NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
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 and the Netherlands. 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 and pork products to approximately 100 countries. Pilgrim’s fresh products consist of refrigerated (nonfrozen) whole chickens, whole cut-up chickens, selected chicken parts that are either marinated or non-marinated, primary pork cuts, added value pork and pork ribs. The Company’s prepared 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, processed sausages, bacon, slow-cooked, smoked meat and gammon joints. The Company’s other products include ready-to-eat meals, multi-protein frozen foods, vegetarian foods and desserts, pre-packed meats, sandwich, deli counter meats, pulled pork balls, meat balls and coated foods. 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., Mexico, France, Puerto Rico and the Netherlands. As of March 29, 2020, Pilgrim’s had approximately 53,300 employees and the capacity to process approximately 44.9 million birds per work week for a total of more than 13.0 billion pounds of live chicken annually. Approximately 4,800 contract growers supply poultry for the Company’s operations. As of March 29, 2020, Pilgrim's had 5,300 employees and the capacity to process more than 43,000 pigs per week for a total of 413.1 million pounds of live pork annually. Approximately 290 contract growers supply pork for the Company's operations. As of March 29, 2020, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 78.8% of the Company’s outstanding common stock.
Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated 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 three months ended March 29, 2020 are not necessarily indicative of the results that may be expected for the year ending December 27, 2020. For further information, refer to the consolidated and combined financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 29, 2019.
The Company operates on the basis of a 52/53 week fiscal year ending on the Sunday falling on or before December 31. Any reference we make to a particular year (for example, 2020) in the notes to these Condensed Consolidated Financial Statements applies to our fiscal year and not the calendar year. The three months ended March 29, 2020 represents the period from December 30, 2019 through March 29, 2020. The three months ended March 31, 2019 represents the period from December 31, 2018 through March 31, 2019.
The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation.
The Condensed Consolidated 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 and the Netherlands 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 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, as well as foreign currency transaction gains and losses, are reflected in Foreign currency transaction loss (gain) in the Condensed Consolidated Statements of Income.
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 Balance Sheets to the total of the same amounts shown in the Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
|
(In thousands)
|
|
|
|
Cash and cash equivalents
|
|
$
|
511,183
|
|
|
$
|
260,568
|
|
|
Restricted cash
|
|
25,234
|
|
|
20,009
|
|
Total cash, cash equivalents and restricted cash shown in the
Condensed Consolidated Statements of Cash Flows
|
|
$
|
536,417
|
|
|
$
|
280,577
|
|
Recent Accounting Pronouncements Adopted as of March 29, 2020
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): 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 adoption of this guidance did not have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, new accounting guidance to improve the effectiveness of disclosures related to fair value measurements. The new guidance removes certain disclosure requirements related to transfers between Level 1 and Level 2 of the fair value hierarchy along with the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. Additions to the disclosure requirements include more quantitative information related to significant unobservable inputs used in Level 3 fair value measurements and gains and losses included in other comprehensive income. The adoption of this guidance did not have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, new accounting guidance to improve the effectiveness of disclosures related to defined benefit plans by eliminating certain required disclosures, clarifying existing disclosures, and adding new disclosures. Changes include removing disclosures related to the amounts in accumulated other comprehensive income expected to be recognized in the next fiscal year, adding narrative disclosure of the reasons for significant gains and losses related to changes in the defined benefit obligation, and clarifying the disclosures required for plans with projected and accumulated benefit obligations in excess of plan assets. The adoption of this guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted as of March 29, 2020
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to improve consistency and simplify several areas of existing guidance. ASU 2019-12 removes certain exceptions to the general
principles related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the effect that the ASU 2019-12 will have on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to the application of current GAAP to existing contracts, hedging relationships and other transactions affected by reference rate reform. The new guidance will ease the transition to new reference rates by allowing entities to update contracts and hedging relationships without applying many of the contract modification requirements specific to those contracts. The provisions of the new guidance will be effective beginning March 12, 2020, extending through December 31, 2022 with the option to apply the guidance at any point during that time period. Once an entity elects an expedient or exception it must be applied to all eligible contracts or transactions. We currently have debt agreements that reference LIBOR and will apply the new guidance as these contracts are modified to reference other rates.
2. BUSINESS ACQUISITION
On October 15, 2019, the Company acquired 100% of the equity of Tulip Limited and its subsidiaries (together, “Tulip”) from Danish Crown AmbA for £311.3 million, or $393.3 million. The acquisition was funded with cash on hand. Tulip is a leading, integrated prepared pork supplier headquartered in Warwick, U.K. The acquisition solidifies Pilgrim's as a leading European food company, creating one of the largest integrated prepared foods businesses in the U.K. The Tulip operations are included in the Company’s U.K. and Europe reportable segment.
Transaction costs incurred in conjunction with the acquisition were approximately $1.5 million. These costs were expensed as incurred.
The results of operations of the acquired business since October 15, 2019 are included in the Company’s Condensed Consolidated Statements of Income. Net sales generated and net loss incurred by the acquired business during the three months ended March 29, 2020 totaled $321.1 million and $3.9 million, respectively.
The assets acquired and liabilities assumed in the Tulip acquisition were measured at their fair values as of October 15, 2019 as set forth below. The excess of the fair values of the net tangible assets and identifiable intangible assets over the purchase price was recorded as gain on bargain purchase in the Company’s U.K. and Europe reportable segment. The fair values recorded were determined based upon various external and internal valuations. The fair values recorded for the assets acquired and liabilities assumed for Tulip are as follows (in thousands):
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
6,854
|
|
|
Trade accounts and other receivables
|
146,423
|
|
|
Inventories
|
104,211
|
|
|
Prepaid expenses and other current assets
|
6,579
|
|
|
Operating lease assets
|
5,613
|
|
|
Property, plant and equipment
|
329,711
|
|
|
Identified intangible assets
|
40,418
|
|
|
Other assets
|
14,647
|
|
|
Total assets acquired
|
654,456
|
|
|
Accounts payable
|
110,296
|
|
|
Other current liabilities
|
55,830
|
|
|
Operating lease liabilities
|
5,613
|
|
|
Deferred tax liabilities
|
14,798
|
|
|
Pension obligations
|
18,435
|
|
|
Other long-term liabilities
|
1,056
|
|
|
Total liabilities assumed
|
206,028
|
|
|
Total identifiable net assets
|
448,428
|
|
|
Gain on bargain purchase
|
(55,140)
|
|
|
Total consideration transferred
|
$
|
393,288
|
|
Significant assumptions used in the Company's valuation of the assets and liabilities of Tulip and the bases for their determination are summarized as follows:
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.
Customer relationships. The Company valued Tulip 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 Tulip customers were estimated to grow at a rate of 2.0% annually, but we also anticipate losing existing Tulip customers at an attrition rate of 10.0%. Income taxes were estimated at 18.0% of pre-tax income in 2020 and 17.0% of pre-tax income thereafter and net cash flows attributable to our existing customers were discounted using a rate of 22.0%. The resulting customer relationships intangible asset has a fair value of $40.4 million and a useful life of 11 years.
See “Note 9. Goodwill and Intangible Assets” for additional information regarding the goodwill and intangible assets recognized by the Company in the Tulip acquisition.
The following unaudited pro forma information presents the combined financial results for the Company and Tulip as if the acquisition had been completed at the beginning of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands, except per share amounts)
|
|
|
|
Net sales
|
$
|
3,074,928
|
|
|
$
|
3,066,174
|
|
|
Net income attributable to Pilgrim's
|
68,513
|
|
|
103,736
|
|
|
Net income attributable to Pilgrim's per common share - diluted
|
0.27
|
|
|
0.42
|
|
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 acquisitions 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 acquisitions.
3. REVENUE RECOGNITION
The vast majority of the Company's revenue is derived from contracts which are based upon a customer ordering our products. While there may be master agreements, the contract is only established when the customer’s order is accepted by the Company. The Company accounts for a contract, which may be verbal or written, when it is approved and committed by both parties, the rights of the parties are identified along with payment terms, the contract has commercial substance and collectability is probable.
The Company evaluates the transaction for distinct performance obligations, which are the sale of its products to customers. Since its products are commodity market-priced, the sales price is representative of the observable, standalone selling price. Each performance obligation is recognized based upon a pattern of recognition that reflects the transfer of control to the customer at a point in time, which is upon destination (customer location or port of destination), which faithfully depicts the transfer of control and recognition of revenue. There are instances of customer pick-up at the Company's facility, in which case control transfers to the customer at that point and the Company recognizes revenue. The Company's performance obligations are typically fulfilled within days to weeks of the acceptance of the order.
The Company makes judgments regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from revenue and cash flows with customers. Determination of a contract requires evaluation and judgment along with the estimation of the total contract value and if any of the contract value is constrained. Due to the nature of our business, there is minimal variable consideration, as the contract is established at the acceptance of the order from the customer. When applicable, variable consideration is estimated at contract inception and updated on a regular basis until the contract is completed. Allocating the transaction price to a specific performance obligation based upon the relative standalone selling prices includes estimating the standalone selling prices including discounts and variable consideration.
Disaggregated Revenue
Revenue has been disaggregated into the categories below to show how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
|
|
|
Domestic
|
|
Export
|
|
Net Sales
|
|
|
(In thousands)
|
|
|
|
|
|
U.S.
|
$
|
1,868,027
|
|
|
$
|
58,853
|
|
|
$
|
1,926,880
|
|
|
U.K. and Europe
|
745,099
|
|
|
77,163
|
|
|
822,262
|
|
|
Mexico
|
325,786
|
|
|
—
|
|
|
325,786
|
|
|
Net sales
|
$
|
2,938,912
|
|
|
$
|
136,016
|
|
|
$
|
3,074,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
Domestic
|
|
Export
|
|
Net Sales
|
|
|
(In thousands)
|
|
|
|
|
|
U.S.
|
$
|
1,818,146
|
|
|
$
|
65,445
|
|
|
$
|
1,883,591
|
|
|
U.K. and Europe
|
451,799
|
|
|
63,163
|
|
|
514,962
|
|
|
Mexico
|
326,122
|
|
|
—
|
|
|
326,122
|
|
|
Net sales
|
$
|
2,596,067
|
|
|
$
|
128,608
|
|
|
$
|
2,724,675
|
|
Shipping and Handling Costs
In the rare case when shipping and handling activities are performed after a customer obtains control of the good, the Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the good. When revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued. Shipping and handling costs are recorded within cost of sales.
Contract Costs
The Company can incur incremental costs to obtain or fulfill a contract such as broker expenses that are not expected to be recovered. The amortization period for such expenses is less than one year; therefore, the costs are expensed as incurred.
Taxes
There is no change in accounting for taxes due to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 as there is no material change to the timing of revenue recognition. We exclude all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added and some excise taxes) from the transaction price.
Contract Balances
The Company receives payment from customers based on terms established with the customer. Payments are typically due within two weeks of delivery. There are rarely contract assets related to costs incurred to perform in advance of scheduled billings. Revenue contract liabilities relate to payments received in advance of satisfying the performance under the customer contract. The revenue contract liability relates to customer prepayments and the advanced consideration received from governmental agency contracts for which performance obligations to the end customer have not been satisfied.
Changes in the revenue contract liability balances are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
41,770
|
|
|
|
|
|
|
|
|
Revenue recognized
|
|
(41,767)
|
|
|
|
|
|
|
|
|
Cash received, excluding amounts recognized as revenue during the period
|
|
32,081
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
32,084
|
|
|
|
|
|
|
|
Accounts Receivable
The Company records accounts receivable when revenue is recognized. The Company records an allowance for doubtful accounts to reduce the receivables balance to an amount it estimates is collectible from customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable and periodic credit evaluations of customers’ financial condition. The Company writes off accounts receivable when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected. Generally, the Company does not require collateral for its accounts receivable.
4. LEASES
The Company is party to operating lease agreements for warehouses, office space, vehicle maintenance facilities and livestock growing farms in the U.S., distribution centers, hatcheries and office space in Mexico and farms, processing facilities and office space in the U.K. and Europe. Additionally, the Company leases equipment, over-the-road transportation vehicles and other assets in all three geographic business segments. The Company is also party to a limited number of finance lease agreements in the U.S.
Our leases have remaining lease terms of one year to 39 years, some of which may include options to extend the lease for up to one year and some which may include options to terminate the lease within one year. The exercise of options to extend lease terms is at our sole discretion. Certain leases also include options to purchase the leased property.
Certain lease agreements include rental payment increases over the lease term that can be either fixed or variable. Fixed payment increases and variable payment increases based on an index or rate are included in the initial lease liability using the index or rate at commencement date. Variable payment increases not based on an index are recognized as incurred. Certain lease agreements contain residual value guarantees, primarily vehicle and transportation equipment leases.
The following table presents components of lease expense. Operating lease cost, finance lease amortization and finance lease interest are respectively included in Cost of sales, Selling, general and administrative expense and Interest expense, net of capitalized interest in the Condensed Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Operating lease cost(a)
|
$
|
22,467
|
|
|
$
|
24,794
|
|
|
Amortization of finance lease assets
|
109
|
|
|
27
|
|
|
Interest on finance leases
|
28
|
|
|
4
|
|
|
Short-term lease cost
|
16,720
|
|
|
14,218
|
|
|
Variable lease cost(a)
|
1,042
|
|
|
869
|
|
|
Net lease cost
|
$
|
40,366
|
|
|
$
|
39,912
|
|
(a)Variable lease cost of $0.9 million was previously presented in Operating lease cost on our interim report on Form 10-Q for the quarterly period ended March 31, 2019 that was reclassified to conform to Variable lease cost presented as of March 29, 2020.
The weighted-average remaining lease term and discount rate for lease liabilities included in our Condensed Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
Weighted-average remaining lease term (years):
|
|
|
|
|
Operating leases
|
5.65
|
|
6.35
|
|
Finance leases
|
4.32
|
|
1.75
|
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
4.74%
|
|
4.80%
|
|
Finance leases
|
5.10%
|
|
8.51%
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
Cash paid for amounts included in the measurement of
lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
25,128
|
|
|
$
|
23,994
|
|
|
Operating cash flows from finance leases
|
28
|
|
|
4
|
|
|
Financing cash flows from finance leases
|
121
|
|
|
27
|
|
Operating lease assets obtained in exchange for
operating lease liabilities
|
8,028
|
|
22,798
|
|
Future minimum lease payments under noncancellable leases at March 29, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
(In thousands)
|
|
|
|
Future minimum lease payments:
|
|
|
|
|
Year 1
|
$
|
76,240
|
|
|
$
|
562
|
|
|
Year 2
|
64,417
|
|
|
494
|
|
|
Year 3
|
54,918
|
|
|
494
|
|
|
Year 4
|
44,389
|
|
|
494
|
|
|
Year 5
|
31,797
|
|
|
223
|
|
|
Thereafter
|
52,712
|
|
|
—
|
|
|
Total future minimum lease payments
|
324,473
|
|
|
2,267
|
|
|
Less: imputed interest
|
(40,351)
|
|
|
(237)
|
|
|
Present value of lease liabilities
|
$
|
284,122
|
|
|
$
|
2,030
|
|
Lease liabilities as of March 29, 2020 are included in our Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
(In thousands)
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
64,262
|
|
|
$
|
—
|
|
|
Current maturities of long-term debt
|
—
|
|
|
469
|
|
|
Noncurrent operating lease liability, less current maturities
|
219,860
|
|
|
—
|
|
|
Long-term debt, less current maturities
|
—
|
|
|
1,561
|
|
|
Total lease liabilities
|
$
|
284,122
|
|
|
$
|
2,030
|
|
Lease liabilities as of December 29, 2019 are included in our Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
(In thousands)
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
66,239
|
|
|
$
|
—
|
|
|
Current maturities of long-term debt
|
—
|
|
|
486
|
|
|
Noncurrent operating lease liability, less current maturities
|
235,382
|
|
|
—
|
|
|
Long-term debt, less current maturities
|
—
|
|
|
1,664
|
|
|
Total lease liabilities
|
$
|
301,621
|
|
|
$
|
2,150
|
|
As of March 29, 2020, the Company had immaterial operating leases and did not have finance leases that have not commenced.
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, wheat, 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 twelve months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico, the U.K., France and the Netherlands. Therefore, it 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 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. The Company’s counterparties require that it post collateral for changes in the net fair value of the derivative contracts. This cash collateral is reported in the line item Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company has not designated certain derivative financial instruments that it has purchased to mitigate commodity purchase exposures in the U.S. and Mexico or foreign currency transaction exposures on our Mexico operations as cash flow hedges. Therefore, the Company recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to the commodity derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated Statements of Income. Gains or losses related to the foreign currency derivative financial instruments are included in the line item Foreign currency transaction loss (gain) and Cost of sales in the Condensed Consolidated Statements of Income.
The Company has designated certain derivative financial instruments related to its U.K. and Europe reportable segment that it has purchased to mitigate foreign currency transaction exposures as cash flow hedges. Before the settlement date of the financial derivative instruments, the Company recognizes changes in the fair value of the effective portion of the cash flow hedge into accumulated other comprehensive income (“AOCI”) while it 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 Statements of Income.
The Company recognized net gains of $27.8 million and net losses of $8.0 million related to changes in the fair value of its derivative financial instruments during the three months ended March 29, 2020 and March 31, 2019, respectively. Information regarding the Company’s outstanding derivative instruments and cash collateral posted with brokers is included in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Fair values:
|
|
|
|
|
Commodity derivative assets
|
$
|
12,544
|
|
|
$
|
5,053
|
|
|
Commodity derivative liabilities
|
(17,988)
|
|
|
(5,430)
|
|
|
Foreign currency derivative assets
|
12,053
|
|
|
426
|
|
|
Foreign currency derivative liabilities
|
(98)
|
|
|
(5,400)
|
|
|
Cash collateral posted with brokers(a)
|
25,234
|
|
|
20,009
|
|
|
Derivatives coverage(b):
|
|
|
|
|
Corn
|
16.0
|
%
|
|
12.0
|
%
|
|
Soybean meal
|
8.0
|
%
|
|
44.0
|
%
|
|
|
|
|
|
|
Period through which stated percent of needs are covered:
|
|
|
|
|
Corn
|
December 2020
|
|
December 2020
|
|
Soybean meal
|
December 2020
|
|
July 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Collateral posted with brokers consists primarily of cash, short-term treasury bills, or other cash equivalents.
(b)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
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Foreign currency derivatives
|
$
|
4,123
|
|
|
$
|
(915)
|
|
|
Total
|
$
|
4,123
|
|
|
$
|
(915)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Foreign currency derivatives
|
$
|
(742)
|
|
|
$
|
221
|
|
|
Total
|
$
|
(742)
|
|
|
$
|
221
|
|
At March 29, 2020, the pre-tax deferred net losses on derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated Statements of Income during the next twelve months are $3.8 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.
6. TRADE ACCOUNTS AND OTHER RECEIVABLES
Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
|
(In thousands)
|
|
|
|
Trade accounts receivable
|
|
$
|
710,702
|
|
|
$
|
696,372
|
|
|
|
|
|
|
|
|
Notes receivable - current
|
|
4,495
|
|
|
4,187
|
|
|
Other receivables
|
|
48,109
|
|
|
48,189
|
|
|
Receivables, gross
|
|
763,306
|
|
|
748,748
|
|
|
Allowance for doubtful accounts
|
|
(9,060)
|
|
|
(7,467)
|
|
|
Receivables, net
|
|
$
|
754,246
|
|
|
$
|
741,281
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties(a)
|
|
$
|
743
|
|
|
$
|
944
|
|
|
|
|
|
|
|
(a) Additional information regarding accounts receivable from related parties is included in “Note 18. Related Party Transactions.”
Activity in the allowance for doubtful accounts for the three months ended March 29, 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(7,467)
|
|
|
Provision charged to operating results
|
|
(2,445)
|
|
|
|
|
|
|
Account write-offs and recoveries
|
|
258
|
|
|
|
|
|
|
Effect of exchange rate
|
|
594
|
|
|
Balance, end of period
|
|
$
|
(9,060)
|
|
7. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Raw materials and work-in-process
|
$
|
788,229
|
|
|
$
|
800,749
|
|
|
Finished products
|
412,684
|
|
|
425,919
|
|
|
Operating supplies
|
81,503
|
|
|
82,447
|
|
|
Maintenance materials and parts
|
79,942
|
|
|
74,420
|
|
|
Total inventories
|
$
|
1,362,358
|
|
|
$
|
1,383,535
|
|
8. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
361,215
|
|
|
$
|
361,215
|
|
|
$
|
159,623
|
|
|
$
|
159,623
|
|
|
Other
|
|
34,665
|
|
|
34,665
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 during the three months ended March 29, 2020 related to the Company’s available-for-sale securities totaled $1.5 million while gross realized losses were immaterial. Gross realized gains during the three months ended March 31, 2019 related to the Company’s available-for-sale securities totaled $2.3 million, while gross realized losses 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 Statements of Cash Flows. Net unrealized holding gains and losses on the Company’s available-for-sale securities recognized during the three months ended March 29, 2020 and March 31, 2019 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 three months ended March 29, 2020 and March 31, 2019 are disclosed in “Note 14. Stockholders’ Equity”.
9. GOODWILL AND INTANGIBLE ASSETS
The activity in goodwill by segment for the three months ended March 29, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
|
|
|
|
Currency Translation
|
|
March 29, 2020
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
41,936
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
41,936
|
|
|
U.K. and Europe
|
|
806,207
|
|
|
|
|
|
|
(38,484)
|
|
|
767,723
|
|
|
Mexico
|
|
125,607
|
|
|
|
|
|
|
—
|
|
|
125,607
|
|
|
Total
|
|
$
|
973,750
|
|
|
|
|
|
|
$
|
(38,484)
|
|
|
$
|
935,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
|
|
Amortization
|
|
Currency Translation
|
|
|
|
|
|
March 29, 2020
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
78,343
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
78,343
|
|
|
Customer relationships
|
|
292,278
|
|
|
|
|
—
|
|
|
(6,285)
|
|
|
|
|
|
|
285,993
|
|
|
Non-compete agreements
|
|
320
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
320
|
|
|
Trade names not subject to amortization
|
|
391,431
|
|
|
|
|
—
|
|
|
(18,222)
|
|
|
|
|
|
|
373,209
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
(45,518)
|
|
|
|
|
(492)
|
|
|
—
|
|
|
|
|
|
|
(46,010)
|
|
|
Customer relationships
|
|
(120,481)
|
|
|
|
|
(4,746)
|
|
|
1,875
|
|
|
|
|
|
|
(123,352)
|
|
|
Non-compete agreements
|
|
(320)
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
(320)
|
|
|
Total
|
|
$
|
596,053
|
|
|
|
|
$
|
(5,238)
|
|
|
$
|
(22,632)
|
|
|
|
|
|
|
$
|
568,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 29, 2020, the Company assessed if events or changes in circumstances indicated that the aggregate carrying amount of its identified intangible assets subject to amortization might not be recoverable. There were no indicators present that required the Company to test the recoverability of the aggregate carrying amount of its identified intangible assets subject to amortization at that date.
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (“PP&E”), net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Land
|
$
|
240,336
|
|
|
$
|
222,076
|
|
|
Buildings
|
1,887,082
|
|
|
1,754,219
|
|
|
Machinery and equipment
|
3,030,430
|
|
|
3,139,748
|
|
|
Autos and trucks
|
69,607
|
|
|
64,122
|
|
|
Finance leases
|
2,182
|
|
|
2,182
|
|
|
Construction-in-progress
|
199,149
|
|
|
229,015
|
|
|
PP&E, gross
|
5,428,786
|
|
|
5,411,362
|
|
|
Accumulated depreciation
|
(2,865,992)
|
|
|
(2,819,301)
|
|
|
PP&E, net
|
$
|
2,562,794
|
|
|
$
|
2,592,061
|
|
The Company recognized depreciation expense of $74.5 million and $61.5 million during the three months ended March 29, 2020 and March 31, 2019, respectively.
During the three months ended March 29, 2020, Pilgrim's spent $77.2 million on capital projects and transferred $87.2 million of completed projects from construction-in-progress to depreciable assets. Capital expenditures were primarily incurred during the three months ended March 29, 2020 to improve efficiencies and reduce costs. During the three months ended ended March 31, 2019, the Company spent $87.9 million on capital projects and transferred $56.1 million of completed projects from construction-in-progress to depreciable assets.
During the three months ended March 29, 2020, the Company sold miscellaneous equipment for $0.6 million in cash and recognized a net gain on these sales of $0.5 million. During the three months ended March 31, 2019, the Company sold miscellaneous equipment for cash of $0.5 million and recognized a net gain on these sales of $0.1 million.
The Company has closed or idled various facilities in the U.S. and in the U.K. 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. As of March 29, 2020, the carrying amounts of these idled assets totaled $42.0 million based on depreciable value of $221.1 million and accumulated depreciation of $179.1 million.
As of March 29, 2020, the Company assessed if events or changes in circumstances indicated that the aggregate carrying amount of its property, plant and equipment held for use might not be recoverable. There were no indicators present that required the Company to test the recoverability of the aggregate carrying amount of its property, plant and equipment held for use at that date.
11. CURRENT LIABILITIES
Current liabilities, other than current notes payable to banks, income taxes and current maturities of long-term debt, consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Accounts payable:
|
|
|
|
|
Trade accounts
|
$
|
836,052
|
|
|
$
|
875,374
|
|
|
Book overdrafts
|
59,836
|
|
|
98,267
|
|
|
Other payables
|
19,775
|
|
|
20,139
|
|
|
Total accounts payable
|
915,663
|
|
|
993,780
|
|
|
Accounts payable to related parties(a)
|
7,998
|
|
|
3,819
|
|
|
Revenue contract liability(b)
|
32,084
|
|
|
41,770
|
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
Compensation and benefits
|
132,935
|
|
|
164,946
|
|
|
Taxes
|
44,256
|
|
|
41,901
|
|
|
Interest and debt-related fees
|
29,040
|
|
|
31,183
|
|
|
Insurance and self-insured claims
|
67,502
|
|
|
67,332
|
|
|
Current maturities of operating lease liabilities
|
64,262
|
|
|
66,239
|
|
|
Derivative liability
|
18,086
|
|
|
10,830
|
|
|
|
|
|
|
|
Other accrued expenses
|
176,428
|
|
|
192,888
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
532,509
|
|
|
575,319
|
|
|
Total accounts payable, accrued expenses and other current liabilities
|
$
|
1,488,254
|
|
|
$
|
1,614,688
|
|
(a) Additional information regarding accounts payable to related parties is included in “Note 18. Related Party Transactions.”
(b) Additional information regarding revenue contract liabilities is included in “Note 3. Revenue Recognition.”
12. INCOME TAXES
The Company recorded income tax expense of $38.5 million, a 36.3% effective tax rate, for the three months ended March 29, 2020 compared to income tax expense of $20.4 million, a 19.5% effective tax rate, for the three months ended March 31, 2019. The increase in income tax expense in 2020 resulted primarily from the effects of foreign currency fluctuations.
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 March 29, 2020, the Company did not believe it had sufficient positive evidence to conclude that realization of a portion of its foreign net deferred tax assets are more likely than not to be realized.
For the three months ended March 29, 2020 and March 31, 2019, there is a tax effect of $2.6 million and $(0.8) million, respectively, reflected in other comprehensive income.
For the three months ended March 29, 2020 and March 31, 2019, there are immaterial tax effects reflected in income tax expense due to excess tax benefits and shortfalls related to share-based compensation.
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 2011 are no longer subject to examination by tax authorities.
13. DEBT
Long-term debt and other borrowing arrangements, including current notes payable to banks, consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
|
|
(In thousands)
|
|
|
|
Senior notes payable, net of premium and discount at 5.75%
|
2025
|
|
$
|
1,001,994
|
|
|
$
|
1,002,095
|
|
|
Senior notes payable, net of discount at 5.875%
|
2027
|
|
844,613
|
|
|
844,433
|
|
|
U.S. Credit Facility (defined below):
|
|
|
|
|
|
|
|
Term note payable at 2.83%
|
2023
|
|
468,750
|
|
|
475,000
|
|
|
Revolving note payable at 2.10%
|
2023
|
|
350,000
|
|
|
—
|
|
|
Moy Park Bank of Ireland Revolving Facility with notes payable at
LIBOR or EURIBOR plus 1.25% to 2.00%
|
2023
|
|
—
|
|
|
—
|
|
|
Mexico Credit Facility (defined below) with notes payable at
TIIE plus 1.50%
|
2023
|
|
—
|
|
|
—
|
|
|
Secured loans with payables at weighted average of 3.34%
|
Various
|
|
437
|
|
|
948
|
|
|
Finance lease obligations
|
Various
|
|
2,030
|
|
|
2,150
|
|
|
Long-term debt
|
|
|
2,667,824
|
|
|
2,324,626
|
|
|
Less: Current maturities of long-term debt
|
|
|
(25,877)
|
|
|
(26,392)
|
|
|
Long-term debt, less current maturities
|
|
|
2,641,947
|
|
|
2,298,234
|
|
|
Less: Capitalized financing costs
|
|
|
(21,040)
|
|
|
(22,205)
|
|
Long-term debt, less current maturities, net of capitalized
financing costs:
|
|
|
$
|
2,620,907
|
|
|
$
|
2,276,029
|
|
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. On September 29, 2017, the Company completed an add-on offering of $250.0 million of these senior notes. The issuance price of this add-on offering was 102.0%, which created gross proceeds of $255.0 million. The additional $5.0 million will be amortized over the remaining life of the senior notes. On March 7, 2018, the Company completed another add-on offering of $250.0 million of these senior notes (together with the senior notes issued in March 2015 and September 2017, the “Senior Notes due 2025”). The issuance price of this add-on offering was 99.25%, which created gross proceeds of $248.1 million. The $1.9 million discount will be amortized over the remaining life of the senior notes. Each issuance of the Senior Notes due 2025 is treated as a single class for all purposes under the 2015 Indenture (defined below) and have the same terms.
The 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 subsidiaries and U.S. Bank National Association, as trustee (the “2015 Indenture”). The 2015 Indenture provides, among other things, that the 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 that were issued in March 2015 and beginning on March 15, 2018 for the Senior Notes due 2025 that were issued in September 2017 and March 2018.
On September 29, 2017, the Company completed a sale of $600.0 million aggregate principal amount of its 5.875% senior notes due 2027. On March 7, 2018, the Company completed an add-on offering of $250.0 million of these senior notes (together with the senior notes issued in September 2017, the “Senior Notes due 2027”). The issuance price of this add-on offering was 97.25%, which created gross proceeds of $243.1 million. The $6.9 million discount will be amortized over the remaining life of the Senior Notes due 2027. Each issuance of the Senior Notes due 2027 is treated as a single class for all purposes under the 2017 Indenture (defined below) and have the same terms.
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 subsidiaries 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 for the Senior Notes due 2027 that were issued in September 2017 and beginning on March 15, 2018 for the Senior Notes due 2027 that were issued in March 2018.
The Senior Notes due 2025 and the Senior Notes due 2027 are each guaranteed on a senior unsecured basis by the Company’s guarantor subsidiaries. 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 Senior Notes due 2027. The Senior Notes due 2025 and the Senior Notes due 2027 and related guarantees are unsecured senior obligations of the Company and its guarantor subsidiaries and rank equally with all of the Company’s and its guarantor subsidiaries’ other unsubordinated indebtedness. The Senior Notes due 2025, the 2015 Indenture, 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 2025 and the Senior Notes due 2027, respectively, when due, among others.
U.S. Credit Facility
On July 20, 2018, the Company, and certain of the Company’s subsidiaries entered into a Fourth Amended and Restated Credit Agreement (the “U.S. Credit Facility”) with CoBank, ACB, as administrative agent and collateral agent, and the other lenders party thereto. The U.S. Credit Facility provides for a $750.0 million revolving credit commitment and a term loan commitment of up to $500.0 million (the “Term Loans”). The Company used the proceeds from the term loan commitment under the U.S. Credit Facility, together with cash on hand, to repay the outstanding loans under the Company’s previous credit agreement with Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the other lenders and financial institutions party thereto.
The U.S. Credit Facility 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 $1.25 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 July 20, 2023. All principal on the Term Loans is due at maturity on July 20, 2023. 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 March 29, 2020, the Company had outstanding borrowings under the term loan commitment of $468.8 million. As of March 29, 2020, the Company had outstanding borrowings, outstanding letters of credit and available borrowings under the revolving credit commitment of $350.0 million, $40.4 million and $359.6 million, respectively.
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 (1) in the case of LIBOR loans, LIBOR plus 1.25% through August 2, 2018 and, thereafter, based on the Company’s net senior secured leverage ratio, between LIBOR plus 1.25% and LIBOR plus 2.75% and (2) in the case of alternate base rate loans, the base rate plus 0.25% through August 2, 2018 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 customary financial and other various covenants for transactions of this type, including restrictions on the Company's ability to incur additional indebtedness, incur liens, pay dividends, make certain restricted payments, consummate certain asset sales, enter into certain transactions with the Company’s affiliates, or merge, consolidate and/or sell or dispose of all or substantially all of its assets, among other things. 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 the Company may not incur capital expenditures in excess of $500.0 million in any fiscal year.
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 (1) the accounts receivable and inventory of the Company and its non-Mexico subsidiaries, (2) 100% of the equity interests in the Company's domestic subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., and 65% of the equity interests in its direct foreign subsidiaries and (3) substantially all of the assets of the Company and the guarantors under the U.S. Credit Facility. The Company is currently in compliance with the covenants under the U.S. Credit Facility.
Moy Park Bank of Ireland Revolving Facility Agreement
On June 2, 2018, Moy Park Holdings (Europe) Ltd. and its subsidiaries entered into an unsecured multicurrency revolving facility agreement (the “Bank of Ireland Facility Agreement”) with the Governor and Company of the Bank of Ireland, as agent, and the other lenders party thereto. The Bank of Ireland Facility Agreement provides for a multicurrency revolving loan commitment of up to £100.0 million. The multicurrency revolving loan commitments under the Bank of Ireland Facility Agreement mature on June 2, 2023. Outstanding borrowings under the Bank of Ireland Facility Agreement bear interest at a rate per annum equal to the sum of (1) LIBOR or, in relation to any loan in euros, EURIBOR, plus (2) a margin, ranging
from 1.25% to 2.00% based on Leverage (as defined in the Bank of Ireland Facility Agreement). All obligations under the Bank of Ireland Facility Agreement are guaranteed by certain of Moy Park's subsidiaries. As of March 29, 2020, the U.S. dollar-equivalent loan commitment and borrowing availability were both $124.6 million. As of March 29, 2020, there were no outstanding borrowings under the Bank of Ireland Facility Agreement.
The Bank of Ireland Facility Agreement contains representations and warranties, covenants, indemnities and conditions that the Company believes are customary for transactions of this type. Pursuant to the terms of the Bank of Ireland Facility Agreement, Moy Park is required to meet certain financial and other restrictive covenants. Additionally, Moy Park is prohibited from taking certain actions without consent of the lenders, including, without limitation, incurring additional indebtedness, entering into certain mergers or other business combination transactions, permitting liens or other encumbrances on its assets and making restricted payments, including dividends, in each case except as expressly permitted under the Bank of Ireland Facility Agreement. The Bank of Ireland Facility Agreement contains events of default that the Company believes are customary for transactions of this type. If a default occurs, any outstanding obligations under the Bank of Ireland Facility Agreement may be accelerated.
Mexico Credit Facility
On December 14, 2018, certain of the Company's Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with Banco del Bajio, Sociedad Anónima, Institución de Banca Múltiple, as lender. The loan commitment under the Mexico Credit Facility is $1.5 billion Mexican pesos and can be borrowed on a revolving basis. Outstanding borrowings under the Mexico Credit Facility accrue interest at a rate equal to the 28-Day Interbank Equilibrium Interest Rate plus 1.5%. The Mexico Credit Facility contains covenants and defaults that the Company believes are customary for transactions of this type. The Mexico Credit Facility will be used for general corporate and working capital purposes. The Mexico Credit Facility will mature on December 14, 2023. As of March 29, 2020, the U.S. dollar-equivalent of the loan commitment and borrowing availability were both $64.3 million. As of March 29, 2020, there were no outstanding borrowings under the Mexico Credit Facility.
14. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
The following tables provide information regarding the changes in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020(a)
|
|
|
|
|
|
|
|
|
|
|
Losses Related to Foreign Currency Translation
|
|
Unrealized Gains 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
|
$
|
(1,108)
|
|
|
$
|
(2,406)
|
|
|
$
|
(71,615)
|
|
|
$
|
—
|
|
|
$
|
(75,129)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications
|
(96,765)
|
|
|
4,123
|
|
|
(8,105)
|
|
|
9
|
|
|
(100,738)
|
|
Amounts reclassified from accumulated other
comprehensive loss to net income
|
—
|
|
|
742
|
|
|
283
|
|
|
—
|
|
|
1,025
|
|
|
Currency translation
|
—
|
|
|
(75)
|
|
|
—
|
|
|
—
|
|
|
(75)
|
|
|
Net current period other comprehensive loss
|
(96,765)
|
|
|
4,790
|
|
|
(7,822)
|
|
|
9
|
|
|
(99,788)
|
|
|
Balance, end of period
|
$
|
(97,873)
|
|
|
$
|
2,384
|
|
|
$
|
(79,437)
|
|
|
$
|
9
|
|
|
$
|
(174,917)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019(a)
|
|
|
|
|
|
|
|
|
|
|
Losses Related to Foreign Currency Translation
|
|
Unrealized Losses on Derivative Financial Instruments Classified as Cash Flow Hedges
|
|
Losses Related to Pension and Other Postretirement Benefits
|
|
Unrealized Holding Losses on Available-for-Sale Securities
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
(55,770)
|
|
|
$
|
(683)
|
|
|
$
|
(71,463)
|
|
|
$
|
82
|
|
|
$
|
(127,834)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before
reclassifications
|
37,442
|
|
|
(915)
|
|
|
2,421
|
|
|
17
|
|
|
$
|
38,965
|
|
Amounts reclassified from accumulated other
comprehensive income (loss) to net income
|
—
|
|
|
(221)
|
|
|
248
|
|
|
(101)
|
|
|
$
|
(74)
|
|
|
Currency translation
|
—
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
Net current period other comprehensive income
|
37,442
|
|
|
(1,119)
|
|
|
2,669
|
|
|
(84)
|
|
|
38,908
|
|
|
Balance, end of period
|
$
|
(18,328)
|
|
|
$
|
(1,802)
|
|
|
$
|
(68,794)
|
|
|
$
|
(2)
|
|
|
$
|
(88,926)
|
|
(a) All amounts are net of tax. Amounts in parentheses represent income (expenses) related to results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss(a)
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Three Months
Ended
March 29, 2020
|
|
Three Months
Ended
March 31, 2019
|
|
Affected Line Item in the Condensed Consolidated Statements of Income
|
|
|
|
(In thousands)
|
|
|
|
|
|
Realized gain (loss) on settlement of derivative financial instruments classified as cash flow hedges
|
|
$
|
(742)
|
|
|
$
|
221
|
|
|
Cost of sales
|
|
Realized gain on sale of securities
|
|
—
|
|
|
135
|
|
|
Interest income
|
|
Amortization of pension and other postretirement plan actuarial losses:
|
|
|
|
|
|
|
|
Union Plan(b)
|
|
(24)
|
|
|
(18)
|
|
|
Miscellaneous, net
|
|
Legacy Gold Kist Plans(b)(c)
|
|
(351)
|
|
|
(310)
|
|
|
Miscellaneous, net
|
|
Total before tax
|
|
(1,117)
|
|
|
28
|
|
|
|
|
Tax benefit
|
|
93
|
|
|
46
|
|
|
|
|
Total reclassification for the period
|
|
$
|
(1,024)
|
|
|
$
|
74
|
|
|
|
(a) Amounts in parentheses represent income (expenses) related to results of operations.
(b) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See “Note 15. Pension and Other Postretirement Benefits” to the Condensed Consolidated Financial Statements.
(c) The Company sponsors the GK Pension Plan, the SERP Plan, the Directors' Emeriti Plan and the Retiree Life Plan (collectively, the “Legacy Gold Kist Plans”).
Share Repurchase Program and Treasury Stock
On October 31, 2018, the Company’s Board of Directors approved a $200.0 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 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 March 29, 2020, the Company had repurchased approximately 1.6 million shares under this program with a market value of approximately $31.0 million. The Company accounted for the shares repurchased using the cost method. The Company currently plans to maintain these shares as treasury stock.
Restrictions on Dividends
Both the U.S. Credit Facility and the indentures governing the Company’s senior notes restrict, but do not prohibit, the Company from declaring dividends. Additionally, the Moy Park Multicurrency Revolving Facility Agreement restricts Moy Park’s ability and the ability of certain of Moy Park’s subsidiaries to, among other things, make payments and distributions to the Company.
15. 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 such as the Pilgrim's Pride Retirement Plan for Union Employees (the “Union Plan”) the Pilgrim's Pride Pension Plan for Legacy Gold Kist Employees (the “GK Pension Plan”), the Tulip Limited Pension Plan and the Geo Adams Group Pension Fund (together, the “U.K. Plans”), nonqualified defined benefit retirement plans, a defined benefit postretirement life insurance plan and defined contribution retirement savings plan. Expenses recognized under all retirement plans totaled $3.6 million and $3.9 million in the three months ended March 29, 2020 and March 31, 2019, 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 Balance Sheets for the defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Change in projected benefit obligation:
|
(In thousands)
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of period
|
$
|
369,066
|
|
|
$
|
1,527
|
|
|
$
|
157,619
|
|
|
$
|
1,462
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
2,039
|
|
|
9
|
|
|
1,467
|
|
|
13
|
|
|
Actuarial losses (gains)
|
(29,447)
|
|
|
(17)
|
|
|
4,235
|
|
|
32
|
|
|
Benefits paid
|
(4,746)
|
|
|
(40)
|
|
|
(5,611)
|
|
|
(37)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Currency translation loss
|
(9,019)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Projected benefit obligation, end of period
|
$
|
327,899
|
|
|
$
|
1,479
|
|
|
$
|
157,710
|
|
|
$
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Change in plan assets:
|
(In thousands)
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of period
|
$
|
294,589
|
|
|
$
|
—
|
|
|
$
|
102,414
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
(37,302)
|
|
|
—
|
|
|
8,816
|
|
|
—
|
|
|
Contributions by employer
|
2,172
|
|
|
40
|
|
|
1,752
|
|
|
37
|
|
|
Benefits paid
|
(4,746)
|
|
|
(40)
|
|
|
(5,611)
|
|
|
(37)
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
(438)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Currency translation loss
|
(8,226)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of period
|
$
|
246,049
|
|
|
$
|
—
|
|
|
$
|
107,371
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Funded status:
|
(In thousands)
|
|
|
|
|
|
|
|
Unfunded benefit obligation, end of period
|
$
|
(81,850)
|
|
|
$
|
(1,479)
|
|
|
$
|
(74,477)
|
|
|
$
|
(1,527)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
Amounts recognized in the Condensed Consolidated Balance Sheets at end of period:
|
(In thousands)
|
|
|
|
|
|
|
|
Current liability
|
$
|
(11,944)
|
|
|
$
|
(157)
|
|
|
$
|
(14,967)
|
|
|
$
|
(158)
|
|
|
Long-term liability
|
(69,906)
|
|
|
(1,322)
|
|
|
(59,510)
|
|
|
(1,369)
|
|
|
Recognized liability
|
$
|
(81,850)
|
|
|
$
|
(1,479)
|
|
|
$
|
(74,477)
|
|
|
$
|
(1,527)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
Amounts recognized in accumulated other
comprehensive loss at end of period:
|
(In thousands)
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
68,691
|
|
|
$
|
74
|
|
|
$
|
58,239
|
|
|
$
|
91
|
|
The accumulated benefit obligation for the Company's defined benefit pension plans was $327.9 million and $369.1 million at March 29, 2020 and December 29, 2019, respectively. Each of the Company's defined benefit pension plans had accumulated benefit obligations that exceeded the fair value of plan assets at both March 29, 2020 and December 29, 2019. As of March 29, 2020, the weighted average duration of the Company's defined benefit pension obligation is 28.12 years.
Net Periodic Benefit Costs
Net defined benefit pension and other postretirement costs included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
2,039
|
|
|
$
|
9
|
|
|
$
|
1,467
|
|
|
$
|
13
|
|
|
|
Estimated return on plan assets
|
(3,283)
|
|
|
—
|
|
|
(1,349)
|
|
|
—
|
|
|
|
Other
|
444
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Amortization of net loss
|
376
|
|
|
—
|
|
|
328
|
|
|
—
|
|
|
|
Net costs
|
$
|
(424)
|
|
|
$
|
9
|
|
|
$
|
446
|
|
|
$
|
13
|
|
|
Economic Assumptions
The weighted average assumptions used in determining pension and other postretirement plan information were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
Assumptions used to measure benefit obligation at end
of period:
|
|
|
|
|
|
|
|
|
Discount rate
|
2.91
|
%
|
|
2.77
|
%
|
|
2.56
|
%
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
Assumptions used to measure net pension and other
postretirement cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
2.72
|
%
|
|
2.77
|
%
|
|
4.40
|
%
|
|
4.07
|
%
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
2.31
|
%
|
|
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 March 29, 2020 and December 29, 2019, all pension and other postretirement benefit plans used variations of the RP2014 mortality table and the MP2015 mortality improvement scale. As of March 29, 2020 and December 29, 2019, the U.K. Plans used variations of the AxC00 mortality table in combination with the CMI_2018 Sk=7.5 mortality improvement scale for pre-retirement employees
and the S3PxA mortality table in combination with the CMI_2018 Sk=7.5 mortality improvement scale for postretirement employees.
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 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
|
$
|
(8,777)
|
|
|
$
|
9,240
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
Cash and cash equivalents
|
2
|
%
|
|
4
|
%
|
|
Pooled separate accounts for the Union Plan(a):
|
|
|
|
|
Equity securities
|
2
|
%
|
|
2
|
%
|
|
Fixed income securities
|
2
|
%
|
|
2
|
%
|
|
Pooled separate accounts and common collective trust funds for the GK Pension Plan(a):
|
|
|
|
|
Equity securities
|
17
|
%
|
|
20
|
%
|
|
Fixed income securities
|
14
|
%
|
|
12
|
%
|
|
Real estate
|
2
|
%
|
|
2
|
%
|
|
Pooled separate accounts for the UK Plans(a):
|
|
|
|
|
Equity securities
|
32
|
%
|
|
40
|
%
|
|
Fixed income securities
|
22
|
%
|
|
18
|
%
|
|
Real estate
|
7
|
%
|
|
—
|
%
|
|
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 PSAs for the Union Plan is 50% in each of fixed income securities and equity securities, the target asset allocation for the investment of pension assets in the PSAs and/or CCTs for the GK Pension Plan is 35% in fixed income securities, 60% in equity securities and 5% in real estate and investment of pension assets in the PSAs for the U.K. Plans is 28% in fixed income securities, 62% in equity securities and 10% in real estate. The plans only invest in fixed income and equity instruments for which there is a readily available public market. The Company develops its 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 its plans invest.
The fair value measurements of plan assets fell into the following levels of the fair value hierarchy as of March 29, 2020 and December 29, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
|
|
|
|
December 29, 2019
|
|
|
|
|
|
|
|
|
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
|
$
|
5,485
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,485
|
|
|
$
|
11,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,582
|
|
|
PSAs for the Union Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. equity funds(d)
|
—
|
|
|
2,420
|
|
|
—
|
|
|
2,420
|
|
|
—
|
|
|
3,071
|
|
|
—
|
|
|
3,071
|
|
|
Small/Mid U.S. equity funds(e)
|
—
|
|
|
254
|
|
|
—
|
|
|
254
|
|
|
—
|
|
|
372
|
|
|
—
|
|
|
372
|
|
|
International equity funds(f)
|
—
|
|
|
1,365
|
|
|
—
|
|
|
1,365
|
|
|
—
|
|
|
1,878
|
|
|
—
|
|
|
1,878
|
|
|
Fixed income funds(g)
|
—
|
|
|
4,236
|
|
|
—
|
|
|
4,236
|
|
|
—
|
|
|
4,452
|
|
|
—
|
|
|
4,452
|
|
|
PSAs and CCTs for the GK Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. equity funds(d)
|
—
|
|
|
15,499
|
|
|
—
|
|
|
15,499
|
|
|
—
|
|
|
20,378
|
|
|
—
|
|
|
20,378
|
|
|
Small/Mid U.S. equity funds(e)
|
—
|
|
|
8,991
|
|
|
—
|
|
|
8,991
|
|
|
—
|
|
|
12,495
|
|
|
—
|
|
|
12,495
|
|
|
International equity funds(f)
|
—
|
|
|
17,810
|
|
|
—
|
|
|
17,810
|
|
|
—
|
|
|
25,149
|
|
|
—
|
|
|
25,149
|
|
|
Fixed income funds(g)
|
—
|
|
|
34,774
|
|
|
—
|
|
|
34,774
|
|
|
—
|
|
|
35,627
|
|
|
—
|
|
|
35,627
|
|
|
Real estate(h)
|
—
|
|
|
21,026
|
|
|
—
|
|
|
21,026
|
|
|
—
|
|
|
5,613
|
|
|
—
|
|
|
5,613
|
|
|
PSAs for the UK Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. equity funds(d)
|
—
|
|
|
11,120
|
|
|
—
|
|
|
11,120
|
|
|
—
|
|
|
17,756
|
|
|
—
|
|
|
17,756
|
|
|
International equity funds(f)
|
—
|
|
|
69,945
|
|
|
—
|
|
|
69,945
|
|
|
—
|
|
|
102,494
|
|
|
—
|
|
|
102,494
|
|
|
Fixed income funds(g)
|
—
|
|
|
53,124
|
|
|
—
|
|
|
53,124
|
|
|
—
|
|
|
53,722
|
|
|
—
|
|
|
53,722
|
|
|
Total assets
|
$
|
5,485
|
|
|
$
|
240,564
|
|
|
$
|
—
|
|
|
$
|
246,049
|
|
|
$
|
11,582
|
|
|
$
|
283,007
|
|
|
$
|
—
|
|
|
$
|
294,589
|
|
(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). These investment options typically carry more risk than short-term fixed income investment options, but less overall risk than equities.
(h) This category is comprised of investment options that invest in real estate investment trusts or private equity pools that own real estate. These long-term investments are primarily in office buildings, industrial parks, apartments or retail complexes. These investment options typically carry more risk, including liquidity risk, than fixed income investment options.
Benefit Payments
The following table reflects the benefits as of March 29, 2020 expected to be paid through 2029 from the Company's pension and other postretirement plans. The Company’s pension plans are primarily funded plans. Therefore, anticipated benefits with respect to these plans will come primarily from the trusts established for these plans. The Company's other postretirement plans are unfunded. Therefore, anticipated benefits with respect to these plans will come from the Company’s own assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In thousands)
|
|
|
|
2020
|
$
|
20,252
|
|
|
$
|
119
|
|
|
2021
|
16,706
|
|
|
155
|
|
|
2022
|
16,541
|
|
|
150
|
|
|
2023
|
16,676
|
|
|
144
|
|
|
2024
|
16,668
|
|
|
137
|
|
|
2025-2029
|
81,853
|
|
|
565
|
|
|
Total
|
$
|
168,696
|
|
|
$
|
1,270
|
|
As required by funding regulations or laws, the Company anticipates contributing $12.4 million and $0.3 million to its pension plans and other postretirement plans, respectively, during the remainder of 2020.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Net actuarial loss (gain), beginning of period
|
$
|
58,239
|
|
|
$
|
91
|
|
|
$
|
54,343
|
|
|
$
|
(34)
|
|
|
Amortization
|
(376)
|
|
|
—
|
|
|
(328)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
(29,447)
|
|
|
(17)
|
|
|
4,235
|
|
|
32
|
|
|
Asset loss (gain)
|
40,578
|
|
|
—
|
|
|
(7,467)
|
|
|
—
|
|
|
Other
|
(303)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net actuarial loss (gain), end of period
|
$
|
68,691
|
|
|
$
|
74
|
|
|
$
|
50,783
|
|
|
$
|
(2)
|
|
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.
Remeasurement
The Company remeasures both plan assets and obligations on a quarterly basis.
Defined Contribution Plans
The Company sponsors two defined contribution retirement savings plans in the U.S. reportable segment for eligible U.S. and Puerto Rico employees. The Company maintains three postretirement plans for eligible employees in the Mexico
reportable segment, as required by Mexico law, which primarily cover termination benefits. The Company maintains two defined contribution retirement savings plans in the U.K. and Europe reportable segment for eligible U.K. and Europe employees, as required by U.K. and Europe law. The Company’s expenses related to its defined contribution plans totaled $3.6 million at March 29, 2020.
16. STOCK-BASED COMPENSATION
For the three months ended March 29, 2020 and three months ended March 31, 2019, we recognized total stock-based compensation expense of $0.7 million and $1.9 million, respectively. For the three months ended March 29, 2020 and three months ended March 31, 2019, the total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.2 million and $0.5 million, respectively.
During the three months ended March 29, 2020, we granted 316,460 performance-based restricted stock units at a weighted average grant date price of $30.94 per unit. These awards will convert to time-vesting restricted stock units in the first quarter of 2021 if or when the Compensation Committee of the Company's Board of Directors certifies the achievement of 2020 performance targets. Once converted to time-vesting restricted stock units, the awards will vest ratably on December 31, 2021, December 31, 2022, and December 31, 2023.
17. 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 March 29, 2020 and December 29, 2019, 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, commodity options instruments and foreign currency instruments to manage translation and remeasurement risk.
The following items were measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
Level 1
|
|
Total
|
|
Level 1
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Commodity futures instruments
|
$
|
10,602
|
|
|
|
$
|
10,602
|
|
|
$
|
4,147
|
|
|
|
$
|
4,147
|
|
|
Commodity options instruments
|
1,942
|
|
|
|
1,942
|
|
|
906
|
|
|
|
906
|
|
|
Foreign currency instruments
|
12,053
|
|
|
|
12,053
|
|
|
426
|
|
|
|
426
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures instruments
|
(12,321)
|
|
|
|
(12,321)
|
|
|
(4,797)
|
|
|
|
(4,797)
|
|
|
Commodity options instruments
|
(5,667)
|
|
|
|
(5,667)
|
|
|
(633)
|
|
|
|
(633)
|
|
|
Foreign currency instruments
|
(98)
|
|
|
|
(98)
|
|
|
(5,400)
|
|
|
|
(5,400)
|
|
See “Note 5. Derivative Financial Instruments” 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 Balance Sheets 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 interim 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.
The carrying amounts and estimated fair values of our fixed-rate debt obligation recorded in the Condensed Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
|
|
December 29, 2019
|
|
|
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Fixed-rate senior notes payable at 5.75%, at Level 1 inputs
|
$
|
(1,001,994)
|
|
|
$
|
(985,000)
|
|
|
$
|
(1,002,095)
|
|
|
$
|
(1,034,200)
|
|
|
Fixed-rate senior notes payable at 5.875%, at Level 1 inputs
|
(844,613)
|
|
|
(851,250)
|
|
|
(844,433)
|
|
|
(919,505)
|
|
|
Secured loans, at Level 3 inputs
|
(437)
|
|
|
(433)
|
|
|
(948)
|
|
|
(939)
|
|
See “Note 13. Debt ” for additional information.
The carrying amounts of our cash and cash equivalents, derivative trading accounts' margin cash, restricted cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximate their fair values due to their relatively short maturities. 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 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 Balance Sheets. The fair value of the Company’s Level 1 fixed-rate debt obligations was based on the quoted market price at March 29, 2020 or December 29, 2019, as applicable. The fair value of the Company’s Level 3 fixed-rate debt obligation was based on discounted cash flows at March 29, 2020 or December 29, 2019, 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.
18. RELATED PARTY TRANSACTIONS
Pilgrim’s has been and, in some cases, continues to be a party to certain transactions with affiliated companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Sales to related parties:
|
|
|
|
|
JBS USA Food Company(a)
|
$
|
3,453
|
|
|
$
|
3,658
|
|
|
JBS Global (U.K.) Ltd.
|
—
|
|
|
43
|
|
|
JBS Chile Ltda.
|
—
|
|
|
78
|
|
|
Combo, Mercado De Congelados
|
73
|
|
|
4
|
|
|
JBS Australia
|
786
|
|
|
—
|
|
|
Total sales to related parties
|
$
|
4,312
|
|
|
$
|
3,783
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Cost of goods purchased from related parties:
|
|
|
|
|
JBS USA Food Company(a)
|
$
|
36,897
|
|
|
$
|
30,413
|
|
|
Seara Meats B.V.
|
2,643
|
|
|
4,521
|
|
|
|
|
|
|
|
|
|
|
|
|
JBS Toledo NV
|
63
|
|
|
120
|
|
|
JBS Global (U.K.) Ltd.
|
226
|
|
|
—
|
|
|
Total cost of goods purchased from related parties
|
$
|
39,829
|
|
|
$
|
35,054
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Expenditures paid by related parties:
|
|
|
|
|
JBS USA Food Company(b)
|
$
|
8,081
|
|
|
$
|
10,006
|
|
|
|
|
|
|
|
|
|
|
|
|
JBS Chile Ltda.
|
—
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures paid by related parties
|
$
|
8,081
|
|
|
$
|
10,011
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Expenditures paid on behalf of related parties:
|
|
|
|
|
JBS USA Food Company(b)
|
$
|
2,420
|
|
|
$
|
2,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Accounts receivable from related parties:
|
|
|
|
|
JBS USA Food Company(a)
|
$
|
545
|
|
|
$
|
643
|
|
|
JBS Chile Ltda.
|
130
|
|
|
301
|
|
|
Combo, Mercado de Congelados
|
26
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
JBS Australia
|
42
|
|
|
—
|
|
|
Total accounts receivable from related parties
|
$
|
743
|
|
|
$
|
944
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Accounts payable to related parties:
|
|
|
|
|
JBS USA Food Company(a)
|
$
|
6,552
|
|
|
$
|
2,826
|
|
|
JBS Global (U.K.) Ltd.
|
111
|
|
|
5
|
|
|
Seara Meats B.V.
|
1,301
|
|
|
988
|
|
|
JBS Chile Ltda.
|
34
|
|
|
—
|
|
|
Total accounts payable to related parties
|
$
|
7,998
|
|
|
$
|
3,819
|
|
(a) The Company routinely executes transactions to both purchase products from JBS USA Food Company (“JBS USA”) and sell products to them. As of March 29, 2020, approximately $1.3 million of goods purchased from JBS USA were in transit and not reflected on our Condensed Consolidated Balance Sheet.
(b) 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, 2020.
19. REPORTABLE SEGMENTS
The Company operates in three reportable segments: U.S., U.K. and Europe, and Mexico. The Company measures segment profit as operating income. Corporate expenses are allocated to the Mexico and U.K. and Europe reportable segments based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. reportable segment.
U.S. Reportable Segment
We conduct separate operations in the continental U.S. and in Puerto Rico. For segment reporting purposes, the Puerto Rico operations are included in the U.S. reportable segment. The chicken products processed by the U.S. reportable segment are sold to foodservice, retail and frozen entrée customers. The segment’s primary distribution is through retailers, foodservice distributors and restaurants.
U.K. and Europe Reportable Segment
The U.K. and Europe reportable segment processes primarily chicken and pork products that are sold to foodservice, retail and frozen entrée customers. The segment’s primary distribution is through retailers, foodservice distributors and restaurants. On October 15, 2019, the Company completed the acquisition of Tulip, a leading integrated pork supplier operating within the U.K., from Danish Crown AmbA.
Mexico Reportable Segment
The chicken products processed by the Mexico reportable segment are sold to foodservice, retail and frozen entrée customers. The segment’s primary distribution is through retailers, foodservice distributors and restaurants.
Additional information regarding reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020(a)
|
|
March 31, 2019(b)
|
|
|
(In thousands)
|
|
|
|
Net sales:
|
|
|
|
|
U.S.
|
$
|
1,926,880
|
|
|
$
|
1,883,591
|
|
|
U.K. and Europe
|
822,262
|
|
|
514,962
|
|
|
Mexico
|
325,786
|
|
|
326,122
|
|
|
Total
|
$
|
3,074,928
|
|
|
$
|
2,724,675
|
|
(a)For the three months ended March 29, 2020, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $56.6 million. These sales consisted of fresh products, prepared products, and grain.
(b)For the three months ended March 31 2019, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $34.5 million. These sales consisted of fresh products, prepared products, and grain.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 29, 2020
|
|
March 31, 2019
|
|
|
(In thousands)
|
|
|
|
Reportable segment profit:
|
|
|
|
|
U.S.
|
$
|
85,052
|
|
|
$
|
114,840
|
|
|
U.K. and Europe
|
23,190
|
|
|
12,714
|
|
|
Mexico
|
(23,880)
|
|
|
9,464
|
|
|
Eliminations
|
24
|
|
|
24
|
|
|
Total operating income
|
84,386
|
|
|
137,042
|
|
|
Interest expense, net of capitalized interest
|
32,688
|
|
|
33,562
|
|
|
Interest income
|
(1,690)
|
|
|
(3,340)
|
|
|
Foreign currency transaction loss (gain)
|
(18,385)
|
|
|
2,636
|
|
|
Miscellaneous, net
|
(34,188)
|
|
|
(357)
|
|
|
|
|
|
|
|
Income before income taxes
|
105,961
|
|
|
104,541
|
|
|
Income tax expense
|
38,512
|
|
|
20,416
|
|
|
Net income
|
$
|
67,449
|
|
|
$
|
84,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Total assets:
|
|
|
|
|
U.S.
|
$
|
5,539,187
|
|
|
|
$
|
5,207,282
|
|
|
U.K. and Europe
|
2,694,024
|
|
|
2,824,382
|
|
|
Mexico
|
978,970
|
|
|
1,020,331
|
|
|
Eliminations
|
(1,960,199)
|
|
|
(1,949,631)
|
|
|
Total assets
|
$
|
7,251,982
|
|
|
$
|
7,102,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
|
December 29, 2019
|
|
|
(In thousands)
|
|
|
|
Long-lived assets(a):
|
|
|
|
|
U.S.
|
$
|
1,791,303
|
|
|
$
|
1,789,530
|
|
|
U.K. and Europe
|
760,211
|
|
|
801,887
|
|
|
Mexico
|
302,118
|
|
|
306,413
|
|
|
Eliminations
|
(4,232)
|
|
|
(4,256)
|
|
|
Total long-lived assets
|
$
|
2,849,400
|
|
|
$
|
2,893,574
|
|
(a)For this disclosure, we exclude financial instruments, deferred tax assets and intangible assets in accordance with ASC 280-10-50-41, Segment Reporting. Long-lived assets, as used in ASC 280-10-50-41, implies hard assets that cannot be readily removed.
20. COMMITMENTS AND CONTINGENCIES
General
The Company is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks. Among other considerations, the Company has not recorded a liability for any of these indemnities because, based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on its financial condition, results of operations and cash flows.
Financial Instruments
The Company’s loan agreements generally obligate the Company to reimburse the applicable lender for incremental increased costs due to a change in law that imposes (1) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (2) any tax, duty or other charge with respect to the loan (except standard income tax) or (3) capital adequacy requirements. In addition, some of the Company’s loan agreements contain a withholding tax provision that requires the Company to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law. These increased cost and withholding tax provisions continue for the entire term of the applicable transaction, and there is no limitation on the maximum additional amounts the Company could be obligated to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default, and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.
Litigation
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.” The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.
Tax Claims and Proceedings
During 2014 and 2015 the Mexican Tax Authorities opened a review of Avícola Pilgrim’s Pride de Mexico, S.A. de C.V. (“APPM”) in regards to tax years 2009 and 2010, respectively. In both instances, the Mexican Tax Authorities claim that controlled company status did not exist for certain subsidiaries because APPM did not own 50% of the shares in voting rights of Incubadora Hidalgo, S. de R.L de C.V. and Commercializadora de Carnes de México S. de R.L de C.V. (both in 2009) and
Pilgrim’s Pride, S. de R. L. de C.V. (in 2010). As a result, APPM should have considered dividends paid out of these subsidiaries partially taxable since a portion of the dividend amount was not paid from the net tax profit account (CUFIN). APPM is currently appealing. Amounts under appeal are $24.3 million and $16.1 million for tax years 2009 and 2010, respectively. No loss has been recorded for these amounts at this time.
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, Case No. 1:16-cv-08637 were filed with the U.S. District Court for the Northern District of Illinois against PPC 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 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 class plaintiffs have filed three consolidated amended complaints: one on behalf of direct purchasers and two on behalf of distinct groups of indirect purchasers. Between December 8, 2017 and October 22, 2019, 32 individual direct action complaints (Affiliated Foods, Inc., et al. v. Claxton Poultry Farms, Inc., et al., Case No. 1:17-cv-08850; Sysco Corp. v. Tyson Foods Inc., et al., Case No. 1:18-cv-00700; U.S. Foods Inc. v. Tyson Foods Inc., et al., Case No. 1:18-cv-00702; Action Meat Distributors, Inc., et al. v. Claxton Poultry Farms, Inc., et al., Case No. 1:18-cv-03471; Jetro Holdings, LLC v. Tyson Foods, Inc., et al., Case No. 1:18-cv-04000; Associated Grocers of the South, Inc., et al. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-4616; The Kroger Co., et al. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-04534; Ahold Delhaize USA, Inc. v. Koch Foods, Inc., et al., Case No. 1:18-cv-05351; Samuels as Trustee In Bankruptcy for Central Grocers, Inc. et al., v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, Inc. et al., Case No. 1:18-cv-05341; W. Lee Flowers & Company, Inc. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, Inc. et al., Case No. 1:18-cv-05345; BJ's Wholesale Club, Inc. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-05877; United Supermarkets LLC, et al. v. Tyson Foods Inc., et al., Case No. 1:18-cv-06693; Associated Wholesale Grocers, Inc. v. Koch Foods, Inc., et al., Case No. 1:18-cv-06316 (transferred from the U.S. District Court for the District of Kansas on September 17, 2018, following Defendants’ successful motion to transfer); Shamrock Foods Company, et al. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-7284; Winn-Dixie Stores, Inc., et al. v. Koch Foods, Inc., et al., Case No. 1:18-cv-00245; Quirch Foods, LLC, f/k/a Quirch Foods Co. v. Koch Foods, Inc., et al., Case No. 1:18-cv-08511; Sherwood Food Distributors, L.L.C., et al. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-00354, Hooters of America, LLC v. Tyson Foods, Inc., et al., Case No. 1:19-cv-00390, Darden Restaurants, Inc. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-00530; Associated Grocers, Inc., et al. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, et al., Case No. 1:19-cv-00638; Checkers Drive-In Restaurants, Inc. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-01283; Conagra Brands, Inc., et al. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-02190, Giant Eagle, Inc. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, et al., Case No. 1:19-cv-02758; Save Mart Supermarkets v. Tyson Foods, Inc., et al., Case No. 1:19-cv-02805; Walmart Inc., et al. v. Pilgrim’s Pride Corporation, et al., Case No. 1:19-cv-03915 (transferred from the U.S. District Court for the Western District of Arkansas on June 11, 2019, following Plaintiffs’ unopposed motion to transfer); Services Group of America, Inc. v. Tyson Food, Inc., et al., Case No. 1:19-cv-04194; Restaurants of America, Inc., et al. v. Tyson Foods, Inc., et al., No. 19-cv-04824; Anaheim Wings, d/b/a Hooters of Anaheim, et al. v. Tyson Foods, Inc., et al., No. 19- cv-05229; Amigos Meat Distributors, LP, et al. v. Tyson Foods, Inc., et al., No. 19-cv-05424; PJ Food Service, Inc. v. Tyson Foods, Inc., et al., No. 19-cv-6141; The Golub Corporation, et al. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, et al., Case No. 19-cv-06955; and Commonwealth of Puerto Rico v. Koch Foods, Inc., et al., Case No. 3:19-cv-01605 (transferred from the U.S. District Court for the District of Puerto Rico) were filed with the U.S. District Court for the Northern District of Illinois by individual direct purchaser entities naming PPC as a defendant, the allegations of which largely mirror those in the class action complaints. The Court has ordered the parties to coordinate scheduling of the direct action complaints with the class complaints with any necessary modifications to reflect time of filing. Discovery will be consolidated. On June 21, 2019, the U.S. Department of Justice (the “DOJ”) filed a motion to intervene and stay discovery in the In re Broiler Chicken Antitrust Litigation for a period of six months. Following a hearing on June 27, 2019, on June 28, 2019, the Court granted the government’s motion to intervene, ordering a limited stay first until September 27, 2019, and then, following a subsequent request for an extension by the DOJ, to June 27, 2020. On July 1, 2019, the DOJ issued a subpoena to PPC in connection with its investigation. PPC is currently in the process of complying with the subpoena. On December 18, 2019, the Court reset the date for the lifting of the stay to March 31, 2020. On January 29, 2020, the Court issued a scheduling order through trial, which contemplates class certification briefing and related expert reports proceeding from June 18, 2020 to November 25, 2020, the close of all merits fact discovery on December 18, 2020, and summary judgment briefing and related expert reports proceeding from January 15, 2021 to August 10, 2021. The Court has set a trial date of April 4, 2022. The U.S. District Court for the Northern District of Illinois issued General Orders in re Coronavirus (“COVID-19”) Public Emergency on March 17, 2020, March 20, 2020 and March 30, 2020, which extended all deadlines in all civil cases first 21 and then 28 days. Further revisions to the schedule are anticipated in the coming weeks.
On October 10, 2016, Patrick Hogan, acting on behalf of himself and a putative class of persons who purchased shares of PPC’s stock between February 21, 2014 and October 6, 2016, filed a class action complaint in the U.S. District Court for the
District of Colorado against PPC and its named executive officers. The complaint alleges, among other things, that PPC’s SEC filings contained statements that were rendered materially false and misleading by PPC’s failure to disclose that (1) PPC 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, (2) its conduct constituted a violation of federal antitrust laws, (3) PPC’s revenues during the class period were the result of illegal conduct and (4) that PPC lacked effective internal control over financial reporting. The complaint also states that PPC’s industry was anticompetitive and seeks compensatory damages. On April 4, 2017, the Court appointed another stockholder, George James Fuller, as lead plaintiff. On May 11, 2017, the plaintiff filed an amended complaint, which extended the end date of the putative class period to November 17, 2017. PPC and the other defendants moved to dismiss on June 12, 2017, and the plaintiff filed its opposition on July 12, 2017. PPC and the other defendants filed their reply on August 1, 2017. On March 14, 2018, the Court dismissed the plaintiff’s complaint without prejudice and issued final judgment in favor of PPC and the other defendants. On April 11, 2018, the plaintiff moved for reconsideration of the Court’s decision and for permission to file a Second Amended Complaint. PPC and the other defendants filed a response to the plaintiff’s motion on April 25, 2018. On November 19, 2018, the Court denied the plaintiff’s motion for reconsideration and granted plaintiff leave to file a Second Amended Complaint. As of the date of these financial statements, the plaintiff has not yet filed a Second Amended Complaint.
On January 27, 2017, a purported class action on behalf of broiler chicken farmers was brought against PPC 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 consolidated amended class action complaint styled as In re Broiler Chicken Grower Litigation, Case No. CIV-17-033-RJS (the “Grower Litigation”). The defendants (including PPC) jointly moved to dismiss the consolidated amended complaint on September 9, 2017. The Court initially held oral argument on January 19, 2018, during which it considered and granted only certain other defendants’ motions challenging jurisdiction. Oral argument on the remaining pending motions in the Oklahoma court occurred on April 20, 2018. In addition, on March 12, 2018, the Northern District of Texas, Fort Worth Division (“Bankruptcy Court”) enjoined the plaintiffs from litigating the Grower Litigation complaint as pled against PPC because allegations in the consolidated complaint violate the confirmation order relating to PPC’s bankruptcy proceedings in 2008 and 2009. Specifically, the 2009 bankruptcy confirmation order bars any claims against PPC based on conduct occurring before December 28, 2009. On March 13, 2018, PPC notified the trial court of the Bankruptcy Court’s injunction. On January 6, 2020, the Court held a motion hearing and denied the pending Rule 12 motion and lifted the stay on discovery. A status conference was held on April 6, 2020 and a case schedule is 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 PPC’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 PPC 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 PPC’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 (1) consolidate the two stockholder derivative cases, (2) stay the consolidated action until the resolution of the motion to dismiss in the Hogan putative securities class action, and (3) 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.
On January 24, 2018 a stockholder derivative action styled as Sciabacucchi v. JBS S.A. et al. was brought against all of PPC’s directors, JBS S.A., JBS USA Holdings and several members of the Batista family, in the Court of Chancery of the State of Delaware (the “Chancery Court”). The complaint alleges, among other things, that the named defendants breached their fiduciary duties arising out of PPC’s acquisition of Moy Park. On May 24, 2018, Employees Retirement System of the City of St. Louis filed a derivative complaint, which was virtually identical to the Sciabacucchi complaint. Both complaints sought compensatory damages. On July 2, 2018, the Chancery Court granted a stipulation consolidating the cases and making the first complaint (Sciabacucchi) the operative complaint. Also by stipulation, various defendants have been voluntarily dismissed from the case without prejudice. The remaining defendants are JBS S.A., JBS USA Holding, and directors Lovette, Nogueira de Souza, Tomazoni, and Molina. PPC also remains in the case as a nominal defendant. On March 15, 2019, the Chancery Court denied the non-PPC defendants’ motion to dismiss. As a result, the case proceeded to discovery, and trial was scheduled to commence in November 2020. On October 3, 2019, the parties entered into a stipulation agreeing to settle the dispute for (1) a cash payment to PPC by the non-PPC defendants of $42.5 million less any fees and expenses awarded to the plaintiffs’ counsel, as well as any applicable taxes (the “Settlement Amount”), and (2) corporate governance changes to be implemented by PPC. No portion of the settlement amount will be paid by PPC to the non-PPC defendants. The settlement was approved by the Court of Chancery on January 28, 2020. On March 2, 2020, the Settlement Amount was transferred to PPC.
Between August 30, 2019 and October 16, 2019, four purported class action lawsuits were filed in the U.S. District Court for the District of Maryland against PPC and a number of other chicken producers, as well as WMS (Webber, Meng, Sahl and Company) and Agri Stats. The plaintiffs seek to represent a nationwide class of processing plant production and maintenance workers (“Plant Workers”). They allege that the defendants conspired to fix and depress the compensation paid to Plant Workers in violation of the Sherman Act and seek damages from January 1, 2009 to the present. The four cases are Jien v. Perdue Farms, Inc., Case No. 19-cv-2521; Earnest v. Perdue Farms, Inc. et al., Case No. 19-cv-02680; Robinson v. Tyson Foods, Inc. et al., Case No. 19-cv-02960; and Avila v. Perdue Farms, Inc., et al., Case No. 19-cv-03018 (together, the “Wages Litigation”). On November 12, 2019, the Court ordered the consolidation of the four cases for pretrial purposes. The defendants (including PPC) jointly moved to dismiss the consolidated complaint on November 22, 2019. Shortly thereafter, the plaintiffs informed the defendants and the Court they would be amending their complaint, which they did on December 20, 2019. The consolidated amended complaint asserts largely similar allegations to the pleadings in the consolidated complaint extended to include more class members and turkey processors as well as chicken. The defendants filed motions to dismiss the consolidated amended complaint on March 2, 2020, with oppositions originally due on April 24, 2020 and replies on May 21, 2020. The U.S. District Court for the District of Maryland has issued a series of Standing Orders related to the exigent circumstances created by COVID-19, which extended filing deadlines by 84 days, including the deadlines for the response briefings related to defendants' motions to dismiss.
PPC believes it has strong defenses in each of the above litigations and intends to contest them vigorously. PPC cannot predict the outcome of these actions nor when they will be resolved. If the plaintiffs were to prevail in any of these litigations, PPC 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 together with the companies controlled by J&F, the “J&F Group”), a company organized in Brazil and an indirect controlling stockholder of the Company, including a former senior executive and former board members of the Company, entered into cooperation agreements (acordos de colaboração) (collectively, the “Cooperation Agreements”) with the Office of the Prosecutor General (Procuradoria-Geral da República), or PGR, in connection with certain illicit conduct by J&F and such individuals acting in their capacity as J&F executives. The details of such illicit conduct are set forth in separate annexes to the Cooperation Agreements, and include admissions of improper payments to politicians and political parties in Brazil during a ten-year period in exchange for receiving, or attempting to receive, favorable treatment for certain J&F Group companies in Brazil.
On June 5, 2017, J&F, for itself and as the controlling shareholder of the J&F Group companies, entered into a leniency agreement (the “Leniency Agreement”) with the Federal Prosecution Service (Ministério Público Federal), or MPF, whereby J&F assumed responsibility for the conduct that was described in the annexes to the Cooperation Agreements. In connection with the Leniency Agreement, J&F has agreed to pay a fine of 10.3 billion Brazilian reais (R$), adjusted for inflation, over a 25-year period. J&F has made five R$50.0 million payments, representing R$250.0 million of the total fine, which payments have been accepted by the MPF. Various proceedings by Brazilian governmental authorities remain pending against J&F and certain of its former or current officers seeking to invalidate the Cooperation Agreements and impose more severe penalties for additional alleged illicit conduct that was not disclosed in the annexes to the Cooperation Agreements.
On December 11, 2017, the PGR requested that the Federal Supreme Court in Brazil (Supremo Tribunal Federal), or the STF, terminate the Cooperation Agreements executed by Joesley Mendonça Batista and a former executive of J&F in light of allegations that included, among others, their receipt of improper support from a member of the PGR on the negotiation of their Cooperation Agreements. On May 17, 2018, the PGR requested that the STF terminate the Cooperation Agreements executed by Wesley Mendonça Batista and another J&F executive on the same grounds. As part of such proceedings, on December 17, 2018, the STF issued a ruling that there is no necessary link between the termination of the Cooperation Agreements, on the one hand, and the Leniency Agreement on the other hand, and that the termination of the Cooperation Agreements would not automatically invalidate the Leniency Agreement. However, a final decision by the STF on the termination of the Cooperation Agreements may change such ruling and directly impact the Leniency Agreement. On April 30, 2019, in connection with an administrative proceeding relating to the Leniency Agreement, the MPF argued that if the STF terminated the Cooperation Agreements, such termination could have repercussions with respect to the Leniency Agreement. According to the MPF, such repercussions could include termination of the Leniency Agreement and the inclusion of additional fines or other obligations that would be payable by J&F.
We cannot assure you that the Leniency Agreement will not be impacted by the termination of any of the Cooperation Agreements or that the MPF will not continue to argue to the STF that the termination of the Cooperation Agreements by the STF should affect the Leniency Agreement. If the Leniency Agreement is terminated or nullified, the facts included therein could be exposed to potential proceedings and sanctions by Brazilian governmental authorities, which could have a material adverse effect on our business, reputation and financial condition.
In accordance with the terms of the Leniency Agreement, J&F is conducting internal investigations and has engaged outside advisors to assist in conducting these investigations, which are ongoing, and with which we are fully cooperating. In addition, JBS S.A., JBS USA and the Company have (1) conducted an independent investigation in connection with matters disclosed in the Leniency Agreement and the Cooperation Agreements; and (2) communicated with relevant U.S. authorities, including the Department of Justice and the Securities and Exchange Commission, regarding the factual findings of these investigations. Additionally, JBS S.A., JBS USA and the Company have taken, and are continuing to take, measures to enhance their compliance programs, including to prevent and detect bribery and corruption.
We cannot predict when these investigations will be completed or the results of such investigations, including whether any litigation will be brought against us or the outcome or impact of any resulting litigation, nor can we predict any potential actions that may be taken by such relevant U.S. authorities, which could include substantial fines and penalties, violations that impact our disclosure, and which could also result in litigations by shareholders against us.
In addition, we cannot guarantee that the investigations will not uncover other instances of prior illicit conduct by any of the parties to the Leniency Agreement or to the Cooperation Agreements, or by other parties affiliated with us (including, without limitation, any of our shareholders, directors, officers, employees, agents or third parties acting in our name) which are not party to the Leniency Agreement or the Cooperation Agreements. It is possible that other facts not covered by the Leniency Agreement or the Cooperation Agreements will be discovered in the future. If that occurs, Brazilian authorities may bring proceedings and impose sanctions, fines or other penalties in relation to any such additional uncovered facts and may seek to use such discoveries to invalidate or terminate the Leniency Agreement or the Cooperation Agreements.
Separately, Joesley Mendonça Batista and Wesley Mendonça Batista (who equally and indirectly own 100% of the equity interests in J&F), JBS S.A. and other defendants are party to administrative proceedings initiated by the Brazilian Securities Commission (Comissao de Valores Mobiliarios), or CVM. The matters under investigation with respect to Joesley Mendonça Batista and Wesley Mendonça Batista include possible violations of Brazilian laws regarding the following: insider trading in regulated market transactions, management due diligence obligations in connection with internal controls, misuse of JBS S.A.’s assets and conflicts of interest in approving management accounts. On September 25, 2018, the Board of Commissioners of the CVM rejected the settlement proposal submitted jointly by Joesley Mendonça Batista and Wesley Mendonça Batista, JBS S.A. and the other defendants to end the administrative proceedings related to insider trading in regulated market transactions and management due diligence obligations in connection with internal controls. On December 3, 2019, the Board of Commissioners of the CVM rejected their settlement proposal to close the administrative proceeding regarding the misuse of JBS S.A.’s assets. These proceedings in Brazil are ongoing and their results cannot be predicted.
Any further adverse developments in these, or other, matters involving Joesley Mendonça Batista and Wesley Mendonça Batista or other parties affiliated with us (including, without limitation, any of our shareholders, directors, officers, employees, agents or third parties acting in our name), could subject us to potential fines or penalties set forth under applicable law, materially adversely affect our public perception or reputation and could have a material adverse effect on us, including: (1) threatening our ability to obtain new financing, which could impair our ability to operate our business; and (2) shifting management’s focus to these matters, which could harm our ability to meet our strategic objectives. Additionally, while we have taken, and are continuing to take, measures to enhance our compliance programs, which are intended to assist us in detecting and preventing bribery and corruption, there can be no assurance that these efforts will enable us to detect or prevent all such activities.
We will monitor the results of the investigations and J&F will continue to engage in dialogue with the relevant U.S. authorities. Any proceedings that require us to make substantial payments, affect our reputation or otherwise interfere with our business operations could have a material adverse effect on our business, financial condition and operating results.