NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Unaudited)
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1.
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DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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Business
Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is one of the largest chicken producers in the world, with operations in the United States (“U.S.”), the United Kingdom (“U.K.”), Mexico, France, Puerto Rico, the Netherlands and Ireland. Pilgrim's products are sold to foodservice, retail and frozen entrée customers. The Company's primary distribution is through retailers, foodservice distributors and restaurants throughout the countries listed above. Additionally, the Company exports chicken products to approximately
85
countries. Pilgrim’s fresh chicken products consist of refrigerated (nonfrozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. The Company’s prepared chicken products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. As a vertically integrated company, we control every phase of the production of our products. We operate feed mills, hatcheries, processing plants and distribution centers in
14
U.S. states, the U.K., Europe, Mexico and Puerto Rico. As of
September 24, 2017
, Pilgrim’s had approximately
52,000
employees and the capacity to process approximately
45.2 million
birds per five-day work week for a total of approximately
12.8 billion
pounds of live chicken annually. Approximately
5,100
contract growers supply poultry for the Company’s operations. As of
September 24, 2017
, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned
78.6%
of the Company’s outstanding common stock.
Consolidated and Combined Financial Statements
The accompanying unaudited consolidated and combined financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments unless otherwise disclosed) considered necessary for a fair presentation have been included. Operating results for the
thirty-nine weeks ended
September 24, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended
December 25, 2016
.
Pilgrim’s operates on a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example,
2017
) in the notes to these Condensed Consolidated and Combined Financial Statements applies to our fiscal year and not the calendar year.
On September 8, 2017, a subsidiary of the Company acquired
100%
of the issued and outstanding shares of Granite Holdings Sàrl and its subsidiaries (together, “Moy Park”) from JBS S.A. in a common-control transaction. For the period from September 30, 2015 through September 7, 2017, the condensed consolidated and combined financial statements include the accounts of the Company and its majority-owned subsidiaries combined with the accounts of Moy Park. For the period from September 8, 2017 through September 24, 2017, the Condensed Consolidated and Combined Financial Statements include the accounts of the Company and its majority-owned subsidiaries, including Moy Park. We eliminate all significant affiliate accounts and transactions upon consolidation.
The Condensed Consolidated and Combined Financial Statements have been prepared in conformity with U.S. GAAP using management’s best estimates and judgments. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments. Significant estimates made by the Company include the allowance for doubtful accounts, reserves related to inventory obsolescence or valuation, useful lives of long-lived assets, goodwill, valuation of deferred tax assets, insurance accruals, valuation of pension and other postretirement benefits obligations, income tax accruals, certain derivative positions and valuations of acquired businesses.
The functional currency of the Company's U.S. and Mexico operations and certain holding-company subsidiaries in Luxembourg, the U.K. and Ireland is the U.S. dollar. The functional currency of its U.K. operations is the British pound. The functional currency of the Company's operations in France, the Netherlands and Ireland is the euro. For foreign currency- denominated entities other than the Company's Mexico operations, translation from local currencies into U.S. dollars is performed for most assets and liabilities using the exchange rates in effect as of the balance sheet date. Income and expense accounts are
remeasured using average exchange rates for the period. Adjustments resulting from translation of these financial records are reflected as a separate component of
Accumulated other comprehensive loss
in the Condensed Consolidated and Combined Balance Sheets. For the Company's Mexico operations, remeasurement from the Mexican peso to U.S. dollars is performed for monetary assets and liabilities using the exchange rate in effect as of the balance sheet date. Remeasurement is performed for non-monetary assets using the historical exchange rate in effect on the date of each asset’s acquisition. Income and expense accounts are remeasured using average exchange rates for the period. Net adjustments resulting from remeasurement of these financial records are reflected in either
Cost of sales
or
Foreign currency transaction loss,
depending on the nature of the transaction, in the Condensed Consolidated and Combined Statements of Income.
The Company reported an adjustment resulting from the translation of a British pound-denominated note payable owed to JBS S.A. as a component of
Accumulated other comprehensive loss
in the Condensed Consolidated Balance Sheet as of September 24, 2017. The Company designated this note payable as a hedge of its net investment in Moy Park.
The Company or its subsidiaries may use derivatives for the purpose of mitigating exposure to changes in foreign currency exchange rates. Foreign currency transaction gains or losses are reported in the Condensed Consolidated and Combined Statements of Income.
Revenue Recognition
We recognize revenue when all of the following circumstances are satisfied: (i) persuasive evidence of an arrangement exists, (ii) price is fixed or determinable, (iii) collectability is reasonably assured and (iv) delivery has occurred. Delivery occurs in the period in which the customer takes title and assumes the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement. Revenue is recorded net of estimated incentive offerings including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged back to net sales in the period in which the facts that give rise to the revision become known.
Book Overdraft
The majority of the Company’s disbursement bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are classified as accounts payable and the change in the related balance is reflected in operating activities on the Condensed Consolidated and Combined Statements of Cash Flows.
Restricted Cash
The Company is required to maintain cash balances with a broker as collateral for exchange traded futures contracts. These balances are classified as restricted cash as they are not available for use by the Company to fund daily operations. The balance of restricted cash may also include investments in U.S. Treasury Bills that qualify as cash equivalents, as required by the broker, to offset the obligation to return cash collateral.
The following table reconciles cash, cash equivalents and restricted cash as reported in the Condensed Consolidated and Combined Balance Sheets to the total of the same amounts shown in the Condensed Consolidated and Combined Statements of Cash Flows:
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September 24, 2017
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December 25, 2016
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(In thousands)
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Cash and cash equivalents
|
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$
|
401,789
|
|
|
$
|
292,544
|
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Restricted cash
|
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4,841
|
|
|
4,979
|
|
|
Total cash, cash equivalents and restricted cash shown in the
Condensed Consolidated and Combined Statements of Cash Flows
|
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$
|
406,630
|
|
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$
|
297,523
|
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Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. In June 2015, the FASB agreed to defer by one year the mandatory effective date of this standard, but will also provide entities the option to adopt the new guidance as of the original effective date. The provisions of the new guidance will be effective as of the beginning of our 2018 fiscal year, but we
had the option to adopt the guidance as early as the beginning of our 2017 fiscal year. We have elected to adopt this standard as of January 1, 2018, the beginning of our 2018 fiscal year, using the modified retrospective approach. Under this method, we would not restate the prior financial statements presented; however, we would be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the prior guidance. We are finalizing our assessment of contracts with customers and evaluating the impact of the new guidance on these contracts. Additionally, our evaluation includes the impact of the new standard on certain common practices currently employed by us, such as slotting fees, discounts, rebates and other pricing allowances, and marketing funds. Although we are still evaluating the impact, we do not currently expect the new guidance to have a material impact on our financial statements beyond additional disclosure requirements.
In July 2015, the FASB issued new accounting guidance on the subsequent measurement of inventory, which, in an effort to simplify unnecessarily complicated accounting guidance that can result in several potential outcomes, requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Current accounting guidance requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The provisions of the new guidance were effective as of the beginning of our 2017 fiscal year. The initial adoption of this guidance did not have a material impact on our financial statements.
In February 2016, the FASB issued new accounting guidance on lease arrangements, which, in an effort to increase transparency and comparability among organizations utilizing leasing, requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. In transition, the entity is required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The provisions of the new guidance will be effective as of the beginning of our 2019 fiscal year. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In March 2016, the FASB issued new accounting guidance on employee share-based payments, which, in an effort to simplify unnecessarily complicated aspects of accounting and reporting for share-based payment transactions, requires an entity to amend accounting and reporting methodology for areas such as the income tax consequences of share-based payments, classification of share-based awards as either equity or liabilities, and classification of share-based payment transactions in the statement of cash flows. The transition approach will vary depending on the area of accounting and reporting methodology to be amended. The Company adopted this standard on December 26, 2016, the beginning of our 2017 fiscal year, and will prospectively present excess tax benefits or deficiencies in the income statement as a component of “Provision for income taxes” rather than in the “Equity” section of the Balance Sheet. As part of the adoption, the Company did not have a cumulative-effect adjustment, as there were no previous unrecognized excess tax benefits that would impact retained earnings. As a result, there was no retrospective adjustment to the prior period statement of cash flows of excess tax benefits as an operating activity rather than a financing activity.
In June 2016, the FASB issued new accounting guidance on the measurement of credit losses on financial instruments, which, in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The provisions of the new guidance will be effective as of the beginning of our 2020 fiscal year. Early adoption is permitted after our 2018 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In November 2016, the FASB issued new accounting guidance on the classification and presentation of restricted cash in the statement of cash flows in order to eliminate the diversity that currently exists in how companies present these changes. The new guidance requires restricted cash to be included with cash and cash equivalents when explaining the changes in cash in the statement of cash flows. We elected to early adopt this guidance as of December 26, 2016, the beginning of our 2017 fiscal year. An entity should apply the new guidance on a retrospective basis, wherein the statement of cash flow of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items. A description of the prior-period information that has been retrospectively adjusted and the effect of the change on the statement of cash flow line items is not disclosed as it is not material.
In March 2017, the FASB issued new accounting guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost, which, in an effort to improve consistency and transparency, requires the service cost component of defined benefit pension cost and postretirement benefit cost (“net benefit cost”) to be reported in the same line of the income statement as other compensation costs earned by the employee and the other components of net benefit cost to be reported below income from operations. The new guidance will be effective as of the beginning of our 2019 fiscal year with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In August 2017, the FASB issued an accounting standard update that simplifies the application of hedge accounting guidance in current GAAP and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. Among the simplification updates, the standard eliminates the requirement in current GAAP to separately recognize periodic hedge ineffectiveness. Mismatches between the changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. The standard requires the presentation of the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The standard is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.
Moy Park
On September 8, 2017, the Company purchased
100%
of the issued and outstanding shares of Moy Park from JBS S.A. for cash of
$301.3 million
and a note payable to the seller in the amount of
£562.5 million
. Moy Park is one of the top-ten food companies in the U.K., Northern Ireland's largest private sector business and one of Europe's leading poultry producers. With
13
processing and manufacturing units in Northern Ireland, the U.K., France, the Netherlands and Ireland, Moy Park processes
6.0 million
birds per seven-day work week, in addition to producing around
200,000
tons of prepared foods per year. Its product portfolio comprises fresh and added-value poultry, ready-to-eat meals, breaded and multi-protein frozen foods, vegetarian foods and desserts, supplied to major food retailers and restaurant chains in Europe (including the U.K.). Moy Park currently has approximately
10,100
employees. The Moy Park operations will comprise our U.K. and Europe segment.
The acquisition was treated as a common-control transaction under U.S. GAAP. A common-control transaction is a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. The accounting and reporting for a transaction between entities under common control is not to be considered a business combination under U.S. GAAP. Since there is no change in control over the net assets from the parent’s perspective, there is no change in basis in the assets or liabilities. Therefore, Pilgrim's, as the receiving entity, recognized the assets and liabilities received at their historical carrying amounts, as reflected in the parent’s financial statements. The difference between the proceeds transferred and the carrying amounts of the net assets on the date of the acquisition is recognized in equity.
Transaction costs incurred in conjunction with the acquisition were approximately
$15.0 million
. These costs were expensed as incurred. The results of operations and financial position of Moy Park have been combined with the results of operations and financial position of Pilgrim's from September 30, 2015, the common control date, through September 7, 2017. Beginning September 8, 2017, the results of operations and financial position of Moy Park have been included in the consolidated results of operations and financial position of the Company. Net sales generated by Moy Park from the September 8, 2017 acquisition date through September 24, 2017 totaled
$199.9 million
. Net sales generated by Moy Park from December 26, 2016 through September 7, 2017 totaled
$1.3 billion
. Net sales generated by Moy Park during the thirty-nine weeks ended September 25, 2016 totaled
$1.5 billion
. Net income generated by Moy Park from the September 8, 2017 acquisition date through September 24, 2017 totaled
$2.1 million
. Net income generated by Moy Park from December 26, 2016 through September 7, 2017 totaled
$23.5 million
. Net income generated by Moy Park during the thirty-nine weeks ended September 25, 2016 totaled
$25.1 million
.
GNP
On January 6, 2017, the Company acquired
100%
of the membership interests of JFC LLC and its subsidiaries (together, “GNP”) from Maschhoff Family Foods, LLC for cash. GNP is a vertically integrated poultry business based in Saint Cloud, Minnesota. The acquired business has a production capacity of
2.1 million
birds per five-day work week in its
three
plants and employs approximately
1,700
people.
The following table summarizes the consideration paid for GNP (in thousands):
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Negotiated sales price
|
$
|
350,000
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|
|
Working capital adjustment
|
7,252
|
|
|
Preliminary purchase price
|
$
|
357,252
|
|
Transaction costs incurred in conjunction with the purchase were approximately
$0.6 million
. These costs were expensed as incurred. The results of operations of the acquired business since January 6, 2017 are included in the Company’s Condensed Consolidated and Combined Statements of Income. Net sales generated by the acquired business during the
thirteen and thirty-nine
weeks ended
September 24, 2017
totaled
$108.6 million
and
$322.3 million
, respectively The acquired business generated net income during the
thirteen and thirty-nine
weeks ended
September 24, 2017
totaling
$9.8 million
and
$24.6 million
, respectively.
The assets acquired and liabilities assumed in the GNP acquisition were measured at their fair values at January 6, 2017 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition as well the assembled workforce. These benefits include (i) complementary product offerings, (ii) an enhanced footprint in the U.S., (iii) shared knowledge of innovative technologies such as gas stunning, aeroscalding and automated deboning, (iv) enhanced position in the fast-growing antibiotic-free and certified organic chicken segments due to the addition of GNP’s portfolio of Just BARE® Certified Organic and Natural/American Humane Certified
TM
/No-Antibiotics-Ever product lines and (v) attractive cost-reduction synergy opportunities and value creation. The Company has tax basis in the goodwill, and therefore, the goodwill is deductible for tax purposes. The preliminary fair values recorded were determined based upon a preliminary valuation. The estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of acquisition accounting that are not yet finalized relate to the preliminary nature of the valuation of property, plant and equipment, intangible assets and residual goodwill. We continue to review inputs and assumptions used in the preliminary valuations.
The fair values recorded for the assets acquired and liabilities assumed for GNP are as follows (in thousands):
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|
|
|
|
|
Cash and cash equivalents
|
$
|
10
|
|
|
Trade accounts and other receivables
|
18,453
|
|
|
Inventories
|
56,459
|
|
|
Prepaid expenses and other current assets
|
3,414
|
|
|
Property, plant and equipment
|
144,138
|
|
|
Identifiable intangible assets
|
131,120
|
|
|
Other long-lived assets
|
829
|
|
|
Total assets acquired
|
354,423
|
|
|
Accounts payable
|
23,848
|
|
|
Other current liabilities
|
11,866
|
|
|
Other long-term liabilities
|
3,393
|
|
|
Total liabilities assumed
|
39,107
|
|
|
Total identifiable net assets
|
315,316
|
|
|
Goodwill
|
41,936
|
|
|
Total net assets
|
$
|
357,252
|
|
The Company recognized certain identifiable intangible assets as of January 6, 2017 due to this acquisition. The following table presents the fair values and useful lives, where applicable, of these assets:
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|
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
|
|
(In thousands)
|
|
(In years)
|
|
Customer relationships
|
$
|
92,900
|
|
|
13.0
|
|
Trade names
|
38,200
|
|
|
20.0
|
|
Non-compete agreement
|
20
|
|
|
3.0
|
|
Total fair value
|
$
|
131,120
|
|
|
|
|
Weighted average useful life
|
|
|
15.2
|
The Company performed a valuation of the assets and liabilities of GNP as of January 6, 2017. Significant assumptions used in the preliminary valuation and the bases for their determination are summarized as follows:
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•
|
Property, plant and equipment, net
. Property, plant and equipment at fair value gave consideration to the highest and best use of the assets. The valuation of the Company's real property improvements and the majority of its personal property was based on the cost approach. The valuation of the Company's land, as if vacant, and certain personal property assets was based on the market or sales comparison approach.
|
|
|
|
|
•
|
Trade names
. The Company valued
two
trade names using the income approach, specifically the relief from royalty method. Under this method, the asset value of each trade name was determined by estimating the hypothetical royalties that would have to be paid if it was not owned. Royalty rates were selected based on consideration of several factors, including (i) prior transactions involving GNP trade names, (ii) incomes derived from license agreements on comparable trade names within the food industry and (iii) the relative profitability and perceived contribution of each trade name. The royalty rate used in the determination of the fair values of the
two
trade names was
2.0%
of expected net sales related to the respective trade names. In estimating the fair value of the trade names, net sales related to the respective trade names were estimated to grow at a rate of
2.5%
. Income taxes were estimated at
39.3%
of pre-tax income, a tax amortization benefit factor was estimated at
1.2098
and the hypothetical savings generated by avoiding royalty costs were discounted using a rate of
13.8%
.
|
|
|
|
|
•
|
Customer relationships
. The Company valued GNP customer relationships using the income approach, specifically the multi-period excess earnings model. Under this model, the fair value of the customer relationships asset was determined by estimating the net cash inflows from the relationships discounted to present value. In estimating the fair value of the customer relationships, net sales related to existing GNP customers were estimated to grow at a rate of
2.5%
annually, but we also anticipate losing existing GNP customers at an attrition rate of
4.0%
. Income taxes were estimated at
39.3%
of pre-tax income, a tax amortization benefit factor was estimated at
1.2098
and net cash flows attributable to our existing customers were discounted using a rate of
13.8%
.
|
See “Note 8. Goodwill and Intangible Assets” for additional information regarding the goodwill and intangible assets recognized by the Company in the GNP acquisition.
During the thirty-nine weeks ended September 24, 2017, the Company recognized restructuring charges in the amounts of
$0.7 million
and
$2.6 million
related to the elimination of prepaid costs associated with obsolete GNP software and severance costs related to the GNP acquisition, respectively. These charges are reported in the line item
Administrative restructuring charges
on the Condensed Consolidated and Combined Statements of Income. The Company expects to incur additional restructuring costs related to GNP of approximately
$1.7 million
during the remainder of 2017 and 2018.
The following unaudited pro forma information presents the combined financial results for the Company and GNP as if the acquisition had been completed at the beginning of the Company’s prior year, December 28, 2015.
|
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|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks
Ended
September 24, 2017
|
|
Thirty-Nine Weeks
Ended
September 25, 2016
|
|
|
(In thousands, except per share amount)
|
|
Net sales
|
$
|
8,031,311
|
|
|
$
|
7,833,406
|
|
|
Net income attributable to Pilgrim's Pride Corporation
|
572,063
|
|
|
363,735
|
|
|
Net income attributable to Pilgrim's Pride Corporation
per common share - diluted
|
2.30
|
|
|
1.40
|
|
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the Company’s results of operations would have been had it completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.
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3.
|
FAIR VALUE MEASUREMENTS
|
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities measured at fair value must be categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation:
|
|
|
|
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
|
|
|
Level 2
|
|
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
|
|
|
|
|
Level 3
|
|
Unobservable inputs, such as discounted cash flow models or valuations.
|
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
As of
September 24, 2017
and
December 25, 2016
, the Company held derivative assets and liabilities that were required to be measured at fair value on a recurring basis. Derivative assets and liabilities consist of long and short positions on exchange-traded commodity futures instruments and foreign currency forward contracts to manage translation and remeasurement risk.
The following items were measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
|
|
Level 1
|
|
Total
|
|
|
|
(In thousands)
|
|
Fair value assets:
|
|
|
|
|
|
Commodity futures instruments
|
|
$
|
2,168
|
|
|
$
|
2,168
|
|
|
Commodity options instruments
|
|
1,200
|
|
|
1,200
|
|
|
Foreign currency instruments
|
|
586
|
|
|
586
|
|
|
Fair value liabilities:
|
|
|
|
|
|
Commodity futures instruments
|
|
(1,587
|
)
|
|
(1,587
|
)
|
|
Commodity options instruments
|
|
(2,196
|
)
|
|
(2,196
|
)
|
|
Foreign currency instruments
|
|
(387
|
)
|
|
(387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
|
|
Level 1
|
|
Total
|
|
|
|
(In thousands)
|
|
Fair value assets:
|
|
|
|
|
|
Commodity futures instruments
|
|
$
|
5,341
|
|
|
$
|
5,341
|
|
|
Commodity options instruments
|
|
98
|
|
|
98
|
|
|
Foreign currency instruments
|
|
516
|
|
|
516
|
|
|
Fair value liabilities:
|
|
|
|
|
|
Commodity futures instruments
|
|
(4,063
|
)
|
|
(4,063
|
)
|
|
Commodity option instruments
|
|
(2,764
|
)
|
|
(2,764
|
)
|
|
Foreign currency instruments
|
|
(153
|
)
|
|
(153
|
)
|
See “Note 7. Derivative Financial Instruments” for additional information.
Fair value and carrying value for our fixed-rate debt obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
(In thousands)
|
|
|
|
Fixed-rate senior notes payable at 5.75%, at Level 1 inputs
|
|
$
|
(500,000
|
)
|
|
$
|
(521,250
|
)
|
|
$
|
(500,000
|
)
|
|
$
|
(503,395
|
)
|
|
Fixed-rate senior notes payable at 6.25%, at Level 1 inputs
|
|
(401,983
|
)
|
|
(415,622
|
)
|
|
(369,736
|
)
|
|
(389,709
|
)
|
|
Chattels Mortgages, at Level 3 inputs
|
|
(1,015
|
)
|
|
(989
|
)
|
|
(1,432
|
)
|
|
(1,379
|
)
|
See “Note 11. Long-Term Debt and Other Borrowing Arrangements” for additional information.
The valuation of financial assets and liabilities classified in Level 1 is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of financial assets and liabilities in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for substantially the full term of the financial instrument. The valuation of financial assets in Level 3 is determined using an income approach based on unobservable inputs such as discounted cash flow models or valuations. For each class of assets and liabilities not measured at fair value in the Condensed Consolidated and Combined Balance Sheet but for which fair value is disclosed, the Company is not required to provide the quantitative disclosure about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy.
In addition to the fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require periodic disclosures regarding the fair value of all of the Company’s financial instruments. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions from prior periods are also required to be disclosed.
Derivative assets were recorded at fair value based on quoted market prices and are included in the line item
Prepaid expenses and other current assets
on the Condensed Consolidated and Combined Balance Sheets. Derivative liabilities were recorded at fair value based on quoted market prices and are included in the line item
Accrued expenses and other current liabilities
on the Condensed Consolidated and Combined Balance Sheets. The fair value of the Company’s Level 1 fixed-rate debt obligations was based on the quoted market price at
September 24, 2017
or
December 25, 2016
, as applicable. The fair value of the Company’s Level 3 fixed-rate debt obligation was based on discounted cash flows at
September 24, 2017
or
December 25, 2016
, as applicable.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges when required by U.S. GAAP. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported.
|
|
|
|
4.
|
TRADE ACCOUNTS AND OTHER RECEIVABLES
|
Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
|
(In thousands)
|
|
Trade accounts receivable
|
|
$
|
612,983
|
|
|
$
|
435,818
|
|
|
Notes receivable - current
|
|
5,130
|
|
|
630
|
|
|
Other receivables
|
|
14,644
|
|
|
15,766
|
|
|
Receivables, gross
|
|
632,757
|
|
|
452,214
|
|
|
Allowance for doubtful accounts
|
|
(7,955
|
)
|
|
(6,661
|
)
|
|
Receivables, net
|
|
$
|
624,802
|
|
|
$
|
445,553
|
|
|
|
|
|
|
|
|
Account receivable from related parties
(a)
|
|
$
|
970
|
|
|
$
|
4,010
|
|
(a)
Additional information regarding accounts receivable from related parties is included in “Note 16. Related Party Transactions.”
Activity in the allowance for doubtful accounts for the thirty-nine weeks ended September 24, 2017 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(6,661
|
)
|
|
Provision charged to operating results
|
|
(1,962
|
)
|
|
Account write-offs and recoveries
|
|
858
|
|
|
Effect of exchange rate
|
|
(190
|
)
|
|
Balance, end of period
|
|
$
|
(7,955
|
)
|
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
(In thousands)
|
|
Live chicken and hens
|
$
|
471,394
|
|
|
$
|
407,475
|
|
|
Feed, eggs and other
|
263,576
|
|
|
257,049
|
|
|
Finished chicken products
|
399,085
|
|
|
243,824
|
|
|
Total chicken inventories
|
1,134,055
|
|
|
908,348
|
|
|
Commercial feed and other
|
62,146
|
|
|
67,260
|
|
|
Total inventories
|
$
|
1,196,201
|
|
|
$
|
975,608
|
|
|
|
|
|
6.
|
INVESTMENTS IN SECURITIES
|
We recognize investments in available-for-sale securities as cash equivalents, current investments or long-term investments depending upon each security's length to maturity. Additionally, those securities identified by management at the time of purchase for funding operations in less than one year are classified as current.
The following table summarizes our investments in available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
|
Amortized Cost
|
|
Fair
Value
|
|
Amortized Cost
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
155,216
|
|
|
$
|
155,216
|
|
|
$
|
140,480
|
|
|
$
|
140,480
|
|
|
Other
|
|
62
|
|
|
62
|
|
|
61
|
|
|
61
|
|
Securities classified as cash and cash equivalents mature within 90 days. Securities classified as short-term investments mature between 91 and 365 days. Securities classified as long-term investments mature after 365 days. The specific identification method is used to determine the cost of each security sold and each amount reclassified out of accumulated other comprehensive loss to earnings. Gross realized gains and gross realized losses recognized during the
thirteen and thirty-nine
weeks ended
September 24, 2017
and
September 25, 2016
related to the Company’s available-for-sale securities were immaterial. Proceeds received from the sale or maturity of available-for-sale securities recognized as either short- or long-term investments are historically disclosed in the Condensed Consolidated and Combined Statements of Cash Flows.
No
proceeds were received from the sale or maturity of available-for-sale securities recognized as either short- or long-term investments during the
thirty-nine weeks ended
September 24, 2017
and
September 25, 2016
. Net unrealized holding gains and losses on the Company’s available-for-sale securities recognized during the
thirty-nine weeks ended
September 24, 2017
and
September 25, 2016
that have been included in accumulated other comprehensive loss and the net amount of gains and losses reclassified out of accumulated other comprehensive loss to earnings during the
thirty-nine weeks ended
September 24, 2017
and
September 25, 2016
is disclosed in “Note 14. Stockholders’ Equity - Accumulated Other Comprehensive Loss.”
|
|
|
|
7.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, and energy, such as natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for approximately the next 12 months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico and Europe (including the U.K.) and, therefore, has exposure to translational foreign exchange risk when the financial results of those operations are remeasured in U.S. dollars. The Company has purchased foreign currency forward contracts to manage this translational foreign exchange risk.
The fair value of derivative assets is included in the line item
Prepaid expenses and other current assets
on the Condensed Consolidated and Combined Balance Sheets while the fair value of derivative liabilities is included in the line item
Accrued
expenses and other current liabilities
on the same statements. Our counterparties require that we post cash collateral for changes in the net fair value of the derivative contracts.
We have not designated certain derivative financial instruments that we have purchased to mitigate commodity purchase or foreign currency transaction exposures on our Mexico operations as cash flow hedges. Items designated as cash flow hedges are disclosed and described further below. Therefore, we recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to these derivative financial instruments are included in the line item
Cost of sales
in the Condensed Consolidated and Combined Statements of Income.
We have designated certain derivative financial instruments related to our U.K. and Europe segment that we have purchased to mitigate foreign currency transaction exposures as cash flow hedges. Before the settlement date of the financial derivative instruments, we recognize changes in the fair value of the effective portion of the cash flow hedge into accumulated other comprehensive income (“AOCI”) while we recognize changes in the fair value of the ineffective portion immediately in earnings. When the derivative financial instruments associated with the effective portion are settled, the amount in AOCI is then reclassified to earnings. Gains or losses related to these derivative financial instruments are included in the line item
Cost of sales
in the Condensed Consolidated and Combined Statements of Income.
The Company recognized net gains of
$6.9 million
and net losses of
$16.7 million
related to changes in the fair value of its derivative financial instruments during the
thirteen weeks ended
September 24, 2017
and
September 25, 2016
, respectively. The Company also recognized net gains of
$7.3 million
and net losses of
$10.5 million
related to changes in the fair value of its derivative financial instruments during the
thirty-nine weeks ended
September 24, 2017
and
September 25, 2016
, respectively.
Information regarding the Company’s outstanding derivative instruments and cash collateral posted with (owed to) brokers is included in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
(Fair values in thousands)
|
|
Fair values:
|
|
|
|
|
Commodity derivative assets
|
$
|
3,368
|
|
|
$
|
5,439
|
|
|
Commodity derivative liabilities
|
(3,782
|
)
|
|
(6,827
|
)
|
|
Foreign currency derivative assets
|
586
|
|
|
516
|
|
|
Foreign currency derivative liabilities
|
(387
|
)
|
|
(153
|
)
|
|
Cash collateral posted with brokers
|
4,841
|
|
|
4,979
|
|
|
Derivatives coverage
(a)
:
|
|
|
|
|
Corn
|
0.7
|
%
|
|
2.3
|
%
|
|
Soybean meal
|
0.2
|
%
|
|
0.3
|
%
|
|
Period through which stated percent of needs are covered:
|
|
|
|
|
Corn
|
September 2018
|
|
|
September 2018
|
|
|
Soybean meal
|
August 2018
|
|
|
July 2017
|
|
|
|
|
|
(a)
|
Derivatives coverage is the percent of anticipated commodity needs covered by outstanding derivative instruments through a specified date.
|
The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
(In thousands)
|
|
Foreign currency derivatives
|
$
|
(779
|
)
|
|
$
|
(220
|
)
|
|
$
|
(128
|
)
|
|
$
|
132
|
|
|
Total
|
$
|
(779
|
)
|
|
$
|
(220
|
)
|
|
$
|
(128
|
)
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
(In thousands)
|
|
Foreign currency derivatives
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
(In thousands)
|
|
Foreign currency derivatives
|
$
|
—
|
|
|
$
|
285
|
|
|
$
|
(9
|
)
|
|
$
|
35
|
|
|
Total
|
$
|
—
|
|
|
$
|
285
|
|
|
$
|
(9
|
)
|
|
$
|
35
|
|
At September 24, 2017, the before-tax deferred net gains on derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated and Combined Statements of Income during the next twelve months are
$1.2 million
. This expectation is based on the anticipated settlements on the hedged investments in foreign currencies that will occur over the next twelve months, at which time the Company will recognize the deferred gains (losses) to earnings.
The Company reported a
$16.9 million
adjustment resulting from the translation of a British pound-denominated note payable owed to JBS S.A. as a component of
Accumulated other comprehensive loss
in the Condensed Consolidated Balance Sheet as of September 24, 2017. The Company designated this note payable as a hedge of its net investment in Moy Park.
|
|
|
|
8.
|
GOODWILL AND INTANGIBLE ASSETS
|
The activity in goodwill by segment for the thirty-nine weeks ended September 24, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
Additions
|
|
Currency Translation
|
|
September 24, 2017
|
|
|
|
(In thousands)
|
|
United States
|
|
$
|
—
|
|
|
$
|
41,936
|
|
|
$
|
—
|
|
|
$
|
41,936
|
|
|
U.K. and Europe
|
|
761,613
|
|
|
—
|
|
|
66,425
|
|
|
828,038
|
|
|
Mexico
|
|
125,608
|
|
|
—
|
|
|
—
|
|
|
125,608
|
|
|
Total
|
|
$
|
887,221
|
|
|
$
|
41,936
|
|
|
$
|
66,425
|
|
|
$
|
995,582
|
|
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
Periodic Activity
|
|
September 24, 2017
|
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Additions
|
|
Amortization
|
|
Currency Translation
|
|
Impairment
|
|
Net Carrying Amount
|
|
|
|
(In thousands)
|
|
Identified intangible
assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
41,369
|
|
|
$
|
(37,029
|
)
|
|
$
|
4,340
|
|
|
$
|
38,200
|
|
|
$
|
(2,794
|
)
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
39,807
|
|
|
Customer
relationships
|
|
171,152
|
|
|
(72,327
|
)
|
|
98,825
|
|
|
92,900
|
|
|
(16,418
|
)
|
|
5,851
|
|
|
|
|
181,158
|
|
|
Non-compete
agreements
|
|
300
|
|
|
(300
|
)
|
|
—
|
|
|
20
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
15
|
|
|
Identified intangible
assets not subject
to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
368,426
|
|
|
—
|
|
|
368,426
|
|
|
—
|
|
|
—
|
|
|
31,287
|
|
|
—
|
|
|
399,713
|
|
|
Total identified
intangible assets
|
|
$
|
581,247
|
|
|
$
|
(109,656
|
)
|
|
$
|
471,591
|
|
|
$
|
131,120
|
|
|
$
|
(19,217
|
)
|
|
$
|
37,199
|
|
|
$
|
—
|
|
|
$
|
620,693
|
|
Intangible assets are amortized over the estimated useful lives of the assets as follows:
|
|
|
|
|
|
Customer relationships
|
5-16 years
|
|
Trade names
|
3-20 years
|
|
Non-compete agreements
|
3 years
|
|
|
|
|
9.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment (“PP&E”), net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
(In thousands)
|
|
Land
|
$
|
204,176
|
|
|
$
|
150,127
|
|
|
Buildings
|
1,650,262
|
|
|
1,487,353
|
|
|
Machinery and equipment
|
2,442,031
|
|
|
2,268,526
|
|
|
Autos and trucks
|
56,641
|
|
|
58,454
|
|
|
Construction-in-progress
|
237,323
|
|
|
255,086
|
|
|
PP&E, gross
|
4,590,433
|
|
|
4,219,546
|
|
|
Accumulated depreciation
|
(2,514,086
|
)
|
|
(2,385,561
|
)
|
|
PP&E, net
|
$
|
2,076,347
|
|
|
$
|
1,833,985
|
|
The Company recognized depreciation expense of
$63.8 million
and
$53.4 million
during the
thirteen weeks ended
September 24, 2017
and
September 25, 2016
, respectively. The Company recognized depreciation expense of
$181.1 million
and
$156.9 million
during the
thirty-nine weeks ended
September 24, 2017
and
September 25, 2016
, respectively.
During the
thirty-nine weeks ended
September 24, 2017
, Pilgrim's spent $
258.4 million
on capital projects and transferred $
272.5
million of completed projects from construction-in-progress to depreciable assets. During the
thirty-nine weeks ended
September 25, 2016
, the Company spent
$221.0 million
on capital projects and transferred $
176.8 million
of completed projects from construction-in-progress to depreciable assets. Capital expenditures were primarily incurred during the
thirty-nine weeks ended September 24, 2017
to improve efficiencies and reduce costs.
During the
thirty-nine weeks ended
September 24, 2017
, the Company sold certain PP&E for cash of
$2.6 million
and recognized net gains on these sales of
$0.5 million
. PP&E sold in the
thirty-nine weeks ended
September 24, 2017
included a processing plant in Texas, a feed mill in Arkansas, poultry farms in Alabama and Texas, vacant land in Texas and miscellaneous equipment. During the thirty-nine weeks ended
September 25, 2016
, the Company sold certain PP&E for cash of
$13.0 million
and recognized net gains on these sales of
$7.3 million
. PP&E sold in the
thirty-nine weeks ended
September 25, 2016
included
a processing plant in Louisiana, poultry farms in Mexico and Texas, an office building in Texas, vacant land in Alabama and Texas, and miscellaneous equipment.
Management has committed to the sale of certain properties and related assets, including, but not limited to, a processing complex in Alabama, a processing plant in Dublin, Ireland, which no longer fit into the operating plans of the Company. The Company is actively marketing these properties and related assets for immediate sale and believes a sale of each property can be consummated within the next 12 months. At
September 24, 2017
and
December 25, 2016
, the Company reported properties and related assets totaling
$2.8 million
and
$5.3 million
, respectively, in the line item
Assets held for sale
on its Condensed Consolidated and Combined Balance Sheets. The fair values of the Alabama processing complex, which was classified as an asset held for sale as of June 25, 2017, and the Dublin processing plant, which was classified as an asset held for sale as of September 24, 2017, were both based on quoted market prices.
The Company tested the recoverability of its Alabama processing complex held for sale as of June 25, 2017 and September 24, 2017. The Company determined that the aggregate carrying amount at June 25, 2017 of this asset group was not recoverable over the remaining life of the primary asset in the group and recognized impairment cost of
$3.5 million
related to the U.S. segment, which it reported in the line item
Administrative restructuring charges
on its Condensed Consolidated and Combined Statements of Income. The Company determined that the aggregate carrying amount st September 24, 2017 of this asset group was recoverable over the remaining life of the primary asset in the group.
The Company tested the recoverability of the Dublin processing plant held for sale as of September 24, 2017. The Company determined that the aggregate carrying amount at September 26, 2014 of this asset group was not recoverable over the remaining life of the primary asset in the group and recognized impairment cost of
$1.6 million
related to the U.K. and Europe segment, which it reported in the line item
Administrative restructuring charges
on its Condensed Consolidated and Combined Statements of Income.
The Company did not recognize impairment cost during the thirteen or thirty-nine weeks ended September 25, 2016.
The Company has closed or idled various processing complexes, processing plants, hatcheries, broiler farms, and feed mills throughout the U.S. Neither the Board of Directors nor JBS has determined if it would be in the best interest of the Company to divest any of these idled assets. Management is therefore not certain that it can or will divest any of these assets within one year, is not actively marketing these assets and, accordingly, has not classified them as assets held for sale. The Company continues to depreciate these assets. At
September 24, 2017
, the carrying amounts of these idled assets totaled
$50.4 million
based on depreciable value of
$169.4 million
and accumulated depreciation of
$119.0 million
.
The Company last tested the recoverability of its long-lived assets held and used in
December 2016
. At that time, the Company determined that the carrying amount of its long-lived assets held and used was recoverable over the remaining life of the primary asset in the group and that long-lived assets held and used passed the Step 1 recoverability test under ASC 360-10-35,
Impairment or Disposal of Long-Lived Assets
. There were no indicators present during the
thirty-nine weeks ended
September 24, 2017
that required the Company to test its long-lived assets held and used for recoverability.
Current liabilities, other than current notes payable to banks, income taxes and current maturities of long-term debt, consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
(In thousands)
|
|
Accounts payable:
|
|
|
|
|
Trade accounts
|
$
|
653,248
|
|
|
$
|
722,495
|
|
|
Book overdrafts
|
77,189
|
|
|
63,577
|
|
|
Other payables
|
13,091
|
|
|
4,306
|
|
|
Total accounts payable
|
743,528
|
|
|
790,378
|
|
|
Accounts payable to related parties
(a)
|
7,091
|
|
|
4,468
|
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
Compensation and benefits
|
168,551
|
|
|
160,591
|
|
|
Interest and debt-related fees
|
16,452
|
|
|
10,907
|
|
|
Insurance and self-insured claims
|
80,210
|
|
|
82,544
|
|
|
Derivative liabilities:
|
|
|
|
|
Commodity futures
|
1,587
|
|
|
4,063
|
|
|
Commodity options
|
2,196
|
|
|
2,764
|
|
|
Foreign currency derivatives
|
387
|
|
|
153
|
|
|
Other accrued expenses
|
147,093
|
|
|
85,999
|
|
|
Total accrued expenses and other current liabilities
|
416,476
|
|
|
347,021
|
|
|
|
$
|
1,167,095
|
|
|
$
|
1,141,867
|
|
(a)
Additional information regarding accounts payable to related parties is included in “Note 16. Related Party Transactions.”
|
|
|
|
11.
|
LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
|
Long-term debt and other borrowing arrangements, including current notes payable to banks, consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
|
|
(In thousands)
|
|
Long-term debt and other long-term borrowing arrangements:
|
|
|
|
|
|
|
Senior notes payable at 5.75%
|
2025
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
Senior notes payable at 6.25%
|
2021
|
|
401,982
|
|
|
369,736
|
|
|
U.S. Credit Facility (defined below):
|
|
|
|
|
|
|
Term note payable at 2.55%
|
2022
|
|
790,000
|
|
|
500,000
|
|
|
Revolving note payable at 2.48%
|
2022
|
|
73,262
|
|
|
—
|
|
|
Mexico Credit Facility (defined below) with notes payable at
TIIE Rate plus 0.95%
|
2019
|
|
84,524
|
|
|
23,304
|
|
|
Moy Park Multicurrency Revolving Facility with notes payable at
LIBOR rate plus 2.5%
|
2018
|
|
9,953
|
|
|
11,985
|
|
|
Moy Park Receivable with payables at LIBOR plus 1.5%
|
2020
|
|
—
|
|
|
—
|
|
|
Moy Park France Invoice Discounting Revolver with payables at
EURIBOR plus 0.8%
|
2018
|
|
3,930
|
|
|
8,918
|
|
|
Chattels mortgages with payables at weighted average of 3.74%
|
Various
|
|
1,015
|
|
|
1,432
|
|
|
JBS S.A. Promissory Note at 0.0%
|
2018
|
|
753,705
|
|
|
—
|
|
|
Term Loan Agence L'eau
|
2018
|
|
6
|
|
|
6
|
|
|
Capital lease obligations
|
Various
|
|
10,703
|
|
|
14,600
|
|
|
Long-term debt
|
|
|
2,629,080
|
|
|
1,429,981
|
|
|
Less: Current maturities of long-term debt
|
|
|
(61,811
|
)
|
|
(15,712
|
)
|
|
Long-term debt, less current maturities
|
|
|
2,567,269
|
|
|
1,414,269
|
|
|
Less: Capitalized financing costs
|
|
|
(18,694
|
)
|
|
(18,145
|
)
|
|
Long-term debt, less current maturities, net of capitalized financing costs:
|
|
|
$
|
2,548,575
|
|
|
$
|
1,396,124
|
|
U.S. Senior Notes
On March 11, 2015, the Company completed a sale of
$500.0 million
aggregate principal amount of its
5.75%
senior notes due 2025 (the “Senior Notes due 2025”). The Company used the net proceeds from the sale of the Senior Notes due 2025 to repay
$350.0 million
and
$150.0 million
of the term loan indebtedness under the U.S. Credit Facility (defined below) on March 12, 2015 and April 22, 2015, respectively. On September 29, 2017, the Company completed an add-on offering of
$250.0 million
of the Senior Notes due 2025 (the “Additional Senior Notes due 2025”). The Additional Senior Notes due 2025 will be treated as a single class with the existing Senior Notes due 2025 for all purposes under the 2015 Indenture (defined below) and will have the same terms as those of the existing Senior Notes due 2025. The Additional Senior Notes due 2025 were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.
The Senior Notes due 2025 and the Additional Senior Notes due 2025 are governed by, and were issued pursuant to, an indenture dated as of March 11, 2015 by and among the Company, its guarantor subsidiary and Wells Fargo Bank, National Association, as trustee (the “2015 Indenture”). The 2015 Indenture provides, among other things, that the Senior Notes due 2025 and the Additional Senior Notes due 2025 bear interest at a rate of
5.75%
per annum from the date of issuance until maturity, payable semi-annually in cash in arrears, beginning on September 15, 2015 for the Senior Notes due 2025 and March, 15 2018 for the Additional Senior Notes due 2025. The Senior Notes due 2025 and the Additional Senior Notes due 2025 are guaranteed on a senior unsecured basis by the Company’s guarantor subsidiary. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes due 2025 and the Additional Senior Notes due 2025. The Senior Notes due 2025 and the Additional Senior Notes due 2025 and related guarantees are unsecured senior obligations of the Company and its guarantor subsidiary and rank equally with all of the Company’s and its guarantor subsidiary’s other unsubordinated indebtedness. The Senior Notes due 2025 and the Additional Senior Notes due 2025 and the 2015 Indenture also contain customary covenants and events of default, including failure to pay principal or interest on the Senior Notes due 2025 and the Additional Senior Notes due 2025 when due, among others.
On September 29, 2017, the Company completed a sale of
$600.0 million
aggregate principal amount of its
5.875%
senior notes due 2027 (the “Senior Notes due 2027”). The Company used the net proceeds from the sale of the Senior Notes due 2027 to repay in full the JBS S.A. Promissory Note (defined below) issued as part of the Moy Park acquisition. The Senior Notes due 2027 were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.
The Senior Notes due 2027 are governed by, and were issued pursuant to, an indenture dated as of September 29, 2017 by and among the Company, its guarantor subsidiary and U.S. Bank National Association, as trustee (the “2017 Indenture”). The 2017 Indenture provides, among other things, that the Senior Notes due 2027 bear interest at a rate of
5.875%
per annum from the date of issuance until maturity, payable semi-annually in cash in arrears, beginning on March 30, 2018. The Senior Notes due 2027 are guaranteed on a senior unsecured basis by the Company’s guarantor subsidiary. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes due 2027. The Senior Notes due 2027 and related guarantees are unsecured senior obligations of the Company and its guarantor subsidiary and rank equally with all of the Company’s and its guarantor subsidiary’s other unsubordinated indebtedness. The Senior Notes due 2027 and the 2017 Indenture also contain customary covenants and events of default, including failure to pay principal or interest on the Senior Notes due 2027 when due, among others.
Moy Park Senior Notes
On May 29, 2014, Moy Park (Bondco) Plc completed the sale of a £
200.0 million
aggregate principal amount of its
6.25%
senior notes due 2021 (the “Moy Park Notes”). On April 17, 2015, an add-on offering of £
100.0 million
of the Moy Park Notes (the “Additional Moy Park Notes”) was completed. The Moy Park Notes and the Additional Moy Park Notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act
.
The Moy Park Notes and the Additional Moy Park Notes are governed by, and were issued pursuant to, an indenture dated as of May 29, 2014 by Moy Park (Bondco) Plc, as issuer, Moy Park Holdings (Europe) Limited, Moy Park (Newco) Limited, Moy Park Limited, O’Kane Poultry Limited, as guarantors, and The Bank of New York Mellon, as trustee (the “Moy Park Indenture”). The Moy Park Indenture provides, among other things, that the Moy Park Notes and the Additional Moy Park Notes bear interest at a rate of
6.25%
per annum from the date of issuance until maturity, payable semiannually in cash in arrears, beginning on November 29, 2014 for the Moy Park Notes and May 28, 2015 for the Additional Moy Park Notes. The Moy Park Notes and the Additional Moy Park Notes are guaranteed by each of the subsidiary guarantors described above. The Moy Park Indenture contains customary covenants and events of default that may limit Moy Park (Bondco) Plc’s ability and the ability of certain subsidiaries to incur additional debt, declare or pay dividends or make certain investments, among others.
On November 2, 2017, Moy Park (Bondco) Plc announced the final results of its previously announced tender offer to purchase for cash any and all of its issued and outstanding Moy Park Notes and Moy Park Additional Notes. As of November 2, 2017,
£1,185,000
principal amount of Moy Park Notes and Moy Park Additional Notes had been validly tendered (and not validly withdrawn). Moy Park (Bondco) Plc has purchased all validly tendered (and not validly withdrawn) Moy Park Notes and Moy Park Additional Notes on or prior to November 2, 2017, with such settlement occurring on November 3, 2017.
U.S. Credit Facility
On May 8, 2017, the Company and certain of its subsidiaries entered into a Third Amended and Restated Credit Agreement (the “U.S. Credit Facility”) with Coöperatieve Rabobank U.A., New York Branch (“Rabobank”), as administrative agent and collateral agent, and the other lenders party thereto. The U.S. Credit Facility provides for a revolving loan commitment of up to
$750.0 million
and a term loan commitment of up to
$800.0 million
(the “Term Loans”). The U.S. Credit Facility also includes an accordion feature that allows the Company, at any time, to increase the aggregate revolving loan and term loan commitments by up to an additional
$1.0 billion
, subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase.
The revolving loan commitment under the U.S. Credit Facility matures on May 6, 2022. All principal on the Term Loans is due at maturity on May 6, 2022. Installments of principal are required to be made, in an amount equal to
1.25%
of
the original principal amount of the Term Loans, on a quarterly basis prior to the maturity date of the Term Loans. Covenants in the U.S. Credit Facility also require the Company to use the proceeds it receives from certain asset sales and specified debt or equity issuances and upon the occurrence of other events to repay outstanding borrowings under the U.S. Credit Facility. As of
September 24, 2017
, the company had Term Loans outstanding totaling
$790.0 million
and the amount available for borrowing under the revolving loan commitment was
$631.9 million
. The Company had letters of credit of
$44.8 million
and borrowings of
$73.3 million
outstanding under the revolving loan commitment as of
September 24, 2017
.
The U.S. Credit Facility includes a
$75.0 million
sub-limit for swingline loans and a
$125.0 million
sub-limit for letters of credit. Outstanding borrowings under the revolving loan commitment and the Term Loans bear interest at a per annum rate equal to (i) in the case of LIBOR loans, LIBOR plus
1.50%
through
September 24, 2017
and, thereafter, based on the Company’s net senior secured leverage ratio, between LIBOR plus
1.25%
and LIBOR plus
2.75%
and (ii) in the case of alternate base rate loans, the base rate plus
0.50%
through
September 24, 2017
and, based on the Company’s net senior secured leverage ratio, between the base rate plus
0.25%
and base rate plus
1.75%
thereafter.
The U.S. Credit Facility contains financial covenants and various other covenants that may adversely affect the Company’s ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain restricted payments, consummate certain assets sales, enter into certain transactions with JBS and the Company’s other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of our assets. The U.S. Credit Facility requires the Company to comply with a minimum level of tangible net worth covenant. The U.S. Credit Facility also provides that we may not incur capital expenditures in excess of
$500.0 million
in any fiscal year. The Company is currently in compliance with the covenants under the U.S. Credit Facility.
All obligations under the U.S. Credit Facility continue to be unconditionally guaranteed by certain of the Company’s subsidiaries and continue to be secured by a first priority lien on (i) the accounts receivable and inventory of our company and its non-Mexico subsidiaries, (ii)
100%
of the equity interests in our domestic subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., and
65%
of the equity interests in our direct foreign subsidiaries and (iii) substantially all of the assets of the Company and the guarantors under the U.S. Credit Facility.
Mexico Credit Facility
On September 27, 2016, certain of our Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with BBVA Bancomer, S.A. Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as lender. The loan commitment under the Mexico Credit Facility was $
1.5 billion
Mexican pesos. Outstanding borrowings under the Mexico Credit Facility accrued interest at a rate equal to the Interbank Equilibrium Interest Rate plus
0.95%
. The Mexico Credit Facility is scheduled to mature on September 27, 2019. As of
September 24, 2017
, the U.S. dollar-equivalent loan commitment under the Mexico Credit Facility was
$84.5 million
, and there were
$84.5 million
outstanding borrowings under the Mexico Credit Facility that bear interest at a per annum rate of
8.33%
. As of
September 24, 2017
, the U.S. dollar-equivalent borrowing availability was less than
$0.1
million.
Moy Park Multicurrency Revolving Facility Agreement
On March 19, 2015, Moy Park Holdings (Europe) Limited, a subsidiary of Granite Holdings Sàrl, and its subsidiaries, entered into an agreement with Barclays Bank plc which matures on March 19, 2018. The agreement provides for a multicurrency revolving loan commitment of up to £
20.0 million
. As of
September 24, 2017
, the U.S. dollar-equivalent loan commitment under Moy Park multicurrency revolving facility was
$26.8 million
and there were
$10.0 million
outstanding borrowings. Outstanding borrowings under the facility bear interest at a per annum rate equal to LIBOR plus a margin determined by Company’s Net Debt to EBITDA ratio. The current margin stands at
2.5%
. As of
September 24, 2017
, the U.S. dollar-equivalent borrowing availability was
$16.8 million
.
The facility contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain assets sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of the Moy Park's assets.
Moy Park Receivables Finance Agreement
Moy Park Limited, a subsidiary of Granite Holdings Sàrl, entered into a
£45.0 million
receivables finance agreement on January 29, 2016 (the “Receivables Finance Agreement”), with Barclays Bank plc, which matures on January 29, 2020. As of
September 24, 2017
, the U.S. dollar-equivalent loan commitment under the Receivables Finance Agreement was
$60.3 million
and there were
no
outstanding borrowings. Outstanding borrowings under the facility bear interest at a per annum rate equal to LIBOR plus
1.5%
. The Receivables Finance Agreement includes an accordion feature that allows us, at any time, to increase the commitments by up to an additional £
15.0 million
(U.S. dollar-equivalent
$20.1 million
as of
September 24, 2017
), subject to the satisfaction of certain conditions.
The Receivables Finance Agreement contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain asset sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.
Moy Park France Invoice Discounting Facility
In June 2009, Moy Park France Sàrl, a subsidiary of Granite Holdings Sàrl, entered into a
€20.0 million
invoice discounting facility with GE De Facto (the “Invoice Discounting Facility”). The facility limit was increased
€10.0 million
in September 2016 to
€30.0 million
. The Invoice Discounting Facility is payable on demand and the term is extended on an annual basis. The agreement can be terminated with three months’ notice. As of
September 24, 2017
, the U.S. dollar-equivalent loan commitment under the Invoice Discounting Facility was
$35.7 million
and there were
$3.9 million
outstanding borrowings. As of
September 24, 2017
, the U.S. dollar-equivalent borrowing availability was
$31.8 million
. Outstanding borrowings under the Invoice Discounting Facility bear interest at a per annum rate equal to EURIBOR plus a margin of
0.80%
.
The Invoice Discounting Facility contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain asset sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.
JBS S.A. Promissory Note
On September 8, 2017, Onix Investments UK Ltd., a wholly owned subsidiary of Pilgrim’s Pride Corporation, executed a subordinated promissory note payable to JBS S.A. (the “JBS S.A. Promissory Note”) for
£562.5 million
, which had a maturity date of September 6, 2018. Interest on the outstanding principal balance of the JBS S.A. Promissory Note accrued at the rate per annum equal to (i) from and after November 8, 2017 and prior to January 7, 2018,
4.00%
, (ii) from and after January 7, 2018 and prior to March 8, 2018,
6.00%
and (iii) from and after March 8, 2018,
8.00%
. The JBS S.A. Promissory Note was repaid in full on October 2, 2017 using the net proceeds from the sale of Senior Notes due 2027 and the Additional Senior Notes due 2025.
The Company recorded income tax expense of
$278.0 million
, a
32.2%
effective tax rate, for the
thirty-nine weeks ended September 24, 2017
compared to income tax expense of
$203.0 million
, a
34.0%
effective tax rate, for the
thirty-nine weeks ended
September 25, 2016
. The increase in income tax expense in 2017 resulted primarily from an increase in pre-tax income.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and tax-planning strategies in making this assessment. As of
September 24, 2017
, the Company did not believe it had sufficient positive evidence to conclude that realization of its federal capital loss carry forwards and a portion of its foreign net deferred tax assets are more likely than not to be realized.
For the
thirty-nine weeks ended September 24, 2017
and
September 25, 2016
, there is a tax effect of
$4.5 million
and
$4.2 million
, respectively, reflected in other comprehensive income.
Beginning in 2017, as a result of new FASB guidance on share-based payments, excess tax benefits are now required to be reported in income tax expense rather than in additional paid-in capital. For the
thirty-nine weeks ended September 24, 2017
, there is an immaterial tax effect reflected in income tax expense due to excess tax benefits related to share-based compensation. For the
thirty-nine weeks ended September 25, 2016
, there is
no
tax effect reflected in additional paid-in capital due to excess tax benefits related to share-based compensation. See “Note 1. Description of Business and Basis of Presentation” for additional information.
The Company and its subsidiaries file a variety of consolidated and standalone income tax returns in various jurisdictions. In the normal course of business, our income tax filings are subject to review by various taxing authorities. In general, tax returns filed by our company and our subsidiaries for years prior to 2010 are no longer subject to examination by tax authorities.
The United States Fifth Circuit Court of Appeals rendered judgment in favor of the Company regarding the IRS’ amended proof of claim relating to the tax year ended June 26, 2004 for Gold Kist Inc. (“Gold Kist”). See “Note 17. Commitments and Contingencies” for additional information.
|
|
|
|
13.
|
PENSION AND OTHER POSTRETIREMENT BENEFITS
|
The Company sponsors programs that provide retirement benefits to most of its employees. These programs include qualified defined benefit pension plans, nonqualified defined benefit retirement plans, a defined benefit postretirement life insurance plan and defined contribution retirement savings plans. Expenses recognized under all of these retirement plans totaled
$2.8 million
and
$2.3 million
in the
thirteen weeks ended September 24, 2017
and
September 25, 2016
, respectively, and
$8.0 million
and
$6.9 million
in the
thirty-nine weeks ended September 24, 2017
and
September 25, 2016
, respectively.
Defined Benefit Plans Obligations and Assets
The change in benefit obligation, change in fair value of plan assets, funded status and amounts recognized in the Condensed Consolidated and Combined Balance Sheets for these defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
September 24, 2017
|
|
Thirty-Nine Weeks Ended
September 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Change in projected benefit obligation:
|
(In thousands)
|
|
Projected benefit obligation, beginning of period
|
$
|
167,159
|
|
|
$
|
1,648
|
|
|
$
|
165,952
|
|
|
$
|
1,672
|
|
|
Interest cost
|
4,178
|
|
|
38
|
|
|
4,189
|
|
|
38
|
|
|
Actuarial losses (gains)
|
9,433
|
|
|
25
|
|
|
12,233
|
|
|
95
|
|
|
Benefits paid
|
(7,571
|
)
|
|
(111
|
)
|
|
(7,274
|
)
|
|
(105
|
)
|
|
Projected benefit obligation, end of period
|
$
|
173,199
|
|
|
$
|
1,600
|
|
|
$
|
175,100
|
|
|
$
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
September 24, 2017
|
|
Thirty-Nine Weeks Ended
September 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Change in plan assets:
|
(In thousands)
|
|
Fair value of plan assets, beginning of period
|
$
|
97,526
|
|
|
$
|
—
|
|
|
$
|
96,947
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
9,321
|
|
|
—
|
|
|
4,769
|
|
|
—
|
|
|
Contributions by employer
|
10,538
|
|
|
111
|
|
|
8,983
|
|
|
105
|
|
|
Benefits paid
|
(7,571
|
)
|
|
(111
|
)
|
|
(7,274
|
)
|
|
(105
|
)
|
|
Fair value of plan assets, end of period
|
$
|
109,814
|
|
|
$
|
—
|
|
|
$
|
103,425
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Funded status:
|
(In thousands)
|
|
Unfunded benefit obligation, end of period
|
$
|
(63,385
|
)
|
|
$
|
(1,600
|
)
|
|
$
|
(69,633
|
)
|
|
$
|
(1,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Amounts recognized in the Condensed Consolidated and Combined Balance Sheets at end of period:
|
(In thousands)
|
|
Current liability
|
$
|
(13,098
|
)
|
|
$
|
(147
|
)
|
|
$
|
(13,113
|
)
|
|
$
|
(147
|
)
|
|
Long-term liability
|
(50,287
|
)
|
|
(1,453
|
)
|
|
(56,520
|
)
|
|
(1,501
|
)
|
|
Recognized liability
|
$
|
(63,385
|
)
|
|
$
|
(1,600
|
)
|
|
$
|
(69,633
|
)
|
|
$
|
(1,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Amounts recognized in accumulated other comprehensive loss at end of period:
|
(In thousands)
|
|
Net actuarial loss (gain)
|
$
|
49,847
|
|
|
$
|
(6
|
)
|
|
$
|
46,494
|
|
|
$
|
(31
|
)
|
The accumulated benefit obligation for our defined benefit pension plans was
$173.2 million
and
$167.2 million
at
September 24, 2017
and
December 25, 2016
, respectively. Each of our defined benefit pension plans had accumulated benefit obligations that exceeded the fair value of plan assets at
September 24, 2017
and
December 25, 2016
, respectively. As of
September 24, 2017
, the weighted average duration of our defined benefit pension obligation is
32.72
years.
Net Periodic Benefit Costs
Net defined benefit pension and other postretirement costs included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
September 24, 2017
|
|
Thirteen Weeks Ended
September 25, 2016
|
|
Thirty-Nine Weeks Ended
September 24, 2017
|
|
Thirty-Nine Weeks Ended
September 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In thousands)
|
|
Interest cost
|
$
|
1,392
|
|
|
$
|
13
|
|
|
$
|
1,396
|
|
|
$
|
12
|
|
|
$
|
4,178
|
|
|
$
|
38
|
|
|
$
|
4,189
|
|
|
$
|
38
|
|
|
Estimated return on plan assets
|
(1,314
|
)
|
|
—
|
|
|
(1,314
|
)
|
|
—
|
|
|
(3,940
|
)
|
|
—
|
|
|
(3,942
|
)
|
|
—
|
|
|
Amortization of net loss
|
233
|
|
|
—
|
|
|
165
|
|
|
—
|
|
|
699
|
|
|
—
|
|
|
494
|
|
|
—
|
|
|
Net costs
|
$
|
311
|
|
|
$
|
13
|
|
|
$
|
247
|
|
|
$
|
12
|
|
|
$
|
937
|
|
|
$
|
38
|
|
|
$
|
741
|
|
|
$
|
38
|
|
Economic Assumptions
The weighted average assumptions used in determining pension and other postretirement plan information were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Assumptions used to measure benefit obligation at end of period:
|
|
|
|
|
|
|
|
|
Discount rate
|
3.87
|
%
|
|
3.41
|
%
|
|
4.31
|
%
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
September 24, 2017
|
|
Thirty-Nine Weeks Ended
September 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Assumptions used to measure net pension and other postretirement cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
4.32
|
%
|
|
3.81
|
%
|
|
4.47
|
%
|
|
4.47
|
%
|
|
Expected return on plan assets
|
5.50
|
%
|
|
NA
|
|
|
5.50
|
%
|
|
NA
|
|
The discount rate represents the interest rate used to determine the present value of future cash flows currently expected to be required to settle the Company's pension and other benefit obligations. The weighted average discount rate for each plan was established by comparing the projection of expected benefit payments to the AA Above Median yield curve. The expected benefit payments were discounted by each corresponding discount rate on the yield curve. For payments beyond 30 years, the Company extended the curve assuming the discount rate derived in year 30 is extended to the end of the plan's payment expectations. Once the present value of the string of benefit payments was established, the Company determined the single rate on the yield curve, that when applied to all obligations of the plan, would exactly match the previously determined present value. As part of the evaluation of pension and other postretirement assumptions, the Company applied assumptions for mortality that incorporate generational white and blue collar mortality trends. In determining its benefit obligations, the Company used generational tables that take into consideration increases in plan participant longevity. As of
September 24, 2017
and
December 25, 2016
, all pension and other postretirement benefit plans used variations of the RP2014 mortality table and the MP2015 mortality improvement scale.
The sensitivity of the projected benefit obligation for pension benefits to changes in the discount rate is set out below. The impact of a change in the discount rate of
0.25%
on the projected benefit obligation for other benefits is less than
$1,000
. This sensitivity analysis is based on changing one assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as for calculating the liability recognized in the Condensed Consolidated and Combined Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Discount Rate of 0.25%
|
|
Decrease in Discount Rate of 0.25%
|
|
|
(In thousands)
|
|
Impact on projected benefit obligation for pension benefits
|
$
|
(4,786
|
)
|
|
$
|
5,088
|
|
The expected rate of return on plan assets was primarily based on the determination of an expected return and behaviors for each plan's current asset portfolio that the Company believes are likely to prevail over long periods. This determination was made using assumptions for return and volatility of the portfolio. Asset class assumptions were set using a combination of empirical and forward-looking analysis. To the extent historical results were affected by unsustainable trends or events, the effects of those trends or events were quantified and removed. The Company also considered anticipated asset allocations, investment strategies and the views of various investment professionals when developing this rate.
Plan Assets
The following table reflects the pension plans’ actual asset allocations:
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
Cash and cash equivalents
|
—
|
%
|
|
—
|
%
|
|
Pooled separate accounts
(a)
:
|
|
|
|
|
Equity securities
|
5
|
%
|
|
5
|
%
|
|
Fixed income securities
|
5
|
%
|
|
5
|
%
|
|
Common collective trust funds
(a)
:
|
|
|
|
|
Equity securities
|
61
|
%
|
|
60
|
%
|
|
Fixed income securities
|
29
|
%
|
|
30
|
%
|
|
Total assets
|
100
|
%
|
|
100
|
%
|
|
|
|
|
(a)
|
Pooled separate accounts (“PSAs”) and common collective trust funds (“CCTs”) are two of the most common types of alternative vehicles in which benefit plans invest. These investments are pooled funds that look like mutual funds, but they are not registered with the SEC. Often times, they will be invested in mutual funds or other marketable securities, but the unit price generally will be different from the value of the underlying securities because the fund may also hold cash for liquidity purposes, and the fees imposed by the fund are deducted from the fund value rather than charged separately to investors. Some PSAs and CCTs have no restrictions as to their investment strategy and can invest in riskier investments, such as derivatives, hedge funds, private equity funds, or similar investments.
|
Absent regulatory or statutory limitations, the target asset allocation for the investment of pension assets in the pooled separate accounts is
50%
in each of fixed income securities and equity securities and the target asset allocation for the investment of pension assets in the common collective trust funds is
30%
in fixed income securities and
70%
in equity securities. The plans only invest in fixed income and equity instruments for which there is a readily available public market. We develop our expected long-term rate of return assumptions based on the historical rates of returns for equity and fixed income securities of the type in which our plans invest.
The fair value measurements of plan assets fell into the following levels of the fair value hierarchy as of
September 24, 2017
and
December 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
|
|
Level 1
(a)
|
|
Level 2
(b)
|
|
Level 3
(c)
|
|
Total
|
|
Level 1
(a)
|
|
Level 2
(b)
|
|
Level 3
(c)
|
|
Total
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
$
|
146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
146
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
Pooled separate accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. equity funds
(d)
|
—
|
|
|
3,228
|
|
|
—
|
|
|
3,228
|
|
|
—
|
|
|
3,302
|
|
|
—
|
|
|
3,302
|
|
|
Small/Mid U.S. equity funds
(e)
|
—
|
|
|
388
|
|
|
—
|
|
|
388
|
|
|
—
|
|
|
406
|
|
|
—
|
|
|
406
|
|
|
International equity funds
(f)
|
—
|
|
|
1,585
|
|
|
—
|
|
|
1,585
|
|
|
—
|
|
|
1,231
|
|
|
—
|
|
|
1,231
|
|
|
Fixed income funds
(g)
|
—
|
|
|
5,024
|
|
|
—
|
|
|
5,024
|
|
|
—
|
|
|
4,867
|
|
|
—
|
|
|
4,867
|
|
|
Common collective trusts funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. equity funds
(d)
|
—
|
|
|
27,077
|
|
|
—
|
|
|
27,077
|
|
|
—
|
|
|
24,547
|
|
|
—
|
|
|
24,547
|
|
|
Small U.S. equity funds
(e)
|
—
|
|
|
19,853
|
|
|
—
|
|
|
19,853
|
|
|
—
|
|
|
17,344
|
|
|
—
|
|
|
17,344
|
|
|
International equity funds
(f)
|
—
|
|
|
20,306
|
|
|
—
|
|
|
20,306
|
|
|
—
|
|
|
17,006
|
|
|
—
|
|
|
17,006
|
|
|
Fixed income funds
(g)
|
—
|
|
|
32,207
|
|
|
—
|
|
|
32,207
|
|
|
—
|
|
|
28,704
|
|
|
—
|
|
|
28,704
|
|
|
Total assets
|
$
|
146
|
|
|
$
|
109,668
|
|
|
$
|
—
|
|
|
$
|
109,814
|
|
|
$
|
119
|
|
|
$
|
97,407
|
|
|
$
|
—
|
|
|
$
|
97,526
|
|
|
|
|
|
(a)
|
Unadjusted quoted prices in active markets for identical assets are used to determine fair value.
|
|
|
|
|
(b)
|
Quoted prices in active markets for similar assets and inputs that are observable for the asset are used to determine fair value.
|
|
|
|
|
(c)
|
Unobservable inputs, such as discounted cash flow models or valuations, are used to determine fair value.
|
|
|
|
|
(d)
|
This category is comprised of investment options that invest in stocks, or shares of ownership, in large, well-established U.S. companies. These investment options typically carry more risk than fixed income options but have the potential for higher returns over longer time periods.
|
|
|
|
|
(e)
|
This category is generally comprised of investment options that invest in stocks, or shares of ownership, in small to medium-sized U.S. companies. These investment options typically carry more risk than larger U.S. equity investment options but have the potential for higher returns.
|
|
|
|
|
(f)
|
This category is comprised of investment options that invest in stocks, or shares of ownership, in companies with their principal place of business or office outside of the U.S.
|
|
|
|
|
(g)
|
This category is comprised of investment options that invest in bonds, or debt of a company or government entity (including U.S. and non-U.S. entities). It may also include real estate investment options that directly own property. These investment options typically carry more risk than short-term fixed income investment options (including, for real estate investment options, liquidity risk), but less overall risk than equities.
|
The valuation of plan assets in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities primarily include equity and fixed income securities funds.
Benefit Payments
The following table reflects the benefits as of
September 24, 2017
expected to be paid through 2026 from our pension and other postretirement plans. Because our pension plans are primarily funded plans, the anticipated benefits with respect to these plans will come primarily from the trusts established for these plans. Because our other postretirement plans are unfunded, the anticipated benefits with respect to these plans will come from our own assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In thousands)
|
|
2017 (remaining)
|
$
|
4,241
|
|
|
$
|
37
|
|
|
2018
|
11,617
|
|
|
147
|
|
|
2019
|
11,088
|
|
|
146
|
|
|
2020
|
11,019
|
|
|
144
|
|
|
2021
|
10,790
|
|
|
142
|
|
|
2022-2026
|
49,927
|
|
|
640
|
|
|
Total
|
$
|
98,682
|
|
|
$
|
1,256
|
|
We anticipate contributing
$0.1 million
and less than
$0.1 million
, as required by funding regulations or laws, to our pension plans and other postretirement plans, respectively, during the remainder of
2017
.
Unrecognized Benefit Amounts in Accumulated Other Comprehensive Loss
The amounts in accumulated other comprehensive loss that were not recognized as components of net periodic benefits cost and the changes in those amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
September 24, 2017
|
|
Thirty-Nine Weeks Ended
September 25, 2016
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In thousands)
|
|
Net actuarial loss (gain), beginning of period
|
$
|
46,494
|
|
|
$
|
(31
|
)
|
|
$
|
38,115
|
|
|
$
|
(79
|
)
|
|
Amortization
|
(699
|
)
|
|
—
|
|
|
(494
|
)
|
|
—
|
|
|
Curtailment and settlement adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Actuarial loss (gain)
|
9,433
|
|
|
25
|
|
|
12,233
|
|
|
95
|
|
|
Asset loss (gain)
|
(5,381
|
)
|
|
—
|
|
|
(828
|
)
|
|
—
|
|
|
Net actuarial loss (gain), end of period
|
$
|
49,847
|
|
|
$
|
(6
|
)
|
|
$
|
49,026
|
|
|
$
|
16
|
|
The Company expects to recognize in net pension cost throughout the remainder of
2017
an actuarial loss of
$0.2 million
that was recorded in accumulated other comprehensive loss at
September 24, 2017
.
Risk Management
Through its defined benefit plans, the Company is exposed to a number of risks, the most significant of which are detailed below:
Asset volatility.
The plan liabilities are calculated using a discount rate set with reference to corporate bond yields; if plan assets under perform this yield, this will create a deficit. The pension plans hold a significant proportion of equities, which are expected to outperform corporate bonds in the long-term while contributing volatility and risk in the short-term. The Company monitors the level of investment risk but has no current plan to significantly modify the mixture of investments. The investment position is discussed more below.
Changes in bond yields.
A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.
The investment position is managed and monitored by a committee of individuals from various departments. This group actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the pension obligations. The group has not changed the processes used to manage its risks from previous periods. The group does not use derivatives to manage its risk. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. The majority of equities are in U.S. large and small cap companies with some global diversification into international entities. The plans are not exposed to significant foreign currency risk.
Remeasurement
The Company remeasures both plan assets and obligations on a quarterly basis.
Accumulated Other Comprehensive Loss
The following tables provide information regarding the changes in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended September 24, 2017
(a)
|
|
|
Gains (Losses) Related to Foreign Currency Translation
|
|
Unrealized Gains (Losses) on Derivative Financial Instruments Classified as Cash Flow Hedges
|
|
Losses Related to Pension and Other Postretirement Benefits
|
|
Unrealized Holding Gains on Available-for-Sale Securities
|
|
Total
|
|
|
(In thousands)
|
|
Balance, beginning of period
|
$
|
(265,714
|
)
|
|
$
|
99
|
|
|
$
|
(64,243
|
)
|
|
$
|
—
|
|
|
$
|
(329,858
|
)
|
|
Granite Holdings Sàrl common-control transaction
|
204,577
|
|
|
(1,368
|
)
|
|
—
|
|
|
—
|
|
|
203,209
|
|
|
Other comprehensive income (loss) before
reclassifications
|
92,364
|
|
|
(137
|
)
|
|
(2,539
|
)
|
|
—
|
|
|
89,688
|
|
|
Amounts reclassified from accumulated other
comprehensive loss to net income
|
—
|
|
|
9
|
|
|
435
|
|
|
—
|
|
|
444
|
|
|
Net current period other comprehensive
income (loss)
|
92,364
|
|
|
(128
|
)
|
|
(2,104
|
)
|
|
—
|
|
|
90,132
|
|
|
Balance, end of period
|
$
|
31,227
|
|
|
$
|
(1,397
|
)
|
|
$
|
(66,347
|
)
|
|
$
|
—
|
|
|
$
|
(36,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended September 25, 2016
(a)
|
|
|
Losses Related to Foreign Currency Translation
|
|
Unrealized Gains (Losses) on Derivative Financial Instruments Classified as Cash Flow Hedges
|
|
Losses Related to Pension and Other Postretirement Benefits
|
|
Unrealized Holding Gains on Available-for-Sale Securities
|
|
Total
|
|
|
(In thousands)
|
|
Balance, beginning of period
|
$
|
(32,482
|
)
|
|
$
|
(61
|
)
|
|
$
|
(58,997
|
)
|
|
$
|
67
|
|
|
$
|
(91,473
|
)
|
|
Other comprehensive income (loss) before
reclassifications
|
(171,509
|
)
|
|
167
|
|
|
(7,158
|
)
|
|
265
|
|
|
$
|
(178,235
|
)
|
|
Amounts reclassified from accumulated other
comprehensive loss to net income
|
—
|
|
|
(35
|
)
|
|
307
|
|
|
(332
|
)
|
|
$
|
(60
|
)
|
|
Net current period other comprehensive
income (loss)
|
(171,509
|
)
|
|
132
|
|
|
(6,851
|
)
|
|
(67
|
)
|
|
(178,295
|
)
|
|
Balance, end of period
|
$
|
(203,991
|
)
|
|
$
|
71
|
|
|
$
|
(65,848
|
)
|
|
$
|
—
|
|
|
$
|
(269,768
|
)
|
|
|
|
|
(a)
|
All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated Other Comprehensive Loss
(a)
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Thirty-Nine Weeks Ended
September 24, 2017
|
|
Thirty-Nine Weeks Ended
September 25, 2016
|
|
Affected Line Item in the Condensed Consolidated and Combined Statements of Income
|
|
|
|
(In thousands)
|
|
|
|
Realized gain (loss) on settlement of derivative
financial instruments classified as cash flow
hedges
|
|
$
|
(9
|
)
|
|
$
|
35
|
|
|
Cost of sales
|
|
Realized gain on sale of securities
|
|
—
|
|
|
534
|
|
|
Interest income
|
|
Amortization of defined benefit pension
and other postretirement plan actuarial
losses:
|
|
|
|
|
|
|
|
Union employees pension plan
(b)(d)
|
|
(18
|
)
|
|
(15
|
)
|
|
Cost of sales
|
|
Legacy Gold Kist plans
(c)(d)
|
|
(212
|
)
|
|
(149
|
)
|
|
Cost of sales
|
|
Legacy Gold Kist plans
(c)(d)
|
|
(469
|
)
|
|
(330
|
)
|
|
Selling, general and administrative expense
|
|
Total before tax
|
|
(708
|
)
|
|
75
|
|
|
|
|
Tax benefit (expense)
|
|
264
|
|
|
(15
|
)
|
|
|
|
Total reclassification for the period
|
|
$
|
(444
|
)
|
|
$
|
60
|
|
|
|
|
|
|
|
(a)
|
Amounts in parentheses represent debits to results of operations.
|
|
|
|
|
(b)
|
The Company sponsors the Pilgrim’s Pride Retirement Plan for Union Employees, a qualified defined benefit pension plan covering certain locations or work groups with collective bargaining agreements.
|
|
|
|
|
(c)
|
The Company sponsors the Pilgrim’s Pride Plan for Legacy Gold Kist Employees, a qualified defined benefit pension plan covering certain eligible U.S. employees who were employed at locations that the Company purchased through its acquisition of Gold Kist in 2007, the Former Gold Kist Inc. Supplemental Executive Retirement Plan, a nonqualified defined benefit retirement plan covering certain former Gold Kist executives, the Former Gold Kist Inc. Directors’ Emeriti Plan, a nonqualified defined benefit retirement plan covering certain former Gold Kist directors, and the Gold Kist Inc. Retiree Life Insurance Plan, a defined benefit postretirement life insurance plan covering certain retired Gold Kist employees.
|
|
|
|
|
(d)
|
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See “Note 13. Pension and Other Postretirement Benefits” to the Condensed Consolidated and Combined Financial Statements.
|
Share Repurchase Program and Treasury Stock
On July 28, 2015, the Company’s Board of Directors approved a
$150.0 million
share repurchase authorization. The Company plans to repurchase shares through various means, which may include but are not limited to open market purchases, privately negotiated transactions, the use of derivative instruments and/or accelerated share repurchase programs. The share repurchase program was originally scheduled to expire on July 27, 2016. On February 10, 2016, the Company’s Board of Directors approved an increase of the share repurchase authorization to
$300.0 million
and an extension of the expiration to February 9, 2017. On February 8, 2017, the Company's Board of Directors further extended the program expiration to August 9, 2017. The extent to which the Company repurchases its shares and the timing of such repurchases will vary and depend upon market conditions and other corporate considerations, as determined by the Company’s management team. The Company reserves the right to limit or terminate the repurchase program at any time without notice. As of
September 24, 2017
, the Company had repurchased approximately
11.4 million
shares under this program with a market value at the time of purchase of approximately
$231.8 million
. The Company accounted for the shares repurchased using the cost method.
Restrictions on Dividends
The U.S. Credit Facility, the 2015 Indenture governing the Senior Notes due 2025 and the 2017 Indenture governing the Senior Notes due 2027 restrict, but do not prohibit, the Company from declaring dividends.
|
|
|
|
15.
|
INCENTIVE COMPENSATION
|
The Company sponsors a short-term incentive plan that provides the grant of either cash or share-based bonus awards payable upon achievement of specified performance goals (the “STIP”). Full-time, salaried exempt employees of the Company and its affiliates who are selected by the administering committee are eligible to participate in the STIP. The Company has accrued
$20.7 million
in costs related to the STIP at
September 24, 2017
related to cash bonus awards that could potentially be awarded during the remainder of
2017
and
2018
. The Company assumed responsibility for the JFC LLC Long-Term Equity Incentive Plan dated January 1, 2014, as amended (the “JFC LTIP”) through its acquisition of GNP on January 6, 2017. The Company has accrued
$3.4 million
in costs related to the JFC LTIP at
September 24, 2017
. The Company assumed responsibility for the Moy Park Incentive Plan dated January 1, 2013, as amended (the “MPIP”) through its acquisition of Moy Park on September 8, 2017. The Company has accrued
$0.6 million
in costs related to the MPIP at
September 24, 2017
.
The Company also sponsors a performance-based, omnibus long-term incentive plan that provides for the grant of a broad range of long-term equity-based and cash-based awards to the Company’s officers and other employees, members of the Board of Directors and any consultants (the “LTIP”). The equity-based awards that may be granted under the LTIP include “incentive stock options,” within the meaning of the Internal Revenue Code, nonqualified stock options, stock appreciation rights, restricted stock awards and restricted stock units (“RSUs”). At
September 24, 2017
, we have reserved approximately
4.8 million
shares of common stock for future issuance under the LTIP.
The following awards were outstanding during the
thirty-nine weeks ended
September 24, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Type
|
|
Benefit
Plan
|
|
Awards Granted
|
|
Grant
Date
|
|
Grant Date Fair Value per Award
(a)
|
|
Vesting Condition
|
|
Vesting Date
|
|
Vesting Date Fair Value per Award
(a)
|
|
Estimated Forfeiture Rate
|
|
Awards Forfeited to Date
|
|
Settlement Method
|
|
RSU
|
|
LTIP
|
|
449,217
|
|
|
02/19/2014
|
|
$
|
16.70
|
|
|
Service
|
|
12/31/2016
|
|
$
|
18.99
|
|
|
13.49
|
%
|
|
86,458
|
|
|
Stock
|
|
RSU
|
|
LTIP
|
|
223,701
|
|
|
03/03/2014
|
|
17.18
|
|
|
Performance / Service
|
|
12/31/2017
|
|
|
|
12.34
|
%
|
|
55,516
|
|
|
Stock
|
|
RSU
|
(b)
|
LTIP
|
|
45,961
|
|
|
02/11/2015
|
|
25.87
|
|
|
Service
|
|
12/31/2017
|
|
18.99
|
|
|
12.34
|
%
|
|
—
|
|
|
Stock
|
|
RSU
|
|
LTIP
|
|
251,136
|
|
|
03/30/2016
|
|
25.36
|
|
|
Performance / Service
|
|
12/31/2019
|
|
18.99
|
|
|
(d)
|
|
|
251,136
|
|
|
Stock
|
|
RSU
|
(b)
|
LTIP
|
|
74,536
|
|
|
10/13/2016
|
|
20.93
|
|
|
Service
|
|
12/31/2016
|
|
|
|
—
|
%
|
|
—
|
|
|
Stock
|
|
RSU
|
|
LTIP
|
|
389,424
|
|
|
01/19/2017
|
|
18.39
|
|
|
Performance / Service
|
|
(e)
|
|
|
|
—
|
%
|
|
—
|
|
|
Stock
|
|
RSU
|
(c)
|
LTIP
|
|
48,586
|
|
|
02/13/2017
|
|
20.52
|
|
|
Service
|
|
2/13/2017
|
|
|
|
—
|
%
|
|
—
|
|
|
Stock
|
|
RSU
|
(c)
|
LTIP
|
|
23,469
|
|
|
02/13/2017
|
|
20.52
|
|
|
Service
|
|
12/31/2017
|
|
|
|
—
|
%
|
|
—
|
|
|
Stock
|
|
|
|
|
(a)
|
The fair value of each RSU granted or vested represents the closing price of the Company's common stock on the respective grant date or vesting date.
|
|
|
|
|
(b)
|
On February 17, 2015, the Company paid a special cash dividend to stockholders of record as of January 30, 2015 totaling
$5.77
per share. On January 27, 2015, the Compensation Committee of the Company's Board of Directors agreed to grant additional RSUs to LTIP participants that were equal to the amount of the dividend that would be awarded to them had their RSUs existing as of the dividend record date been vested. The additional RSUs that were granted to the LTIP participants are subject to the same vesting requirements as the underlying RSUs granted under the LTIP.
|
|
|
|
|
(c)
|
On May 18, 2016, the Company paid a special cash dividend to stockholders of record as of May 10, 2015 totaling
$2.75
per share. On October 27, 2016, the Compensation Committee of the Company's Board of Directors agreed to grant additional RSUs to LTIP participants that were equal to the amount of the dividend that would be awarded to them had their RSUs existing as of the dividend record date been vested. The additional RSUs that were granted to the LTIP participants are subject to the same vesting requirements as the underlying RSUs granted under the LTIP.
|
|
|
|
|
(d)
|
Performance conditions associated with these awards were not satisfied. Therefore,
100%
of the awards were forfeited during the thirty-nine weeks ended
September 24, 2017
.
|
|
|
|
|
(e)
|
The subject RSUs will vest in ratable tranches on December 31, 2018, December 31, 2019, and December 31, 2020.
|
Compensation costs and the income tax benefit recognized for our share-based compensation arrangements are included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
(In thousands)
|
|
Share-based compensation cost:
|
|
|
|
|
|
|
|
|
Cost of sales
|
$
|
32
|
|
|
$
|
449
|
|
|
$
|
219
|
|
|
$
|
710
|
|
|
Selling, general and administrative expense
|
475
|
|
|
3,086
|
|
|
2,235
|
|
|
4,694
|
|
|
Total
|
$
|
507
|
|
|
$
|
3,535
|
|
|
$
|
2,454
|
|
|
$
|
5,404
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
132
|
|
|
$
|
1,083
|
|
|
$
|
733
|
|
|
$
|
1,633
|
|
The Company’s RSU activity is included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended September 24, 2017
|
|
Thirty-Nine Weeks Ended September 25, 2016
|
|
|
Number
|
|
Weighted Average Grant Date Fair Value
|
|
Number
|
|
Weighted Average Grant Date Fair Value
|
|
|
(In thousands, except weighted average fair values)
|
|
Outstanding at beginning of period
|
906
|
|
|
$
|
20.00
|
|
|
774
|
|
|
$
|
19.30
|
|
|
Granted
|
462
|
|
|
18.72
|
|
|
251
|
|
|
25.36
|
|
|
Vested
|
(486
|
)
|
|
17.73
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
(251
|
)
|
|
25.36
|
|
|
(193
|
)
|
|
24.51
|
|
|
Outstanding at end of period
|
631
|
|
|
$
|
18.68
|
|
|
832
|
|
|
$
|
19.92
|
|
The total fair value of awards vested during the
thirty-nine weeks ended
September 24, 2017
was
$8.6 million
.
No
awards vested during the
thirty-nine weeks ended September 25, 2016
.
At
September 24, 2017
, the total unrecognized compensation cost related to all nonvested awards was
$8.5 million
. That cost is expected to be recognized over a weighted average period of
2.06
years.
Historically, we have issued new shares to satisfy award conversions.
|
|
|
|
16.
|
RELATED PARTY TRANSACTIONS
|
Pilgrim’s has been and, in some cases, continues to be a party to certain transactions with affiliated companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
|
(In thousands)
|
|
|
JBS S.A.:
|
|
|
|
|
|
|
|
|
|
JBS S.A. Promissory Note
(a)
|
$
|
753,704
|
|
|
$
|
—
|
|
|
$
|
753,704
|
|
|
$
|
—
|
|
|
|
Expenditures paid by JBS S.A. on
behalf of Pilgrim's Pride Corporation
(b)
|
—
|
|
|
5,887
|
|
|
3,824
|
|
|
5,887
|
|
|
|
Expenditures paid by Pilgrim's Pride Corporation on
behalf of JBS S.A.
(b)
|
—
|
|
|
—
|
|
|
5
|
|
|
19
|
|
|
|
JBS USA Food Company Holdings:
|
|
|
|
|
|
|
|
|
|
Letter of credit fees
(c)
|
—
|
|
|
—
|
|
|
—
|
|
|
202
|
|
|
|
JBS USA Food Company:
|
|
|
|
|
|
|
|
|
|
Purchases from JBS USA Food Company
(d)
|
31,161
|
|
|
28,799
|
|
|
83,444
|
|
|
75,687
|
|
|
|
Expenditures paid by JBS USA Food Company on behalf
of Pilgrim’s Pride Corporation
(e)
|
10,856
|
|
|
17,242
|
|
|
29,127
|
|
|
33,568
|
|
|
|
Sales to JBS USA Food Company
(d)
|
4,221
|
|
|
4,819
|
|
|
13,618
|
|
|
12,235
|
|
|
|
Expenditures paid by Pilgrim’s Pride Corporation on
behalf of JBS USA Food Company
(e)
|
1,516
|
|
|
1,142
|
|
|
3,976
|
|
|
9,858
|
|
|
|
JBS Chile Ltda.:
|
|
|
|
|
|
|
|
|
|
Sales to JBS Chile Ltda.
|
—
|
|
|
126
|
|
|
—
|
|
|
438
|
|
|
|
JBS Global (UK) Ltd.:
|
|
|
|
|
|
|
|
|
|
Sales to JBS Global (UK) Ltd.
|
—
|
|
|
—
|
|
|
19,217
|
|
|
122
|
|
|
|
JBS Five Rivers:
|
|
|
|
|
|
|
|
|
|
Sales to JBS Five Rivers
|
7,271
|
|
|
—
|
|
|
23,787
|
|
|
—
|
|
|
|
J&F Investimentos Ltd..:
|
|
|
|
|
|
|
|
|
|
Sales to J&F Investimentos Ltd.
(f)
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
|
JBS Seara International Ltd.:
|
|
|
|
|
|
|
|
|
|
Sales to JBS Seara International Ltd.
(g)
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
|
Expenditures paid by Pilgrim’s Pride Corporation on
behalf of JBS Seara International Ltd.
(g)
|
—
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
|
Toledo International NV:
|
|
|
|
|
|
|
|
|
|
|
Purchases from Toledo International NV
(h)
|
149
|
|
|
67
|
|
|
190
|
|
|
67
|
|
|
|
Sales to Toledo International NV
(h)
|
—
|
|
|
—
|
|
|
—
|
|
|
148
|
|
|
|
JBS Seara Alimentos:
|
|
|
|
|
|
|
|
|
|
Purchases from JBS Seara Alimentos
(i)
|
—
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
|
JBS Seara Meats B.V.:
|
|
|
|
|
|
|
|
|
|
Purchases from JBS Seara Meats B.V.
(j)
|
3,343
|
|
|
5,702
|
|
|
9,719
|
|
|
16,730
|
|
|
|
Expenditures paid by Pilgrim’s Pride Corporation on
behalf of JBS Seara Meats B.V.
(j)
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
|
|
|
|
(a)
|
On September 8, 2017, Onix Investments UK Ltd., a wholly owned subsidiary of the Company, executed the JBS S.A. Promissory Note, which had a maturity date of September 6, 2018. Interest on the outstanding principal balance of the JBS S.A. Promissory Note accrued at the rate per annum equal to (i) from and after November 8, 2017 and prior to January 7, 2018,
4.00%
, (ii) from and after January 7, 2018 and prior to March 8, 2018,
6.00%
and (iii) from and after March 8, 2018,
8.00%
. The JBS S.A. Promissory Note was repaid in full on October 2, 2017.
|
|
|
|
|
(b)
|
There was
no
outstanding receivable from JBS S.A. at
September 24, 2017
. The outstanding receivable from JBS S.A. at December 25, 2016 was less than
$0.1 million
, respectively.
|
|
|
|
|
(c)
|
JBS USA Food Company Holdings (“JBS USA Holdings”) arranged for letters of credit to be issued on its account in the aggregate amount of
$56.5 million
to an insurance company on behalf of the Company in order to allow that insurance company to return cash it held as collateral against potential workers’ compensation, auto liability and general liability claims. In return for providing this letter of credit, the Company has agreed to reimburse JBS USA Holdings for the letter of credit fees the Company would otherwise incur under its U.S. Credit Facility. The letter of credit arrangements for
$40.0 million
and
$16.5 million
were terminated on March 7, 2016 and April 1, 2016, respectively. For the thirty-nine weeks ended September 25, 2016, the Company paid JBS USA Holdings $
0.2 million
for letter of credit fees.
|
|
|
|
|
(d)
|
We routinely execute transactions to both purchase products from JBS USA Food Company (“JBS USA”) and sell products to them. As of
September 24, 2017
and December 25, 2016, the outstanding payable to JBS USA was
$5.6 million
and
$1.4 million
, respectively. As of
September 24, 2017
and December 25, 2016, the outstanding receivable from JBS USA was
$0.9 million
and
$3.8 million
, respectively. As of
September 24, 2017
, approximately $
0.7 million
of goods from JBS USA were in transit and not reflected on our Condensed Consolidated Balance Sheet.
|
|
|
|
|
(e)
|
The Company has an agreement with JBS USA to allocate costs associated with JBS USA’s procurement of SAP licenses and maintenance services for its combined companies. Under this agreement, the fees associated with procuring SAP licenses and maintenance services are allocated between the Company and JBS USA in proportion to the percentage of licenses used by each company. The agreement expires on the date of expiration, or earlier termination, of the underlying SAP license agreement. The Company also has an agreement with JBS USA to allocate the costs of supporting the business operations by one consolidated corporate team, which have historically been supported by their respective corporate teams. Expenditures paid by JBS USA on behalf of the Company will be reimbursed by the Company and expenditures paid by the Company on behalf of JBS USA will be reimbursed by JBS USA. This agreement expires on December 31, 2019.
|
|
|
|
|
(f)
|
The outstanding receivable from J&F Investimentos Ltd. at
September 24, 2017
was less than
$0.1 million
. There was
no
outstanding receivable or payable from J&F Investimentos Ltd. at December 25, 2016.
|
|
|
|
|
(g)
|
The outstanding receivable from JBS Seara International Ltd. at
September 24, 2017
and December 25, 2016 was less than
$0.1 million
, respectively. There was
no
outstanding payable from JBS Seara International Ltd. at September 24, 2017 and December 25, 2016.
|
|
|
|
|
(h)
|
There was
no
outstanding receivable from Toledo International NV at
September 24, 2017
and December 25, 2016. The outstanding payable from Toledo International NV at September 24, 2017 and December 25, 2016 was less than
$0.1 million
, respectively.
|
|
|
|
|
(i)
|
There was
no
outstanding receivable or payable from JBS Seara Alimentos at
September 24, 2017
and December 25, 2016.
|
|
|
|
|
(j)
|
There was
no
outstanding receivable from JBS Seara Meats B.V. at
September 24, 2017
and December 25, 2016. The outstanding payable from JBS Seara Meats B.V. at September 24, 2017 and December 25, 2016 was
$1.3 million
and
$3.0 million
, respectively.
|
The Company entered into a tax sharing agreement during 2014 with JBS USA Holdings effective for tax years starting in 2010. The net tax receivable of
$5.0 million
for tax year 2016 was accrued in 2016 and paid in February 2017. The net tax receivable of
$3.7 million
for tax year 2015 was accrued in 2015 and paid in January 2016.
|
|
|
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
We are a party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. Among other considerations, we have not recorded a liability for any of these indemnities as based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on our financial condition, results of operations and cash flows.
The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. In the Company’s opinion, it has made appropriate and adequate accruals for claims where necessary; however, the ultimate liability for these matters is uncertain, and if significantly different than the amounts accrued, the ultimate outcome could have a material effect on the financial condition or results of operations of the Company. For a discussion of the material legal proceedings and claims, see Part II, Item 1. “Legal Proceedings.” Below is a summary of some of these material proceedings and claims. The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.
Tax Claims and Proceedings
In 2009, the IRS asserted claims against the Company totaling
$74.7 million
. Pilgrim's entered into
two
Stipulations of Settled Issues agreements with the IRS (the “Stipulations”) on December 12, 2012 that accounted for approximately
$29.3 million
of the claims and should result in no additional tax due. The Company is currently working with the IRS to finalize the complete tax calculations associated with the Stipulations.
Other Claims and Proceedings
Between September 2, 2016 and October 13, 2016, a series of purported federal class action lawsuits styled as
In re Broiler Chicken Antitrust Litigation
were brought against Pilgrim's and
13
other producers by and on behalf of direct and indirect purchasers of broiler chickens alleging violations of federal and state antitrust and unfair competition laws. The complaints, which were filed with the U.S. District Court for the Northern District of Illinois, seek, among other relief, treble damages for an alleged conspiracy among defendants to reduce output and increase prices of broiler chickens from the period of January 2008 to the present. The plaintiffs have filed
three
consolidated amended complaints:
one
on behalf of direct purchasers and
two
on behalf of distinct groups of indirect purchasers. The defendants (including the Company) moved to dismiss all complaints on January 27, 2017, which are fully briefed and a ruling by the court is pending.
On October 10, 2016, Patrick Hogan, acting on behalf of himself and a putative class of persons who purchased shares of Pilgrim’s common stock between February 21, 2014 and October 4, 2016, filed a class action complaint in the U.S. District Court for the District of Colorado against the Company and its named executive officers. The complaint alleges, among other
things, that the Company’s SEC filings contained statements that were rendered materially false and misleading by its failure to disclose that (i) Pilgrim's colluded with several of its industry peers to fix prices in the broiler chicken market as alleged in the
In re Broiler Chicken Antitrust Litigation
, (ii) the Company's conduct constituted a violation of federal antitrust laws, (iii) Pilgrim's revenues during the class period were the result of illegal conduct and (iv) the Company lacked effective internal control over financial reporting, as well as stating that Pilgrim's industry was anticompetitive. On April 4, 2017, the court appointed another stockholder, George James Fuller, as lead plaintiff. On April 26, 2017, the court set a briefing schedule for the filing of an amended complaint and the defendants' motion to dismiss. On May 11, 2017, the plaintiff filed an amended complaint, which extended the end date of the putative class period to November 17, 2016. The defendants moved to dismiss on June 12, 2017, and the plaintiff filed its Opposition on July 12, 2017. The defendants replied on August 1, 2017. The Court’s decision on the motion is currently pending.
On January 27, 2017, a purported class action on behalf of broiler chicken farmers was brought against Pilgrim's and four other producers in the Eastern District of Oklahoma, alleging, among other things, a conspiracy to reduce competition for grower services and depress the price paid to growers. Plaintiffs allege violations of the Sherman Act and the Packers and Stockyards Act and seek, among other relief, treble damages. The complaint was consolidated with a subsequently filed class action complaint styled as
In re Broiler Chicken Antitrust Litigation
, Case No. CIV-17-033-RJS
.
The defendants (including PPC) moved to dismiss the consolidated amended complaint on September 9, 2017. Briefing on the motions will be complete on November 22, 2017, and a hearing on the motions has been scheduled for January 19, 2018. In addition, on August 29, 2017, PPC filed a Motion to Enforce Confirmation Order Against Growers in the U.S. Bankruptcy Court in the Eastern District of Texas (
In re Pilgrim’s Pride Corporation
, Case No. 08-45664 (DML) seeking an order enjoining the Grower Plaintiffs from pursuing the class action against PPC. A hearing on this motion was held October 12, 2017. The Court’s decision on the motion is currently pending.
On March 9, 2017, a stockholder derivative action styled as
DiSalvio v. Lovette, et al.
, No. 2017 cv. 30207, was brought against all of the Company's directors and its Chief Financial Officer, Fabio Sandri, in the District Court for the County of Weld in Colorado. The complaint alleges, among other things, that the named defendants breached their fiduciary duties by failing to prevent the Company and its officers from engaging in an antitrust conspiracy as alleged in the
In re Broiler Chicken Antitrust Litigation
, and issuing false and misleading statements as alleged in the
Hogan
class action litigation. On April 17, 2017, a related stockholder derivative action styled
Brima v. Lovette, et al.
, No. 2017 cv. 30308, was brought against all of the Company's directors and its Chief Financial Officer in the District Court for the County of Weld in Colorado. The
Brima
complaint contains largely the same allegations as the
DiSalvio
complaint. On May 4, 2017, the plaintiffs in both the
DiSalvio
and
Brima
actions moved to (i) consolidate the two stockholder derivative cases, (ii) stay the consolidated action until the resolution of the motion to dismiss in the
Hogan
putative securities class action, and (iii) appoint co-lead counsel. The court granted the motion on May 8, 2017, staying the proceedings pending resolution of the motion to dismiss in the
Hogan
action.
The Company believes it has strong defenses in each of the above litigations and intends to contest them vigorously. The Company cannot predict the outcome of these actions nor when they will be resolved. If the plaintiffs were to prevail in any of these litigations, the Company could be liable for damages, which could be material and could adversely affect its financial condition or results of operations.
J&F Investigation
On May 3, 2017, certain officers of J&F Investimentos S.A. (“J&F,” and the companies controlled by J&F, the “J&F Group”) (including
two
former directors of the Company), a company organized in Brazil and an indirect controlling stockholder of the Company, entered into plea bargain agreements (the “Plea Bargain Agreements”) with the Brazilian Federal Prosecutor’s Office (Ministério Público Federal) (“MPF”) in connection with certain illicit conduct involving improper payments made to Brazilian politicians, government officials and other individuals in Brazil committed by or on behalf of J&F and certain J&F Group companies. The details of such illicit conduct are set forth in separate annexes to the Plea Bargain Agreements, and include admissions of improper payments to politicians and political parties in Brazil over the last 10 years in exchange for receiving, or attempting to receive, favorable treatment for certain J&F Group companies in Brazil.
Pursuant to the terms of the Plea Bargain Agreements, the MPF agreed to grant immunity to the officers in exchange for such officers agreeing, among other considerations, to: (1) pay fines totaling
$225.0 million
; (2) cooperate with the MPF, including providing supporting evidence of the illicit conduct identified in the annexes to the Plea Bargain Agreements; and (3) present any previously undisclosed illicit conduct within 120 days following the execution of the Plea Bargain Agreements as long as the description of such conduct had not been omitted in bad faith. In addition, the Plea Bargain Agreements provide that the MPF may terminate any Plea Bargain Agreement and request that the Supreme Court of Brazil (Supremo Tribunal Federal) (“STF”) ratify such termination if any illicit conduct is identified that was not included in the annexes to the Plea Bargain Agreements.
On June 5, 2017, J&F, in its role as the controlling shareholder of the J&F Group, entered into a leniency agreement (the “Leniency Agreement”) with the MPF, whereby J&F assumed responsibility for the conduct that was described in the annexes to
the Plea Bargain Agreements. In connection with the Leniency Agreement, J&F has agreed to pay a fine of
R$10.3 billion
, adjusted for inflation, over a 25-year period. In exchange, the MPF agreed not to initiate or propose any criminal, civil or administrative actions against J&F, the companies of the J&F Group or those officers of J&F with respect to such conduct. Pursuant to the terms of the Leniency Agreement, if the Plea Bargain Agreement is annulled by the STF, then the Leniency Agreement may also be terminated by the Fifth Chamber of Coordination and Reviews of the MPF or, solely with respect to the criminal related provisions of the Leniency Agreement, by the 10th Federal Court of the Federal District in Brasília, the authorities responsible for the ratification of the Leniency Agreement.
On August 24, 2017, the Fifth Chamber ratified the Leniency Agreement. On September 8, 2017, the 10th Federal Court ratified the Leniency Agreement. In compliance with the terms of the Leniency Agreement, J&F is conducting an internal investigation involving improper payments made in Brazil by or on behalf of J&F, certain companies of the J&F Group and certain officers of J&F (including two former directors of the Company). J&F has engaged outside advisors to assist it in conducting the investigation, including an assessment as to whether any of the misconduct disclosed to Brazilian authorities had any connection to the Company or Moy Park, or resulted in a violation of U.S. law. The internal investigation is ongoing and the Company is fully cooperating with J&F in connection with the investigation. We cannot predict when the investigation will be completed or the results of the investigation, including the outcome or impact of any government investigations or any resulting litigation.
On September 8, 2017, at the request of the MPF, the STF issued an order temporarily revoking the immunity from prosecution previously granted to Joesley Mendonça Batista and another executive of J&F in connection with the Plea Bargain Agreements. The MPF requested the revocation of their immunity following public disclosure of certain voice recordings involving them in which they discussed certain alleged illicit activities the MPF claims were not covered by the annexes to their respective Plea Bargain Agreements. On September 10, 2017, Joesley Mendonça Batista voluntarily turned himself into police in Brazil. On September 11, 2017, the 10th Federal Court suspended its ratification of the criminal provisions of the Leniency Agreement as a result of the STF’s temporary revocation of Joesley Mendonça Batista immunity under his Plea Bargain Agreement. On October 11, 2017, Judge Vallisney de Souza of the 10th Federal Court revalidated the criminal provisions of the Leniency Agreement.
We cannot predict whether the Plea Bargain Agreements will be upheld or terminated by the STF, and, if terminated, whether the Leniency Agreement will be also terminated by either the Fifth Chamber and/or the 10th Federal Court, and to what extent. If the Leniency Agreement is terminated, in whole or in part, as a result of any Plea Bargain Agreement being terminated, this may materially adversely affect the public perception or reputation of the J&F Group, including the Company, and could have a material adverse effect on the J&F Group’s business, financial condition, results of operations and prospects. Furthermore, the termination of the Leniency Agreement may cause the termination of certain stabilization agreements entered into by JBS S.A. and certain of its subsidiaries, which would permit the lenders of the debt that is the subject to the terms of the stabilization agreements to accelerate their debt, which could have a material adverse effect on JBS S.A. and its subsidiaries (including the Company).
18. SEGMENT REPORTING
We operate in
three
reportable segments: U.S., U.K. and Europe, and Mexico. We measure segment profit as operating income. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S.
On September 8, 2017, we acquired Moy Park, one of the top-ten food companies in the U.K., Northern Ireland's largest private sector business and one of Europe's leading poultry producers, from JBS S.A. in a common-control transaction. Moy Park's results from operations subsequent to the common-control date of September 30, 2015 comprise the U.K. and Europe segment.
On January 6, 2017, the Company acquired GNP, a vertically integrated poultry business with locations in Minnesota and Wisconsin. GNP's results from operations subsequent to the acquisition date are included in the U.S. segment.
Information on segments and a reconciliation to income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
(In thousands)
|
|
U.S.
|
$
|
1,938,542
|
|
|
$
|
1,724,625
|
|
|
$
|
5,557,089
|
|
|
$
|
5,072,351
|
|
|
U.K. and Europe
|
514,325
|
|
|
463,560
|
|
|
1,473,854
|
|
|
1,484,708
|
|
|
Mexico
|
341,018
|
|
|
307,096
|
|
|
994,568
|
|
|
950,622
|
|
|
Total net sales
|
$
|
2,793,885
|
|
|
$
|
2,495,281
|
|
|
$
|
8,025,511
|
|
|
$
|
7,507,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
(In thousands)
|
|
U.S.
|
$
|
307,962
|
|
|
$
|
141,195
|
|
|
$
|
719,121
|
|
|
$
|
480,280
|
|
|
U.K. and Europe
|
18,569
|
|
|
13,027
|
|
|
51,874
|
|
|
55,841
|
|
|
Mexico
|
45,692
|
|
|
22,603
|
|
|
146,241
|
|
|
108,856
|
|
|
Elimination
|
23
|
|
|
23
|
|
|
69
|
|
|
71
|
|
|
Total operating income
|
372,246
|
|
|
176,848
|
|
|
917,305
|
|
|
645,048
|
|
|
Interest expense, net of capitalized interest
|
24,636
|
|
|
19,119
|
|
|
66,315
|
|
|
58,480
|
|
|
Interest income
|
(2,128
|
)
|
|
(253
|
)
|
|
(3,600
|
)
|
|
(2,000
|
)
|
|
Foreign currency transaction gain
|
(888
|
)
|
|
4,569
|
|
|
(2,500
|
)
|
|
(1,769
|
)
|
|
Miscellaneous, net
|
(1,083
|
)
|
|
(2,371
|
)
|
|
(5,198
|
)
|
|
(7,327
|
)
|
|
Income before income taxes
|
$
|
351,709
|
|
|
$
|
155,784
|
|
|
$
|
862,288
|
|
|
$
|
597,664
|
|
In addition to the net sales reported above, the U.S. segment also generated intersegment net sales of
$21.0 million
and
$22.0 million
in the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively, and intersegment net sales of
$66.7 million
and
$70.6 million
in the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively, from transactions with the Mexico segment. These intersegment net sales were transacted at market prices.
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
September 24, 2017
|
|
December 25, 2016
|
|
|
(In thousands)
|
|
U.S.
|
$
|
41,936
|
|
|
$
|
—
|
|
|
U.K. and Europe
|
828,038
|
|
|
761,613
|
|
|
Mexico
|
125,608
|
|
|
125,608
|
|
|
Total goodwill
|
$
|
995,582
|
|
|
$
|
887,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
September 24, 2017
|
|
December 25, 2016
|
|
|
|
(In thousands)
|
|
|
U.S.
|
$
|
3,515,513
|
|
|
$
|
2,472,931
|
|
|
|
U.K. and Europe
|
2,204,885
|
|
|
2,013,725
|
|
|
|
Mexico
|
947,112
|
|
|
840,088
|
|
|
|
Eliminations
|
(604,225
|
)
|
|
(304,802
|
)
|
(a)
|
|
Total assets
|
$
|
6,063,285
|
|
|
$
|
5,021,942
|
|
|
|
|
|
|
(a)
|
Eliminations for the period ended
September 24, 2017
include the elimination of the U.S. segment's
$191.7 million
investment in the Mexico segment, the elimination of
$111.2 million
in intersegment receivables and payables between the U.S. and Mexico segments and the elimination of the U.S. segment's
$301.3 million
investment in the U.K. and Europe segment. Eliminations for the period ended December 25, 2016 include the elimination of the U.S. segment's
$191.8 million
investment in the Mexico segment and the elimination of
$113.0 million
in intersegment receivables and payables between the U.S. and Mexico segments.
|
19. SUBSEQUENT EVENTS
On September 29, 2017, the Company completed an offering of
$250.0 million
Additional Senior Notes due 2025 and a sale of
$600.0 million
aggregate principal amount of the Senior Notes due 2027. The Company used the net proceeds from the sale of the Additional Senior Notes due 2025 and the Senior Notes due 2027 to repay in full the JBS S.A. Promissory Note issued as part of the Moy Park acquisition. See “Note 11. Long-Term Debt and Other Borrowing Arrangements” for additional information.
On October 24, 2017, the Company announced that it will close the Luverne, Minnesota, poultry processing facility effective December 29, 2017. The decision to close the facility will allow the Company to shift production and equipment to more efficient operations with the objective of enhancing synergies and better serving the Company’s key customers.