was $97.0 million compared to net income of $105.3 million for the first quarter of 2014 . The following summarizes the operating results of each of our reportable segments and other significant changes impacting net income for the first quarter of 2015 compared to the first quarter of 2014 : ▪ Fresh Pork operating profit decreased by $25.7 million primarily as a result of lower fresh pork market prices. ▪ Packaged Meats operating profit increased by $ 51.2 million as a result of higher sales volume due primarily to the timing of Easter. ▪ Hog Production operating results decreased by $15.9 million primarily as a result of lower live hog market prices. ▪ International operating profit decreased by $21.0 million due to lower average selling prices in Europe as well as a decrease in results from Campofrío Food Group (CFG) and our joint ventures in Mexico. 19 EBITDA for the first quarter of 2015 was $233.4 million compared to $254.2 million in the first quarter of 2014. EBITDA is a non-GAAP measure. We believe EBITDA is a useful measure to our investors because it excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs. EBITDA is not intended to be a substitute for our comparable GAAP measures and should not be used by investors or other users of our financial statements as the sole basis for formulating decisions as it excludes a number of important cash and non-cash charges. The following table provides a reconciliation of net income to EBITDA for both periods: Three Months Ended March 29, 2015 March 30, 2014 (in millions) Net Income $ 97.0 $ 105.3 Interest expense 34.7 40.8 Income tax expense 43.7 51.4 Depreciation expense 56.2 55.0 Amortization expense 1.8 1.7 EBITDA $ 233.4 $ 254.2 Tender Offer 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). 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. Porcine Epidemic Diarrhea Virus (PEDv) The U.S. Department of Agriculture (USDA) identified 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. swine. 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. in 2015; however, the outbreak currently is less severe than in 2014. The USDA and the industry continue to monitor the situation. We are subject to risks related to our ability to maintain animal health and control PEDv. We are unable to predict the extent the disease will impact our operations or market prices in the future. Renewable Fuel Standard The federal Renewable Fuel Standard (RFS) program requires that bio-fuels be blended into transportation fuels at ever-increasing volumes up to 36 billion gallons in 2030. In October 2010, the Environmental Protection Agency (EPA) granted a “partial waiver” to a statutory bar under the Clean Air Act prohibiting fuel manufacturers from introducing fuel additives that are not “substantially similar” to those already approved and in use for vehicles of model year (MY) 1975 or later. Prior to EPA's decision, the ethanol content of gasoline in the United States was limited to 10 percent (E10), which created a barrier, commonly referred to as the “blendwall,” to the expansion of blended bio-fuels as prescribed by the RFS. The EPA's decision allows fuel manufacturers to increase the ethanol content of gasoline to 15 percent (E15) for use in MY 2007 and newer light-duty motor vehicles, including passenger cars, light-duty trucks and medium-duty passenger vehicles. In January 2011, the EPA granted another partial waiver authorizing E15 use in MY 2001-2006 light-duty motor vehicles. Judicial challenges to these rulemakings by a coalition of industry groups were dismissed. 20 In 2013, the EPA issued a proposed rule that would have reduced the volume of renewable fuels mandated by statute and reflected the EPA’s estimate of what would actually be produced in 2014. However, the EPA has not yet issued the final rule for 2014 production volumes, nor has it issued a proposed rule for 2015 production volumes. Representative Bob Goodlatte (R-VA) has re-introduced legislation in the 114th Congress that would eliminate the corn ethanol mandate, cap the blendwall at E10, and require the EPA to set cellulosic standards at production levels. Although the long-term impact of the RFS is currently unknown, studies have shown that expanded corn-based ethanol production has driven up the price of livestock feed and led to commodity-price volatility. We cannot presently assess the full economic impact of the RFS program on the meat processing industry or on our operations. Country of Origin Labeling Following a World Trade Organization (WTO) panel ruling on a complaint by Canada and Mexico that existing U.S. country- of-origin labeling (COOL) requirements violated the United States’ WTO obligations, the USDA published a new rule effective May 23, 2013, Mandatory Country of Origin Labeling of Beef, Pork, Lamb, Chicken, Goat Meat, Wild and Farm-Raised Fish and Shellfish, Perishable Agricultural Commodities, Peanuts, Pecans, Ginseng, and Macadamia Nuts . 78 Fed. Reg. 31367 (May 24, 2013) (the 2013 Rule). The 2013 Rule requires, in part, that labels on covered meat products must list separately, in sequence, the specific country where the animal was "born," the country where it was "raised," and the country where it was "slaughtered." The rule also prohibits combining or commingling of meats with different "Born, Raised, and Slaughtered" combinations in the same package at retail. On March 28, 2014 and on July 29, 2014, the U.S. Court of Appeals for the District of Columbia Circuit rejected a judicial challenge to these rulemakings by a coalition of industry groups. As of February 9, 2015, industry opponents dropped their lawsuit against the USDA. The Canadian and Mexican governments challenged the 2013 Rule before the Dispute Settlement Body (DSB) of the WTO. On October 20, 2014, the DSB issued panel reports finding in favor of Canada and Mexico and against the United States' 2013 Rule. The U.S. Trade Representative has appealed the WTO determination and the appeal decision is expected in late spring. If the Canadian and Mexican WTO challenge is ultimately successful, then the USDA will be faced with the choice of re-formulating another country of origin regulation, seeking amendments to the underlying statute from Congress, or subjecting U.S. industries to substantial retaliatory tariffs that could begin as early as summer 2015. 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. 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. With the launch of our recently announced 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. There are 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: • Leveraging Smithfield's size and scope in pork industry; • Maximizing our manufacturing platform and distribution system; • Approaching the market more efficiently and effectively; • Best utilizing management talent across company; • Aligning our operations to provide better customer service; • Optimizing operations in areas like brand management, manufacturing, sales, and marketing; and • Strengthening marketing, brand building and innovation across all brands. We will continue to sharpen our strategic focus and drive operational improvements across our entire platform. Our most exciting growth prospect is the ongoing development of our packaged meats business. We will continue to strengthen our consumer-focused marketing programs and promote innovation to improve our product mix toward branded, value-added products. Consequently, we expect to deliver modest volume growth and very solid packaged meats margins. PEDv has not been a major issue, but the virus does remain a potential wildcard going forward. We expect U.S. market hog supplies to rebound in 2015, although lower prices and reduced energy costs should generate additional demand in the export markets, as well as domestically. Lower pork prices should also allow us to leverage additional synergistic opportunities with WH Group and Shuanghui, our sister company in China. 21 We are sharply focused on growth and believe that Smithfield is in an ideal position to continue to achieve strong results in 2015. 22 RESULTS OF OPERATIONS Consolidated Results of Operations The tables presented below compare our results of operations for the first quarters of 2015 and 2014. Three Months Ended March 29, 2015 March 30, 2014 % Change (in millions) Sales $ 3,616.5 $ 3,422.1 6 % Cost of sales 3,210.4 3,025.4 6 % Gross profit 406.1 396.7 2 % Selling, general and administrative expenses 221.9 215.4 3 % Income from equity method investments (4.0 ) (15.1 ) (73 )% Operating profit 188.2 196.4 (4 )% Interest expense 34.7 40.8 (15 )% Non-operating (gain) loss 12.8 (1.1 ) (1,249 )% Income before income taxes 140.7 156.7 (10 )% Income tax expense 43.7 51.4 (15 )% Net income $ 97.0 $ 105.3 (8 )% Sales and gross profit ▪ Sales increased primarily as a result of higher sales volume of domestic packaged meats products due primarily to the timing of Easter. ▪ Gross profit increased primarily as a result of higher sales volume of domestic packaged meats products, lower pork processing raw material costs and lower hog raising costs. Income from equity method investments ▪ The decrease in equity income is a result of a significant tax benefit recognized by CFG in the prior year which positively impacted equity income from CFG in 2014. Additionally, current year equity income was negatively impacted by lower hog prices in Mexico. Interest expense ▪ The decrease in interest expense in the current year is primarily due to our 2015 Tender Offer. Non-operating (gain) 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 31% and 33% for the first 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. 23 Segment Results The following information reflects the results from each respective segment for the first quarters of 2015 and 2014. Three Months Ended March 29, 2015 March 30, 2014 % Change (in millions) Sales: Fresh Pork $ 1,334.1 $ 1,387.1 (4 )% Packaged Meats 1,709.6 1,548.5 10 % Hog Production 806.4 849.5 (5 )% International 330.2 374.7 (12 )% Total segment sales 4,180.3 4,159.8 — % Intersegment sales (563.8 ) (737.7 ) (24 )% Consolidated sales $ 3,616.5 $ 3,422.1 6 % Operating profit (loss): Fresh Pork $ 33.2 $ 58.9 (44 )% Packaged Meats 172.5 121.3 42 % Hog Production (6.4 ) 9.5 (167 )% International 15.9 36.9 (57 )% Corporate (27.0 ) (30.2 ) 10 % Consolidated operating profit $ 188.2 $ 196.4 (4 )% Fresh Pork ▪ Sales decreased 4% due to an 8% decrease in average selling prices partially offset by a 4% increase in volume. ▪ Operating profit decreased to $4 per head from $8 per head due to lower fresh pork market prices. ▪ We processed 7.7 million hogs in 2015, an increase of 5% from the prior year. Packaged Meats ▪ Sales increased 10% due to a 12% increase in volume, driven primarily by the timing of Easter, partially offset by a 2% decrease in average selling prices. Current year sales volume totaled 729.6 million pounds. ▪ Operating profit increased to $0.24 per pound from $0.19 per pound due to lower raw material costs. 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 year amounted to 4.0 million , relatively unchanged from the prior year. However, average hog weights were up 2% . ▪ Operating results decreased due to a 25% decrease in domestic live hog market prices, partially offset by favorable hedging results and lower feed costs. International ▪ Sales decreased 12% due primarily to changes in foreign exchange rates, which negatively impacted sales by $53.0 million , or 14% . On a constant currency basis, sales increased 2% due to a 4% increase in volume of 360.2 million pounds, driven largely by a 7% increase in hogs processed and a 20% increase in poultry processed in Europe. We processed 1.1 million hogs in 2015. Additionally, average selling prices decreased 2% . ▪ Operating profit was negatively impacted by lower average selling prices in Europe along with lower equity income from CFG and our Mexican joint ventures. CFG's results in the prior year were positively impacted by a significant tax benefit recognized in the first quarter of 2014. Foreign currency translation also negatively impacted operating profit by approximately $2.4 million due to a stronger U.S. Dollar. 24 LIQUIDITY AND CAPITAL RESOURCES Summary Our cash requirements consist primarily of the purchase of raw materials used in our hog production and pork processing operations, long-term debt obligations and related interest, lease payments for real estate, machinery, vehicles and other equipment, and expenditures for capital assets, other investments and other general business purposes. Our primary sources of liquidity are cash we receive as payment for the products we produce and sell, as well as our credit facilities. 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 March 29, 2015 , our liquidity position was approximately $1.3 billion , comprised of approximately $1.2 billion in availability under our credit facilities and $66.9 million in cash and cash equivalents. Sources of Liquidity We have available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, acquisitions, integration costs, debt retirement and other capital requirements. Accounts Receivable and Inventories The meat processing industry is characterized by high sales volume and rapid turnover of inventories and accounts receivable. Because of the rapid turnover rate, we consider our meat inventories and accounts receivable highly liquid and readily convertible into cash. The Hog Production segment also has rapid turnover of accounts receivable. Although inventory turnover in the Hog Production segment is slower, mature hogs are readily convertible into cash. Borrowings under our credit facilities are used, in part, to finance increases in the levels of inventories and accounts receivable resulting from seasonal and other market-related fluctuations in raw material costs. Credit Facilities March 29, 2015 Facility Capacity Borrowing Base Adjustment Outstanding Letters of Credit Outstanding Borrowings Amount Available (in millions) Inventory Revolver $ 1,025.0 $ — $ — $ — $ 1,025.0 Securitization Facility 325.0 — (94.0 ) (145.0 ) 86.0 International facilities 173.8 (5.3 ) — (33.7 ) 134.8 Total credit facilities $ 1,523.8 $ (5.3 ) $ (94.0 ) $ (178.7 ) $ 1,245.8 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 U.S. 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 U.S. Dollar commitments by up to $375 million in the future. It also provides for a foreign currency subfacility for Canadian Dollars, Japanese Yen, Euros and British Pounds Sterling 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 will be based upon borrowing base valuations of the Company's domestic 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 the election of the Company, 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 the Company's 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, the Company is 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 the Company's consolidated funded debt to consolidated EBITDA. 25 The obligations under the Inventory Revolver Credit Agreement are guaranteed by substantially all domestic subsidiaries of the Company and are secured by a first-priority lien, subject to permitted liens and exceptions for excluded assets, on substantially all of the Company's and the subsidiary guarantors' accounts receivable (other than those sold and financed pursuant to the Securitization Facility), inventory, other personal property relating to such inventory and accounts receivable and all proceeds therefrom, cash and cash equivalents, deposit accounts, intercompany notes, intellectual property and certain capital stock and interests pledged by the Company and the subsidiary guarantors. The Inventory Revolver Credit Agreement contains affirmative and negative covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to create liens and encumbrances; incur debt; make capital expenditures, make acquisitions and investments; dispose of or transfer assets; and pay dividends or make other payments in respect of the Company's capital stock; in each case, subject to certain qualifications and exceptions. In addition, the Inventory Revolver Credit Agreement contains financial covenants requiring the Company 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. Cash Flows Operating Activities Three Months Ended March 29, 2015 March 30, 2014 (in millions) Net cash flows from operating activities $ (4.5 ) $ (379.4 ) The following items explain the significant changes in cash flows from operating activities: ▪ In the current year, we received $ 101.7 million for the settlement of derivative contracts and for margin requirements compared to $ 293.2 million paid in the prior year. ▪ The current year included net tax refunds of $ 32.7 million for domestic income taxes as compared to net payments of $ 0.4 million in the prior year. ▪ Cash paid to outside hog suppliers decreased due to a 25% decrease in average domestic live hog prices. ▪ In the current 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 increased approximately $68.7 million from the prior year. 26 Investing Activities Three Months Ended March 29, 2015 March 30, 2014 (in millions) Capital expenditures $ (67.7 ) $ (30.8 ) Net proceeds (expenditures) from breeding stock transactions (13.2 ) 3.4 Proceeds from the sale of property, plant and equipment 1.1 0.5 Advance note and other — (0.1 ) Net cash flows from investing activities $ (79.8 ) $ (27.0 ) The following items explain the significant investing activities: ▪ 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. Financing Activities Three Months Ended March 29, 2015 March 30, 2014 (in millions) Proceeds from the issuance of long-term debt $ — $ 13.0 Principal payments on long-term debt and capital lease obligations (408.6 ) (10.0 ) Proceeds from Securitization Facility 230.0 100.0 Payments on Securitization Facility (85.0 ) (60.0 ) Net proceeds (payments) on revolving credit facilities (14.6 ) 258.9 Net cash flows from financing activities $ (278.2 ) $ 301.9 The following items explain the significant financing activities: ▪ In the current 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 current year, we drew $145.0 million, net of repayments, on our Securitization Facility, primarily to repay other long-term debt, as noted above. ▪ In the prior year, we drew $280.0 million, net of repayments, on our Inventory Revolver and $40.0 million, net of repayments, on our Securitization Facility, primarily to cover margin requirements on our commodity derivative contracts. Financial Position Our balance sheet as of March 29, 2015 , as compared to December 28, 2014 , was impacted by the following significant changes: ▪ Investments decreased $51.3 million mainly due to currency translation adjustments, a result of a stronger U.S. Dollar, as well as a $14.3 million cash dividend received from one of our Mexican joint ventures. ▪ Accounts payable decreased by $276.3 million mainly due to the timing of payments. Interest Rate Spread As of March 29, 2015 , the interest rates on borrowings under the Inventory Revolver and the Securitization Facility were LIBOR plus 3.0% and the lender's cost of funds of 0.12% plus 1.15% , respectively. The Inventory Revolver interest rate spread is based on a pricing-level grid in the agreement and is determined by our Funded Debt to EBITDA ratio (as defined in the Second Amended and Restated Credit Agreement, dated as of June 9, 2011, among the Company, specified subsidiaries of the Company, Rabobank Nederland, New York Branch, as Administrative Agent, specified lenders, and other specified agents and arrangers, as amended). 27 Guarantees 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 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 March 29, 2015 , we continued to guarantee $7.4 million of leases that were transferred to JBS S.A. in connection with the sale of Smithfield Beef, Inc which closed in October 2008. This guaranty may remain in place until the leases expire through February 2022. Additional Matters Affecting Liquidity 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. Group Pens 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. We anticipate the full cost of our transition to group pens will total approximately $360.0 million , including associated maintenance and repairs. 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. 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. 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. We asked contract sow growers to convert by 2022 and offered a sliding scale of incentives to accelerate that timetable through the receipt of contract extensions upon completion of the conversion. Risk Management Activities We are exposed to market risks primarily from changes in commodity prices, and to a lesser degree, interest rates and foreign exchange rates. 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. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative portfolio. When the value of our open derivative contracts decreases, we may be required to post margin deposits with our brokers to cover a portion of the decrease. 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 three months ended March 29, 2015 , margin deposits ranged from $(15.4) million to $73.3 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 March 29, 2015 was $29.3 million . As of March 29, 2015 , the net amount on deposit with our brokers was $70.0 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. For example, in a period of rising grain prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in spot markets. These offsetting changes do not always occur, however, in the same amounts or in the same period, with lag times of as much as twelve months. 28 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated condensed financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our experience and our understanding of the current facts and circumstances. Actual results could differ from those estimates. 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. FORWARD-LOOKING STATEMENTS This report contains "forward-looking" statements within the meaning of the federal securities laws. The forward-looking statements include statements concerning our outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Our forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These risks and uncertainties include, but are not limited to, the availability and prices of live hogs, feed ingredients (including corn), raw materials, fuel and supplies, food safety, livestock disease, live hog production costs, product pricing, the competitive environment and related market conditions, risks associated with our indebtedness, including cost increases due to rising interest rates or changes in debt ratings or outlook, hedging risk, adverse weather conditions, operating efficiencies, changes in foreign currency exchange rates, access to capital, the cost of compliance with and changes to regulations and laws, including changes in accounting standards, tax laws, environmental laws, agricultural laws and occupational, health and safety laws, adverse results from litigation, actions of domestic and foreign governments, labor relations issues, credit exposure to large customers, the ability to realize the anticipated strategic benefits of the acquisition of Smithfield Foods, Inc. 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. 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. Any forward-looking statement that we make speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.